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, 1997
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)
(650) 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 10,
1997 was 7,594,959.
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Unaudited Condensed Statements of Operations for the three
months and nine months ended September 30, 1997 and 1996, and
the period from June 26, 1989 (inception) through
September 30, 1997 4
Unaudited Condensed Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996, and the period
from June 26, 1989 (inception) through September 30, 1997 5
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
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
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Condensed Balance Sheets
thousands, except per share amounts)
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,338 $ 36
Short-term investments 4,975 5,256
Other current assets 448 351
----------- -------------
Total current assets 6,761 5,643
Property and equipment, net 16 31
Long-term investments 3,064 2,022
----------- -------------
$ 9,841 $ 7,696
=========== ==============
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable and accrued liabilities $ 182 $ 270
Deferred revenue 500 ---
Accrued research fees 21 21
Accrued compensation and related expenses 24 18
----------- -------------
Total current liabilities 727 309
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized:
Series A convertible preferred stock; 1,100 shares designated;
no shares issued and outstanding at September 30, 1997, and
195 shares issued and outstanding at December 31, 1996 --- 2,161
Common stock, no par value; 20,000,000 shares authorized:
7,594,959 shares issued and outstanding at September 30, 1997,
and 5,152,752 shares issued and outstanding at December 31,
1996 26,497 20,141
Unrealized gain on investments 48 22
Deficit accumulated during the development stage (17,431) (14,937)
----------- -------------
Total shareholders' equity 9,114 7,387
----------- -------------
$ 9,841 $ 7,696
=========== =============
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Condensed Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
<CAPTION>
Period from
June 26, 1989
Three Months Ended Nine Months Ended (inception) through
September 30, September 30, September 30, 1997
------------------------- ------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing and contract revenue from
affiliate $ -- $ -- $ -- $ 15 $ 1,145
Licensing, milestone and development
funding 299 -- 517 -- 1,077
Government grants 26 -- 126 -- 200
-------- ------- -------- -------- --------
Total revenues 325 -- 643 15 2,422
Operating expenses:
Research and development 852 673 2,389 1,866 11,511
General and administrative 330 387 1,066 1,171 7,248
-------- ------- -------- -------- --------
Total operating expenses 1,182 1,060 3,455 3,037 18,759
Operating loss (857) (1,060) (2,812) (3,022) (16,337)
Interest expense -- -- -- -- (864)
Interest income and other, net 170 166 354 271 1,219
-------- ------- -------- -------- --------
Net loss (687) (894) (2,459) (2,751) (15,982)
Non-cash preferred dividends 2 35 115 1,368 1,449
-------- ------- -------- -------- --------
Net loss applicable to common
shareholders $ (689) $(1,009) $ (2,493) $ (4,119) $(17,431)
======== ======= ======== ======== ========
Net loss per share applicable to
common shareholders $ (0.10) $ (0.23) $ (0.41) $ (1.02)
======== ======= ======== ========
Shares used in calculation of net loss
per share applicable to common
shareholders 7,112 4,438 6,076 4,050
======== ======= ======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
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
September 30, September 30, 1997
------------------------------ --------------------------
1997 1996
---- ----
Operating activities
<S> <C> <C> <C>
Net loss $ (2,459) $(2,750) $ (15,982)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15 29 262
Compensation expense related to the
extension of option exercise periods 70 34 338
Loss on sale of property and equipment --- --- 4
Amortization of discount on notes payable
and deferred financing costs --- --- 568
Issuance of common shares for services --- --- 24
Issuance of Series A convertible preferred
stock for services rendered --- --- 73
Issuance of Series A convertible preferred
stock for interest --- --- 68
Issuance of Series A convertible preferred
stock for license agreement --- --- 100
Changes in operating assets and liabilities:
Other current assets (97) (169) (448)
Accounts payable and accrued liabilities (88) (61) 182
Accrued research fees --- --- 21
Accrued compensation and related expenses 6 (159) 24
Deferred revenue 500 --- 500
---------- ------- ----------
Net cash used in operating activities (2,053) (3,076) (14,266)
Investing activities
Purchase of property and equipment --- (8) (173)
Purchases of investments (6,990) (5,626) (23,613)
Sales and maturities of investments 6,256 220 15,623
---------- ------- -----------
Net cash used in
investing activities (734) (5,414) (8,163)
</TABLE>
(continued on next page)
5
<PAGE>
<TABLE>
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
September 30, September 30, 1997
------------------------------- ------------------------
1997 1996
---- ----
<S> <C> <C> <C>
Financing activities
Proceeds from notes payable $ --- $ --- $ 3,547
Repayment of notes payable --- --- (2,111)
Net proceeds from the issuance of common stock 4,089 16 10,653
Repurchase of common stock --- --- ---
Issuance of convertible preferred stock, net of
issuance costs --- 6,753 11,758
Deferred financing costs --- --- (80)
-------- -------- ---------
Net cash provided by financing activities 4,089 6,769 23,767
Net increase (decrease) in cash and
cash equivalents 1,302 (1,721) 1,338
Cash and cash equivalents,
beginning of period 36 2,320 ---
-------- -------- ---------
Cash and cash equivalents, end of period $ 1,338 $ 599 $ 1,338
======== ======== =========
Supplemental disclosure of non-cash transactions:
Conversion of preferred stock to
common stock $ 2,196 $ 5,498 $ 14,715
======== ======== =========
Issuance of common stock for notes payable $ $ $ 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>
</TABLE>
6
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Condensed Financial Statements
Note 1. - Basis of Presentation
The accompanying unaudited condensed balance sheet as of September 30,
1997, the audited condensed balance sheet as of December 31, 1996, the unaudited
condensed statements of operations for the three months and nine months ended
September 30, 1997 and 1996, and the unaudited condensed statements of cash
flows for the nine months ended September 30, 1997 and 1996, 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, 1996. 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 and three months ended September
30, 1997 may not necessarily be indicative of the results to be expected for any
other interim period or for the full year.
