DMK PHARMACEUTICALS Corp - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
one)
x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the Fiscal Year Ended December 31, 2005
OR
o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission
File Number 000-26372
CELLEGY
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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82-0429727
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1800
Byberry Rd., Building 13, Huntingdon Valley, PA
19006
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(Address
of Principal Executive Offices) (zip
code)
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Registrant’s
telephone number, including area code: (215)
914-0900
Securities
registered pursuant to Section 12(b) of the Act:
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None
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None
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.0001 par value
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
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YES ¨
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NO x
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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YES o
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NO x
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Note
-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 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.
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YES x
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NO o
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
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YES o
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NO x
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The
aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2005 was $43,547,000.
As
of
March 24, 2006, there were 29,831,625 shares of common stock
outstanding.
Documents
Incorporated By Reference:
The
information called for by Part III of this Report, and certain information
called for by Part II, Item 5 of this Report, to the extent not set forth
herein, is incorporated by reference to the definitive Proxy Statement relating
to the Annual Meeting of Stockholders of the Company which will be filed with
the Securities and Exchange Commission not later than 120 days after the end
of
the fiscal year to which this Report relates.
This
Annual Report includes forward-looking statements that involve substantial
risks
and uncertainties. These forward-looking statements are not historical facts,
but are based on current expectations, estimates and projections about our
industry, our beliefs and our assumptions. 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 are not guarantees
of future performance and concern matters that could subsequently differ
materially from those described in the forward-looking statements. Actual events
or results may also differ materially from those discussed in this Annual
Report. These risks and uncertainties include those described in
“Risk
Factors” and elsewhere in this Annual Report. Except as required by law, we
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this Annual
Report.
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2005
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Part I
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Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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15
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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25
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Item
2.
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PROPERTIES
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25
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Item
3.
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LEGAL
PROCEEDINGS
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25
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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27
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Part II
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
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28
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Item
6.
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SELECTED
FINANCIAL DATA
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29
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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29
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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38
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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38
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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39
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Item
9A.
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CONTROLS
AND PROCEDURES
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39
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Item
9B.
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OTHER
INFORMATION
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39
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Part III
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Item
10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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40
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Item
11.
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EXECUTIVE
COMPENSATION
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40
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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40
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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41
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Item
14.
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PRINCIPAL
ACCOUNTANT, FEES AND SERVICES
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Part IV
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Item
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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42
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Unless
the context otherwise requires, the terms “we”, “our”, “the Company”, and
“Cellegy” refer to Cellegy Pharmaceuticals, Inc., a Delaware corporation,
and its subsidiaries. Savvy®, Cellegesic™, Fortigel™, Tostrelle®, Tostrex®, and
Rectogesic® are our trademarks. We also refer to trademarks of other
corporations and organizations in this document.
3
Cellegy
Pharmaceuticals is a development stage specialty biopharmaceutical company
primarily engaged in the development and commercialization of prescription
drugs
targeting women’s health care, including the reduction in transmission of HIV,
and gastrointestinal conditions using proprietary topical formulations and
nitric oxide (“NO”) donor technologies. In October 2004, Cellegy completed
the acquisition of Biosyn, Inc., a privately held Pennsylvania based
biopharmaceutical company, with a late-stage product candidate,
Savvy®
(C31G
vaginal gel), a contraceptive microbicide gel designed to reduce HIV/AIDS
transmission in women.
Cellegy
is developing Cellegesic™ (nitroglycerin ointment) for the treatment of anal
fissures and hemorrhoids. In January 2004, the results of preliminary
analysis of our third Phase 3 clinical trial for Cellegesic showed a reduction
in anal fissure pain, compared with a placebo control, during the first three
weeks of the trial, the primary efficacy endpoint of the study. The company
submitted a New Drug Application (“NDA”) to the U.S.
Food
and Drug Administration (“FDA” or the “Agency”) in
June 2004. The FDA issued a Not Approvable letter for Cellegesic in
December 2004.
Cellegy
submitted an amended NDA containing new analyses of data from its trials to
the
FDA in April 2005 and the submission has been under review at the FDA since
then. In January 2006, the FDA indicated that the Company’s submission
will be reviewed April 25, 2006 by the Cardiovascular and Renal Drug Products
Advisory Committee (the “Committee”), an independent panel of external experts.
The Committee’s recommendation for approval or non-approval of Cellegesic is
expected to be rendered at the conclusion of its review. While the FDA will
consider the findings of the Committee, the final regulatory decision rests
with
the Agency. The FDA has not indicated when its final decision will be
communicated. Cellegesic cannot be marketed in the United States unless and
until the FDA grants marketing approval for the product.
The
U.K.
Medicines and Healthcare Products Regulatory Agency (“MHRA”) approved Cellegesic
(branded Rectogesic in Europe) for sale in the United Kingdom in
August 2004 and the product was launched by our European marketing partner,
ProStrakan Group Limited (“ProStrakan”), in May 2005. ProStrakan is seeking
additional approvals of Rectogesic by other member states of the European Union
through the Mutual Recognition Procedure. The Mutual Recognition Procedure
has
been successfully completed, although additional national licenses will be
sought and are expected to be issued in the 19 additional countries included
in
the submission.
Cellegy
is developing two transdermal gel testosterone products, Fortigel™ (testosterone
gel) and Tostrelle®
(testosterone gel). Fortigel, a replacement therapy for male hypogonadism,
was
the subject of a Not Approvable letter by the FDA in July 2003.
Tostrex®
(testosterone gel), which is the brand name for Fortigel in Europe, was approved
by the Medical Products Agency in Sweden (“MPA”) for the treatment of male
hypogonadism in December 2004 and was launched by ProStrakan in September,
2005. ProStrakan is currently seeking additional approvals of Tostrex by other
member states of the European Union through the Mutual Recognition
Procedure.
Tostrelle
is for the treatment of female sexual dysfunction in postmenopausal women and
has completed Phase 2 development. In 2004, the FDA indicated that specific
guidelines regarding the long-term safety of testosterone for the treatment
of
female sexual dysfunction are under internal discussion by the Division of
Reproductive and Urologic Drug Products. The company is awaiting these
guidelines before embarking upon a Phase 3 program.
Biosyn
is
developing a portfolio of proprietary products known as microbicides. Biosyn’s
product candidates, which include both contraceptive and non-contraceptive
microbicides, are used intravaginally to reduce transmission of sexually
transmitted diseases (“STD’s”) including HIV/AIDS. Biosyn’s products include
Savvy, which is currently undergoing Phase 3 clinical trials in Africa and
in
the United States; UC-781 vaginal gel, in Phase 1 trials; and Cyanovirin-N,
in
pre-clinical development.
Cellegesic
(nitroglycerin ointment for treatment of anal fissures and
dyspareunia)
Cellegesic
is a topical, nitroglycerin-based prescription product being developed for
the
treatment of anal fissures and dyspareunia. Nitroglycerin is a drug that has
safely and effectively been used for many years to treat cardiac conditions,
primarily angina pectoris.
4
Anal
fissures are painful tears in the lining of the anal canal. The condition is
associated with increased pressure in the anal canal and a decrease in blood
supply to the region. Many chronic cases require a surgical procedure (Lateral
Internal Sphincterotomy) that is designed to reduce anal pressure by severing
the inner anal sphincter muscle. This procedure, while highly effective,
frequently leaves up to 35% of patients incontinent.
