10-Q 1 0001.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-26372 CELLEGY PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) California 82-0429727 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080 (Address of principal executive offices, including zip code) (650) 616-2200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- The number of shares outstanding of the registrant's common stock at October 31, 2000 was 13,772,831. CELLEGY PHARMACEUTICALS, INC. INDEX TO FORM 10-Q
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements ( Unaudited ) Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........................................... 3 Consolidated Statements of Operations for three and nine months ended September 30, 2000 and 1999, and the period from June 26, 1989 (inception) through September 30, 2000... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999, and the period from June 26, 1989 (inception) through September 30, 2000............. 5 Notes to Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 3. Quantitative and Qualitative Disclosure of Market Risk...... 10 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... 10 Item 2. Changes in Securities and Use of Proceeds................... 10 Item 3. Defaults Upon Senior Securities............................. 10 Item 4. Submission of Matters to a Vote of Security Holders......... 11 Item 5. Other Information........................................... 11 Item 6. Exhibits and Reports on Form 8-K............................ 11 Signature(s).................................................................... 12
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Cellegy Pharmaceuticals, Inc. (a development stage company) Consolidated Balance Sheets (Amounts in thousands)
September 30, 2000 December 31, 1999 ----------------------- ---------------------- (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents ................................................. $ 2,620 $ 804 Short-term investments .................................................... 5,608 10,971 Prepaid expenses and other current assets ................................. 1,015 1,026 ----------- ----------- Total current assets ........................................................... 9,243 12,801 Long-term investments .......................................................... -- 4,963 Property and equipment, net .................................................... 2,847 3,149 Intangible assets related to acquisition, net of accumulated amortization ...... 1,666 -- ----------- ----------- Total assets ................................................................... $ 13,756 $ 20,913 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities .................................. $ 525 $ 475 Accrued research fees ..................................................... 428 239 Accrued compensation and related expenses ................................. 120 106 Current portion of note payable ........................................... 781 1,153 ----------- ----------- Total current liabilities ...................................................... 1,854 1,973 Long-term portion of note payable .............................................. 1,590 2,882 Other long-term liabilities .................................................... 314 219 Shareholders' equity: Common stock, no par value; 20,000,000 shares authorized: 12,262,614 shares issued and outstanding at September 30, 2000 and 12,010,242 shares issued and outstanding at December 31, 1999 ................... 57,168 55,368 Accumulated other comprehensive loss ...................................... (12) (35) Deficit accumulated during the development stage .......................... (47,158) (39,494) ----------- ----------- Total shareholders' equity ................................................ 9,998 15,839 ----------- ----------- Total liabilities and shareholders' equity ..................................... $ 13,756 $ 20,913 =========== =========== The accompanying notes are an integral part of these condensed financial statements.
3 Cellegy Pharmaceuticals, Inc. (a development stage company) Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except per share amounts)
Period from June 26, 1989 (inception) Three Months Ended Nine Months Ended through September 30, September 30, September 30, 2000 1999 2000 1999 2000 ----------- ----------- ------------ ----------- -------------- Revenues: Licensing, milestone, and development funding ............. $ -- $ 25 $ -- $ 67 $ 2,697 Government grants ................... 19 -- 91 -- 521 Product sales ....................... 607 -- 1,197 712 2,553 -------- -------- -------- -------- -------- Total revenues 626 25 1,288 779 5,771 Operating expenses: Cost of product sales ............... 151 -- 287 194 670 Research and development ............ 2,577 1,604 6,730 5,894 34,272 General and administrative .......... 886 570 2,104 1,983 14,992 Acquired in-process technology ...... -- -- -- -- 3,843 -------- -------- -------- -------- -------- Total cost and expenses .................. 3,614 2,174 9,121 8,071 53,777 -------- -------- -------- -------- -------- Operating loss ........................... (2,988) (2,149) (7,833) (7,292) (48,006) Interest income (expense), and Other income, net ............... (71) 238 169 431 2,297 -------- -------- -------- -------- -------- Net loss ................................. (3,059) (1,911) (7,664) (6,861) (45,709) Non-cash preferred dividends ............. -- -- -- -- 1,449 -------- -------- -------- -------- -------- Net loss applicable to common shareholders $ (3,059) $ (1,911) $ (7,664) $ (6,861) $(47,158) ======== ======== ======== ======== ======== Basic and diluted net loss per common share $ (0.25) $ (0.17) $ (0.63) $ (0.65) ======== ======== ======== ======== Basic and diluted weighted average common shares outstanding .................. 12,258 11,328 12,134 10,560 ======== ======== ======== ======== The accompanying notes are an integral part of these condensed financial statements.
