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, 2000
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 March 31,
2000 was 12,078,118.
<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, 2000 and
December 31, 1999 ................................................ 3
Condensed Statements of Operations for three months ended
March 31, 2000 and 1999, and the period from June 26, 1989
(inception) through March 31, 2000 ............................... 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2000 and 1999, and the period from
June 26, 1989 (inception) through March 31, 2000 ................. 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 ........... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 10
Item 2. Changes in Securities and Use of Proceeds ........................ 10
Item 3. Defaults Upon Senior Securities .................................. 10
Item 4. Submission of Matters to a Vote of Security Holders .............. 10
Item 5. Other Information ................................................ 10
Item 6. Exhibits and Reports on Form 8-K ................................. 10
Signature(s) ............................................................... 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------- --------
(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................ $ 1,291 $ 804
Short-term investments ................................... 12,319 10,971
Prepaid expenses and other current assets ................ 680 1,026
-------- --------
Total current assets ....................................... 14,290 12,801
Long-term investments ...................................... 992 4,963
Property and equipment, net ................................ 3,056 3,149
-------- --------
Total assets ............................................... $ 18,338 $ 20,913
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ................. $ 500 $ 475
Accrued research fees .................................... 178 239
Accrued compensation and related expenses ................ 148 106
Current portion of note payable .......................... 930 1,153
-------- --------
Total current liabilities .................................. 1,756 1,973
Long-term portion of note payable .......................... 2,172 2,882
Other long-term liabilities
........................................................... 240 219
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized:
12,078,118 shares issued and outstanding at March 31,
2000 and 12,010,242 shares issued and outstanding at
December 31, 1999 ...................................... 55,598 55,368
Accumulated other comprehensive income/(loss) ............ (20) (35)
Deficit accumulated during the development stage ......... (41,408) (39,494)
-------- --------
Total shareholders' equity ............................... 14,170 15,839
-------- --------
Total liabilities and shareholders' equity ................. $ 18,338 $ 20,913
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
June 26, 1989
(inception)
Three Months Ended March 31, through
-------------------- March 31,
2000 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licensing, milestone, and development funding ...... $ -- $ 42 $ 2,697
Government grants .................................. 52 -- 482
Product sales ...................................... 478 318 1,834
-------- -------- --------
Total revenues ....................................... 530 360 5,013
Costs and expenses:
Cost of product sales .............................. 105 95 488
Research and development ........................... 1,860 2,324 29,402
General and administrative ......................... 546 727 13,434
Acquired in-process technology ..................... -- -- 3,843
-------- -------- --------
Total costs and expenses ............................. 2,511 3,146 47,167
-------- -------- --------
Operating loss ....................................... (1,981) (2,786) (42,154)
Interest income (expense) , and other income, net .. 66 116 2,194
-------- -------- --------
Net loss ............................................. (1,915) (2,670) (39,960)
Non-cash preferred dividends ......................... -- -- 1,449
-------- -------- --------
Net loss applicable to common shareholders ........... $ (1,915) $ (2,670) $(41,409)
======== ======== ========
Basic and diluted net loss per common share .......... $ (0.16) $ (0.26)
======== ========
Weighted average common shares outstanding ........... 12,034 10,173
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Period from
June 26, 1989
(inception)
Three Months Ended March 31, through
-------------------- March 31,
2000 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net cash used in operating activities ......................... $ (1,425) $ (3,277) $(33,951)
Investing activities
Purchase of property and equipment ............................ (24) (107) (3,777)
Purchases of investments ...................................... -- (1,500) (60,525)
Sales and maturities of investments ........................... 2,623 3,523 47,180
-------- -------- --------
Net cash provided by (used in) investing activities ........... 2,599 1,916 (17,122)
Financing activities
Proceeds from notes payable ................................... $ -- $ 500 $ 8,047
Repayment of notes payable .................................... (932) -- (3,508)
Other long-term liabilities ................................... -- 31 219
Net proceeds from issuance of common stock .................... 245 -- 35,928
Issuance of convertible preferred stock, net of issuance costs -- -- 11,758
Deferred financing costs ...................................... -- -- (80)
-------- -------- --------
Net cash provided by financing activities ..................... (687) 531 52,364
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... 487 (830) 1,291
Cash and cash equivalents, beginning of period ................ $ 804 $ 1,611 $ --
-------- -------- --------
Cash and cash equivalents, end of period ...................... $ 1,291 $ 781 $ 1,291
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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 Cellegy 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 three months ended March 31, 2000 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, 1999 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 Cellegy's Annual Report on Form 10-K for the year
ended December 31, 1999.