There
are
currently no FDA approved drug therapies for anal fissures, although topical
anesthetics and anti-inflammatory agents, which only partially and temporarily
relieve the symptoms of the condition, are currently prescribed. According
to
2004 Verispan audits, anal fissures afflict an estimated 765,000 Americans,
resulting in over one million physician visits each year. These data for 2004
show about 84,000 annual uses of pharmacy-compounded nitroglycerin for the
treatment of anal fissures.
Dyspareunia
is a condition that is characterized by intense vaginal pain. The condition
can
be recurrent and frequently causes significant impairment to normal sexual
functioning in women. Several publications have reported that between 7% to
15%
of American women of sexually active age are affected by the condition. There
are no approved treatments for dyspareunia and while many different approaches
are used, none are completely satisfactory. In a non placebo controlled clinical
study of nitroglycerin ointment conducted by Dr. Jennifer Berman of the
University of California Los Angeles Medical Center, the product was reported
to
reduce the pain of women suffering from vulvodynia, a condition that is a major
contributor to dyspareunia. The Company may conduct additional clinical trials
using Cellegesic for the treatment of vulvodynia.
Previous
Cellegesic Clinical Trial Results. We
completed our initial Phase 3 clinical trial using Cellegesic for the treatment
of anal fissures and announced the results in November 1999. The trial,
which included 304 patients, did not demonstrate a statistically significant
rate of healing compared with placebo, but did show significant pain reduction.
Based on this outcome, we initiated a second Phase 3 trial in 2000 to test
the
drug’s ability to reduce fissure pain, the primary trial endpoint, with healing
of chronic anal fissures as a secondary endpoint. The second Phase 3 clinical
trial, which included 229 patients, was completed in September 2001.
Positive results were achieved in the primary endpoint, which was accelerating
the rate of pain reduction associated with chronic anal fissures. Statistical
significance was not achieved in healing.
In
June 2001, we filed a rolling NDA with the FDA for the use of Cellegesic
for the treatment of pain associated with chronic anal fissures based on partial
results of the second Phase 3 trial. We amended the NDA in November 2001
upon completion of the second Phase 3 study. In April 2002, we announced
the withdrawal of our Cellegesic NDA after it became clear that the FDA was
not
going to approve the NDA. After several subsequent discussions and meetings
with
the FDA, the FDA indicated that it would require another Phase 3 trial before
considering approval of the product.
In
January 2004, Cellegy announced results of its third Cellegesic Phase 3
clinical trial showing a statistically significant (p<0.05) reduction in anal
fissure pain compared with a placebo control during the first three weeks of
the
trial, the primary efficacy endpoint of the study. As observed in two earlier
Phase 3 trials, the most common side effect was mild to moderate headache.
The
double blind, placebo controlled trial was conducted according to a Special
Protocol Assessment (“SPA”) that was agreed to by Cellegy and the FDA. Based on
these trial results we filed an NDA with the FDA in July 2004.
Side
effects seen in the trial were consistent with those observed in the previous
two Phase 3 studies, with mild to moderate headache the most common side effect.
Five subjects dropped out of the study as a result of headache. The SPA required
that subjects discontinuing due to nitroglycerin related headache, defined
as
one that occurs within 30 minutes of application, should have their last daily
pain intensity score, as recorded on the day the subject dropped out, carried
forward each day through day 21. Clinical judgment, based on each subject’s
entire record, was used to determine which of the five subjects discontinued
due
to nitroglycerin related headaches. Last daily pain intensity scores were
carried forward for three of the five subjects. The other two subjects who
withdrew from the trial due to headache had all of their available pain data
prior to dropout included in the analysis. The FDA, after conducting its own
analysis and raising other issues not covered in the SPA, issued a Not
Approvable letter in December 2004.
The
Company submitted an amended NDA containing new analyses of data from its trials
to the FDA in April 2005, and the submission has been under review at the FDA
since then. In January 2006, the FDA indicated that the company’s
submission will be reviewed on April 25, 2006 by the Cardiovascular and Renal
Drug Products Advisory Committee. The Committee’s recommendation for approval or
non-approval of Cellegesic is expected to be rendered at the conclusion of
its
review. While the FDA will consider the findings of the Committee, the final
regulatory decision rests with the Agency. The FDA has not indicated when its
final decision will be communicated. Cellegesic cannot be marketed in the United
States unless and until the FDA grants marketing approval for the product.
5
Savvy
(contraceptive vaginal gel for women, designed to prevent
HIV/AIDS)
Cellegy
obtained rights to the late-stage product candidate, Savvy, with its
October 2004 acquisition of Biosyn. Savvy, a microbicidal gel, is one of
the most clinically advanced product candidates in development for the reduction
in transmission of HIV and has also shown promising results in the prevention
of
other STDs, including those caused by herpes simplex virus and Chlamydia. Savvy
has also shown activity against gonorrhea and syphilis.
Savvy
is
currently undergoing a Phase 3 trial for reduction of HIV transmission in
Nigeria in populations of women at risk for HIV infection. The primary endpoint
of the study is a 50% reduction in the rate of transmission of HIV in the Savvy
group compared with the placebo. The current enrollment for the Nigerian trial
is approximately 2,000 women.
In
November 2005, the company discontinued its Phase 3 trial for reduction of
HIV
transmission in Ghana which had enrolled approximately 2,100 women. The
Data
Monitoring Committee reviewing interim data from the Savvy Ghana Phase 3 HIV
prevention trial made the recommendation in November 2005 that continuing the
trial would not allow the effect of Savvy (C31G vaginal gel) on HIV to be
determined because of a lower than expected rate of HIV seroconversion in the
trial. The estimated annual rate of HIV seroconversion in the Ghana study
population was 3.7% at the time of trial initiation, but the observed annual
rate was 1.2% eighteen months into the trial. This lower rate was possibly
due
in part to procedures designed to ensure ethical trial design, including
counseling on HIV prevention and distribution of condoms. There were no safety
issues associated with the Ghana trial.
Consideration
is being given to expansion of the ongoing Savvy Phase 3 HIV prevention trial
in
Nigeria and/or the opening of new trial sites in areas with higher HIV incidence
as ways to determine the effectiveness of Savvy. Additionally,
data from the Ghana trial will be analyzed for effects on other endpoints
including pregnancy. If the data warrant, the Ghana results will be submitted
as
a supplemental data package for the contraception New Drug Application.
A
Phase 3
trial for contraception is ongoing in the United States, with about 686 women
enrolled out of an expected total enrollment of 1,600 by the end of
2007.
The
active compound in Savvy is C31G, a broad-spectrum compound with antiviral,
antibacterial and antifungal activity. Its mechanism of action is via immediate
membrane disruption, and it is also spermicidal. Because of its mechanism of
action, C31G has a low potential for resistance and is active against drug
resistant pathogens.
