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 June 30, 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 July 19,
1999 was 10,177,063.
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CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
<CAPTION>
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements ( Unaudited )
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998 ..... 3
Condensed Statements of Operations for three and six months ended June
30, 1999 and 1998, and the period from June 26, 1989 (inception) through
June 30, 1999 .......................................................... 4
Condensed Statements of Cash Flows for the six months ended June 30,
1999 and 1998, and the period from June 26, 1989 (inception) through
June 30, 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
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<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>
June 30, 1999 December 31, 1998
---------------- -----------------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................................. $ 2,178 $ 1,611
Short-term investments ..................................................... 6,246 7,282
Inventory .................................................................. -- 53
Prepaid expenses and other current assets .................................. 697 1,380
-------- --------
Total current assets ............................................................ 9,121 10,326
Long-term investments ........................................................... 2,252 6,327
Property and equipment, net ..................................................... 3,323 2,831
-------- --------
Total assets .................................................................... $ 14,696 $ 19,484
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ................................... $ 690 $ 1,552
Deferred revenue ........................................................... -- 250
Accrued research fees ...................................................... 69 94
Accrued compensation and related expenses .................................. 102 69
Current portion of note payable ............................................ 982 403
-------- --------
Total current liabilities ....................................................... 1,843 2,368
Long-term portion of note payable ............................................... 3,518 2,818
Other long-term liabilities ..................................................... 111 80
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized: 10,177,063 shares
issued and outstanding at June 30, 1999 and 10,173,294 shares issued and
outstanding at December 31, 1998 ....................................... 44,364 44,363
Accumulated other comprehensive income (loss) .............................. 3 47
Deficit accumulated during the development stage ........................... (35,143) (30,192)
-------- --------
Total shareholders' equity ................................................. 9,224 14,218
-------- --------
Total liabilities and shareholders' equity ...................................... $ 14,696 $ 19,484
======== ========
<FN>
The accompanying notes are an integral part of these condensed 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 per share amounts)
<CAPTION>
Period from
June 26, 1989
(inception)
Three Months Ended Six Months Ended through
June 30, June 30, June 30,
1999 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing, milestone, and
development funding ............................ $ -- $ 103 $ 42 $ 165 $ 2,621
Government grants .................................. -- 33 -- 86 400
Product sales ...................................... 394 -- 712 -- 1,170
-------- -------- -------- -------- --------
Total revenues .......................................... 394 136 754 251 4,191
Operating expenses:
Cost of product sales .............................. 99 -- 194 -- 307
Research and development ........................... 1,966 1,752 4,290 2,934 23,867
General and administrative ......................... 686 834 1,413 1,353 11,689
Acquired in process technology ..................... -- -- -- -- 3,843
-------- -------- -------- -------- --------
Total operating expenses ................................ 2,751 2,586 5,897 4,287 39,706
-------- -------- -------- -------- --------
Operating loss .......................................... (2,357) (2,450) (5,143) (4,036) (35,515)
Interest income / (expenses) ....................... 77 255 193 573 1,821
-------- -------- -------- -------- --------
Net loss ................................................ (2,280) (2,195) (4,950) (3,463) (33,694)
Non-cash preferred dividends ............................ -- -- -- -- 1,448
-------- -------- -------- -------- --------
Net loss applicable to common shareholders .............. $ (2,280) $ (2,195) $ (4,950) $ (3,463) $(35,142)
======== ======== ======== ======== ========
Basic and diluted net loss per common share ............. $ (0.22) $ (0.22) $ (0.49) $ (0.34)
======== ======== ======== ========
Weighted average common shares outstanding .............. 10,176 10,165 10,175 10,154
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
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4
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<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
<CAPTION>
Period from
June 26, 1989
(inception)
Six Months Ended June 30, through
-------------------------- June 30,
1999 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net cash used in operating activities ........................................ $ (5,107) $ (3,986) $(28,022)
Investing activities
Purchase of property and equipment ........................................... (703) -- (3,708)
Purchases of investments ..................................................... (1,500) (3,000) (42,078)
Sales and maturities of investments .......................................... 6,565 6,326 33,581
-------- -------- --------
Net cash provided by (used in) investing activities .......................... 4,362 3,326 (12,205)
Financing activities
Proceeds from notes payable .................................................. $ 1,280 $ -- $ 8,048
Repayment of notes payable ................................................... -- -- (2,111)
Other long-term liabilities .................................................. 31 -- 111
Net proceeds from issuance of common stock ................................... 1 161 24,679
Issuance of convertible preferred stock, net of issuance costs ............... -- -- 11,758
Deferred financing costs ..................................................... -- -- (80)
-------- -------- --------
Net cash provided by financing activities .................................... 1,312 161 42,405
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................... 567 (499) 2,178
Cash and cash equivalents, beginning of period ............................... $ 1,611 $ 1,822 --
-------- -------- --------
Cash and cash equivalents, end of period ..................................... $ 2,178 $ 1,323 $ 2,178
======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
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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 six and three
months ended June 30, 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. It has no impact on net loss or on
stockholder's equity. Total comprehensive loss for six months ended June 30,
1999 was $4,994,000 compared with $3,387,000 for the same six months ending June
30, 1998. Total comprehensive loss for three months ended June 30, 1999 and June
30, 1998 are $2,353,000 and $2,195,000 respectively.
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.
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The following table contains information ( amounts in thousands )
regarding revenues and loss from operating each business segment for the three
and six months ended June 30, 1999 and 1998.