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 three months ended
March 31, 2000 was $1,900,000 compared with $2,641,000 for the same three months
ended March 31, 1999.
Note 4. - Segment Reporting
Cellegy has two business segments: pharmaceuticals and cosmeceuticals.
Pharmaceuticals include primarily research and development expenses for
potential prescription products to be marketed directly by Cellegy or through
corporate partners.
The cosmeceutical business segment primarily includes development expenses
for non-prescription skin care 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 products through
a major specialty store chain exclusively in the United States.
6
<PAGE>
The following table contains information (amount in thousands) regarding
revenues and loss from operating each business segment for the three months
ended March 31, 2000 and 1999.
Three months ended March 31,
-----------------------
2000 1999
------- -------
Revenues:
Pharmaceuticals $ 52 $ 42
Cosmeceuticals 478 318
------- -------
530 $ 360
Income / (Loss) from Operations:
Pharmaceuticals $(2,277) $(2,780)
Cosmeceuticals 296 (6)
------- -------
$(1,981) $(2,786)
======= =======
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 statements concern matters
that involve risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Further, we undertake
no obligation to revise any 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., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs and high performance skin care products. We are developing
several prescription drugs, including Anogesic(R), a nitroglycerin-based product
for the treatment of anal fissures and hemorrhoids and two transdermal
testosterone gel products, Tostrex(TM), for the treatment of male hypogonadism,
a condition that affects men, generally above the age of forty, and
Tostrelle(TM), for the treatment of diminished sexual energy in menopausal
women. We have developed a line of anti-wrinkling cosmeceutical products which
we believe will address the skin care needs of an affluent and aging population.
General
In December 1997, we completed an asset purchase agreement with Neptune
Pharmaceutical Corporation ("Neptune") to acquire patent and other intellectual
property rights relating to Anogesic. Our expenses relating to Anogesic product
development and clinical trials are expected to increase during the remainder of
2000 as a result of a second confirmatory Phase III clinical trial initiated in
the first quarter 2000.
In September 1998, we began initial shipments and product sales of our
Intensive Moisturizing formulation to Gryphon Development Inc. ("Gryphon"), the
product development arm of a major specialty retailer. This formulation is a key
ingredient in a line of healing hand creams sold at the specialty retailer's
chain of stores in the United States.
In July 1999, we completed a $10.1 million private placement of 1.6 million
shares of common stock. Participants in the offering included three
institutional investors and our President and Chief Executive Officer.
In October 1999, Cellegy and Glaxo Welcome terminated a license agreement
with the return to us of all Glylorin(TM) product rights and with no further
financial obligations by either party. We do not currently intend to develop
Glylorin on our own, but will seek an appropriate partner for certain geographic
territories to develop the product in exchange for possible contract payments
and royalties on future sales.
7
<PAGE>
In April 2000, Cellegy entered into an agreement with the Australian
company, Quay Pharmaceuticals PTY. LTD., to acquire all of Quay's assets
relating to Rectogesic(R) (nitroglyerin ointment) for a combination of Cellegy
stock, warrants and cash. The acquisition is subject to final completion of due
diligence by Cellegy.
Results of Operations
Revenues. Cellegy had revenues of $530,000 and $360,000 for the three
months ended March 31, 2000 and 1999, respectively. During the first three
months of March 2000, revenues consisted of $478,000 in product sales to
Gryphon, the development subsidiary of a major specialty retailer, and $52,000
in development funding associated with a Small Business Innovation Research
("SBIR") grant from the National Institutes of Health. During the first three
months of 1999, revenues consisted of $318,000 in product sales to Gryphon and
$42,000 development funding from Glaxo. There is no assurance that further
orders for our Intensive Moisturizer will be forthcoming during the second
quarter of 2000. Revenues from sales of the newly acquired Rectogesic product in
Australia will be minimal during the second quarter of 2000.
Research and Development Expenses. During the first quarter of 2000 and
1999, research and development expenses were $1,860,000 and $2,324,000,
respectively. Higher expenses for the first quarter of 1999 were due primarily
to costs associated with Cellegy's Phase III clinical trial studying Anogesic
for the treatment of anal fissures. Research expenses are expected to increase
during the remainder of 2000 due primarily to peak activity associated with the
Anogesic confirmatory Phase III clinical trial, Phase II trials with Anogesic
for the treatment of hemorrhoids and pain following hemorrhoidectomy surgery, as
well as, transdermal testosterone gel clinical studies for both men and women.