Certain
Phase 3 trial expenses for Savvy, and certain other clinical and preclinical
development costs for the Biosyn pipeline, are funded by grant and contract
commitments through agencies including: the United States Agency for
International Development; the National Institute for Child Health and
Development; the National Institute for Allergy and Infectious Disease; CONRAD
(formerly the Contraceptive
Research and Development Program);
and
other governmental and philanthropic organizations.
Fortigel
(testosterone replacement therapy for male hypogonadism)
Fortigel
is a transdermal gel testosterone product designed to treat male hypogonadism,
a
condition involving deficient levels of the sex hormone testosterone. Low levels
of testosterone can result in lethargy, depression and a decline in libido.
In
severely deficient cases, loss of muscle mass and bone density can occur.
Approximately five million men in the United States, primarily in the aging
(over 40) male population group, have deficient levels of
testosterone.
Fortigel
is a transparent, rapid-drying and non-staining gel, designed as a once-a-day
application from a unique metered dose dispenser to relatively small areas
of
the skin. Based on the results of a 201-patient Phase 3 trial announced in
November 2001, Cellegy filed an NDA in June of 2002. However, Fortigel
was subsequently the subject of a Not Approvable letter by the FDA in
July 2003. In its letter, the FDA stated that in its opinion the following
deficiencies in the Fortigel NDA were found: (1) there is insufficient
information to establish that high supraphysiologic daily Cmax serum
testosterone levels achieved in a significant portion of participants in the
major clinical study supporting the NDA are safe under conditions of chronic
administration; and (2) there is insufficient information provided to
demonstrate that the dose of the product can be adjusted to consistently
preclude achieving these high supraphysiological testosterone levels. The
company has no current plans to develop the product further and is seeking
to
either sell or out-license the technology.
6
Tostrex®
(testosterone gel), which is the brand name for Fortigel in Europe, was approved
in December 2004 by the Medical Products Agency in Sweden for the treatment
of male hypogonadism and was launched by ProStrakan in September 2005.
ProStrakan is currently seeking additional approvals of Tostrex by other member
states of the European Union through the Mutual Recognition
Procedure.
Tostrelle
(testosterone gel for female hormone replacement therapy)
Normal
blood concentrations of testosterone in women range from 10 to 20 times less
than those of men. Nevertheless, in both sexes, testosterone plays a key role
in
building muscle tissue or bone and in maintaining normal sexual desire. In
women, the ovaries and adrenal glands continue to synthesize testosterone after
menopause, although the rate of production may diminish by as much as 50%.
Testosterone deficiency in women frequently leads to diminished libido,
decreased bone and muscle mass and reduced energy levels. Approximately 15
million women in the United States suffer from symptoms of testosterone
deficiency. At the present time, there are no approved products for the
treatment of this condition, although it has been reported that testosterone
treatment is frequently being prescribed off-label for women by obstetricians
and gynecologists.
Based
on
the results of pharmacokinetic studies in men receiving Fortigel, scientists
calculated the concentration of testosterone required to achieve normal
pre-menopausal hormone levels in postmenopausal women. The result is Cellegy’s
Tostrelle, a product designed to safely restore normal testosterone levels
in
hormone deficient women.
Cellegy
has successfully completed two Phase 1/2 pharmacokinetic studies in which the
proper dosage was determined to restore normal testosterone levels to naturally
menopausal and surgically induced menopausal women. In September 2004, we
announced results of a second interim analysis of a Phase 2 study using
Tostrelle for the treatment of female sexual dysfunction, which showed a 65%
increase in sexual activity in women with hypoactive sexual desire disorder
(HSDD), a 30% increase over placebo. Based on these results, the Company stopped
enrollment in the Phase 2 clinical study. Later in 2004, the Company met with
the FDA to review the trial results and the overall Tostrelle program. The
FDA
informed Cellegy that specific guidelines regarding the long-term safety of
testosterone for the treatment of female sexual dysfunction are under internal
discussion by the Division of Reproductive and Urologic Drug Products. Cellegy
is awaiting these guidelines before embarking upon a Phase 3 program. If the
new
FDA guidelines prove to be too onerous, limiting or too costly to implement,
the
Phase 3 program may be significantly delayed or Cellegy may decide not to pursue
the further development of Tostrelle.
Rectogesic
(nitroglycerin ointment for the treatment of anal fissures)
Rectogesic (nitroglycerin
ointment), the brand name for Cellegesic outside of the United States, was
approved by the MHRA for sale in the United Kingdom in September 2004 and
was launched by ProStrakan in May 2005. Approvals by other member states of
the
European Union are being sought by ProStrakan through the Mutual Recognition
Procedure.
In
November 2005, Cellegy renegotiated its marketing agreement with ProStrakan.
Under the terms of the amended agreement, ProStrakan will assume responsibility
for all manufacturing and other product support functions and will purchase
the
product directly from the manufacturer rather than from Cellegy. In connection
with its revised marketing agreement, Cellegy received a payment of $2 million
and may receive certain future milestone payments of up to $750,000 upon
approval of the product in certain major European countries.
7
Rectogesic
was approved by the Australian Therapeutic Goods Administration, has been
successfully marketed in Australia since 1999, and is now also marketed in
New
Zealand, Singapore and South Korea. Rectogesic is the only approved product
for
the treatment of anal fissures.
On
March
24, 2006 Cellegy announced that its European marketing partner ProStrakan had
successfully completed the European Union Mutual Recognition Procedure for
Rectogesic. Following the successful conclusion of the MRP process, national
licenses will be sought and are expected to be issued in due course in the
19
additional countries included in the MRP submission application. Cellegy is
entitled to receive $250,000 for each marketing regulatory approval obtained
in
the first of any three countries out of France, Italy, Germany or Spain up
to a
maximum total amount payable of $750,000. PDI is entitled to receive one-half
of
these payments under its previous agreements with Cellegy.
Tostrex
(testosterone gel)
Tostrex
was approved in December 2004 by the MPA for the treatment of male
hypogonadism and was launched by ProStrakan in September 2005. ProStrakan is
currently seeking additional approvals of Tostrex by other member states of
the
European Union through the Mutual Recognition Procedure.
Cellegy
intends to become a leader in the development and commercialization of selected
specialty biopharmaceutical products that are directed towards the treatment
of
HIV prevention and contraception, female sexual dysfunction and gastrointestinal
disorders. Key elements of our business and commercialization strategy include
the following:
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·
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Self-Marketing
to Specialty Physicians in the United States. If
economically viable, we plan to self-market our products to a targeted
audience of key physician specialists, including Gastroenterologists
and
Obstetrician-Gynecologists, through the establishment of our own
sales
force.
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·
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Outside
the United States. In
most cases, we plan to out-license the overseas rights for the products
we
develop. During 2004 in two separate transactions, we out-licensed
commercial rights to our Tostrex and Rectogesic products in Europe
to
ProStrakan Group Limited, a specialty pharmaceutical company located
in
the United Kingdom with European-wide marketing
capability.
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·
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Manufacturing. Cellegy
has manufacturing arrangements with PendoPharm Inc., an FDA approved
contract-manufacturing company based in Canada. PendoPharm, an affiliate
of Pharmasciences, has successfully manufactured Cellegesic, Fortigel
and
Tostrelle for past clinical trials and Rectogesic and Tostrex for
European
commercial sales. PendoPharm will be the commercial manufacturer
of these
products in the event of any future regulatory approvals in other
markets.