4 Cellegy Pharmaceuticals, Inc. (a development stage company) Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands)
Period from June 26, 1989 (inception) Nine Months Ended September 30, through ---------------------------------------- September 30, 2000 1999 2000 ----------------- ----------------- -------------- Operating activities Net cash used in operating activities ......................... $ (6,785) $ (7,545) $(39,311) Investing activities Purchase of property and equipment ............................ (54) (739) (3,807) Purchases of investments ...................................... -- (18,135) (60,525) Sales and maturities of investments ........................... 10,326 14,704 54,883 Purchase of Quay, net of cash acquired ........................ (368) -- (368) -------- -------- -------- Net cash provided by (used in) investing activities ........... 9,904 (4,170) (9,817) Financing activities Proceeds from notes payable ................................... $ -- $ 1,280 $ 8,047 Repayment of notes payable .................................... (1,664) (233) (4,240) Other long-term liabilities ................................... -- 31 219 Net proceeds from issuance of common stock .................... 361 10,562 36,044 Issuance of convertible preferred stock, net of issuance costs -- -- 11,758 Deferred financing costs ...................................... -- -- (80) -------- -------- -------- Net cash provided by financing activities ..................... (1,303) 11,640 51,748 -------- -------- -------- Net increase (decrease) in cash and cash equivalents .......... $ 1,816 $ (75) $ 2,620 Cash and cash equivalents, beginning of period ................ 804 1,611 -- -------- -------- -------- Cash and cash equivalents, end of period ...................... $ 2,620 $ 1,536 $ 2,620 ======== ======== ======== The accompanying notes are an integral part of these condensed financial statements.
5 Cellegy Pharmaceuticals, Inc. (a development stage company) Notes to Consolidated Financial Statements Note 1. - Basis of Presentation The accompanying interim consolidated financial statements have been prepared by Cellegy in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of operating results for the nine and three months ended September 30, 2000 and may not necessarily be indicative of the results to be expected for any other interim period or for the full year. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in Cellegy's Annual Report on Form 10-K for the year ended December 31, 1999. Note 2. - Recent Accounting Pronouncements In June 1998, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" ("SFAS 133"), which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS 133 is effective for fiscal years beginning after June 15, 2000 and is not anticipated to have an impact on Cellegy's results of operations or financial condition when adopted as Cellegy holds no derivative financial instruments and does not currently engage in hedging activities. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition. The adoption of SAB 101 has no significant impact on Cellegy's revenue recognition policy or results of operations. In March 2000, the FASB issued interpretation No. 44, ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB 25." This interpretation clarifies (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this interpretation are recognized on a prospective basis from July 1, 2000. The adoption of FIN 44 does not have a material impact on Cellegy's financial statements. Note 3. - Principles of Consolidation Our consolidated financial statements include the accounts of Cellegy Australia Pty Ltd ("Cellegy Australia") from June 14, 2000, the date of acquisition, which are immaterial. Note 4. - Comprehensive Income 6 Accumulated other comprehensive income (loss) presented on the accompanying balance sheet consists of the accumulated net unrealized gain (loss) on available-for-sale investments. Total comprehensive loss for nine months ended September 30, 2000 was $7,635,000 compared with $6,881,000 for the same nine months ended September 30, 1999. Total comprehensive loss for three months ended September 30, 2000 and September 30, 1999 was $3,042,000 and $1,935,000, respectively. Note 5. - Segment Reporting Cellegy has two business segments: pharmaceuticals and cosmeceuticals. Pharmaceuticals include primarily research and development expenses for potential prescription products to be marketed directly by us or through corporate partners. Pharmaceuticals also include revenues and expenses associated with the operations of Cellegy Australia. The cosmeceutical business segment primarily includes development expenses for non-prescription skin care products. Using related technologies, Cellegy is currently incurring development expenses and receiving all of its product sales from one customer, Gryphon Development, Inc., which is selling products exclusively in the United States through a major specialty store chain. The following table contains information (amount in thousands) regarding revenues and loss from operating each business segment for the three and nine months ended September 30, 2000 and 1999.
