FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number: 0-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
349 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of principal executive offices, including zip code)
(650) 616-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares outstanding of the registrant's common stock at April 23,
1999 was 10,173,294.
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of March 31, 1999 and
December 31, 1998 ............................................. 3
Condensed Statements of Operations for the three months
ended March 31, 1999 and 1998, and the period from June 26,
1989 (inception) through March 31, 1999 ....................... 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and 1998, and the period from June 26,
1989 (inception) through March 31, 1999 ....................... 5
Notes to Condensed Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
Item 3. Quantitative and Qualitative Disclosure of Market Risk ........ 10
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
(Amounts in thousands, except share amounts)
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................................... $ 781 $ 1,611
Short-term investments ...................................................................... 7,267 7,282
Inventory ................................................................................... 83 53
Prepaid expenses and other current assets ................................................... 1,137 1,380
-------- --------
Total current assets ............................................................................. 9,268 10,326
Long-term investments ............................................................................ 4,349 6,327
Property and equipment, net ...................................................................... 2,848 2,831
-------- --------
Total assets ..................................................................................... $ 16,465 $ 19,484
======== ========
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable and accrued liabilities .................................................... $ 840 $ 1,552
Deferred revenue ............................................................................ -- 250
Accrued research fees ....................................................................... 136 94
Accrued compensation and related expenses ................................................... 80 69
Current portion of note payable ............................................................. 930 403
-------- --------
Total current liabilities ........................................................................ 1,986 2,368
Long-term portion of note payable ................................................................ 2,791 2,818
Other long-term liabilities ...................................................................... 111 80
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized: 10,173,294 shares
issued and outstanding at March 31, 1999 and at December 31, 1998 ....................... 44,363 44,363
Accumulated other comprehensive income (loss) ............................................... 76 47
Deficit accumulated during the development stage ............................................ (32,862) (30,192)
-------- --------
Total shareholders' equity .................................................................. 11,577 14,218
-------- --------
Total liabilities and shareholders' equity ....................................................... $ 16,465 $ 19,484
======== ========
<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
(inception)
Three Months Ended March 31, through
--------------------------- March 31,
1999 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licensing, milestone, and development funding ........................ $ 42 $ 62 $ 2,621
Government grants .................................................... -- 53 400
Product sales ........................................................ 318 -- 776
-------- -------- --------
Total revenues ............................................................ 360 115 3,797
Costs and expenses:
Cost of product sales ................................................ 95 -- 208
Research and development ............................................. 2,324 1,182 21,901
General and administrative ........................................... 727 519 11,003
Acquired in process technology ....................................... -- -- 3,843
-------- -------- --------
Total costs and expenses .................................................. 3,146 1,701 36,955
-------- -------- --------
Operating loss ............................................................ (2,786) (1,586) (33,158)
Interest income (expense), and other income, net ..................... 116 318 1,744
-------- -------- --------
Net loss .................................................................. (2,670) (1,268) (31,414)
Non-cash preferred dividends .............................................. -- -- 1,448
-------- -------- --------
Net loss applicable to common shareholders ................................ $ (2,670) $ (1,268) $(32,862)
======== ======== ========
Basic and diluted net loss per common share ............................... $ (0.26) $ (0.13)
======== ========
Weighted average common shares outstanding ................................ 10,173 10,143
======== ========
<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
(inception)
Three Months Ended March 31, through
-------------------------- March 31,
1999 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net cash used in operating activities ........................................ $ (3,277) $ (1,799) $(26,192)
Investing activities
Purchase of property and equipment ........................................... (107) -- (3,112)
Purchases of investments ..................................................... (1,500) (3,000) (42,078)
Sales and maturities of investments .......................................... 3,523 4,324 30,539
-------- -------- --------
Net cash provided by (used in) investing activities .......................... 1,916 1,324 (14,651)
Financing activities
Proceeds from notes payable .................................................. $ 500 $ -- $ 7,268
Repayment of notes payable ................................................... -- -- (2,111)
Other long-term liabilities .................................................. 31 -- 111
Net proceeds from issuance of common stock ................................... -- 161 24,678
Issuance of convertible preferred stock, net of issuance costs ............... -- -- 11,758
Deferred financing costs ..................................................... -- -- (80)
-------- -------- --------
Net cash provided by financing activities .................................... 531 161 41,624
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................... (830) (314) 781
Cash and cash equivalents, beginning of period ............................... $ 1,611 $ 1,822 $ --
-------- -------- --------
Cash and cash equivalents, end of period ..................................... $ 781 $ 1,508 $ 781
======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
5
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Condensed Financial Statements
Note 1. - Basis of Presentation
The accompanying interim condensed financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying condensed financial statements include all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of operating results for the three months
ended March 31, 1999 and may not necessarily be indicative of the results to be
expected for any other interim period or for the full year.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant Company and Subsidiaries'
annual report on Form 10-K for the year ended December 31, 1998.