In 2005, the Company modified its relationship with PendoPharm concerning
the manufacture of Rectogesic, giving control to ProStrakan. Similar
control was given to ProStrakan in 2006 regarding the manufacture
of
Tostrex. We are planning to validate a domestic contract manufacturer
to
serve as a second manufacturing source for our product candidates.
Our
products sold in Australia, New Zealand, Singapore and South Korea
are
currently supplied by a pharmaceutical manufacturer
in Australia.
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·
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Distribution. Cellegy
has entered into distribution agreements for Rectogesic in New Zealand,
Singapore and South Korea. Cellegy has also entered into distribution
agreements for Tostrex in Israel, Australia, South Korea, South Africa
and
approximately 10 other Far East
markets.
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Cellegy’s
research and development programs focus on developing products in the area
of
women’s health, prevention of HIV transmission, sexual function, anorectal and
peripheral vascular disorders. The acquisition of Biosyn in 2004 expanded our
pipeline into the area of women’s health. Most of our current research programs
are now being conducted at Biosyn, in Huntingdon Valley,
Pennsylvania.
Biosyn. Biosyn’s
topical microbicide technology expands our product pipeline in women’s health
care. In 2004, Biosyn’s lead product, Savvy, entered three concurrent Phase 3
clinical studies; a contraception study in the United States and two HIV studies
Africa. In Africa, studies were being conducted in Nigeria and in Ghana testing
Savvy’s effectiveness in preventing HIV transmission in women. In November 2005,
the company discontinued its Ghana trial due to a
lower
than expected rate of HIV seroconversion in the trial. The estimated annual
rate
of HIV seroconversion in the Ghana study population was 3.7% at the time of
trial initiation, but the observed annual rate was 1.2% eighteen months into
the
trial. This lower rate was possibly due in part to procedures designed to ensure
ethical trial design, including counseling on HIV prevention and distribution
of
condoms. There were no safety issues associated with the Ghana
trial.
8
If
the
Phase 3 trial for contraception in the United States is successful, Savvy could
be the first product among many microbicide products in various stages of
development to enter the commercial marketplace. There can be no assurances
that
Savvy will be successfully commercialized or, if commercialized, that it would
be the first, or one of the first, such products to enter the marketplace.
A
second-generation product, UC-781, is a non-nucleoside reverse transcriptase
(RT) inhibitor that has demonstrated efficacy against a wide range of HIV-1
isolates, including laboratory adapted strains, T cell and macrophage tropic
isolates, and primary isolates of all major clades (A through G and isolates
that are resistant to other RT inhibitors). Phase 1 human safety studies of
UC-781 are currently under way. Biosyn’s expanded microbicides portfolio also
includes a naturally occurring protein, Cyanovirin-N, (“CV-N”) that may be
effective in blocking viral fusion in
vitro.
CV-N
has demonstrated in
vivo
efficacy
in vaginal and rectal prevention of HIV infection in animal models.
Nitric
Oxide Donor Technology. Expanded
expertise in nitric oxide pharmacology has led to an understanding of the role
of nitric oxide as a signaling molecule, operating at lower concentrations
than
is normally required for vasodilators, especially in tissue under an abnormally
vaso-spasmatic or vaso-constrictive state. This discovery presents various
potential approaches to treat conditions caused by vaso-constriction, such
as
peripheral vascular insufficiency found in Raynaud’s disease and selected
aspects of female sexual dysfunction.
Cellegesic
and Rectogesic ointment. Two
issued U.S. patents and over 20 issued foreign patents relate to our topical
nitroglycerin products, Cellegesic and Rectogesic ointments, for the treatment
of anal disorders. While the European patent was challenged and subsequently
revoked during opposition proceedings in December 2003, Cellegy has filed an
appeal to the decision, and the case stands on appeal.
Testosterone
gel products for males and females.
Three
issued U.S. patents, five issued foreign patents and over 5 pending patent
applications relate to our topical testosterone products Fortigel, Tostrex
and
Tostrelle gels.
Savvy
Contraceptive gel. Two
issued U.S. patents and over 20 issued foreign patents relate to Savvy gel
for
contraception and the reduction in transmission of HIV infection.
In
addition, Cellegy also holds issued and pending patents pertaining to our
potential back-up products for treatment of anal disorders as well as for our
earlier pipeline products for the treatment of female sexual disorders,
urogenital disorders, and vascular insufficiency.
9
Acquisitions
and Divestitures
In
October 2004, Cellegy acquired Biosyn, Inc., a privately held
biopharmaceutical company. Under the terms of the agreement, Cellegy issued
approximately 2,462,000 shares of Cellegy’s common stock for all of Biosyn’s
issued and outstanding capital stock. In addition, outstanding Biosyn stock
options and warrants were assumed by Cellegy and converted into options and
warrants to purchase approximately 318,504 shares of Cellegy common stock.
The
options issued to acquire Cellegy common stock are fully vested and exercisable.
The exercise prices of the options and warrants were adjusted by the exchange
ratio in the transaction; the expiration date and other terms of the converted
options and warrants remain the same. The purchase price does not include any
provisions for contingent milestone payments of up to $15 million which would
be
payable to Biosyn shareholders on the achievement of C31G marketing approval
in
the United States and a portion of which would be payable earlier upon
commercial launch in certain major overseas markets.
In
November 2001, Cellegy acquired Vaxis Therapeutics Corporation, a private
Canadian company subsequently renamed Cellegy Canada. Its operations were
discontinued in the fourth quarter of 2005 and the company’s assets liquidated
by December 31, 2005. All cancer prevention related patents and in-process
technology were returned by action of agreement to Parteq Innovations, from
whom
Cellegy originally acquired the patents.
In
June 2000, Cellegy acquired Quay Pharmaceuticals (subsequently renamed
Cellegy Australia), an Australian company marketing Rectogesic, for the
treatment of anal fissures. Cellegy continues to self-market Rectogesic through
Cellegy Australia.
In
December 2005, the Company divested its skin care business.
Cellegy
In
December 2002, Cellegy entered into a license agreement (the “PDI
Agreement”), with PDI, Inc. (“PDI”) granting PDI the exclusive right to
store, promote, sell and distribute Fortigel in North American markets. Cellegy
received an upfront payment of $15.0 million on the effective date of
December 31, 2002 with an additional $10.0 million payable no later than
thirty days after Cellegy certifies to PDI that Fortigel has received all FDA
approvals required to manufacture, sell and distribute the product in the United
States. Cellegy recorded costs of $947,000 to selling, general and
administrative expenses associated with an investment banking fee for the year
ended December 31, 2002 related to the PDI Agreement. Under the PDI
Agreement, Cellegy would also receive royalties each year until the expiration
of the last patent right related to Fortigel of 20% - 30% of net sales and
Cellegy would be reimbursed for 110% of burdened costs for any product supplied
to PDI. In October 2003, Cellegy received a mediation notice from PDI. In
December 2003, Cellegy and PDI initiated legal proceedings against each
other.