Three months ended September 30, Nine months ended September 30, 2000 1999 2000 1999 Revenues: Pharmaceuticals $ 57 $ 25 $ 141 $ 67 Cosmeceuticals 569 -- 1,147 712 ------- ------- ------- ------- $ 626 $ 25 $ 1,288 $ 779 ======== ======= ======= ======= Profit/(Loss) from Operations: Pharmaceuticals $(3,363) $(2,035) $(8,524) $(7,351) Cosmeceuticals 375 (114) 691 59 ------- ------- ------- ------- $(2,988) $(2,149) $(7,833) $(7,292) ======== ======= ======= ======= =================================================================================================================
Note 6. - Acquisition Activity In June 2000, we acquired all assets of the Australian company, Quay Pharmaceuticals Pty Ltd ("Quay"), an Australian pharmaceutical company producing Rectogesic(TM), a drug similar to Anogesic. The acquired assets consisted of the company's inventory, other tangible assets, and purchased technology. The aggregate value of the 169,224 shares of our unregistered common stock paid to Quay with an estimated value of $977,000, the 171,146 warrants to purchase common stock with an estimated value of $484,000, and cash payments of $369,000 were allocated to net tangible assets of $92,000, purchased technology of $770,000, and goodwill of $968,000 based on their estimated fair values on the acquisition date. The recorded intangible assets will be amortized over three to ten years. Note 7. - Intangible Assets Intangible assets, including purchased technology associated with the Quay acquisition, are stated at cost and amortized on a straight-line basis over their estimated useful lives of three years. Goodwill, which represents the excess of acquisition cost over the net assets acquired, is being amortized on a straight-line basis over ten years. As of September 30, 2000 accumulated amortization was $164,000. Note 8. - Subsequent Event 7 In October 2000, we completed a private placement of 1.5 million shares of our common stock, resulting in $11.6 million of gross proceeds to Cellegy. Participants in the financing included funds managed by Baker/Tisch Investments in New York, Capital Research & Management in San Francisco, and Framlington in the United Kingdom. Capital Research and Framlington are new investors in the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q includes forward-looking statements. Words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These statements concern matters that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further, we undertake no obligation to revise any statements in order to reflect events or circumstances that may arise after the date of this report. Actual events or results may differ materially from those discussed in this Quarterly Report. Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company incorporated in California in 1989, is engaged in the development of prescription drugs and high performance skin care products. We are developing several prescription drugs, including Anogesic(R), a nitroglycerin-based product for the treatment of anal fissures and hemorrhoids and two transdermal testosterone gel products, Tostrex(TM), for the treatment of male hypogonadism, a condition that affects men, generally above the age of forty, and Tostrelle(TM), for the treatment of diminished sexual energy in menopausal women. We have developed a line of anti-wrinkling cosmeceutical products which we believe will address the skin care needs of an aging population. General In December 1997, we completed an asset purchase agreement with Neptune Pharmaceutical Corporation ("Neptune") to acquire patent and other intellectual property rights relating to Anogesic. Our expenses relating to Anogesic product development and clinical trials are expected to increase during the remainder of 2000 as a result of a second Phase III clinical trial initiated in the first quarter 2000 for pain reduction in chronic anal fissures and two Phase II trials for the treatment of hemorrhoids. In September 1998, we began initial shipments and product sales of our Intensive Moisturizing formulation to Gryphon Development Inc. ("Gryphon"), the product development arm of a major specialty retailer. This formulation is a key ingredient in a line of healing hand creams sold at the specialty retailer's chain of stores in the United States. In October 1999, Cellegy and Glaxo Welcome ("Glaxo") terminated a license agreement with the return to us of all Glylorin(TM) product rights and with no further financial obligations by either party. We do not currently intend to develop Glylorin on our own, but will seek an appropriate partner for certain geographic territories to develop the product in exchange for possible contract payments and royalties on future sales. On June 14, 2000, Cellegy acquired