Note 2. - Basic and Diluted Net Loss per Share
The financial statements are presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic net loss per
common share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share incorporate the
incremental shares issued upon the assumed exercise of stock options and
warrants, when dilutive. There is no difference between basic and diluted net
loss per share, as presented in the statement of operations, because all options
and warrants are anti-dilutive.
Note 3. - Comprehensive Income
Accumulated other comprehensive income (loss) presented on the
accompanying balance sheet consists of the accumulated net unrealized gain
(loss) on available-for-sale investments. Total comprehensive loss for the first
quarter of 1999 was $ 2,641,000, compared with $ 1,192,000 for the same quarter
of 1998.
Note 4. - Segment Reporting
The Company has two business segments: pharmaceuticals and
cosmeceuticals. Pharmaceuticals include primarily research and development
expenses for potential prescription products to be marked directly by the
Company or through corporate partners.
The cosmeceutical business segment primarily includes development
expenses for non-prescription anti-aging products. Using related technologies,
Cellegy is currently incurring development expenses and receiving all of its
product sales from one customer, Gryphon Development, Inc., which is selling
product through Bath & Body Works specialty retail stores exclusively in the
United States.
6
<PAGE>
The following table contains information regarding revenues and
operating income (loss) of each business segment for the three months ended
March 31, 1999 and 1998.
Three months ended March 31,
-------------------------------
1999 1998
----------- -----------
Revenues:
Pharmaceuticals ............... $ 42,200 $ 115,000
Cosmeceuticals ................ 317,800 --
----------- -----------
$ 360,000 $ 115,000
=========== ===========
Loss from Operations:
Pharmaceuticals ............... $(2,780,300) $(1,491,000)
Cosmeceuticals ................ (5,700) (95,000)
----------- -----------
$(2,786,000) $(1,586,000)
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. These forward-looking statements
concern matters that involve risks and uncertainties 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. Actual events or results may differ materially from those
discussed in this Quarterly Report.
Cellegy Pharmaceuticals, Inc. 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 delivery
technologies. The Company was incorporated in California in 1989. Cellegy is
developing several prescription drugs, including Anogesic(R), a
nitroglycerin-based product for the treatment of anal fissures and hemorrhoids,
and a transdermal testosterone gel for the treatment of male hypogonadism, a
condition that frequently results in lethargy and reduced libido in men above
the age of 40. In addition to its prescription drugs, Cellegy is testing and
developing a line of anti-wrinkling cosmeceutical products which the Company
believes will address the skin care needs of an affluent and aging population.
General
In November 1997, the Company completed a $15.1 million public offering
of approximately 2.0 million shares of Common Stock. CIBC Oppenheimer Corp.
acted as underwriter in connection with the offering. Simultaneously, the
Company's stock was approved for listing on the Nasdaq National Market.
