10-Q 1 v049338_10q.htm
UNITED STATES
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 June 30, 2006

OR

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

Commission File Number 1-10352

COLUMBIA LABORATORIES, INC.
(Exact name of Registrant 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
  
Livingston, New Jersey
07039
(Address of principal executive offices)
(Zip Code)

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

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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o Yes x No

Number of shares of Common Stock of Columbia Laboratories, Inc. issued and outstanding as of August 3, 2006: 49,667,288


PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

The following unaudited, condensed consolidated financial statements of Columbia Laboratories, Inc. (“Columbia” or 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 three and six months ended June 30, 2006 are not necessarily indicative of the results for the year ending December 31, 2006. It is suggested that these financial statements be read in conjunction with the financial statements and related disclosures for the year ended December 31, 2005 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Page 2

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   
June 30, 2006
  
December 31, 2005
  
   
(Unaudited)
      
ASSETS
          
Current assets- 
              
 Cash and cash equivalents
  
$
22,003,677
  
$
7,136,854
  
 Accounts receivable, net
    
3,794,605
   
4,020,019
 
 Inventories
    
1,768,756
   
1,821,433
 
 Prepaid expenses and other current assets
    
724,575
   
625,908
 
Total current assets
    
28,291,613
   
13,604,214
 
               
Property and equipment, net 
    
878,884
   
1,002,580
 
Other assets 
    
120,204
   
124,756
 
TOTAL ASSETS
  
$
29,290,701
  
$
14,731,550
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
              
Current liabilities- 
              
 Current portion of financing agreements
  
$
754,611
  
$
12,840,161
  
 Accounts payable
    
1,763,166
   
1,905,381
 
 Accrued expenses
    
2,303,628
   
2,329,475
 
Total current liabilities
    
4,821,405
   
17,075,017
 
Deferred revenue 
    
4,535,920
   
4,058,327
 
Long-term portion of financing agreements 
    
10,235,635
   
8,747,743
 
TOTAL LIABILITIES
    
19,592,960
   
29,881,087
 
Stockholders' equity (deficiency)-
              
Preferred stock, $.01 par value; 1,000,000 shares authorized: 
              
 Series B Convertible Preferred Stock, 130 shares issued and
              
outstanding in 2006 and 2005
    
1
   
1
 
 Series C Convertible Preferred Stock, 3,250 shares issued
             
and outstanding in 2006 and 2005
   
32
   
32
 
 Series E Convertible Preferred Stock, 69,000 shares issued
              
and outstanding in 2006 and 2005
   
690
   
690
 
Common stock, $.01 par value; 100,000,000 authorized; 
              
 49,653,303 and 41,754,784 shares issued and outstanding in
             
 2006 and 2005, respectively
    
496,533
   
417,548
 
Capital in excess of par value 
    
205,308,479
   
175,340,023
 
Accumulated deficit 
    
(196,308,891
)
  
(191,084,974
)
Accumulated other comprehensive income  
    
200,897
   
177,143
 
 TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)
    
9,697,741
   
(15,149,537
)
 TOTAL LIABILITIES AND STOCKHOLDERS'
              
EQUITY (DEFICIENCY)
  
$
29,290,701
  
$
14,731,550
  
 
See notes to condensed consolidated financial statements

Page 3

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
NET REVENUES
  
$
10,068,490
  
$
10,614,422
  
$
5,523,113
  
$
6,333,845
  
                           
COST OF REVENUES
    
4,182,007
   
4,062,440
   
2,303,739
   
2,245,435
 
Gross profit  
    
5,886,483
   
6,551,982
   
3,219,374
   
4,088,410
 
                           
OPERATING EXPENSES:
                          
Selling and distribution 
    
3,239,490
   
5,000,396
   
1,739,511
   
2,101,793
 
General and administrative 
    
3,348,796
   
3,522,722
   
1,761,146
   
1,696,964
 
Research and development 
    
3,370,370
   
2,540,822
   
1,643,753
   
1,248,597
 
 Total operating expenses
    
9,958,656
   
11,063,940
   
5,144,410
   
5,047,354
 
                           
 Loss from operations
    
(4,072,173
)
  
(4,511,958
)
  
(1,925,036
)
  
(958,944
)
                           
OTHER INCOME (EXPENSE):
                          
Interest income 
    
355,899
   
86,399
   
255,404
   
40,561
 
Interest expense 
    
(1,216,470
)
  
(1,365,966
)
  
(545,479
)
  
(625,353
)
Other, net 
    
(291,173
)
  
(13,218
)
  
(262,484
)
  
(46,300
)
     
(1,151,744
)
  
(1,292,785
)
  
(552,559
)
  
(631,092
)
                           
 Net loss
  
$
(5,223,917
)
$
(5,804,743
)
$
(2,477,595
)
$
(1,590,036
)
                           
NET LOSS PER COMMON SHARE:
                          
Basic and diluted 
  
$
(0.11
)
$
(0.14
)
$
(0.05
)
$
(0.04
)
                           
WEIGHTED AVERAGE NUMBER OF
                          
COMMON SHARES OUTSTANDING: 
                          
Basic and diluted 
    
46,467,128
   
41,751,934
   
49,555,297
   
41,751,934
 
 
See notes to condensed consolidated financial statements

Page 4

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)

   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
 
   
2006
  
2005
  
2006
  
2005
  
                   
NET LOSS
  
$
(5,223,917
)
$
(5,804,743
)
$
(2,477,595
)
$
(1,590,036
)
                           
Other comprehensive loss:
                          
Foreign currency translation, net of tax
    
23,754
   
(58,235
)
  
16,629
   
(33,324
)
                           
Comprehensive loss
  
$
(5,200,163
)
$
(5,862,978
)
$
(2,460,966
)
$
(1,623,360
)

See notes to condensed consolidated financial statements

Page 5

COLUMBIA LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Uaudited)

