FORM 10-QSB
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, 1996
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)
1065 East Hillsdale Boulevard, Suite 418, Foster City, California 94404
(Address of principal executive Offices, including zip code)
(415) 524-1600
(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 16,
1996 was 4,993,603.
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CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
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Page
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PART I - FINANCIAL INFORMATION:
ITEM 1 - Financial Statements
Condensed Balance Sheets as of September 30, 1996 (unaudited)
and December 31, 1995 3
Unaudited Condensed Statements of Operations for the three months
and nine months ended September 30, 1996 and 1995, and the
period from June 26, 1989 (inception) through September 30, 1996 4
Unaudited Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995, and the period from June 26, 1989
(inception) through September 30, 1996 5
Notes to Condensed Financial Statements 7
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 13
ITEM 2 - Changes in Securities 13
ITEM 3 - Defaults Upon Senior Securities 13
ITEM 4 - Submission of Matters to a Vote of Security Holders 13
ITEM 5 - Other Information 13
SIGNATURE(S) 14
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
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CELLEGY PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED BALANCE SHEETS
(Amounts in thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 599 $2,320
Short-term investments 6,906 1,500
Other current assets 318 149
------- -------
Total current assets 7,823 3,969
------- -------
Property and equipment, net 38 59
------- -------
Total assets $7,861 $4,028
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $131 $192
Accrued compensation & related expenses 29 188
------- -------
Total current liabilities 160 380
------- -------
SHAREHOLDERS' EQUITY:
Series A Preferred Stock, no par value; 1,100 shares authorized;
275 shares issued and outstanding at September 30, 1996 and
no shares issued and outstanding at December 31, 1995 2,476 --
Common stock, no par value; 20,000,000 shares
authorized; 4,922,090 shares issued and outstanding
at September 30, 1996 and 3,777,074 shares issued
and outstanding at December 31, 1995 18,131 13,804
Deficit accumulated during the development stage (12,906) (10,156)
------- -------
Total shareholders' equity 7,701 3,648
------- -------
Total liabilities and shareholders' equity $7,861 $4,028
======= =======
<FN>
The accompanying notes are an integral part of these condensed financial
statements.
Note: The balance sheet at December 31, 1995 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.
</FN>
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3
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CELLEGY PHARMACEUTICALS, INC.
(A Development-Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
June 26, 1989
Three Months Ended Nine Months Ended (inception) through
Sept. 30, Sept. 30, Sept. 30, 1996
------------------------- -------------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
License revenue from affiliate $ -- $ -- $ -- $ 1,000 $ 1,000
Contract revenue from affiliate -- -- 15 -- 145
------- ------ ------- ------- --------
Total Revenue -- -- 15 1,000 1,145
Operating expenses:
Research and development 673 283 1,866 826 8,276
General and administrative 387 234 1,170 708 5,719
------- ------ ------- ------- --------
Total operating expenses 1,060 517 3,036 1,534 13,995
Operating income (loss) (1,060) (517) (3,021) (534) (12,850)
Interest expense -- (387) -- (753) (863)
Interest income and other, net 166 20 271 44 807
------- ------ ------- ------- --------
Net income (loss) $ (894) $ (884) $(2,750) $(1,243) $(12,906)
Net income (loss) per share $ (0.20) $(0.27) $ (0.68) $ (0.41)
======= ====== ======= =======
Shares used in net income (loss)
per share calculation 4,438 3,315 4,050 3,013
======= ====== ======= =======
<FN>
The accompanying notes are an integral part of these condensed financial
statements.
</FN>
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4
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CELLEGY PHARMACEUTICALS, INC.
(A Development - Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
June 26, 1989
Nine Months Ended (inception) through
Sept. 30, Sept. 30, 1996
------------------------ -------------------
1996 1995
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<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,750) $(1,243) $(12,906)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 29 13 238
Loss on sale of equipment -- -- 4
Amortization of discount on notes payable and
deferred financing costs -- 476 568
Issuance of common shares for services -- -- 24
Issuance of Series A convertible preferred
stock for interest, license agreement
and services rendered -- -- 240
Changes in operating assets and liabilities:
Other current assets (169) (100) (318)
Accounts payable and accrued liabilities (61) (230) 131
Accrued compensation and related expenses (159) -- 29
Deferred revenue -- (1,000) --
Other 34 -- 34
------- ------- --------
Net cash used in operating activities $(3,076) $(2,084) $(11,956)
------- ------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment $ (8) $ -- $ (173)
Proceeds from sale of property and equipment -- 9 --
Purchase of short-term investments (5,626) -- (12,673)
Sales of short term investments 220 22 5,767
------- ------- --------
Net cash provided by
(used in) investing activities $(5,414) $31 $ (7,079)
------- ------- --------
<FN>
(continued on next page)
</FN>
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5
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CELLEGY PHARMACEUTICALS, INC.