In December 1997, the Company completed an asset purchase agreement
with Neptune Pharmaceutical Corporation ("Neptune") to acquire all patent and
other intellectual property rights relating to Anogesic. The Company's expenses
relating to product development and clinical trials are expected to increase
during 1999 as a result of the ongoing Phase III clinical trials initiated in
July 1998. The purchase price and future milestone payments for Anogesic are
payable in Cellegy Common Stock. The Company expects additional non-cash charges
7
<PAGE>
to operations for related milestone payments of approximately $750,000 in the
second half of 1999. Based on the April 23, 1999 closing price of Cellegy's
common stock, approximately 100,000 shares would be issued.
In September 1998, Cellegy began initial shipments and product sales of
its C79 intensive moisturizing formulation to Gryphon Development Inc., the
product development arm of Bath & Body Works. C79 is a key ingredient in a new
line of healing hand creams launched at most Bath & Body Works stores in the
United States.
In March 1999, Cellegy and Glaxo announced their intention to terminate
the license agreement with the return to Cellegy of Glylorin(TM) product rights.
Subject to final termination agreement terms, Cellegy expects to receive any
remaining development funding due from Glaxo through the date of termination.
Cellegy intends to repay Glaxo approximately $250,000 in funds previously
advanced by Glaxo. Cellegy does not currently intend to develop Glylorin on its
own, but will seek an appropriate partner for certain geographic territories to
develop the product in exchange for certain upfront payments, milestones, and
royalties on future sales.
Results of Operations
Revenues. The Company had revenues of $360,000 and $115,000 for the
three months ended March 31, 1999 and 1998, respectively. During the first
quarter of 1999, revenues consisted of $318,000 in product sales to Gryphon
Development, the development subsidiary of specialty retailer Bath & Body Works,
and $42,000 for development funding associated with the Glaxo license agreement.
During the three months ended March 31, 1998, revenues consisted of $62,000 for
development funding from Glaxo and $53,000 related to an Orphan Drug grant from
the Food and Drug Administration ( "FDA" ) to cover certain of the Company's
clinical trial costs for Glylorin. The Company expects to receive minimal
additional development funding from Glaxo, pending termination of the license
agreement.
Cellegy, through its Cellisis Cosmeceuticals affiliate, has received
additional orders totaling approximately $230,000 from Gryphon Development for
its C79 intensive moisturizer. This will be recorded as revenue during the
second quarter of 1999. There is no assurance that further orders for this
product will be forthcoming in future quarters.
Research and Development Expenses. Research and development expenses
were $2,324,000 for the three months ended March 31, 1999, compared with
$1,182,000 for the same period last year. The increase was primarily due to
costs associated with the Company's ongoing Phase III clinical trial studying
Anogesic for the treatment of anal fissures. In addition, research and clinical
staffing, as well as lease expenses associated with the Company's new office and
laboratory facility increased from comparable periods last year. Cellegy's
research expenses are expected to continue to increase during 1999 associated
primarily with its Anogesic and transdermal testosterone gel clinical studies.
General and Administrative Expenses. General and administrative
expenses increased to $727,000 for the three months ended March 31, 1999,
compared with $519,000 for the same period last year. This increase was
primarily due to higher lease expenses associated with its new facility. The
Company's general and administrative expenses are expected to increase in the
future in support of its research and product commercialization efforts.
Interest Income and Expense. The Company earned $199,000 in interest
income for the three months ended March 31, 1999, compared with $318,000 for the
same period last year. The reduction in interest income earned during the first
quarter of 1999 was due to lower average investment balances . Interest expense
of $83,000 during the three months ended March 31, 1999 was associated with a
bank loan for new facility tenant improvements. No interest expenses were
incurred during the first quarter of 1998. The Company expects interest expenses
to increase in the next two quarters associated with increased loan balances.
Net Loss. The net loss applicable to common shareholders was $2,670,000
or $0.26 per share for the three months ended March 31, 1999 based on 10,173,000
weighted average shares outstanding, compared with a net loss of $1,268,000 or
$0.13 per share for the same period in the prior year, when 10,143,000 weighted
average shares were outstanding.