   
Six Months Ended June 30,
  
   
2006
  
2005
  
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net loss
  
$
(5,223,917
)
$
(5,804,743
)
Adjustments to reconcile net loss to net
              
cash used in operating activities- 
              
 Depreciation and amortization
    
131,018
   
155,055
 
 Provision for doubtful accounts
    
55,855
   
89,009
 
 Provision for returns and allowances
    
620,868
   
2,125,048
 
 Writedown of inventories
    
349,722
   
497,125
 
 Stock based compensation
    
390,054
   
—
  
 Interest expense on financing agreements
    
1,206,910
   
1,210,386
 
 Loss on partial extinguishment of financing agreement
    
280,000
   
—
 
 Loss on disposal of fixed asset
    
2,178
   
—
 
 Issuance of options for sales services
    
—
   
4,537
 
Changes in assets and liabilities-
              
(Increase) decrease in: 
              
 Accounts receivable
    
169,559
   
(504,488
)
 Inventories
    
(297,045
)
  
(349,313
)
 Prepaid expenses and other current assets
    
(98,667
)
  
710,758
 
 Other assets
    
4,552
   
819
 
Increase (decrease) in:
              
 Accounts payable
    
(142,215
)
  
(1,300,498
)
 Accrued expenses
    
(913,350
)
  
(2,260,429
)
 Deferred revenue
    
477,593
   
111,813
 
Net cash used in operating activities
    
(2,986,885
)
  
(5,314,921
)
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchase of property and equipment
    
(9,500
)
  
(67,216
)
 Net cash used in investing activities
    
(9,500
)
  
(67,216
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Proceeds from the issuance of common stock, net
    
28,766,126
   
—
 
Proceeds from the issuance of preferred stock, net
    
—
   
6,900,000
 
Payment of note payable
    
—
   
(10,000,000
)
Proceeds from exercise of options
    
972,511
   
—
 
Payments pursuant to financing agreements
    
(11,817,933
)
  
(2,193,544
)
Dividends paid
    
(81,250
)
  
(81,250
)
 Net cash provided by (used in) financing activities
    
17,839,454
   
(5,374,794
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
23,754
   
(58,127
)
               
NET INCREASE (DECREASE) IN CASH
              
AND CASH EQUIVALENTS
    
14,866,823
   
(10,815,058
)
               
CASH AND CASH EQUIVALENTS,
              
Beginning of period
    
7,136,854
   
19,781,591
 
               
CASH AND CASH EQUIVALENTS,
              
End of period
  
$
22,003,677
  
$
8,966,533
  
 
See notes to condensed consolidated financial statements
 
Page 6

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, 2005.
 
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal year 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) providing supplemental implementation guidance for SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The Company adopted SFAS 123(R) using the modified prospective transition method which requires the recognition of expense relative to existing, unvested awards from January 1, 2006. The Company’s Condensed Consolidated Financial Statements, as of and for the three and six months ended June 30, 2006, reflect the impact of SFAS 123(R). Employee stock-based compensation expense for the three and six months ended June 30, 2006, was $288,997 and $390,054, respectively, which in each case consisted primarily of stock-based compensation expense related to employee stock options recognized under SFAS 123(R).
 
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense for employee stock options had been recognized in the Company’s Consolidated Statements of Operations, because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. In accordance with the modified prospective transition method the Company used in adopting SFAS 123(R), the Company’s results of operations prior to fiscal year 2006 have not been restated to reflect, and do not include, the possible impact of SFAS 123(R).
 
Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest. Stock-based compensation expense recognized in the three and six months ended June 30, 2006 included compensation expense for stock-based awards granted prior to, but not yet vested as of December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the stock-based awards granted or modified subsequent to December 31, 2005, based on the fair value on the grant date estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company is continuing to use the straight line single-option method of attributing the value of stock-based compensation expense. Compensation expense for all stock-based awards granted prior to January 1, 2006 will be recognized using the straight line single-option approach, and compensation expense for all stock-based awards granted subsequent to December 31, 2005, will also be recognized using the straight line single-option method. Because stock-based compensation expense to be recognized in the results for periods beginning after December 31, 2005, is based on awards ultimately expected to vest, the amounts will be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to 2006, the Company accounted for forfeitures as they occurred for the purposes of pro forma information under SFAS 123, as disclosed in the Notes to Consolidated Financial Statements for the related periods.

Page 7
 
(2) INVENTORIES:

Inventories consisted of the following:

   
June 30,
  
December 31,
  
   
2006
  
2005
  
Finished goods
  
$
1,269,303
  
$
1,165,413
  
Raw materials
    
499,453
   
656,020
 
               
   
$
1,768,756
  
$
1,821,433
  

(3) FINANCING AGREEMENTS:

In an agreement dated July 31, 2002, Quintiles Transnational Corp.’s strategic investment group, PharmaBio Development, Inc. (“PharmaBio”) agreed to pay the Company $4.5 million in four equal quarterly installments commencing third quarter 2002 for the right to receive 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 royalty payments are subject to minimum ($8 million) and maximum ($12 million) amounts and 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%. $193,846 and $172,291 were recorded as interest expense for the three months ended June 30, 2006 and June 30, 2005, respectively, and $381,036 and $320,168 were recorded as interest expense for the six months ended June 30, 2006 and June 30, 2005, respectively. The Company has paid PharmaBio $3,291,759 under this agreement through June 30, 2006.