On
April
11, 2005, Cellegy entered into a settlement agreement with PDI resolving the
lawsuits that the companies had filed against each other. Under the terms
of the settlement agreement, the license agreement was terminated and all
product rights have reverted to Cellegy. Cellegy paid $2.0 million to PDI
upon signing the settlement agreement. Cellegy also issued a $3.0 million
promissory note to PDI and a $3.5 million non-negotiable senior convertible
debenture. The settlement of the Company’s lawsuit with PDI resulted in the
recognition of the remaining $6.5 million in deferred revenue from PDI as
license revenue during the second quarter of 2005.
In
July 2004, Cellegy and ProStrakan entered into to an exclusive license
agreement for the future commercialization of Tostrex®
(testosterone gel) in Europe. Under the terms of the agreement, ProStrakan
will
be responsible for regulatory filings, sales, marketing and distribution of
Tostrex throughout the European Union and in certain nearby non-EU countries.
Cellegy will be responsible for supplying finished product to ProStrakan through
Cellegy’s contract manufacturer.
In
December 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the commercialization of Rectogesic in Europe. Under the terms
of
the original agreement, Cellegy received a non-refundable upfront payment of
$1.0 million and is entitled to receive additional milestone payments, along
with additional payments based on net sales of Rectogesic in Europe. ProStrakan
will be responsible for additional regulatory filings, sales, marketing and
distribution of Rectogesic throughout Europe. The agreement covers 38 European
territories, including all EU member states. Under the original agreement,
Cellegy was responsible for supplying finished product to ProStrakan through
its
contract manufacturer.
10
In
November 2005, the company renegotiated its marketing agreement with ProStrakan
relating to Rectogesic. Under the terms of the amended agreement, ProStrakan
will assume responsibility for all manufacturing and other product support
functions and will purchase the product directly from the manufacturer rather
than from Cellegy. In connection with its revised marketing agreement, Cellegy
received a payment of $2.0 million and may receive certain future milestone
payments of up to $750,000 upon approval of the product in certain major
European countries.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan will assume
responsibility for all manufacturing and other product support functions and
will purchase Tostrex directly from Cellegy’s contract manufacturer rather than
purchasing the product from Cellegy under the terms of the original agreement.
Cellegy will continue to receive milestones and royalties as set forth in the
original agreement.
Biosyn
In
October 1996, Biosyn acquired the C31G Technology from the entity that
originally licensed the technology to Biosyn. As part of the agreement, Biosyn
is required to make annual royalty payments equal to the sum of 1% of net
product sales of up to $100 million, 0.5% of the net product sales over $100
million and 1% of any royalty payments received by Biosyn under license
agreement. The term of the agreement lasts until December 31, 2011 or upon
the expiration of the C31G Technology’s patent protection, whichever is later.
Biosyn’s current C31G patents expire between 2011 and 2018.
11
In
May 2001, Biosyn entered into an exclusive license agreement with Crompton
Corporation under which Biosyn obtained the rights to develop and commercialize
UC-781, a non-nucleoside reverse transcriptase inhibitor, as a topical
microbicide. Under the terms of the agreement, Biosyn paid Crompton a
nonrefundable, upfront license fee that was expensed in research and
development. Crompton also received a warrant to purchase Biosyn common stock,
which converted into a Cellegy warrant in connection with the acquisition and
is
exercisable for a period of two years upon initiation of Phase 3 trials of
UC-781. Crompton is entitled to milestone payments upon the achievement of
certain development milestones and royalties on product sales. If UC-781 is
successfully developed as a microbicide, then Biosyn has exclusive worldwide
commercialization rights.
In
February 2003, Biosyn acquired exclusive worldwide rights from the National
Institutes of Health, or NIH, for the development and commercialization of
Cyanovirin-N as a vaginal gel to prevent the sexual transmission of HIV. Under
the terms of the agreement, Biosyn paid to NIH a nonrefundable, upfront license
fee that was charged to research and development. NIH is entitled to milestone
payments upon the achievement of certain development milestones and royalties
on
product sales.
On
February 1, 2006 Cellegy announced that it had entered into a non-exclusive,
developing world licensing agreement with CONRAD for collaboration on the
development of Cellegy’s entire microbicide pipeline. The agreement encompasses
the licensing of Savvy currently in Phase 3 clinical trials in the United States
and Africa; UC-781, currently in expanded Phase 1 trials in the United States
and Thailand; and Cyanovirin-N, currently in pre-clinical
development.
Under
the
terms of certain of its funding agreements, Biosyn has been granted the right
to
commercialize products supported by the funding in developed and developing
countries, and is obligated to make its commercialized products, if any,
available in developing countries, as well as to public sector agencies in
developed countries, at prices reasonably above cost or at a reasonable royalty
rate.
Biosyn
has entered into various other research and technology agreements. Under these
other agreements, Biosyn is working in collaboration with various other parties.
Should any discoveries be made under such arrangements, Biosyn may be required
to negotiate the licensing of the discovery for the development of the
respective technologies.
FDA
Requirements for Human Drugs. The
research, development, testing, manufacturing, storage, labeling, record
keeping, distribution, advertising, promotion and marketing of drug products
are
extensively regulated by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous FDA
regulation pursuant to, among other laws, the Food, Drug and Cosmetic Act or
FD&C Act.
The
steps
ordinarily required before a new pharmaceutical product may be marketed in
the
United States include: (i) preclinical tests; (ii) the submission to
the FDA of an Investigational New Drug Application, or IND, which must be
approved before human clinical trials commence; (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
product for its proposed indication; (iv) the submission of a New Drug
Application, or NDA, for a new drug or a Product License Application for a
new
biologic to the FDA; and (v) FDA review and approval of the NDA or Product
License Application before any commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of product formulation and
animal studies (if an appropriate animal model is available) to assess the
potential safety and efficacy of the product. Formulations must be manufactured
according to the FDA’s current Good Manufacturing Practice, or GMP,
requirements, and preclinical safety tests must be conducted by laboratories
that comply with FDA’s Good Laboratory Practice regulations.
The
results of preclinical testing are submitted to the FDA as part of an IND and
are reviewed by the FDA before commencement of human clinical trials. Clinical
trials may begin 30 days after the IND is received, unless the FDA raises
concerns or questions about the conduct of the clinical trials. If concerns
or
questions are raised, the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials. In some instances, the IND application process can result in substantial
delay and expense. Clinical trials are normally done in three phases, although
the phases may overlap. Phase 1 trials are concerned primarily with the safety
and pharmacokinetics of the product. Phase 2 trials are designed primarily
to
demonstrative effectiveness and safety in treating the disease or condition
for
which the product is indicated. These trials typically explore various dose
and
regimens. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness needed to clarify the
product’s benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug,
among other things. The FDA receives reports on the progress of each phase
of
clinical testing and may require the modification, suspension or termination
of
clinical trials if an unwarranted risk is presented to patients. When data
is
required from long-term use of a drug following its approval and initial
marketing, the FDA can require Phase 4 or post-marketing, studies to be
conducted. The FDA, upon request through an SPA, can also provide specific
written guidance on the acceptability of protocol designs for selected clinical
trials.