all the assets of Quay Pharmaceuticals Pty Ltd, an Australian company producing Rectogesic(TM) (nitroglycerin ointment), a product similar to Anogesic, for a combination of Cellegy stock, warrants and cash. The operations in Australia are incorporated in a wholly owned subsidiary, Cellegy Australia Pty Ltd. The amortization of technology and goodwill associated with the acquisition was $134,000 for the third quarter and will be the same amount for the fourth quarter. Results of Operations Revenues. Cellegy had revenues of $1,288,000 and $779,000 for the nine months ended September 30, 2000 and 1999, respectively. During the nine months ended September 30, 2000, revenues consisted of $1,147,000 in product sales to Gryphon, the development subsidiary of a specialty retailer, $50,000 in Rectogesic sales through Cellegy's Australian 8 subsidiary, and $91,000 in development funding associated with a Small Business Innovation Research ("SBIR") grant from the National Institutes of Health. During the nine months ended September 30, 1999, revenues consisted of $712,000 in product sales to Gryphon and $67,000 for development funding associated with the Glaxo license agreement. Cellegy had revenues of $626,000 and $25,000 for the three months ended September 30, 2000 and 1999, respectively. During the three months ended September 30, 2000, revenues consisted of $569,000 in product sales to Gryphon, $38,000 in Rectogesic sales in Australia, and $19,000 in development funding associated with the SBIR grant. During the three months ended September 30, 1999, revenue of $25,000 consisted exclusively of development funding from Glaxo. Sales to Gryphon in the fourth quarter are expected to be less than the third quarter 2000 sales. Research and Development Expenses. Research and development expenses were $6,730,000 for the nine months ended September 30, 2000, compared with $5,894,000 for the same period last year. During the three months ended September 30, 2000 and 1999, research and development expenses were $2,577,000 and $1,604,000, respectively. Higher expenses for the third quarter of 2000 were due primarily to costs associated with Cellegy's Phase III clinical trial studying Anogesic for the treatment of anal fissures, Phase II trials with Anogesic for the treatment of hemorrhoids and pain following hemorrhoidectomy surgery, as well as testosterone gel clinical studies for both men and women. Research expenses are expected to increase during the remainder of 2000 due primarily to peak activity associated with these clinical trials. General and Administrative Expenses. General and administrative expenses were $2,104,000 for the nine months ended September 30, 2000, compared with $1,983,000 for the same period last year. We incurred general and administrative expenses of $886,000 and $570,000 for the three months ended September 30, 2000 and 1999, respectively. The increases for both the three-month and nine-month periods in 2000 were primarily due to expenses associated with increased corporate development programs and were partially due to increased spending on investor relations programs and for marketing of Rectogesic in Australia. General and administrative expenses are expected to increase in the future due, in part, to the addition of certain Australian marketing programs. Interest Income (Expense), and Other Income, Net. Cellegy earned net interest income of $333,000 and $431,000 for the nine months ended September 30, 2000 and 1999, respectively. For the three months ended September 30, 2000 and 1999, we earned net interest income of $63,000 and $238,000, respectively. Net interest income is expected to increase in the fourth quarter due to increased cash and investment balances associated with the recently completed private placement and reduced bank loan balances. Net Loss. The net loss applicable to common shareholders was $7,664,000 or $0.63 per share for the nine months ended September 30, 2000 based on 12,134,000 weighted average shares outstanding, compared with a net loss of $6,861,000 or $0.65 per share for the nine months ended September 30, 1999 based on 10,560,000 weighted average shares outstanding. For the three months ended September 30, 2000, the net loss applicable to common shareholders was $3,059,000 or $0.25 per share based on 12,258,000 average shares outstanding compared with a net loss applicable to common shareholders of $1,911,000 or $0.17 per share during the same period in 1999 when 11,328,000 weighted average shares were outstanding. Liquidity and Capital Resources Cellegy has experienced net losses and negative cash flow from operations each year since its inception. Through September 30, 2000, we have incurred an accumulated deficit of $47.2 million and have consumed cash