In an agreement dated March 5, 2003 (the “Striant Agreement”), PharmaBio agreed to pay the Company $15 million in five quarterly installments commencing with the signing of the agreement. In return, PharmaBio will receive 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 received by the Company, 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%. $490,203 and $453,062 were recorded as interest expense for the three months ended June 30, 2006 and June 30, 2005, respectively, and $974,004 and $890,218 were recorded as interest expense for the six months ended June 30, 2006 and June 30, 2005, respectively. The agreement called for a true-up payment on November 14, 2006 equal to the difference between royalties paid through and for the third quarter of 2006 and $13,000,000. On April 14, 2006, the Company entered into a letter agreement (the “Letter Agreement”) with PharmaBio pursuant to which the Company agreed to pay approximately $12 million of the true-up payment seven months early. Accordingly, on April 14, 2006, the Company paid PharmaBio $11,585,235 (the “Early Payment”), which was the present value of a November 14, 2006 $12 million true-up payment using a six percent (6%) annual discount factor. In consideration of such payment, PharmaBio agreed that PharmaBio will be deemed (solely for purposes of the Striant Agreement) to have received on account of that payment $12 million for purposes of the true-up payment. In the event that, as of the payment date for the true-up payment, the aggregate amount of royalties paid under the Striant Agreement, including the Early Payment, exceed $13 million, the Company will be entitled to have such excess reimbursed. Although the Company paid and will record approximately $415,000 less in interest expense during 2006 due to this early payment, for accounting purposes, the payment resulted in a non cash loss of approximately $280,000 during the second quarter of 2006. Including the Early Payment, the Company has paid PharmaBio $12,712,346 through June 30, 2006.

Page 8

Long term liabilities from financing agreements consisted of the following:

   
June 30,
  
December 31,
  
   
2006
  
2005
  
July 31, 2002 financing agreement
  
$
3,416,463
  
$
3,242,607
  
March 5, 2003 financing agreement
    
7,573,783
   
18,345,297
 
     
10,990,246
   
21,587,904
 
Less: current portion
    
754,611
   
12,840,161
 
   
$
10,235,635
  
$
8,747,743
  

Page 9

(4) GEOGRAPHIC INFORMATION:

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

   

Net Revenues
  
Profit
 (Loss) from
 Operations
  
Identifiable Assets
  
               
As of and for the six months
                    
ended June 30, 2006-
                    
United States
  
$
5,016,298
  
$
(6,066,893
)
$
21,350,900
  
Europe
    
5,052,192
   
1,994,720
   
7,939,801
 
                     
   
$
10,068,490
  
$
(4,072,173
)
$
29,290,701
  
                     
As of and for the six months
                    
ended June 30, 2005-
                    
United States
  
$
5,161,006
  
$
(7,141,356
)
      
Europe
    
5,453,416
   
2,629,398
       
                     
   
$
10,614,422
  
$
(4,511,958
)
      
                     
As of and for the three months
                    
ended June 30, 2006-
                    
United States
  
$
2,964,606
  
$
(2,975,544
)
      
Europe
    
2,558,507
   
1,050,508
       
                     
   
$
5,523,113
  
$
(1,925,036
)
      
                     
As of and for the three months
                    
ended June 30, 2005-
                    
United States
  
$
3,431,639
  
$
(2,659,739
)
      
Europe
    
2,902,206
   
1,700,795
       
                     
   
$
6,333,845
  
$
(958,944
)
      

Page 10

(5) INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE:

The calculation of basic and diluted loss per common and potential common share is as follows:
 
   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net loss
  
$
(5,223,917
)
$
(5,804,743
)
$
(2,477,595
)
$
(1,590,036
)
Less: Preferred stock dividends
    
(81,250
)
  
(81,250
)
  
(40,625
)
  
(40,625
)
                           
Net loss applicable to
                          
common stock
  
$
(5,305,167
)
$
(5,885,993
)
$
(2,518,220
)
$
(1,630,661
)
                           
Basic and diluted:
                          
Weighted average number of
                          
common shares outstanding
    
46,467,128
   
41,751,934
   
49,555,297
   
41,751,934
 
                           
Basic and diluted net loss per common share
  
$
(0.11
)
$
(0.14
)
$
(0.05
)
$
(0.04
)
 
Basic loss per share is computed by dividing the net loss plus preferred dividends by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share gives effect to dilutive options, warrants and other potential common stock outstanding during the periods. Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the preferred stock are not included in the computation of diluted loss per share as their effect is anti-dilutive. Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the preferred stock excluded from the calculation amounted to 11,821,413 and 11,278,475 at June 30, 2006 and 2005, respectively.

(6) LEGAL PROCEEDINGS:

Claims and lawsuits have been filed against the Company from time to time. Although the results of pending claims 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 the Company’s financial position or results of operations. Additionally, the Company believes that it has reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance in the event of any unfavorable outcome resulting from these actions.

(7) STOCK-BASED COMPENSATION:
 
On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method. SFAS 123(R) requires the measurement and recognition of compensation expense for all stock-based awards made to the Company’s employees and directors including employee stock options and other stock-based awards based on estimated fair values.
 
Page 11
 
The following table summarizes the impact of the adoption of SFAS 123(R) on stock-based compensation costs for employees on the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005:

   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
 
   
2006
  
2005
  
2006
  
2005
  
Employee stock-based compensation in:
                          
Cost of revenue
  
$
34,302
  
$
—
  
$
18,220
  
$
—
  
                           
Selling and distribution
    
35,343
   
—
   
19,511
   
—
 
General and administrative
    
262,306
   
—
   
217,526
   
—
 
Research and development
    
58,103
   
—
   
33,740
   
—
 
Total employee stock-based compensation
                          
in operating expenses
    
355,752
   
—
   
270,777
   
—
 
                           
Total employee stock-based compensation
 
$
390,054
  
$
—
  
$
288,997
  
$
—
  
 
No tax benefit has been recognized due to net losses during the periods presented.
 