8
<PAGE>
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through March 31, 1999, the Company
had incurred an accumulated deficit of $32.9 million and had consumed cash from
operations of $26.2 million. The Company's public financing included $6.4
million in net proceeds from its initial public offering in August 1995, $6.8
million in net proceeds from a preferred stock financing in April 1996, $3.8
million in net proceeds from a private placement of Common Stock in July 1997,
and $13.8 million in net proceeds for a secondary public offering in November
1997. The Company's cash and investments were $12.4 million at March 31, 1999,
compared with $15.2 million at December 31, 1998. The decrease in cash and
investments was principally due to net cash used in operating activities.
The Company's operations have and will continue to use substantial
amounts of cash. The Company has no current source of significant ongoing
revenues or capital beyond existing cash and investments and the current product
sale agreement with Gryphon Development. In order to complete the research and
development and other activities necessary to commercialize its products,
additional financing will 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 pre-clinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the costs of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments, changes 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.
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, 1999.
Year 2000 Issues
To address the potential impact of year 2000, the Company established a
Y2K cross-function project team in August of 1998, chaired by the Company's Vice
President, Finance and Chief Financial Officer. The Y2K project team reports to
the Information Systems ("IS") committee which consists of the Company's Chief
Executive Officer and all its other officers. The Y2K project team developed a
phased approach to identify and resolve any Year 2000 issues.
The first two phases are completed. The remaining third phase of the
Company's compliance program involves the actual testing and correction of the
Company's IS and non-IS systems. This testing and correction phase is on
schedule and will be completed by mid-year 1999. Cellegy does not expect the
cost of the Year 2000 compliance program to be material. The total cost is
estimated at less than $50,000.
The Company has developed a contingency plan in the event that a
business interruption caused by Year 2000 problems should occur. The contingency
plan also addresses vendor and third parties' Year 2000 issues that may arise.
Nevertheless, Year 2000 compliance is a complex project and it depends on many
factors, some of which are not completely within the Company's control. Should
either the Company's internal systems or the internal systems of one or more
significant vendor or supplier fail to achieve Year 2000 compliance, the
Company's business and its results of operations could be adversely affected.
9
<PAGE>
Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties, including, but not limited to, statements
concerning the completion of clinical trials, particularly the Company's ongoing
Phase III trial using Anogesic, the timing of planned regulatory filings, the
applicability of drug and cosmetic laws and regulations to the Company's
products, the scope of the Company's patent coverage, anticipated expenditures
and the need for additional funds. The factors discussed in the Company's
reports filed with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, in
particular under the caption "Factors That May Affect Future Operating Results,"
should be carefully considered when evaluating the Company's business and
prospects.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company invests its excess cash in short-term, investment grade,
fixed income securities under an investment policy. All of the Company's
investments are classified as available-for-sale . Over 50% of the Company's
securities will mature by the end of 1999. The Company believes that potential
near-term losses in future earnings, fair values or cash flows related to their
investment portfolio would not be significant. Cellegy has a long-term note
payable outstanding with an interest rate which currently varies with the
lender's prime rate.
10
<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
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: April 30, 1999 /s/ K. Michael Forrest
-----------------------------------
K. Michael Forrest
President and Chief Executive
Officer
Date: April 30, 1999 /s/ A. Richard Juelis
-----------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 781
<SECURITIES> 11,616
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,268
<PP&E> 3,089
<DEPRECIATION> (241)
<TOTAL-ASSETS> 16,465
<CURRENT-LIABILITIES> 1,986
<BONDS> 0
0
0
<COMMON> 44,363
<OTHER-SE> (32,786)
<TOTAL-LIABILITY-AND-EQUITY> 16,465
<SALES> 360
<TOTAL-REVENUES> 360
<CGS> 95
<TOTAL-COSTS> 95
<OTHER-EXPENSES> 3,051
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