from operations of $39.3 million. Our equity financings include $6.4 million in net proceeds from our initial public offering in August 1995, $6.8 million in net proceeds from a preferred stock financing in April 1996, $3.8 million in net proceeds from a private placement of common stock in July 1997, $13.8 million in net proceeds from a secondary public offering of common stock in November 1997, and $10.0 million in net proceeds from a private placement of common stock in July 1999. Our cash and investments were $8.2 million at September 30, 2000, compared with $16.7 million at December 31, 1999. Cash and investment balances after the October 3, 2000 private placement financing increased to approximately $19.8 million. Cellegy's operations have used and will continue to use substantial amounts of cash. We have no current source of significant ongoing revenues or capital beyond existing cash and investments, current product sales to Gryphon Development and revenues from Cellegy Australia. We have an existing $5.0 million credit line with our bank with a current available balance of $2.6 million. In order to complete the research and development and other activities necessary to commercialize 9 our products, additional financing will be required. Our future expenditures and capital requirements depend on numerous factors including, without limitation, the progress and focus of our research and development programs, the progress and results of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, changes to our existing research relationships, our ability to establish collaborative arrangements, the initiation of commercialization activities, the purchase of capital equipment and the availability of other financing. In the course of our development activities, we have incurred significant losses and expect to incur substantial additional development costs. As a result, we will require additional funds to finance operations and may seek private or public equity investments and future collaborative arrangements with third parties to meet such needs. There is no assurance that such funding will be available for us to finance our operations on acceptable terms, if at all. Insufficient funding may require us to delay, reduce or eliminate some or all of our research and development activities, planned clinical trials and administrative programs. We believe that available cash resources, including the funds raised during the recently concluded private placement, and the interest thereon will be adequate to satisfy our capital needs through at least December 31, 2001. Proceeds from the recent financing will provide us with the resources necessary to complete our ongoing clinical trials. Factors That May Affect Future Operating Results This Quarterly Report on Form 10-Q contains forward-looking statements which involve risks and uncertainties, including, but not limited to, statements concerning the completion of clinical trials, particularly our ongoing Phase III trials using Anogesic and Tostrex, the timing of planned regulatory filings, the validity of our patent coverage, the issuance of future patents pending or patents applied for, and the need for additional funds. The factors discussed in Cellegy's reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 1999, in particular under the caption "Factors That May Affect Future Operating Results," should be carefully considered when evaluating our business and prospects. Item 3. Quantitative and Qualitative Disclosures About Market Risk We invest our excess cash in short-term, investment grade, fixed income securities under an investment policy. All of our investments are classified as available-for-sale. 50% of our securities will mature by the end of 2000. We believe that potential near-term losses in future earnings, fair values or cash flows related to their investment portfolio would not be significant. Cellegy has a long-term note payable outstanding with an interest rate that currently varies with the lender's prime rate. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None 10 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K On October 3, 2000, we completed a private placement of 1.5 million shares of our common stock, resulting in $11.6 million of gross proceeds to Cellegy. This private placement was reported in a Form 8-K filing on October 5, 2000. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CELLEGY PHARMACEUTICALS, INC. Date: November 3, 2000 /s/ K. Michael Forrest ------------------------------------- K. Michael Forrest Chairmain of the Board, President and Chief Executive Officer Date: November 3, 2000 /s/ A. Richard Juelis ------------------------------------- A. Richard Juelis Vice President, Finance and Chief Financial Officer 12