The table below reflects net loss and net loss per share for the three and six months ended June 30, 2006, compared with the pro forma information for the three and six months ended June 30, 2005 reflecting the impact of stock-based compensation as if accounted for under SFAS 123(R):

   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
   
 
  
(pro forma)
  
 
  
(pro forma)
  
Net loss, before stock-based compensation
                         
for employees, prior period
  
$
(5,223,917
)
$
(5,804,743
)
$
(2,477,595
)
$
(1,590,036
)
Less: Stock-based employee compensation included
                         
in the determination of net loss as reported
    
390,054
         
288,997
       
Add: Stock-based compensation expense for
                         
employees determined under fair-value based method
    
(390,054
)
  
(941,012
)
  
(288,997
)
  
(268,707
)
Net loss, after effect of stock-based compensation
                         
for employees
 
$
(5,223,917
)
$
(6,745,755
)
$
(2,477,595
)
$
(1,858,743
)
                           
Net loss per share:
                          
Basic and diluted - as reported in prior year
  
$
(0.11
)
$
(0.14
)
$
(0.05
)
$
(0.04
)
Basic and diluted - after effect of stock-based
                          
compensation for employees
  
$
(0.11
)
$
(0.16
)
$
(0.05
)
$
(0.05
)

Page 12

As of June 30, 2006, total unamortized stock-based compensation cost related to non-vested stock options was $1,542,043 which is expected to be recognized over the remaining vesting period of the outstanding options, up to the next 47 months. The Company selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, and expected dividends.
 
The assumptions used to value options granted are as follows:

   
Six Months Ended
  
Three Months Ended
  
   
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Risk free interest rate
    
5.03
%
  
4.02
%
  
5.03
%
  
3.89
%
Expected term
    
4.75 years
    
6.69 years
    
4.75 years
    
6.25 years
  
Dividend yield
    
0.0
    
0.0
    
0.0
    
0.0
  
Expected volatility
    
62.55
%
  
81.92
%
  
62.55
%
  
81.81
%
 
The Company estimated the volatility of the Company’s stock based on historical volatility in accordance with guidance in SFAS 123(R) and SAB 107. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the employee stock options. The dividend yield assumption is based on our history and expectation of dividend payouts.

Generally, stock options granted under the Company’s 1996 Long-term Performance Plan (“1996 Plan”) prior to January 1, 2006 have a contractual term of ten years from the date of grant, and stock options granted under the 1996 Plan on or after January 1, 2006 are expected to have a contractual term of seven years from the date of grant. Options generally vest over a four-year period, with 25% vesting on each of the first four anniversaries of the date of grant. The Company’s general policy is to issue new shares upon the exercise of stock options. Pursuant to the 1996 Plan, an aggregate of 8,000,000 shares of common stock have been reserved for issuance.
 
The expected term of employee stock options represents the weighted-average period that employees are expected to hold the options before exercise. The Company derived the expected term assumption based on the Company’s historical settlement experience, while giving consideration to options that have life cycles less than the contractual terms and vesting schedules in accordance with guidance in SFAS 123(R) and SAB 107. Prior to the adoption of SFAS 123(R), the Company used historical settlement experience to derive the expected term for the purposes of pro forma information under SFAS 123, as disclosed in the Notes to the Company’s Consolidated Financial Statements for the related periods.

Page 13
 
A summary of the Company’s stock option activity and related activity for the three and six months ended June 30, 2006 is as follows:

   
Six Months Ended
  
Three Month Ended
 
   
June 30, 2006
  
June 30, 2006
  
   

Number of
Shares
  
Weighted
Average
Price Per
Share
  

Number of
Shares
  
Weighted
Average
Price Per
Share
  
Outstanding at beginning of period
    
5,960,525
 
$
7.79
    
5,408,922
 
$
8.07
  
Options granted
    
275,500
 
$
4.34
    
275,500
 
$
4.34
  
Options exercised
    
(312,424
)
$
3.11
    
(229,046
)
$
3.11
  
Options forfeited or expired
    
(1,065,474
)
$
5.60
    
(597,249
)
$
5.76
  
Outstanding at June 30, 2006
    
4,858,127
 
$
8.37
    
4,858,127
 
$
8.37
  
 
The weighted average grant date fair values of options granted was $2.44 per share during the three and six and months ended June 30, 2006 and $2.01 and $1.86 per share during the three and six months ended June 30, 2005, respectively.
 
The following table summarizes the range of exercise prices and the weighted average prices for options outstanding, options exercisable and unvested options at June 30, 2006:

   
Options Outstanding
  
Options Exercisable
  
Unvested Options
  
Range of Exercise Prices
  

Number
Outstanding at
June 30, 2006
  
Weighted-
Average
Remaining
Contractual
Life (Years)
  

Weighted-
Average
Exercise
Price
  

Number
Exercisable at
June 30, 2006
  

Weighted-
Average
Exercise
Price
  

Number
Unvested at
June 30, 2006
  

Weighted-
Average
Exercise Price
  
$1.91 - $3.83
    
1,164,277
    
6.75
  
$
2.79
    
741,134
  
$
2.92
    
423,143
 
$
2.56
  
$4.05 - $7.90
    
1,394,350
    
6.20
    
5.21
    
892,076
    
5.57
    
502,274
   
4.57
  
$8.25 - $12.13
    
1,209,500
    
1.82
    
11.24
    
1,194,500
    
11.24
    
15,000
   
10.68
  
$14.00 - $18.63
    
1,090,000
    
0.68
    
15.22
    
1,090,000
    
15.22
    
—
   
0.00
  
$1.91 - $18.63
    
4,858,127
    
4.00
    
8.37
    
3,917,710
    
9.48
    
940,417
   
3.76
  
 
The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2006 is $798,986 and $419,890, respectively.
 
During the first six months of 2006, cash received from the exercise of options was $972,511.

Page 14
 
Restricted stock grants consist of the Company’s common stock. The Board set a two or four year vesting period for most of the issued restricted shares. The fair value of each restricted share grant is equal to the market price of the Company’s common stock at the date of grant. Expense relating to restricted shares is amortized ratably over the vesting period.
 
A summary of the Company’s restricted stock activity and related information for the three and six months ended June 30, 2006 is as follows:

   
Six Months Ended
  
Three Months Ended
 
   
June 30, 2006
  
June 30, 2006
  
   
Shares
  
Weighted-
Average Grant
Date Fair Value
  
Shares
  
Weighted-
Average Grant
Date Fair Value
  
Unvested at beginning of period
    
—
 
$
—
    
70,000
 
$
4.70
  
Granted
    
157,875
 
$
4.49
    
87,875
 
$
4.33
  
Vested
    
—
 
$
—
    
—
 
$
—
  
Forfeited
    
—
 
$
—
    
—
 
$
—
  
Unvested at June 30, 2006
    
157,875
 
$
4.49
    
157,875
 
$
4.49
  
 
(8) RECENT ACCOUNTING PRONOUNCEMENTS:

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We no not expect FIN 48 will have a material effect on our consolidated financial condition or results of operations.
 