Note 2. - Net Loss Per Share
Net loss per share applicable to common shareholders is computed using
the weighted average number of shares of Common Stock outstanding. In February
1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share, which is required to be adopted on December 31, 1997. At the
time of the adoption, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
This change will have no impact on the net loss per share for the nine months
and three months ended September 30, 1997 and September 30, 1996, respectively.
Note 3. - Common Stock Private Placement
On July 23, 1997, the Company completed a $3,850,003 private placement
of 1,547,827 shares of common stock. The purchase price for all investors,
except the Company's chief executive officer, was $2.375 per share. The purchase
price for the shares purchased by the Company's chief executive officer in the
private placement was $2.875 per share, which is equal to the closing price of
the common stock on the Nasdaq SmallCap Market on the date immediately preceding
the closing date.
Note 4. - Comprehensive Income
The Company intends to adopt Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income", in its first quarter of 1998 interim financial
statements. The new standard is not expected to have a material affect on the
Company's financial position or results of operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cellegy Pharmaceuticals is a biopharmaceutical company engaged in the
development of prescription drugs and cosmeceuticals to address a variety of
diseases and conditions utilizing its patented transdermal and topical drug
delivery technologies. Cellegy's first prescription drug, GlylorinTM, is a novel
treatment for certain forms of ichthyosis, a family of incurable skin diseases.
Glylorin has been licensed by Cellegy to Glaxo Wellcome Inc. ("Glaxo") and is
currently in Phase III clinical trials in the United States. Cellegy is also
evaluating several prescription drugs including a transdermal testosterone gel
and a line of anti-wrinkling cosmeceutical products.
Since its inception in 1989, the Company has engaged entirely in
research and development activities, and intends to continue research and
development of its drug delivery systems, and the preclinical and clinical
testing of its pharmaceutical and cosmeceutical products.
General
In July 1997, the Company completed a $3.8 million private placement of
approximately 1.5 million shares of Common Stock to a group of investors
including the Tisch family, the Biotechnology Value Fund, two other
sophisticated investors and Cellegy's Chief Executive Officer. The Company
intends to use the funds raised from this private placement to support Cellegy's
product development and commercialization plans.
In July 1997, the Company reacquired rights to skin repair technology
previously licensed to Neutrogena Corporation, a subsidiary of Johnson &
Johnson, in April 1992. Cellegy may use this technology to enhance certain
products currently under development. If successfully developed, the Company may
seek to have these products marketed by pharmaceutical companies and consumer
products companies focusing on skin care.
In November 1996, the Company entered into a licensing agreement with
Glaxo for Cellegy's first prescription dermatologic drug, Glylorin. The license
agreement provides for milestone payments, certain development funding and
royalty payments on net sales assuming successful completion of product
development and market launch.
In September 1996, the Company received an Orphan Drug grant from the
United States Food and Drug Administration ("FDA") to cover certain of the
Company's Phase III study costs for Glylorin over a two year period.
Results of Operations
Revenues. The Company had revenues of $643,000 for the nine months
ended September 30, 1997, compared with revenues of $15,000 for the same period
last year. Revenues for the nine months ended September 30, 1997 consisted of
approximately $442,000 for development funding associated with the Glaxo license
agreement, $126,000 from the FDA Orphan Drug grant and $75,000 from Neutrogena
Corporation for the reimbursement of certain patent expenses incurred by Cellegy
related to the Neutrogena licensing agreement. Revenues of $15,000 for the nine
months ended September 30, 1996 were associated with the Neutrogena licensing
agreement. For the three months ended September 30, 1997, the Company had
revenues of $325,000. No revenues were recorded for the three months ended
September 30, 1996. The Company expects to receive additional development
funding and milestones from Glaxo over the next several quarters and is pursuing
other licensing and product supply agreements which, if entered into, may result
in additional contract revenues or product sales. There can be no assurances
regarding when, or if, such revenues will occur.
