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 March 31, 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)
(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 April 21,
1997 was 5,667,175.
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 3
Unaudited Condensed Statements of Operations for the three
months ended March 31, 1997 and 1996, and the period from
June 26, 1989 (inception) through March 31, 1997 4
Unaudited Condensed Statements of Cash Flows for the three
months ended March 31, 1997 and 1996, and the period from
June 26, 1989 (inception) through March 31, 1997 5
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature(s) 13
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Condensed Balance Sheets
(Amounts in thousands, except share amounts)
- ----------------------------------------------------------------------------------------------------------
March 31, 1997 December 31, 1996
-------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 91 $ 36
Short-term investments 5,369 5,256
Other current assets 345 351
-------- --------
Total current assets 5,805 5,643
Property and equipment, net 25 31
Long-term investments 1,000 2,022
-------- --------
$ 6,830 $ 7,696
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 217 $ 270
Accrued research fees -- 21
Accrued compensation and related expenses 13 18
-------- --------
Total current liabilities 230 309
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
Series A convertible preferred stock; 1,100 shares designated;
50 shares issued and outstanding at March 31, 1997, and 195
shares issued and outstanding at December 31, 1996 564 2,161
Common stock, no par value; 20,000,000 shares authorized;
5,623,511 shares issued and outstanding at March 31, 1997,
and 5,152,752 shares issued and outstanding at December 31, 1996 21,853 20,141
Unrealized gain on investments 13 22
Deficit accumulated during the development stage (15,830) (14,937)
-------- --------
Total shareholders' equity 6,600 7,387
-------- --------
$ 6,830 $ 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 share amounts)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
June 26, 1989
Three Months Ended (inception) through
March 31, March 31, 1997
------------------------------ ------------------
1997 1996
---- ----
<S> <C> <C> <C>
Revenues:
Licensing and contract revenue from affiliate $ -- $ 15 $ 1,145
Licensing, milestone and development funding 95 -- 654
Government grants 53 -- 127
-------- -------- --------
Total revenues 148 15 1,926
Operating expenses:
Research and development 734 596 9,856
General and administrative 360 351 6,542
-------- -------- --------
Total operating expenses 1,094 947 16,398
-------- -------- --------
Operating loss (946) (932) (14,472)
Interest expense -- -- (864)
Interest income and other, net 79 68 946
-------- -------- --------
Net loss (867) (864) (14,390)
Non-cash preferred dividends 26 -- 1,440
-------- -------- --------
Net loss applicable to common shareholders $ (893) $ (864) $(15,830)
======== ======== ========
Net loss per share applicable to
common shareholders $ (0.17) $ (0.23)
======== ========
Shares used in calculation of net loss
per share 5,377 3,836
======== ========
<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
Three Months Ended (inception) through
March 31, March 31, 1997
----------------------------------- -------------------
1997 1996
---- ----
<S> <C> <C> <C>
Operating activities
Net loss $ (867) $ (864) $(14,390)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6 8 252
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 6 (71) (345)
Accounts payable and accrued liabilities (53) (54) 217
Accrued research fees (21) -- --
Accrued compensation and related expenses (5) (116) 13
Deferred revenue -- -- --
-------- -------- --------
Net cash used in operating activities (864) (1,063) (13,078)
Investing activities
Purchase of property and equipment -- (42) (173)
Purchases of investments (1,000) -- (17,623)
Sales and maturities of investments 1,900 -- 11,267
-------- -------- --------
Net cash provided by (used in)
investing activities 900 (42) (6,529)
(continued on next page)
</TABLE>
5
<PAGE>
<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Condensed Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
June 26, 1989
Three Months Ended (inception) through
March 31, March 31, 1997
-------------------------------- -------------------
1997 1996
---- ----
<S> <C> <C> <C>
Financing activities
Proceeds from notes payable $ -- $ -- $ 3,548
Repayment of notes payable -- -- (2,111)
Net proceeds from the issuance of common stock 19 2 6,583
Repurchase of common stock -- -- --
Issuance of convertible preferred stock, net of
issuance costs -- -- 11,758
Deferred financing costs
-- -- (80)
-------- -------- --------
Net cash provided by financing activities 19 2 19,698
Net increase (decrease) in cash and
cash equivalents 55 (1,103) 91
Cash and cash equivalents,
beginning of period 36 2,320 --
-------- -------- --------
Cash and cash equivalents, end of period $ 91 $ 1,217 $ 91
======== ======== ========
Supplemental disclosure of non-cash transactions:
Conversion of preferred stock to
common stock $ 1,623 $ -- $ 13,134
======== ======== ========
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 sheets as of March 31,
1997 and December 31, 1996, the unaudited condensed statements of operations for
the three months ended March 31, 1997 and 1996, and the unaudited condensed
statements of cash flows for the three months ended March 31, 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 three months ended March 31, 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
that time, 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 first quarter ended March 31,
1997 and March 31, 1996, respectively.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company commenced operations in 1989 to engage in the research,
development and commercialization of proprietary products including a drug
delivery system which uses the skin as the portal of entry, prescription
therapeutic products for skin disorders, and consumer and cosmeceutical products
to repair and protect damaged skin. Since its inception, 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 consumer products.
General
During 1996, the Company advanced its intellectual property positions
associated with its core technologies. Two important achievements were the
granting of a notice of allowance of a U.S. patent for Cellegy's drug delivery
system and a Japanese patent for one of the Company's anti-wrinkling products.