(9) SALE OF COMMON STOCK:
 
On March 10, 2006, the Company entered into a Securities Purchase Agreement with certain investors for the private placement of 7,428,220 shares of the Company’s common stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). The gross proceeds from the sale of the Shares were approximately $30 million. The Warrants are exercisable for common stock of the Company at $5.39 per share beginning on September 9, 2006, and expiring on March 11, 2011. The exercise price and number of shares issuable upon exercise of the Warrants are subject to adjustment in the event of stock split, stock dividend, recapitalization, reclassification, combination or exchange of shares, reorganization, liquidation, dissolution, consolidation, or merger. Pursuant to the Securities Purchase Agreement, the Company filed with the SEC, within 30 days, a registration statement to register for resale the Shares and the shares of common stock issuable upon the exercise of the Warrants. This registration statement was declared effective on April 14, 2006. 

Page 15

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

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.
 
We are in the business of developing, manufacturing and selling pharmaceutical products that treat various medical conditions, as well as similar products that may be classified for regulatory purposes as medical devices or cosmetics. Most of our products and developmental product candidates address women’s healthcare issues. We have also developed Striant, a buccal system for the treatment of hypogonadism in men, and a desmopressin buccal product for the treatment of nocturnal enuresis in children.
 
All of our products and product candidates utilize our novel, proprietary Bioadhesive Delivery System (“BDS”), which consists principally of a polymer (polycarbophil) and, for pharmaceutical products, an active ingredient. The BDS is based upon the principle of bioadhesion, a process by which the polymer adheres to epithelial surfaces or mucosa. The polymer remains attached to epithelial surfaces or mucosa and is discharged upon normal cell turnover, a physiological process that, depending upon the area of the body, occurs every 12 to 72 hours or longer. This extended period of attachment permits the BDS to be utilized in products when extended duration of effectiveness is desirable or required.
 
Over the last few years we have laid a foundation for the Company’s long-term growth. We established marketing partnerships and forged alliances with strategic partners to create a base business of products that these partners market and that provide us with good margins and growth potential. In September 2002, we developed our own commercial organization to commercialize our women’s healthcare products in the United States. We more than doubled the size of that sales organization in the summer of 2003 upon FDA approval of Striant. Subsequently, in both January 2004 and February 2005, we restructured our sales and marketing organizations and downsized them to reduce costs. We have advanced several clinical research initiatives designed to realize additional potential from currently marketed Prochieve products by developing new indications, notably Prochieve 8% for the prevention of preterm birth in women at-risk for this condition while advancing the development of new product candidates. Our focus in fiscal 2006 is to build on this foundation and execute well in key areas.

Results of Operations - Six Months Ended June 30, 2006 versus Six Months Ended June 30, 2005

Net revenues decreased 5% in the six months ended June 30, 2006 to $10.1 million as compared to $10.6 million in the six months ended June 30, 2005. Net revenues in the six-month period ended June 30, 2005 reflect a provision for product returns amounting to $2.1 million. During the 2005 period, the Company re-evaluated its estimate for product returns to take into consideration additional factors related to inventory and return practices of its primary trade customers. We receive revenues both from selling our products to licensees, which we refer to as our “partnered products”, and selling our products that we promote through our own sales force to wholesalers and other distributors, which we refer to as our “promoted products.”
 
Partnered Products are:
 
·  
Crinone® sold to Ares Trading S.A. (“Serono”) on a worldwide basis;
·  
Striant® sold to our ex-U.S. marketing partners;

Page 16

·  
Replens® Vaginal Moisturizer sold to Lil’ Drug Store Products, Inc. (“Lil’ Drug Store”) ex-U.S.;
·  
RepHresh® Vaginal Gel sold to Lil’ Drug Store on a worldwide basis; and,
·  
Royalty and licensing revenues.
 
Promoted Products are:
 
·  
Prochieve® 8%, Prochieve 4% and Striant in the U.S.;
·  
Crinone® prescriptions in the U.S. from our OB/GYN audience, for which Serono pays us a 40% supplemental royalty; and
·  
Replens® Vaginal Moisturizer and RepHresh® Vaginal Gell, which Lil’ Drug Store pays us promotion fees to present to OB/GYNs.

Revenues from promoted products decreased 5% to $2.9 million in the six months ended June 30, 2006 as compared to $3.1 million in the six months ended June 30, 2005, primarily as a result of a decrease in sales of Striant and the Prochieve line of products, reflecting the trend among wholesalers to reduce their inventory levels of pharmaceutical products to a one-to-two month supply.

Revenues from partnered products decreased 5% to $7.1 million in the six months ended June 30, 2006 as compared to $7.5 million in the six months ended June 30, 2005, primarily as a result of the reduction in orders of RepHresh by one of our marketing partners. The higher level of orders of RepHresh in the six months ended June 30, 2005 reflected that marketing partner’s orders to support its launch of the product.

Gross profit as a percentage of revenues was 58% in the six months ended June 30, 2006 and 62% in the six months ended June 30, 2005. The 4% decrease in gross profit percentage from 2005 to 2006 was the result of a lower effective rate on royalties paid to Serono in the 2005 period. Under the Company’s Prochieve marketing sublicense, the Company is obligated to pay Serono a royalty equal to 30% of net sales on all Prochieve sales. This amounted to approximately $431,000 and $3,000 for the six months ended June 30, 2006 and June 30, 2005, respectively. The lower royalty expense in 2005 resulted from the deduction of actual product returns in calculating net sales on which the royalty is based. The Company is also obligated to pay Serono an additional 40% royalty on all Prochieve sales dispensed to patients of physicians on Serono’s target list of fertility specialists. This amounted to approximately $119,000 and $143,000 for the six months ended June 30, 2006 and June 30, 2005, respectively. Both of these royalty payments are included in cost of revenues.

