SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
--------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Delaware 52-1758016
- --------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
301 South State Street, Newtown, PA 18940
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 579-7388
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 31, 1998:
Class Number of Shares
--------------------------- ----------------
Common Stock $.01 par value 8,569,454
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<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
December 31, March 31,
1997 1998
------------ ---------
(unaudited)
(in thousands except
share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 16,379 $ 16,214
Short-term investments ................................. 6,392 4,193
Interest receivable .................................... 88 73
Prepaid expenses ....................................... 190 252
-------- --------
Total current assets .............................. 23,049 20,732
Equipment, net ............................................ 103 103
Other assets .............................................. 13 13
-------- --------
Total assets ...................................... $ 23,165 $ 20,848
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 551 $ 394
Accrued expenses ....................................... 1,906 1,818
-------- --------
Total current liabilities ......................... 2,457 2,212
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding .............. -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 8,567,579 and 8,569,454 shares issued
and outstanding in 1997 and 1998, respectively ....... 86 86
Additional paid-in capital ............................. 47,298 47,302
Deferred compensation .................................. (313) (282)
Deficit accumulated during the development stage ....... (26,363) (28,470)
-------- --------
Stockholders' equity .............................. 20,708 18,636
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity ........ $ 23,165 $ 20,848
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997 and 1998 and for
the period from January 10, 1992 (inception) to March 31, 1998
(Unaudited)
For the Period
Three Months Ended March 31, from 1/10/92
------------------------------ (inception) to
1997 1998 3/31/98
----------- ----------- -------------
(in thousands, except share amounts)
<S> <C> <C> <C>
Revenues:
License revenues ................. $ -- $ -- $ 725
Contract revenues ................ -- 3 12
----------- ----------- -----------
Total revenues ................. -- 3 737
----------- ----------- -----------
Operating expenses incurred in the
development stage:
Research and development ......... 693 999 18,362
General and administrative ....... 968 1,415 13,205
----------- ----------- -----------
Total operating expenses ...... 1,661 2,414 31,567
----------- ----------- -----------
Loss from operations ....... 1,661 2,411 30,830
Other income (expense):
Interest income .................. 236 304 2,505
Other expense ....................... -- -- (144)
----------- ----------- -----------
Net loss ..................... $ (1,425) $ (2,107) $ (28,469)
=========== =========== ===========
Accretion of undeclared dividends
attributable to mandatorily
redeemable convertible preferred
stock ............................. -- -- 2,597
=========== =========== ===========
Net loss allocable to common
stockholders ...................... (1,425) (2,107) (31,066)
=========== =========== ===========
Net loss per share allocable to
common stockholders:
Basic ............................ $ (0.19) $ (0.25)
Diluted .......................... (0.19) (0.25)
=========== ===========
Shares used in computing net loss per
share allocable to common
stockholders:
Basic ............................ 7,538,572 8,568,162
Diluted .......................... 7,538,572 8,568,162
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1998 and for
the period from January 10, 1992 (inception) to March 31, 1998
(Unaudited)
Three Months Ended For the Period
March 31, from 1/10/92
--------------------- (inception) to
1997 1998 3/31/98
--------- --------- --------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (1,425) $ (2,107) $(28,469)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash research and development expense .......... -- -- 514
Non-cash compensation expense ...................... 24 31 329
Non-cash consulting expense ........................ -- -- 15
Depreciation and amortization expense .............. 6 9 64
Change in assets and liabilities:
(Increase) decrease in interest receivable ....... (63) 15 (73)
Increase in prepaid expenses ..................... (136) (62) (252)
Increase in other assets ......................... -- -- (13)
Increase (decrease) in accounts payable .......... 268 (157) 394
Increase (decrease) in accrued expenses .......... 88 (88) 1,818
-------- -------- --------
Net cash used in operating activities ...................... (1,238) (2,359) (25,673)
-------- -------- --------
Cash flows from investing activities:
Organizational costs .................................... -- -- (5)
Capital expenditures .................................... (18) (9) (162)
Purchase of short-term investments (available for
sale) ................................................. (4,450) (1,000) (36,717)
Proceeds from the sale of short-term investments
(available for sale) .................................. 4,544 3,199 32,524
-------- -------- --------
Net cash provided by (used in) investing activities ........ 76 2,190 (4,360)
-------- -------- --------
(Continued)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1998 and for
the period from January 10, 1992 (inception) to March 31, 1998
(Unaudited)
(Continued from preceding page)
Three Months Ended For the Period
March 31, from 1/10/92
--------------------- (inception) to
1997 1998 3/31/98
--------- --------- --------------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of preferred stock ............... -- -- 13,508
Proceeds from issuance of common stock .................. 4 4 29,714
Proceeds from issuance of promissory notes .............. -- -- 3,150
Repayment of promissory note ............................ -- -- (125)
-------- -------- --------
Net cash provided by financing activities .................. 4 4 46,247