(A Development- Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
June 26, 1989
Nine Months Ended (inception) through
Sept. 30, Sept. 30, 1996
------------------------ -------------------
1996 1995
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FINANCING ACTIVITIES:
Proceeds from notes payable $ -- $1,750 $ 3,548
Repayment of notes payable -- (2,017) (2,111)
Net proceeds from the issuance of
common stock 16 6,492 6,520
Issuance of Series A convertible preferred
stock, net of issuance costs 6,753 -- 6,780
Issuance of Series B convertible preferred -- -- (1)
Issuance of Series C convertible preferred
stock, net of issuance costs -- -- 4,978
Deferred financing costs -- -- (80)
------- ------- -------
Net cash provided by
financing activities 6,769 6,225 19,634
Net increase (decrease) in cash (1,721) 4,172 599
Cash and cash equivalents at beginning of period 2,320 380 --
------- ------- -------
Cash and cash equivalents at end of period $ 599 $4,552 $ 599
======= ====== =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:
Conversion of preferred stock to
common stock $ 4,277 -- $10,791
Issuance of common stock for notes
payable -- $ 268 $ 268
Issuance of warrants in connection with
notes payable financing -- -- $ 487
Issuance of Series A convertible
preferred stock for notes payable -- -- $ 1,153
Issuance of Series B convertible
preferred stock for notes payable -- -- $ 115
Issuance of common stock for
Pacific Pharmaceuticals, Inc. -- -- $ 9
<FN>
The accompanying notes are an integral part of these condensed financial
statements.
</FN>
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6
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CELLEGY PHARMACEUTICALS, INC.
(A Development-Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed balance sheets as of September 30, 1996 and
December 31, 1995, the unaudited condensed statements of operations for the
three months and nine months ended September 30, 1996 and 1995, and the
unaudited condensed statements of cash flows for the nine months ended September
30, 1996 and 1995, have been prepared by the Company in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements. These condensed financial statements should be read in conjunction
with the Company's financial statements and notes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995. In
the opinion of management, the accompanying condensed financial statements
include all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation of financial position and results
of operations for the periods presented.
Operating results for the nine months ended September 30, 1996, may not
necessarily be indicative of the results to be expected for any other interim
period or for the full year.
NOTE 2. CONVERTIBLE SERIES A PREFERRED STOCK
On April 19, 1996, the Company completed a $7,500,000 private placement of 750
shares of convertible Series A Preferred Stock ("Series A Preferred") or
("Preferred Stock Financing"). Net proceeds were approximately $6,753,000. The
shares are convertible, at the option of the holder, into Cellegy common stock.
The Company filed a registration statement on May 9, 1996, to register for
resale from time to time the common stock issuable upon conversion of the Series
A Preferred, as well as certain other outstanding shares or shares issuable upon
the exercise of outstanding warrants. The registration statement was declared
effective by the Securities and Exchange Commission (the "Commission"), on July
2, 1996. The number of shares of common stock issuable on conversion of a share
of Series A Preferred is calculated based on the lower of a fixed conversion
price or a variable conversion price primarily depending on the average market
price of the common stock on the five trading days proceeding the conversion
date. The minimum number of additional shares which could be issued on
conversion of all the remaining unconverted Series A Preferred is approximately
371,000 shares, which would occur if all remaining unconverted shares are
converted by December 1, 1996 at the fixed conversion price of $6.6275 per
share.
7
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If the variable conversion price is lower than the fixed conversion price, a
greater number of shares will be issued upon conversion. Two years after
issuance, any remaining unconverted preferred shares are automatically converted
into common stock. A conversion premium accrues at the rate of 8 percent per
annum and is payable upon conversion, in shares of common stock. Cellegy has
redemption rights under certain circumstances. As of September 30, 1996,
1,039,716 shares of common stock have been issued in conjunction with the
conversion of Series A Preferred. An additional 63,513 shares of common stock
were issued as of October 16, 1996.
NOTE 3. SUBSEQUENT EVENT
On October 2, 1996, the Company filed a registration statement on Form S-3,
which was declared effective by the Commission on October 4, 1996, to register
for resale shares of Common Stock held or acquirable by certain persons named in
the prospectus. This registration statement was intended in part to replace and
supersede the registration statement referred to in note 2 above and included
most of the shares that were registered on that registration statement.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company commenced operations in 1989 to engage in the research,
development and commercialization of proprietary products for the skin including
drug delivery products using the skin as the portal of entry, non-prescription
over-the-counter consumer products to repair and protect damaged skin and
prescription therapeutic products for skin disorders. Since its inception, the
Company has engaged entirely in research and development activities, and intends
to continue research and development of its drug delivery products, and the
preclinical and clinical testing of its pharmaceutical products.