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Pharmaceuticals $ -- $ 136 $ 42 $ 251
Cosmeceuticals 394 -- 712 --
------- ------- ------- -------
$ 394 $ 136 $ 754 $ 251
======= ======= ======= =======
Loss from Operations:
Pharmaceuticals $(2,536) $(2,216) $(4,991) $(3,707)
Cosmeceuticals 179 (234) (152) (329)
------- ------- ------- -------
$(2,357) $(2,450) $(5,143) $(4,036)
======= ======= ======= =======
</TABLE>
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. 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. Certain future milestone
payments for Anogesic are payable to Neptune in Cellegy Common Stock. The
Company expects additional non-cash charges to operations for milestone payments
of approximately $750,000 in the second half of 1999. The exact number of shares
issuable will be based on a formula tied to the market price of the common stock
7
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when the milestone is achieved. Based on the July 19, 1999 closing price of
Cellegy's common stock, approximately 100,000 shares would be issued for
anticipated milestones achieved in the second half of 1999.
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 line of
healing hand creams launched at most Bath & Body Works stores in the United
States. Total sales from inception through June 1999 exceed $1.1 million.
In March 1999, Cellegy and Glaxo Wellcome ( "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 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 $754,000 and $251,000 for the six
months ended June 30, 1999 and 1998, respectively. During the six months ended
June 30, 1999, revenues consisted of $712,000 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 first six months of 1998, revenues consisted of $165,000 in
development funding from Glaxo, and $86,000 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.
For the three months ended June 30, 1999, the Company recorded revenues of
$394,000 consisting exclusively of product sales to Gryphon Development. For the
same period in 1998, revenues were $136,000 consisting of $103,000 in
development funding associated with the Glaxo and $33,000 from the FDA Orphan
Drug grant.
Cellegy has not yet received additional orders for the remainder of 1999
from Gryphon Development for its C79 intensive moisturizer. Cellegy expects
certain orders will be forthcoming for the year end holiday selling season.
However, there is no assurance that further orders for this product will be
forthcoming.
Research and Development Expenses. Research and development expenses were
$4,290,000 for the six months ended June 30, 1999, compared with $2,934,000 for
the same period last year. During the first three months of 1999 and 1998,
research and development spending was $1,966,000 and $1,752,000, respectively.
The increases were 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(R)
clinical studies and regulatory filings and its transdermal testosterone gel
clinical study.
General and Administrative Expenses. General and administrative expenses
were $1,413,000 for the six months ended June 30, 1999, compared with $1,353,000
for the same period last year. The Company incurred general and administrative
expenses of $686,000 and $834,000 for the three months ended June 30, 1999 and
1998, respectively. The increase during the first six months was primarily due
to higher lease expenses associated with its new facility. Expenses for the
three month period ended June 30, 1998 were higher than during the comparable
quarter of 1999 due to one-time staffing and relocation expenses that occurred
last year. The Company's general and administrative expenses are expected to
increase in the future resulting from its European corporate development program
and in support of its research and product commercialization efforts.
Interest Income and Expense. The Company earned $351,000 and $578,000 in
interest income for the six
8
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months ended June 30, 1999 and 1998, respectively. For the three months ended
June 30, 1999 and 1998, the Company earned $151,000 and $255,000, respectively.
The reductions in interest income earned during the six and three month periods
of 1999 were due to lower average investment balances. Interest expense for the
six and three month periods ended June 30, 1999 were $158,000 and $75,000,
respectively. This was associated with a bank loan for new facility tenant
improvements. There was no interest expense for the six and three month periods
ended June 30, 1998. The Company expects interest expense to increase in the
next quarter associated with increased loan balances.
Net Loss. The net loss applicable to common shareholders was $4,950,000 or
$0.49 per share for the six months ended June 30, 1999 based on 10,175,000
weighted average shares outstanding, compared with a net loss of $3,463,000 or
$0.34 per share for the same period in the prior year, when 10,154,000 weighted
average shares were outstanding. For the three months ended June 30, 1999, the
net loss applicable to common shareholders was $2,280,000 or $0.22 per share
based on 10,176,000 average shares outstanding compared with a net loss
applicable to common shareholders of $2,195,000 or $0.22 per share during the
same period in 1998 when 10,165,000 weighted average shares were outstanding.
Liquidity and Capital Resources
From inception through June 30, 1999, the Company had incurred an
accumulated deficit of $35.1 million and had consumed cash from operations of
$28.0 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 $10.7 million at June 30, 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 since inception, 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 is currently seeking 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
9
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Officer and all its other officers. The Y2K project team developed a phased
approach to identify and resolve any Year 2000 issues.
All three phases of the Company's compliance program are now completed.
Cellegy does not expect the cost of the Year 2000 compliance program to be
material. The total cost is now estimated at less than $35,000.
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.
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
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 an outstanding long-term note
payable with an interest rate that currently varies with the lender's prime
rate.
10
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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
None
11
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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.
Date: July 29, 1999 /s/ K. Michael Forrest
--------------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: July 29, 1999 /s/ A. Richard Juelis
--------------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2178
<SECURITIES> 8,498
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,121
<PP&E> 3,685
<DEPRECIATION> (362)
<TOTAL-ASSETS> 14,696
<CURRENT-LIABILITIES> 1,843
<BONDS> 0
0
0
<COMMON> 44,364
<OTHER-SE> (35,143)
<TOTAL-LIABILITY-AND-EQUITY> 14,696
<SALES> 754
<TOTAL-REVENUES> 754
<CGS> 194
<TOTAL-COSTS> 194
<OTHER-EXPENSES> 5,703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> (4,950)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,950)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