Research and Development Expenses. Research and development expenses
were $2,389,000 for the nine months ended September 30, 1997, compared with
$1,866,000 for the same period last year. The Company incurred research and
development expenses of $852,000 and $673,000 for the three months ended
September 30, 1997 and 1996, respectively. These increases were primarily due to
salary costs associated with the addition of scientific personnel, as well as
increased contract research expenses. Cellegy's research expenses are expected
to increase during the fourth quarter of 1997 and throughout 1998 as preclinical
and clinical trial activities associated
8
<PAGE>
with its testosterone and anti-wrinkling programs increase and as it continues
to focus on the identification and testing of compounds using the Company's drug
delivery methods. The Company plans to selectively add personnel in research and
development in order to accomplish its goals.
General and Administrative Expenses. General and administrative
expenses were $1,066,000 for the nine months ended September 30, 1997, a
decrease from $1,171,000 for the same period last year. General and
administrative expenses decreased to $330,000 from $387,000 for the three months
ended September 30, 1997 compared with the three months ended September 30,
1996. Higher expenses during the 1996 periods resulted primarily from
administrative costs associated with the Series A Preferred Stock financing and
subsequent preparation and filing of registration statements. The Company's
general and administrative expenses are expected to increase in the future in
support of its research and product commercialization efforts. However, the rate
of increase in general and administrative expenses is expected to be less than
the growth rate of research and development spending.
Interest Income. Interest income was $354,000 for the nine months ended
September 30, 1997, compared with $271,000 for the same period last year.
Interest income was $170,000 and $166,000 for the three months ended September
30, 1997 and 1996, respectively. The additional interest income earned during
1997 was due to higher investment balances.
Net Loss. The net loss applicable to common shareholders was $2,493,000
or $0.41 per share for the nine months ended September 30, 1997, compared with
$4,119,000 or $1.02 per share for the same period last year. The Company's net
loss applicable to common shareholders was $689,000 or $0.10 per share and
$1,009,000 or $0.23 per share for the three months ended September 30, 1997 and
1996, respectively. The Company's net loss was impacted by significant non-cash
preferred dividends reflecting the 15% discount to the common stock variable
conversion price of the Series A Preferred Stock and the 8% per annum mandatory
preferred dividends associated with the issuance of Series A Preferred Stock.
The impact of these dividends was $35,000 and $1,368,000, for the nine months
ended September 30, 1997 and 1996, respectively.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through September 30, 1997 the Company
had incurred an accumulated deficit of $17.4 million and had consumed cash from
operations of $14.3 million. 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 a preferred stock financing in April 1996. An
additional $3.8 million were raised in a private placement of Common Stock in
July 1997.
The Company's cash and investments were $9.4 million at September 30,
1997, compared with $7.3 million at December 31, 1996. The increase of $2.1
million during the first nine months of 1997 was principally due to additional
funds received in the private placement completed in July 1997, offset by net
cash used in operating activities.
The Company's operations to date have consumed substantial amounts of
cash. The Company has no current source of significant ongoing revenues or
capital beyond existing cash and investments and payments, if any, that may be
received pursuant to existing licensing agreements with third parties. In order
to complete the research and development and other activities necessary to
commercialize its products, additional financing may be required. The Company's
future expenditures and capital requirements depend on numerous factors
including, without limitation, the progress and focus of its research and
development programs, the progress and results of preclinical 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 in the Company's existing research relationships, the
ability of the Company to establish collaborative arrangements, the initiation
of commercialization activities, the purchase of capital equipment and the
availability of other financing.
9
<PAGE>
In the course of its development activities, the Company has incurred
significant losses and expects to incur substantial additional development
costs. As a result, the Company 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 the Company to finance its
operations on acceptable terms, if at all. Insufficient funding may require the
Company to delay, reduce or eliminate some or all of its research and
development activities, planned clinical trials and administrative programs. The
Company believes that available cash resources and the interest thereon will be
adequate to satisfy its capital needs through at least December 31, 1998.
Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-QSB, 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 forward-looking
statements concern matters that involve risks and uncertainties, including, but
not limited to, those set forth below, that could cause actual results to differ
materially from those in the 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, 1996, especially under the caption
"Factors That May Affect Future Operating Results," should be carefully
considered when evaluating the Company's business and prospects.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
As described in Note 3 above, the Company completed a $3,850,003
private placement of 1,547,827 shares of Common Stock in July 1997. No
underwriting discounts or placement fees were paid. The securities were sold in
reliance on the exemptions provided under Paragraph 4(2) of the Securities Act
of 1933, and under Rule 505 of Regulation D, in light of the small number and
sophistication of the purchasers.
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
None
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.
CELLEGY PHARMACEUTICALS, INC.
Date: October 16, 1997 /s/ K. Michael Forrest
-------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: October 16, 1997 /s/ A. Richard Juelis
---------------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000887247
<NAME> Cellegy Pharmaceuticals
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,338
<SECURITIES> 8,039
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,761
<PP&E> 150
<DEPRECIATION> (134)
<TOTAL-ASSETS> 9,841
<CURRENT-LIABILITIES> 727
<BONDS> 0
0
0
<COMMON> 26,497
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,841
<SALES> 0
<TOTAL-REVENUES> 643
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,493)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> 0
</TABLE>