General
On July 10, 1996, the Company announced the deaths of William E. Bliss,
its President and Chief Executive Officer, and Lionel N. Simon, Ph.D., its Vice
President, Corporate Development, in an automobile accident. This event was
reported on Form 8-K filed on July 25, 1996. Dr. Carl Thornfeldt, the Company's
Chairman of the Board, was named Acting Chief Executive Officer. Dr. Thornfeldt,
Dr. Denis Burger, a director, Dr. Michael Francoeur, Vice President of Research
and Development, and A. Richard Juelis, Vice President, Finance and Chief
Financial Officer, are serving on a transition committee responsible for the
Company's corporate development and operational activities. The Company has also
established a search committee, headed by Dr. Burger, and engaged Heidrick &
Struggles, the executive recruiting firm which originally recruited Mr. Bliss,
to conduct a nationwide search for a new Chief Executive Officer. The Company
has had discussions with a number of candidates and plans to complete its search
in the near term.
On October 3, 1996, the Company received an Orphan Drug grant from the
United States Food and Drug Administration ("FDA") of up to $400,000 over a two
year period from September 30, 1996, to September 30, 1998. The grant will cover
part of the Company's Phase III study costs to evaluate the safety and efficacy
of the topical drug Glylorin(TM) for the treatment of congenital ichthyosiform
erythroderma, a disfiguring skin disease.
On October 17, 1996, the Company announced that it had signed a letter
of intent with Glaxo Wellcome, Inc. for the licensing of Glylorin. The letter is
non-binding, and the parties' legal obligations will be created only upon
negotiation and execution of definitive agreements. According to the letter of
intent, Cellegy would provide Glaxo with an exclusive license of patent rights
and know-how covering the Glylorin product in most of the world's major markets.
In exchange for this license, Cellegy would receive from Glaxo upfront and
milestone payments, as well as a royalty on net sales assuming successful
completion of product development and market launch. In addition to milestone
payments, Glaxo will assume responsibility and the associated costs for all
future development and commercialization, including regulatory submissions,
testing, manufacturing, marketing and distribution of the product. Glaxo will
also reimburse Cellegy for certain previously incurred development costs. The
Company plans to complete the agreement in the very near term.
9
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The Company is currently in active discussions with a number of other
potential corporate partners for the development and licensing of its products,
although there can be no assurance that these discussions will result in future
agreements. If successfully completed, these arrangements could be a potential
source of revenue over the next several quarters, although there can be no
assurance that revenues would result from such arrangements.
Results of Operations
Revenues. The Company had revenues of $15,000 for the nine months ended
September 30, 1996, attributable to its license agreement with Neutrogena
Corporation, compared with revenues of $1,000,000 for the nine months ended
September 30, 1995. Revenues in 1995 were attributable to the purchase of an
exclusive, worldwide (excluding Japan), royalty free license for azelaic acid
for both prescription and consumer products by Neutrogena Corporation (which was
subsequently acquired by Johnson & Johnson). The Company had no revenues during
the three months ended September 30, 1995 and 1996. Except for contract revenue
associated with the Glylorin licensing agreement with Glaxo Wellcome, Inc., the
Company does not anticipate receiving any significant revenues for at least the
next several quarters. There can be no assurances that the Company will receive
any further licensing or other revenues.
Research and Development Expenses. Research and development expenses
were $1,866,000 and $826,000, for the nine months ended September 30, 1996 and
1995, respectively. For the three months ended September 30, 1996 and 1995, such
expenses were $673,000 and $283,000, respectively. The increases for both
periods of 1996 were mainly due to toxicology and clinical trial expenses
related to Glylorin. In January 1996, the Company commenced a Phase III study
using Glylorin to evaluate its efficacy in the topical treatment of congenital
ichthyosiform erythroderma. The Company expects that the study will be expanded
to approximately 25 medical centers across the U.S. over the next year.
During the first half of 1996 the Company occupied, equipped and
staffed a new laboratory in San Carlos, California, which contributed, in part,
to the year to date increase in research and development expenses compared with
1995. During the next several months, the Company's research and development
expenses are expected to decrease as the Glylorin product development costs are
paid for by Glaxo Wellcome, Inc. under terms of the license agreement that the
Company believes will be entered into consistent with the letter of intent
described above. In subsequent periods, research spending is expected to
increase over time as a result of preclinical research on the Company's
transdermal drug delivery, skin protectant, and consumer products.
General and Administrative Expenses. General and administrative
expenses were $1,170,000 and $708,000 for the nine months ended September 30,
1996 and 1995, respectively. For the three months ended September 30, 1996 and
1995, such expenses increased to $387,000 from $234,000.