12
After
successful completion of the required clinical testing, generally an NDA is
submitted. FDA approval of the NDA (as described below) is required before
marketing may begin in the United States. The FDA reviews all NDAs submitted
and
may request more information before it accepts the filing. The review process
is
often extended significantly by FDA requests for additional information or
clarification. The FDA may refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is
not
bound by the recommendation of an advisory committee. During the review process,
the FDA generally will conduct an inspection of the relevant drug manufacturing
facilities and clinical sites to ensure that the facilities are in compliance
with applicable Good Manufacturing Practices requirements. If FDA evaluations
of
the NDA application, manufacturing facilities, and clinical sites are favorable,
the FDA may issue either an approvable letter or a not approvable letter that
contains a number of conditions that must be met in order to secure approval
of
the NDA. When and if those conditions have been met to the FDA’s satisfaction,
the FDA will issue an approvable letter, authorizing commercial marketing of
the
drug for certain specific indications.
If
the
FDA’s evaluation of the NDA submission or manufacturing facilities is not
favorable, the FDA may refuse to approve the NDA or may issue a not approvable
letter, outlining the deficiencies in the submission and often requiring
additional testing or information. Notwithstanding the submission of any
requested additional data or information in response to an approvable or not
approvable letter, the FDA ultimately may decide that the application does
not
satisfy the regulatory criteria for approval. Even if FDA approval is obtained,
a marketed drug product and its manufacturer are subject to continual review
and
inspection, and later discovery of previously unknown problems with the product
or manufacturer may result in restrictions or sanctions on such product or
manufacturer, including withdrawal of the product from the market.
The
process of developing and obtaining approval for a new pharmaceutical product
within this regulatory framework requires a number of years and the expenditure
of substantial resources. There can be no assurance that necessary approvals
will be obtained on a timely basis, if at all. Delays in obtaining regulatory
approvals could have a material adverse effect on us. If we fail to comply
with
applicable regulatory requirements for marketing drugs, we could be subject
to
administrative or judicially imposed sanctions such as warning letters, fines,
product recalls or seizures, injunctions against production, distribution,
sales, or marketing, delays in obtaining marketing authorizations or the refusal
of the government to grant such approvals, suspensions and withdrawals of
previously granted approvals, civil penalties and criminal prosecution of
Cellegy, our officers or our employees.
Manufacturing. Each
domestic drug manufacturing facility must be registered with the FDA. Domestic
drug manufacturing establishments are subject to routine inspection by the
FDA
and other regulatory authorities and must comply with GMP requirements and
any
applicable state or local regulatory requirements. Foreign manufacturing
facilities are also subject to periodic FDA inspections or inspections by
foreign regulatory authorities. Among other things, the FDA may withhold
approvals of NDA’s or other product applications if deficiencies are found at
the facility. Vendors that supply us finished product or components used to
manufacture, package and label products are subject to similar regulation and
periodic inspection. We have used and intend to continue to use contract
manufacturers that operate in conformance with these requirements to produce
our
compounds and finished products in commercial quantities. Nevertheless, there
can be no assurances that manufacturing or quality control problems will not
arise at the manufacturing plants of our contract manufacturers or that such
manufacturers will have the financial capabilities or management expertise
to be
able to adequately supply product or maintain compliance with the regulatory
requirements necessary to continue manufacturing our products.
13
Foreign
Regulation of Drugs. Whether
or not FDA approval has been obtained, approval of a product by comparable
regulatory authorities may be necessary in foreign countries before the
commencement of marketing of the product in such countries. The approval
procedures vary among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there are
some
procedures for unified filings for certain European countries, in general each
country has its own procedures and requirements, many of which are time
consuming and expensive. Under European Union regulatory systems, a company
may
submit marketing authorization applications either under a centralized or
decentralized procedure. The centralized procedure, which is available for
medicines produced by biotechnology or which are highly innovative, provides
for
the grant of a single marketing authorization that is valid for European Union
member states. This authorization is called a marketing authorization approval.
The decentralized procedure provides for mutual recognition of national approval
decisions. Under this procedure, the holder of a national marketing
authorization may submit an application to the remaining member states. Each
member state must then make its own determination regarding approval. This
procedure is referred to as the Mutual Recognition Procedure. There can be
substantial delays in obtaining required approvals from both the FDA and foreign
regulatory authorities after the relevant applications are filed. We expect
to
rely principally on corporate partners, licensees and contract research
organizations, along with our expertise, to obtain governmental approval in
foreign countries of drug formulations utilizing our compounds.
Other
Government Regulation. In
addition to regulations enforced by the FDA, Cellegy is also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and
Recovery Act and other similar federal and state laws regarding, among other
things, occupational safety, the use and handling of radioisotopes,
environmental protection and hazardous substance control. Although we believe
that we have complied with these laws and regulations in all material respects
and have not been required to take any action to correct any noncompliance,
there can be no assurance that Cellegy will not be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research and development involves the controlled use of hazardous
materials, chemicals, and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, Cellegy could be held liable
for
any damages that result and any such liability could exceed our
resources.
Health
Care Reform. In
the
United States, there have been, and Cellegy expects there will continue to
be, a
number of federal and state proposals to implement cost controls and other
health care regulatory measures. Future legislation could result in a
substantial restructuring of the health care delivery system. While we cannot
predict whether any legislative or regulatory proposals will be adopted or
the
effect such proposals may have on our business, the uncertainty of such
proposals could have a negative effect on our ability to raise capital and
to
identify and reach agreements with potential partners, and the adoption of
such
proposals could have an adverse effect on Cellegy. In both domestic and foreign
markets, sales of our therapeutic products, if any, will depend in part on
the
availability of reimbursement from third-party payers. There can be no assurance
that our products will be considered cost effective or that reimbursement will
be available. We cannot predict the outcome of any government or industry reform
initiatives or the impact thereof on our financial position or results of
operations.
The
pharmaceutical industry is characterized by extensive research efforts and
rapid
and significant technological change. In the development and marketing of
topical prescription drugs, Cellegy faces intense competition. Cellegy is much
smaller in terms of size and resources than many of its competitors in the
United States and abroad, which include, among others, major pharmaceutical,
chemical, consumer product, and biotechnology companies, specialized firms,
universities and other research institutions. Cellegy’s competitors may succeed
in developing technologies and products that are safer, more effective or less
costly than any which are being developed by Cellegy, thus rendering its
technology and potential products obsolete and noncompetitive. Many of these
competitors have substantially greater financial and technical resources,
clinical production and marketing capabilities and regulatory experience than
Cellegy.
14
In
addition, Cellegy’s products, if commercialized, are subject to competition from
existing products. Cellegesic, which is a prescription product, is expected
to
compete with over-the-counter products, such as Preparation H marketed by Wyeth,
and various other prescription products. Cellegy’s Fortigel product, if approved
for marketing, is expected to compete with several products, including a
currently marketed transdermal patch product sold by Watson Pharmaceuticals,
two
transdermal testosterone gel products marketed by Unimed/Solvay and Auxilium
Pharmaceuticals and a buccal tablet marketed by Columbia Laboratories. In
addition, there may be generic product competition for these prescription
products in the future. As a result, Cellegy’s products under development may
not be able to compete successfully with existing products or possible generic
products under development by other organizations.