General and Administrative Expenses. General and administrative expenses
were $546,000 for the three months ended March 31, 2000, compared with $727,000
for the same period last year. The decrease was primarily due to one-time
staffing and relocation expenses, as well as, higher lease expenses in 1999
associated with our new facility. General and administrative expenses are
expected to increase in the future resulting from our corporate development
programs and in support of marketing and promotional expenses associated with
expected sales efforts relating to Rectogesic in Australia.
Interest Income (Expense), and other Income, Net. The Company earned
$68,000 in net interest income for the three months ended March 31, 2000,
compared with $116,000 for the same period last year. Interest income earned
decreased during the first quarter of 2000 due to lower average investment
balances, and interest expenses increased due to a higher lending rate
associated with our bank loan. We expect net interest income to decrease in the
next quarter.
Net Loss. The net loss applicable to common shareholders was $1,915,000 or
$0.16 per share for the three months ended March 31, 2000 based on 12,034,000
weighted average shares outstanding, compared with a net loss of $2,670,000 or
$0.26 per share for the same period in the prior year, when 10,173,000 weighted
average shares were outstanding.
Liquidity and Capital Resources
Cellegy has experienced net losses and negative cash flow from operations
each year since its inception. Through March 31, 2000, we have incurred an
accumulated deficit of $41.4 million and had consumed cash from operations of
$33.9 million. Our equity financing included $6.4 million in net proceeds from
our 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, $13.8 million in net proceeds
from a secondary public offering of common stock in November 1997 and $10.0
million in net proceeds from a private placement of common stock in July 1999.
Our cash and investments were $14.6 million at March 31, 2000, compared with
$16.7 million at December 31, 1999. The decrease in cash and investments was
principally due to net cash used in operating activities.
Cellegy's operations have and will continue to use substantial amounts of
cash. We have no current source of significant ongoing revenues or capital
beyond existing cash and investments and the current product sale agreement with
Gryphon Development. We have an existing $5.0 million credit line with our bank
with a current available balance of $1.9 million. In order to complete the
research and development and other activities necessary to commercialize our
products, additional
8
<PAGE>
financing will be required. Our future expenditures and capital requirements
depend on numerous factors including, without limitation, the progress and focus
of our 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 to our existing research
relationships, our ability to establish collaborative arrangements, the
initiation of commercialization activities, the purchase of capital equipment
and the availability of other financing.
In the course of our development activities, we have incurred significant
losses and expect to incur substantial additional development costs. As a
result, we 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 us to finance our operations on acceptable terms, if at all.
Insufficient funding may require us to delay, reduce or eliminate some or all of
our research and development activities, planned clinical trials and
administrative programs. We believe that available cash resources and the
interest thereon will be adequate to satisfy our capital needs through at least
December 31, 2000.
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(R), the timing of planned regulatory filings, the
applicability of drug and cosmetic laws and regulations to Cellegy's products,
the scope of our patent coverage, anticipated expenditures and the need for
additional funds. The factors discussed in Cellegy's reports filed with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended December 31, 1999, in particular under the caption "Factors That
May Affect Future Operating Results," should be carefully considered when
evaluating our business and prospects.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We invest our excess cash in short-term, investment grade, fixed income
securities under an investment policy. All of our investments are classified as
available-for-sale. Over 70% of our securities will mature by the end of 2000.
We believe 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 that
currently varies with the lender's prime rate.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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
10
<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 _____, 2000
----------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: April ______, 2000
----------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000887247
<NAME> CELLEGY PHARMACEUTICALS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 1,291
<SECURITIES> 13,311
<RECEIVABLES> 405
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,290
<PP&E> 3,754
<DEPRECIATION> (698)
<TOTAL-ASSETS> 18,338
<CURRENT-LIABILITIES> 1,756
<BONDS> 0
0
0
<COMMON> 55,598
<OTHER-SE> (41,428)
<TOTAL-LIABILITY-AND-EQUITY> 18,338
<SALES> 0
<TOTAL-REVENUES> 530
<CGS> 105
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> (1,913)
<INCOME-TAX> 2
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,915)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