Selling and distribution expenses decreased 35% to $3.2 million in the six months ended June 30, 2006, as compared to $5.0 million in the six months ended June 30, 2005. Selling and distribution expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, promotions, tradeshows, seminars, and other marketing-related programs. The Company restructured its sales force in February 2005, reducing the number of salespeople, which is reflected in the 2006 reduction in expense. Included in the 2006 expenses were sales force costs of approximately $1.7 million, product marketing expenses of approximately $569,000 and salary costs of approximately $244,000. Expenses in 2005 included approximately $2.9 million in sales force costs, approximately $768,000 in product marketing expenses and approximately $467,000 in salary costs.

General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. General and administrative expenses decreased 5% to $3.3 million in the six months ended June 30, 2006 as compared to $3.5 million in the six months ended June 30, 2005. The reduction in 2006 expenses is primarily the result in a decrease in salary expense ($587,000), offset by increases in insurance premiums ($164,000) and the 2006 expense for stock-based compensation ($262,000).

Page 17

Research and development expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with product development, as well as the cost of conducting and administering clinical studies and the cost of regulatory filings for our products. Research and development expenses increased 33% to $3.4 million in the six months ended June 30, 2006 as compared to $2.5 million in the six months ended June 30, 2005. The increase is primarily related to the higher costs associated with the Company’s ongoing Phase III trial for Prochieve® 8% in preventing preterm birth in pregnant women who are at-risk for this problem.

As a result, the net loss for the six months ended June 30, 2006 was $5.2 million or $(0.11) per common share as compared to the net loss for the six months ended June 30, 2005 of $5.8 million or $(0.14) per common share.

Results of Operations - Three Months Ended June 30, 2006 versus Three Months Ended June 30, 2005

Net revenues decreased 13% in the three months ended June 30, 2006 to $5.5 million as compared to $6.3 million in the three months ended June 30, 2005. Net revenues in the second quarter of 2005 reflect a provision for product returns amounting to $1.6 million. During the 2005 quarter, the Company re-evaluated its estimate for product returns to take into consideration additional factors related to inventory and return practices of its primary trade customers.

Revenues from promoted products decreased 33% to $1.1 million in the three months ended June 30, 2006 as compared to $1.7 million in the three months ended June 30, 2005, primarily as a result of a decrease in sales of Striant and the Prochieve line of products, reflecting the trend among wholesalers to reduce their inventory levels of pharmaceutical products to a one-to-two month supply.

Revenues from partnered products decreased 5% to $4.4 million in the three months ended June 30, 2006 as compared to $4.6 million in the three months ended June 30, 2005, primarily as a result of the reduction in orders of RepHresh by one of our marketing partners. The higher level of orders of RepHresh in the 2005 quarter reflected that marketing partner’s orders to support its launch of the product.

Gross profit as a percentage of revenues was 58% in the three months ended June 30, 2006 and 65% in the three months ended June 30, 2005. The 7% decrease in gross profit percentage from 2005 to 2006 was the result of a change in product mix and a lower effective rate on royalties paid to Serono in the 2005 period. Under the Company’s Prochieve marketing sublicense, the Company is obligated to pay Serono a royalty equal to 30% of net sales on all Prochieve sales. This amounted was approximately $67,000 and $158,000 for the three months ended June 30, 2006 and June 30, 2005, respectively. In 2005, the deduction of actual product returns in calculating net sales on which the royalty is based reduced the royalty expense by approximately $100,000. The Company is also obligated to pay Serono an additional 40% royalty on all Prochieve sales dispensed to patients of physicians on Serono’s target list of fertility specialists. This amounted to approximately $63,000 and $65,000 for the three months ended June 30, 2006 and June 30, 2005, respectively. Both of these royalty payments are included in cost of revenues.

Selling and distribution expenses decreased 17% to $1.7 million in the three months ended June 30, 2006, as compared to $2.1 million in the three months ended June 30, 2005. Included in the 2006 expenses were sales force costs of approximately $829,000, product marketing expenses of approximately $385,000 and salary costs of approximately $141,000. Expenses in 2005 included approximately $1.2 million in sales force costs, approximately $286,000 in product marketing expenses and approximately $195,000 in salary costs.

Page 18

General and administrative expenses increased 4% to $1.8 million in the three months ended June 30, 2006 as compared to $1.7 million in the three months ended June 30, 2005. The increase in 2006 expenses is primarily the result of the 2006 expense for stock-based compensation ($218,000) and an increase in insurance premiums ($85,000) offset partially by reductions in salaries ($184,000) and professional fees ($86,000).

Research and development expenses increased 32% to $1.6 million in the three months ended June 30, 2006 as compared to $1.2 million in the three months ended June 30, 2005. The increase is primarily related to the higher costs associated with the Company’s ongoing Phase III trial for Prochieve® 8% in preventing preterm delivery in pregnant women who are at-risk for this problem. There were 61 study centers and 599 patients enrolled in the Prochieve preterm birth study at June 30, 2006, compared to 33 study centers and 175 patients enrolled at June 30, 2005.

As a result, the net loss for the three months ended June 30, 2006 was $2.5 million or $(0.05) per common share as compared to the net loss for the three months ended June 30, 2005 of $1.6 million or $(0.04) per common share.

Liquidity and Capital Resources

Cash and cash equivalents were $22,003,677 and $7,136,854 at June 30, 2006 and December 31, 2005, respectively.