Savvy
is
subject to competition from other microbicides that are currently undergoing
clinical trials and which may be sold by prescription or over the counter,
as
well as non-microbicide products such as condoms. Additionally, if a vaccine
for
HIV/AIDS is made available, this could limit the potential market for Savvy
and
Biosyn’s other products. As a result, we cannot assure you that Biosyn’s
products under development will be able to compete successfully with existing
products or other innovative products under development.
Therapies
for sexual dysfunction and women’s health products represent a potentially large
market opportunity. If this market potential is realized, competition will
expand. The approval and marketing of competitive products and other products
that treat the indications targeted by Cellegy could adversely affect the market
acceptance of Cellegy’s products. The presence of directly competitive products
could also result in more intense price competition than might otherwise exist.
We are aware of other pharmaceutical companies that are developing prescription
testosterone replacement products for women, including a female testosterone
patch from Procter & Gamble, a testosterone gel product from BioSante
Pharmaceuticals, Inc. and a spray product from
VIVUS, Inc.
As
of
March 15, 2006, the Company had 18 full-time employees and 1 part-time
employee, including 4 full-time employees at our Brisbane, California office,
and 14 full-time employees and 1 part-time employee at our Biosyn subsidiary
in
Huntingdon Valley, Pennsylvania.
In
addition, we utilize the services of several professional consultants, as well
as contract manufacturing and clinical research organizations to supplement
our
internal staff’s activities. None of our employees are represented by a labor
union. We have experienced no work stoppages and we believe that our
employee relations are good.
We
are
subject to the reporting requirements under the Securities Exchange Act of
1934.
Consequently, we are required to file reports and information with the
Securities and Exchange Commission, or SEC, including reports on the following
forms: annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. These reports and other information concerning us may
be
obtained at the SEC’s Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 or accessed through the SEC’s website at
http://www.sec.gov.
The
SEC’s Public Reference Room phone number is 1-800-SEC-0330. In addition,
electronic copies of our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 are posted to our website (www.cellegy.com).
Such
filings are placed on our website as soon as reasonably possible after they
are
filed with the SEC. Upon written request to the Company at Cellegy
Pharmaceuticals, Inc., 1800 Byberry Road, Building 13, Huntingdon Valley,
Pa, 19006, Attention: Chief Financial Officer, Cellegy will provide a copy
of
the 10-K to any stockholder.
ITEM
1A: RISK FACTORS
We
have a history of losses, and we expect losses to continue for at least several
years.
We
have
incurred losses since our inception and negative cash flows from operations
that
raise substantial doubt about our ability to continue as a going concern. Our
deficit accumulated during the development stage as of December 31, 2005,
was approximately $132.3 million. We have never operated profitably and, given
our planned level of operating expenses, we expect to continue to incur losses
through at least 2006. If we are able to obtain sufficient funding, we plan
to
devote significant resources to pre-clinical studies, clinical trials,
administrative, marketing, sales and patent activities. Accordingly, without
substantial revenues from new corporate collaborations, royalties on product
sales or other revenue sources, we expect to incur substantial operating losses
in the foreseeable future as our potential products move through development
and
as we continue to invest in research and clinical trials. As a result of our
continuing losses, we may exhaust our resources and may be unable to complete
the development of our products, and our accumulated deficit will continue
to
increase as we continue to incur losses. Our losses may increase in the future,
and even if we achieve our revenue targets, we may not be able to sustain or
increase profitability on a quarterly or annual basis. The amount of future
net
losses, and the time required to reach profitability, are both highly uncertain.
To achieve sustained profitable operations, we must, among other things,
successfully discover, develop, and obtain regulatory approvals for and market
pharmaceutical products. We cannot assure you that we will ever be able to
achieve or sustain profitability.
15
We
have received a “going concern” opinion from our independent registered public
accounting firm, which may negatively impact our
business.
Our
audit
opinion from our independent registered public accounting firm regarding the
consolidated financial statements for the years ended December 31, 2004 and
2005, included an explanatory paragraph indicating that there is substantial
doubt about the Company’s ability to continue as a going concern. We have
incurred losses and negative cash flows from operations since inception. The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty. Any failure to dispel any continuing doubts about
our ability to continue as a going concern could adversely affect our ability
to
enter into collaborative relationships with business partners, make it more
difficult to obtain required financing on favorable terms or at all, negatively
affect the market price of our common stock and could otherwise have a material
adverse effect on our business, financial condition and results of
operations.
Our
prospects for obtaining additional financing are uncertain and failure to obtain
needed financing could affect our ability to develop or market products or
to
continue operations.
Throughout
our history, we have consumed substantial amounts of cash. Our cash needs may
increase during 2006 to fund our research, development and clinical trial
programs, administrative and litigation expenses, and Biosyn’s operations to the
extent these are not covered by various government and non-government
organizations. In addition, one or more such organizations could withdraw,
reduce the extent of, delay or terminate their funding commitments.
As
of
December 31, 2005, Cellegy had approximately $2.3 million in cash and cash
equivalents. Cellegy has no current source of significant ongoing revenues
or
capital beyond existing cash, product sales and grant funding.
The
amount of cash required to fund future expenditures and capital requirements
will depend on numerous factors including, without limitation:
|
·
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requirements
in support of our development
programs;
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·
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progress
and results of pre-clinical and clinical
testing;
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·
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time
and costs involved in obtaining regulatory approvals, including the
cost
of complying with additional FDA information and/or clinical trial
requirements to obtain marketing approval of our product
candidates;
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·
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the
commercial success of our products that are approved for
marketing;
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·
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the
costs of filing, prosecuting, defending and enforcing patent claims,
oppositions and appeals, and our other intellectual property
rights;
|
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·
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the
cost and outcome of the current litigation with PDI, Inc., as well as
expenses associated with any other unforeseen
litigation;
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our
ability to establish new collaborative arrangements;
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·
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the
validation of a second contract manufacturing site;
and
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·
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the
extent of expenses required to support Biosyn’s operations.
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16
In
order
to complete the development, manufacturing and other pre-launch marketing
activities necessary to commercialize our products, additional financing will
be
required. Cellegy may seek other alternatives such as private or public equity
investments, partnerships with other pharmaceutical companies to co-develop
and
fund our research and development efforts, sales of technology or assets,
additional out-licensing agreements with third parties, or agreements to
monetize in the near term our future milestone and royalty payments expected
from licenses. There is no assurance that such funding will be available for
us
to finance our operations on acceptable terms, if at all, and any future equity
funding may involve significant dilution to our stockholders.
Insufficient
funding may require us to delay, reduce or eliminate some or all of our research
and development activities, planned clinical trials, administrative programs,
personnel, outside services and facility costs; reduce the size and scope of
our
sales and marketing efforts; delay or reduce the scope of, or eliminate, one
or
more of our planned commercialization or expansion activities; seek
collaborators for our product candidates at an earlier stage than otherwise
would be desirable and on terms that are less favorable than might otherwise
be
available; or relinquish, license or otherwise dispose of rights to
technologies, product candidates or products that we would otherwise seek to
develop or commercialize ourselves on terms that are less favorable than might
otherwise be available. In addition, even if we do receive additional financing,
we may not be able to complete planned clinical trials, development,
manufacturing or marketing of any or all of our product candidates.