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... (1,158) (165) 16,214
Cash and cash equivalents at beginning of period ........... 9,848 16,379 --
-------- -------- --------
Cash and cash equivalents at end of period ................. $ 8,690 $ 16,214 $ 16,214
======== ======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest .................................. $ -- $ -- $ 23
======== ======== ========
Supplemental schedule of non-cash financing activities:
Conversion of mandatorily redeemable convertible
preferred stock to common stock ....................... $ -- $ -- $ 19,628
======== ======== ========
Accretion of undeclared dividends attributable
to mandatorily redeemable convertible preferred
stock ................................................. $ -- $ -- $ 2,597
======== ======== ========
Conversion of promissory notes to preferred stock .......... $ -- $ -- $ 2,904
======== ======== ========
Deferred compensation ...................................... $ -- $ -- $ 611
======== ======== ========
Preferred stock issued in connection with technology
license agreements ...................................... $ -- $ -- $ 498
======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
5
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1998
(Unaudited)
(1) Basis of Presentation
- ---------------------------
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with the Company's 1997 audited consolidated financial statements
and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiary (CollaGenex
International, Ltd.). All intercompany accounts and transactions have been
eliminated.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly its financial position as of March 31, 1998, its results of
operations for the three months ended March 31, 1997 and 1998 and for the period
January 10, 1992 (inception) to March 31, 1998, and its cash flows for the three
months ended March 31, 1997 and 1998 and for the period January 10, 1992
(inception) to March 31, 1998. Interim results are not necessarily indicative of
results anticipated for the full fiscal year.
(2) New Accounting Pronouncements
- -----------------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 requires that all items defined as comprehensive income, including changes
in the amounts of certain items such as foreign currency translation adjustments
and gains and losses on certain securities, be shown as a component of
comprehensive income in a financial statement. The adoption of SFAS 130 had no
effect on the Company's unaudited condensed consolidated financial statements
contained herein, as the Company had no items of comprehensive income during any
period presented therein.
6
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1998
(Unaudited)
(Continued)
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), was adopted by the Company on December 31, 1997. In accordance
with SFAS 128, all earnings per share data for periods prior to adoption should
be restated to conform to the new standard. There was no change in the
previously reported net loss per share for the three months ended March 31, 1997
as computed under SFAS 128.
7
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company began operations in January 1992 and is engaged in the
development and commercialization of innovative, proprietary medical therapies
for the treatment of periodontal disease and other pathologies. Since its
origin, the Company has had no revenues from sales of its own products and has
funded its operations primarily from the proceeds of public and private
issuances of equity securities. Substantially all of the Company's expenditures
to date have been for pharmaceutical development activities and general and
administrative expenses.
Since inception, the Company has operated with a minimal number of
employees. Substantially all pharmaceutical development activities, including
clinical trials, have been contracted to independent contract research and other
organizations. The Company anticipates that it will significantly increase the
number of its employees over the next several years, primarily in general and
administrative areas, following regulatory approval of Periostat(R), the
Company's lead drug for the treatment of periodontal disease. There can be no
assurance, however, that the Company will obtain such regulatory approval on a
timely basis, if at all.
The Company has incurred losses each year since inception and had an
accumulated deficit of $28.5 million at March 31, 1998. The Company expects to
continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's business of developing
pharmaceutical products is subject to a number of significant risks, including
risks inherent in research and development activities and in conducting business
in a highly regulated environment. The success of the Company depends to a large
degree upon obtaining United States Food & Drug Administration (the "FDA") and
foreign regulatory approval to market products currently under development.
There can be no assurance that any of the Company's product candidates will be
approved by any regulatory authority for marketing in any jurisdiction or, if
approved, that any such products will be successfully commercialized by the
Company. The Company's actual results may differ materially from the results
discussed in the forward-looking statements contained herein.
8
<PAGE>
Results of Operations
- ---------------------
From its founding through March 31, 1998, the Company had no revenues from
sales of its own products. Operating expenses consist of research and
development expenses and general and administrative expenses. Research and
development expenses consist primarily of funds paid to contract research
organizations for the provision of services and materials for drug development
and clinical trials. General and administrative expenses consist primarily of
personnel salaries and benefits, professional and consulting fees, insurance,
facilities and general office expenses. The Company anticipates that general and
administrative expenses will increase during the next several years due to the
expansion of its commercial infrastructure, primarily in sales and marketing.
For the three months ended March 31, 1998, the Company earned $3,000 in
contract revenues. There were no contract revenues for the three months ended
March 31, 1997.