10
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The increase for both periods of 1996 was primarily due to increased consulting
and professional fees, as well as personnel and related expenses. The Company's
general and administrative expenses are expected to increase over the next
several quarters as a result of anticipated higher general and administrative
expenses in support of anticipated greater research and development activities,
and the Company's corporate partnering efforts.
Interest Income and Expense. The Company recognized $271,000 in
interest income for the nine months ended September 30, 1996, compared with
$44,000 for the same period in 1995. The additional interest income earned in
1996 was due to a higher average investment balance during the 1996 period.
Interest income earned in the third quarter 1996 exceeded that earned in the
same period of 1995 by $146,000, due to investment of proceeds from the
Preferred Stock Financing completed in April 1996, see note 2 above. The Company
incurred no interest expense for the three months ended September 30, 1996,
compared with $387,000 for the same period in 1995. The interest expense in the
third quarter 1995 was associated with previously issued bridge notes.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through September 30, 1996, the
Company has incurred a cumulative net loss of approximately $12.9 million and
consumed cash in operational activities of approximately $12.0 million. Prior to
the completion of its initial public offering, the Company had financed its
operations primarily from private sales of debt and equity securities, raising
net proceeds of approximately $7.3 million. Subsequently the Company raised
approximately $6.5 million in net proceeds from its initial public offering in
August 1995, and approximately $6.8 million in net proceeds from the Preferred
Stock Financing in April 1996.
The Company's cash, cash equivalents and short-term investments
increased from approximately $3.8 million at December 31, 1995, to approximately
$7.5 million at September 30, 1996. The approximate $3.7 million increase during
the first nine months of 1996 was due to proceeds from the Preferred Stock
Financing in April 1996, offset by net cash used in operating activities.
Cellegy's operating expenses and capital requirements over the next
several quarters will depend on numerous factors, but will mainly be affected by
the progress of its research and development programs, its preclinical and
clinical testing, and its ability to complete additional corporate partnership
agreements. After an initial cash inflow over the next several months associated
with the anticipated definitive Glaxo Wellcome license agreement and the
Glylorin orphan drug grant, described above, the Company's cash needs are
expected to continue to increase over at least the next two years in order to
fund the additional expenses the Company will incur as it expands its current
research and development programs, particularly in drug delivery, skin
protectant, and consumer product areas.
11
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Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-QSB and matters discussed herein
contain forward looking statements. These forward looking statements and all
assumptions, anticipations, and expectations contained herein concern matters
that involve risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. Such words used as
"believes", "anticipates", "expects" or "intends" are intended to identify, but
are not the sole means of identifying, forward looking statements. Further the
Company undertakes no obligation to revise any forward looking statements in
order to reflect events or circumstances that may arise after the date of this
report.
The factors discussed in the Company's reports filed with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995, the Company's Quarterly
Reports on Form 10-QSB for the periods ended March 31, 1996, and June 30, 1996,
should be carefully considered when evaluating the Company's business and
prospects.
Although over two-thirds of the initially issued Series A Preferred has
been converted into Common Stock, the remaining preferred stock will, upon
conversion, further increase the number of outstanding shares of Common Stock.
In addition, the one year lock-up period associated with the Company's initial
public offering (the "IPO"), restricting public sales of most of the shares that
were issued before the IPO, expired in August 1996. The increase in common
shares available for sale in the public market could have a negative impact on
the market price of the Company's Common Stock and publicly-traded warrants,
particularly in light of the Company's relatively low trading volume and public
share float.
See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations - General".
12
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On July 10, 1996, the Company announced the deaths of William E. Bliss,
its President and Chief Executive Officer, and Lionel N. Simon, Ph.D., its Vice
President, Corporate Development, in an automobile accident. This event was
reported on a Form 8-K filed on July 25, 1996.
13
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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.
CELLEGY PHARMACEUTICALS, INC.
/s/ Carl R. Thornfeldt, M.D.
Date: November 1, 1996 -----------------------------
Carl R. Thornfeldt, M.D.
Chairman of the Board and
Chief Executive Officer
/s/ A. Richard Juelis
Date: November 1, 1996 -----------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,505
<SECURITIES> 0
<RECEIVABLES> 318
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,823
<PP&E> 150
<DEPRECIATION> (112)
<TOTAL-ASSETS> 7,861
<CURRENT-LIABILITIES> 160
<BONDS> 0
<COMMON> 18,131
0
2,476
<OTHER-SE> (12,906)
<TOTAL-LIABILITY-AND-EQUITY> 7,861
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (1,060)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166
<INCOME-PRETAX> 0
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (894)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
</TABLE>