In September 1996, the Company received an Orphan Drug grant from the
United States Food and Drug Administration of up to $400,000 over a two year
period beginning September 30, 1996. The grant will cover part of the Company's
Phase III study costs to evaluate the safety and efficacy of the topical drug
GlylorinTM for the treatment of ichthyoses.
In November 1996, the Company entered into an agreement granting Glaxo
Wellcome, Inc. ("Glaxo") licensing rights to Glylorin in most of the world's
major markets. In exchange for this license, Cellegy received from Glaxo an
initial payment and could potentially receive future milestone payments (if all
milestones specified in the agreement are satisfied) totaling, with the initial
payment, $8.7 million, as well as royalties 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 future
development and commercialization, including certain development costs incurred
prior to the date of the agreement.
Results of Operations
Revenues. The Company recorded revenues of $148,000 and $15,000 for the
three months ended March 31, 1997 and 1996, respectively. In 1997, revenues
consisted of $95,000 associated with the Glaxo license agreement and $53,000
from the Orphan Drug grant. Revenues of $15,000 in the first quarter of 1996
were associated with a license agreement between the Company and Neutrogena
Corporation. The Company expects to receive additional funding from Glaxo over
8
<PAGE>
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 in 1997. However, there can be no assurances regarding when, or
if, such revenues will occur.
Research and Development Expenses. Research and development expenses
for the three months ended March 31, 1997 were $734,000, compared with $596,000
for the same period last year. This increase was primarily due to personnel
costs associated with the addition of internal scientists, as well as certain
contract research expenses related to the Company's drug delivery technology.
Although the Company's expenses related to Glylorin are expected to decrease
significantly as Glaxo will be paying for most product development costs,
Cellegy's research expenses are expected to increase during 1997 as preclinical
and clinical trial activity associated with its other research programs
increases and as it continues to focus on the identification and testing of
compounds using the Company's drug delivery methods. In addition, testing of
pharmaceutical and cosmeceutical product formulations are expected to continue
to increase over the next several quarters. 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 for the three months ended March 31, 1997 were $360,000, compared with
$351,000 for the same period last year. The Company's general and administrative
expenses are expected to increase in the future in support of its research and
product commercialization efforts. 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 and Expense. Interest income for the three months ended
March 31, 1997 was $79,000, compared with $68,000 for the same period last year.
The additional interest income earned during the first quarter of 1997 was due
to a higher investment balance during this period, compared with the same period
last year, caused by proceeds from a preferred stock financing transaction
completed in April 1996. Interest income is expected to decrease during 1997, in
line with the anticipated reduction of cash balances associated with the
Company's cash burn rate.
Net Loss. The net loss applicable to common shareholders for the three
months ended March 31, 1997 was $893,000 or $0.17 per share, compared with a net
loss of $864,000 or $0.23 per share for the same period last year. The net loss
for the first quarter of 1997 was impacted by two non-cash charges. Operating
9
<PAGE>
expenses for the first three months ended March 31, 1997 included $70,000
associated with the extension of certain stock option exercise periods. In
addition, there was a non-cash preferred dividend charge of $26,000 due to an
ongoing dividend rate of 8% associated with the issuance of convertible Series A
Preferred Stock. Excluding these non-cash expenses, the net loss was $797,000.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through March 31, 1997 the Company had
incurred a cumulative net loss applicable to common shareholders of $15.8
million and had consumed cash from operations of $13.1 million. Prior to the
completion of its initial public offering, the Company had financed its
operations primarily from 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, followed by approximately $6.8 million in net proceeds from a
preferred stock financing in April 1996.
The Company's cash and investments were $6.4 million at March 31, 1997,
compared with $7.3 million at December 31, 1996. The decrease of $0.9 million
during the first three months of 1997 was principally due to net cash used in
operating activities.
The Company's future expenditures and capital requirements 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. Although the Company
expects to have cash inflow related to the Glaxo agreement, as well as the
Orphan Drug grant, these funds are expected to cover only a portion of research
and development expenses in 1997. The Company's cash needs are expected to
continue to increase significantly 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 the drug delivery,
prescription, pharmaceutical, and cosmeceutical product areas, although the
level of such cash needs will be affected by many factors, including any funding
that may be received from third parties pursuant to license development in other
agreements that the Company may enter into in the future, and the level of
revenues, if any, from commercial sales of products.
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 fund operations
and may seek
10
<PAGE>
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. Based upon the Company's current
plan, the Company believes that its existing resources will satisfy its
anticipated cash requirements through at least April 30, 1998.
Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-QSB and matters discussed herein,
include 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.
As of April 21, 1997, approximately 95% of the Series A Preferred Stock
was converted into Common Stock. Based on the market price of the Common Stock
at April 21, 1997, approximately 135,000 shares of Common Stock would be
issuable upon conversion of the remaining Preferred Stock. While no assurances
are possible, the Company believes that such conversions will not have a
material impact on the market price of the Common Stock. However, larger blocks
of other common shares, if sold, could have a negative impact on the market
price of the Common Stock, particularly in light of the Company's low trading
volume.
11
<PAGE>
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
None
12
<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: April 30, 1997 /s/ K. Michael Forrest
----------------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: April 30, 1997 /s/ A. Richard Juelis
----------------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 91
<SECURITIES> 6,369
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,805
<PP&E> 158
<DEPRECIATION> (133)
<TOTAL-ASSETS> 6,830
<CURRENT-LIABILITIES> 230
<BONDS> 0
<COMMON> 21,853
0
564
<OTHER-SE> (15,817)
<TOTAL-LIABILITY-AND-EQUITY> 6,830
<SALES> 0
<TOTAL-REVENUES> 148
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,094
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (867)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (867)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