Research and development expenses for the three months ended March 31,
1998 were $1.0 million compared to $0.7 million for the three months ended March
31, 1997. This increase resulted primarily from additional costs associated with
the Company's amendment to its new drug application (the "NDA") for Periostat
submitted to the FDA in March 1998 and a Phase 3b clinical trial initiated
during the three month period ended March 31, 1998. The Company anticipates that
the results from such clinical trial, if favorable, will be used to support
marketing activities for Periostat following regulatory approval. There can be
no assurance that the Company will obtain such approval on a timely basis, if at
all.
General and administrative expenses for the three months ended March 31,
1998 were $1.4 million compared to $1.0 million for the three months ended March
31, 1997. This increase was primarily due to the Company's pre-launch marketing
activities related to Periostat and sales and marketing efforts related to
certain contractual marketing arrangements entered into during 1997.
Interest income increased to $0.3 million during the three months ended
March 31, 1998 compared to $0.2 million for the three months ended March 31,
1997. This increase was due to higher balances in cash and short-term
investments as a result of the Company's follow-on public offering of Common
Stock in April 1997.
Liquidity and Capital Resources
- -------------------------------
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. At March 31, 1998, the
Company had cash, cash equivalents and short-term investments of approximately
$20.4 million, a decrease of $2.4 million from the $22.8 million balance at
December 31, 1997. In accordance with investment guidelines approved by the
Company's Board of Directors, cash balances in excess of
9
<PAGE>
those required to fund operations have been invested in short-term U.S. Treasury
securities and commercial paper with a credit rating no lower than A1/P1. The
Company's working capital of $18.5 million at March 31, 1998 reflected a
decrease of $2.1 million in working capital as of December 31, 1997.
The Company had no debt or capital leases outstanding (other than accounts
payable and accrued expenses) at March 31, 1998. On June 26, 1997, the Company
entered into a credit arrangement consisting of a $5,000,000 line of credit (the
"LOC") to support the future working capital needs of the Company. The LOC will
be unsecured as long as the Company's cash and investment balances maintained
with the lender or an affiliate of the lender equal or exceed $10.0 million. At
the Company's option, the LOC will bear interest at either the prime rate
charged by the lender or LIBOR plus 2.15%. The LOC is terminable by the lender
at any time. No balance was outstanding under the LOC at March 31, 1998.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least 1998. The Company's
future capital requirements and the adequacy of its available funds will depend
on many factors, including the timing of FDA approval, if any, of the Company's
NDA for Periostat, such NDA having been submitted to the FDA in August 1996, the
size and scope of the Company's sales and marketing effort, the terms of
agreements entered into with corporate partners, if any, and the results of
research and development and pre-clinical and clinical studies for other
applications of the Company's core technology. Over the long term, the Company's
liquidity is dependent on market acceptance of its products and technology.
10
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
- ---------------------------
NEW DRUG APPLICATION
On January 28, 1998, the Company announced that it had received its second
action letter from the FDA regarding the NDA. In such letter, and in subsequent
discussions with the Company, the FDA raised new issues about the NDA. At a
meeting with the FDA in March 1998, the Company addressed these issues and
provided a review of summary clinical results from its recently completed
scaling and root planing (SRP) trial. The FDA and the Company then agreed that
the Company would seek a claim for Periostat based on the submission of a NDA
amendment containing the results from this trial. On March 31, 1998, the Company
announced that it had completed its submission of such amendment to the FDA. The
FDA has committed to review the amendment within six months of such submission.
There can be no assurance that the Company's NDA with respect to Periostat will
be approved by the FDA on a timely basis, if at all. Failure to obtain FDA
approval of a NDA for Periostat would have a material adverse effect on the
Company's business, financial condition and results of operations.
METASTAT(TM) CLINICAL STUDIES
In January 1998, the Company initiated Phase I clinical trials with
respect to its lead cancer compound Metastat. Such studies are being sponsored
by the National Cancer Institute (the "NCI") pursuant to the Company's
collaboration agreement with the NCI.
Item 6. Exhibits and Reports on Form 8-K.
- -------------------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter to which this report
on Form 10-Q relates.
11
<PAGE>
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.
CollaGenex Pharmaceuticals, Inc.
Date: May 1, 1998 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 1, 1998 By: /s/Nancy C. Broadbent
-------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001012270
<NAME> CollaGenex Pharmaceuticals, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> 16,214
<SECURITIES> 4,193
<RECEIVABLES> 73
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,732
<PP&E> 162
<DEPRECIATION> 59
<TOTAL-ASSETS> 20,848
<CURRENT-LIABILITIES> 2,212
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 18,550
<TOTAL-LIABILITY-AND-EQUITY> 20,848
<SALES> 0
<TOTAL-REVENUES> 3
<CGS> 0
<TOTAL-COSTS> 2,414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,107)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