Cash provided by (used in) operating, investing and financing activities is summarized as follows:

   
Six Months Ended
  
   
June 30,
  
   
2006
  
2005
  
Cash flows:
          
 
  
Operating activities
  
$
(2,986,885
)
$
(5,314,921
)
Investing activities
    
(9,500
)
  
(67,216
)
Financing activities
    
17,839,454
   
(5,374,794
)

Operating Activities:

Net cash used in operating activities in 2006 resulted primarily from the net loss, net of non-cash items amounting to $2,187,312, a reduction in accrued expenses of approximately $913,000, related to customer usage of sales return credits and to a reduction in accrued salaries, an increase in inventory (primarily Prochieve manufactured in the second quarter of 2006) amounting to approximately $297,000 and a decrease in accounts payable of approximately $142,000. These were partially offset by the receipt of milestone payments received from a licensee totaling $800,000.

Page 19

Net cash used in operating activities in 2005 resulted primarily from the net loss, net of non-cash items amounting to $1,723,583, a reduction in accrued expenses of approximately $2,260,000, principally related to customer usage of sales return credits , an increase in accounts receivables of approximately $504,000 resulting from increased second quarter 2005 sales, an increase in inventory, primarily related to Striant amounting to approximately $349,000 and a decrease in accounts payable of approximately $1,300,000. These were partially offset by a reduction in prepaid expense and other current assets of approximately $711,000 primarily as a result of a reduction in prepaid insurance.

Investing Activities:

Net cash used in investing activities in 2006 and 2005 was primarily attributable to the purchase of office equipment, including computers

Financing Activities:

Net cash provided by financing activities in 2006 resulted from the receipt of $28,766,126 in net proceeds from the issuance of common stock and $972,511 from the exercise of stock options. Offsetting these receipts was the payment of $11,817,933 on the Company’s two product financing agreements (including an $11,585,235 true-up payment on the Striant Agreement and $81,250 in dividends paid to the owners of the Company’s Series C Convertible Preferred Stock.

Net cash used in financing activities in 2005 was attributable to the $10 million payoff of the subordinated convertible note due on March 15, 2005, $2,193,544 paid on the Company’s two product financing agreements with PharmaBio (including the $1,891,944 true-up payment on the women’s healthcare products financing agreement) and $81,250 in dividends paid to the owners of the Company’s Series C Convertible Preferred Stock. Offsetting these payments was the receipt by the Company of $6,900,000 in gross proceeds from the issuance of Series E Convertible Preferred Stock.

The Company has an effective registration statement that we filed with the SEC using a shelf registration process. Under the shelf registration process, we may offer from time to time shares of our common stock up to an aggregate amount of $75,000,000. To date, the Company has sold approximately $56,400,000 in common stock under the registration statement. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the marketing of one or more of our products and the development and/or commercialization of one or more of our product candidates.

In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of the patents underlying the Company’s BDS, other patent applications and related technology, the Company pays Bio-Mimetics, Inc. a royalty equal to two percent of the net sales of products based on the BDS, up to an aggregate of $7.5 million or until the last of the relevant patents expire. The Company is required to prepay 25% of the remaining maximum royalty obligation, in cash or stock at the option of the Company, within 30 days of March 2 of any year in which the closing price on that date of the Company’s common stock on any national securities exchange is $20 or more. Through June 30, 2006, the Company has paid approximately $3.5 million in royalty payments.

Page 20

As of June 30, 2006, the Company has outstanding exercisable options and warrants that, if exercised, would result in approximately $42.1 million of additional capital and would cause the number of shares outstanding to increase. However, there can be no assurance that any such options or warrants will be exercised.

Significant expenditures anticipated by the Company in the near future are concentrated on research and development related to new products and new indications for currently approved products. In addition, the Company anticipates it will spend approximately $50,000 on property and equipment in 2006.

As of June 30, 2006, the Company had available net operating loss carryforwards of approximately $135 million to offset its future U.S. taxable income. There can be no assurance that the Company will have sufficient income to utilize the net operating loss carryforwards or that the net operating loss carryforwards will be available at that time.

In accordance with Statement of Financial Accounting Standards No. 109, as of June 30, 2006 and December 31, 2005, other assets in the accompanying consolidated balance sheets include deferred tax assets of approximately $48 and $45 million, respectively (comprised primarily of a net operating loss carryforward), for which a full valuation allowance has been recorded since the realizability of the deferred tax assets are not determinable.

Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements

The Company’s contractual obligations, commercial commitments and off-balance sheet arrangements disclosures in its Annual Report on Form 10-K for the year ended December 31, 2005 have not materially changed since that report was filed.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We no not expect FIN 48 will have a material effect on our consolidated financial condition or results of operations.
 
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 15 of the Annual Report on Form 10-K for the year ended December 31, 2005, 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 our 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, using such factors as historical trends, distributor inventory levels and product prescription data, 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 those sales are made by the strategic alliance partners. License fees are recognized in net sales over the term of the license.

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Accounting for PharmaBio Agreements. In July 2002 and March 2003, the Company entered into agreements with PharmaBio 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. 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 minimum to be paid by the Company over the amount received by the Company is being recorded as interest expense over the terms of the agreements.
 
Stock-Based Compensation - Employee Stock-Based Awards. On January 1, 2006, the Company adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes previous accounting under APB 25 for periods beginning in fiscal year 2006. In March 2005, the SEC issued SAB 107 providing supplemental implementation guidance for SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The Company adopted SFAS 123(R) using the modified prospective transition method which requires the application of the accounting standard starting from January 1, 2006. The Condensed Consolidated Financial Statements, as of and for the three and six months ended June 30, 2006, reflect the impact of SFAS 123(R). Stock-based compensation expense for the three and six months ended June 30, 2006, was $288,997 and $390,054, respectively, which in each case consisted primarily of stock-based compensation expense related to employee stock options recognized under SFAS 123(R).
 
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense for employee stock options had been recognized in the Company’s Consolidated Statements of Operations, because the exercise price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. In accordance with the modified prospective transition method the Company used in adopting SFAS 123(R), the results of operations prior to fiscal year 2006 have not been restated to reflect, and do not include, the possible impact of SFAS 123(R).
 
Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest. Stock-based compensation expense recognized in the three and six months ended June 30, 2006 included compensation expense for stock-based awards granted prior to, but not yet vested as of December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the stock-based awards granted subsequent to December 31, 2005, based on the fair value on the grant date estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company is continuing to use the straight line single-option method of attributing the value of stock-based compensation expense. Compensation expense for all stock-based awards granted prior to January 1, 2006 will continue to be recognized using the straight line single-option approach, while compensation expense for all stock-based awards granted subsequent to December 31, 2005, will also be recognized using the straight line single-option method. Because stock-based compensation expense to be recognized in the results for periods beginning after December 31, 2005, is based on awards ultimately expected to vest, the amounts will be reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to 2006, the Company accounted for forfeitures as they occurred for the purposes of pro forma information under SFAS 123, as disclosed in the Notes to Consolidated Financial Statements for the related periods.

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Upon adoption of SFAS 123(R), the Company selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.
 
Generally, stock options granted under the 1996 Plan prior to January 1, 2006 have a contractual term of ten years from the date of grant, and stock options granted under the 1996 Plan on or after January 1, 2006 are expected to have a contractual term of seven years from the date of grant.

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 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. Controls And Procedures

Evaluation of Disclosure Controls and Procedures
 
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Claims and lawsuits have been filed against the Company from time to time. Although the results of pending claims 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 reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance in the event of for any unfavorable outcome resulting from these actions.

Item 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.

Forward-Looking Information

From time to time, the Company and its representatives make written or verbal forward-looking statements, including statements contained in this and other filings with the SEC 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 clinical research programs, sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions and general views 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 that 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 might cause future results to differ include, but are not limited to, the following: the successful marketing of Prochieve® 8%, Prochieve® 4% and Striant® in the U.S.; whether Prochieve is dispensed to patients of physicians on Serono’s target list of fertility specialists at a rate of less than 10% the amount of Crinone® dispensed to those patients as further described in the Company’s annual report on Form 10-K, the timing and size of orders for out-licensed products from our marketing partners; the timely and successful development of products; the timely and successful completion of clinical studies, including the Phase III study of Prochieve 8% in preventing preterm birth and vaginally-administered lidocaine studies; success in obtaining acceptance and approval of new products and indications for current products by the FDA and international regulatory agencies, including acceptance and approval of an indication for preventing preterm birth for Prochieve 8% from the FDA; the impact of competitive products and pricing; competitive economic and regulatory factors in the pharmaceutical and health care industry; general economic conditions; and other risks and uncertainties that may be detailed, from time to time, in the Company’s reports filed with the SEC. 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 Form 10-Q, 8-K, and 10-K reports to the SEC.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities
 
None.

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

The Annual Meeting of shareholders was held on May 15, 2006. At the meeting:

1. Seven nominees for director were elected for one-year terms by a vote of shares as follows:

Valerie L. Andrews received 38,007,462 votes for her election (99.4% of shares voted; 72.1% of shares outstanding) and 241,335 votes were withheld (0.6% of shares voted; 0 .5% of outstanding shares).

Edward A. Blechschmidt received 38,019,902 votes for his election (99.4% of shares voted; 72.1% of shares outstanding) and 228,895 votes were withheld (0.6% of shares voted; 0 .4% of outstanding shares).

James S. Crofton received 38,024,412 votes for his election (99.4% of shares voted; 72.1% of shares outstanding) and 224,385 votes were withheld (0.6% of shares voted; 0.4% of outstanding shares).

Stephen Kasnet received 38,015,502 votes for his election (99.4% of shares voted; 72.1% of shares outstanding) and 233,295 votes were withheld (0.6% of shares voted; 0.4% of outstanding shares).

Robert S. Mills, Jr. received 38,010,702 votes for his election (99.4% of shares voted; 72.1% of shares outstanding) and 238,095 votes were withheld (0.6% of shares voted; 0.5% of outstanding shares).

Denis M. O’Donnell received 37,992,662 votes for his election (99.3% of shares voted; 72.0% of shares outstanding) and 256,135 votes were withheld (0.7% of shares voted; 0.5% of outstanding shares).

Selwyn P. Oskowitz received 38,009,912 votes for his election (99.4% of shares voted; 72.1% of shares outstanding) and 236,885 votes were withheld (0.6% of shares voted; 0.4% of outstanding shares).
 
2. The designation of Goldstein Golub Kessler LLP to audit the books and records of the Company for the year ending December 31, 2006 was ratified by a vote of 99.7% of shares voted (or 72.3% of outstanding shares).

For
    
Against
    
Abstain
  
               
38,143,596
    
32,358
    
72,843
  

Item 5. Other Information

None.

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Item 6. Exhibits

(a)  
Exhibits
 
10.60
Employment Agreement by and between Columbia Laboratories, Inc. and Robert S. Mills dated March 30, 2006.1/
   
10.61
Employment Agreement by and between Columbia Laboratories, Inc. and Michael McGrane dated March 30, 2006.1/
   
10.62
Letter Agreement Supplement to Striant Investment and Royalty Agreement dated April 14, 2006.2/
   
10.63
Form of Restricted Stock Agreement.3/
   
10.64
Form of Option Agreement.3/
   
10.65
Description of the Registrant’s compensation and reimbursement practices for non-employee directors.3/
   
31(i).1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company.4/
   
31(i).2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company.4/
   
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 4/
   
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 4/
   
1/
Incorporated by reference to the Company’s Current Report on Form 8-K, dated  March 30, 2006
   
2/
Incorporated by reference to the Company’s Current Report on Form 8-K, dated April 14, 2006.
   
3/
Incorporated by reference to the Company’s Current Report on Form 8-K, dated May 15, 2006.
   
4/
Filed herewith.

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SIGNATURES

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

     
    COLUMBIA LABORATORIES, INC. 
 
   
DATE: August 9, 2006   /S/ DAVID L. WEINBERG
 
DAVID L. WEINBERG, Vice President-
Finance and Chief Financial Officer
 
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