Cellegy
believes that available cash resources will be adequate to satisfy our capital
needs through at least April 30, 2006 assuming no material adverse financial
impact associated with the PDI litigation and any subsequent legal proceedings,
although failure to obtain additional funds as described above may affect the
timing of development, clinical trials or commercialization activities relating
to certain products.
Funds
provided from sales of subsidiaries, assets, equity or debt financing, or other
arrangements, if obtained, would permit satisfaction of capital needs for a
longer period of time. A favorable determination by the FDA Advisory Committee
and the FDA following the scheduled April 2006 hearing on our Cellegesic NDA
may
improve the prospects for one or more such transactions.
We
could be forced into bankruptcy.
There
is
a risk that one or more of our creditors could bring lawsuits to collect amounts
to which they believe they are entitled. In the event of lawsuits of this type,
if we are unable to negotiate settlements or satisfy our obligations, we could
voluntarily
file bankruptcy proceedings, or we could become the subject of an involuntary
bankruptcy proceeding filed by one or more creditors against
us.
The
outcome of the lawsuit with PDI is uncertain. An unfavorable outcome will have
a
material adverse affect on our financial position and stock
price.
As
more
fully described under Item 3, “Legal Proceedings”, the Company is presently
engaged in a lawsuit with PDI alleging that Cellegy is in material breach of
the
April
2005 settlement agreement between Cellegy and PDI and related documents,
including two promissory notes given by Cellegy to PDI, as a result of
Cellegy’s failure to notify PDI of the receipt of certain payments and of
Cellegy’s failure to pay amounts to which PDI believes it is entitled. The
lawsuit seeks immediate payment of the notes along with payments for default
interest and damages. An unfavorable outcome to this lawsuit would have a
material adverse affect on our business and stock price.
We
are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products. Unexpected regulatory outcomes
could adversely affect our business and stock price.
Cellegy’s
product candidates, Savvy, Cellegesic, Fortigel and Tostrelle and our ongoing
research and clinical activities relating to those product candidates are
subject to extensive regulation by governmental regulatory authorities in the
United States and in other countries. Before we obtain regulatory approval
for
the commercial sale of our potential drug products, we must demonstrate through
pre-clinical studies and clinical trials that the product is safe and
efficacious for use in the clinical indication for which approval is sought.
The
timing of NDA submissions, the outcome of reviews by the FDA and the initiation
and completion of other clinical trials are subject to uncertainty, change
and
unforeseen delays. Under the Prescription Drug User Fee Act (“PDUFA”), the FDA
establishes a target date to complete its review of an NDA. Although the FDA
attempts to respond by the relevant PDUFA date to companies that file NDAs,
there is no obligation on the FDA’s part to do so. In addition, extensive
current pre-clinical and clinical testing requirements and the current
regulatory approval process of the FDA in the United States and of certain
foreign regulatory authorities, or new government regulations, could prevent
or
delay regulatory approval of Cellegy’s products.
17
The
process of developing and obtaining approval for a new pharmaceutical product
within this regulatory framework requires a number of years and substantial
expenditures. There can be no assurance that necessary approvals will be
obtained on a timely basis, if at all. Delays in obtaining regulatory approvals
could delay receipt of revenues from product sales, increase our expenditures
relating to obtaining approvals, jeopardize corporate partnership arrangements
that we might enter into with third parties regarding particular products,
or
cause a decline in our stock price. If we fail to comply with applicable
regulatory requirements, we could be subject to a wide variety of serious
administrative or judicially imposed sanctions and penalties, any of which
could
result in significant financial penalties that could reduce our available cash,
delay introduction of products resulting in deferral or elimination of revenues
from product sales, and could result in a decline in our stock
price.
One
or
more of our ongoing or planned clinical trials could be delayed, or the FDA
could issue a Not Approvable letter with respect to our current or future
product candidates, as it did with our Fortigel NDA in July 2003 and our
Cellegesic NDA in December 2004. Such actions could result in further
clinical trials or necessitate other time consuming or costly actions to satisfy
regulatory requirements. For example, in January 2004, Cellegy reported
positive results from its confirmatory Phase 3 study using Cellegesic for the
treatment of chronic anal fissure pain, and we submitted an NDA to the FDA
in
June 2004. In December 2004, the FDA concluded that the trial data did
not satisfy the standards specified in the SPA and did not grant marketing
approval for Cellegesic.
The
Company submitted an amended NDA containing new analyses of data from its trials
to the FDA in April 2005 and has been under review at the FDA since then.
In January, 2006 the FDA indicated that the Company’s submission will be
reviewed April 25, 2006 by the Cardiovascular and Renal Drug Products Advisory
Committee. The Committee’s recommendation for approval or non-approval of
Cellegesic is expected to be rendered at the conclusion of its review. While
the
FDA will consider the findings of the Committee, the final regulatory decision
rests with the Agency. The FDA has not indicated when its final decision will
be
communicated. Cellegesic cannot be marketed in the United States unless and
until the FDA grants marketing approval for the product.
Similarly,
since there is still no definitive agreement with the FDA regarding requirements
for approval of Fortigel, the FDA will require an additional Phase 3
clinical trial. The FDA may also decide to have an Advisory Panel review the
submission of our product candidates with an uncertain outcome of such panel’s
recommendation, or take other actions having the effect of delaying or
preventing commercial introduction of our products. The FDA or other regulatory
agencies could impose requirements on future trials that could delay the
regulatory approval process for our products. Similarly, there are risks and
uncertainties associated with our female clinical trial programs for Tostrelle
and Savvy in that sufficient resources for clinical development of these product
candidates may not be available or one or both drugs may not prove to be safe
and effective by standards established by worldwide regulatory authorities.
There can be no assurance that the FDA, or other regulatory agencies, will
find
any of our trial data or other sections of our regulatory submissions sufficient
to approve any of our product candidates for marketing in the United States
or
in other overseas markets.
Sales
of
Cellegy’s products outside the United States are subject to different regulatory
requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay introduction
of
Cellegy’s products in those countries. Cellegy may not be able to obtain
marketing approval for one or more of its products in any countries in addition
to those countries where approvals have already been obtained.
Our
clinical trial results are very difficult to predict in advance, and the
clinical trial process is subject to delays. Failure of one or more clinical
trials or delays in trial completion could adversely affect our business and
our
stock price.
Results
of pre-clinical studies and early clinical trials may not be good predictors
of
results that will be obtained in later-stage clinical trials. We cannot provide
any assurances that Cellegy’s present or future clinical trials will demonstrate
the results required to continue advanced trial development and allow us to
seek
marketing approval for these or our other product candidates. Because of the
independent and blind nature of certain human clinical testing, there will
be
extended periods during the testing process when we will have only limited,
or
no, access to information about the status or results of the tests. Cellegy
and
other pharmaceutical companies have believed that their products performed
satisfactorily in early tests, only to find their performance in later tests,
including Phase 3 clinical trials, to be inadequate or unsatisfactory, or that
FDA Advisory Committees have declined to recommend approval of the drugs, or
that the FDA itself refused approval, with the result that stock prices have
fallen precipitously.
18
Clinical
trials can be extremely costly. Certain costs relating to the Phase 3 trials
for
the Savvy product for contraception and reduction in the transmission of HIV,
and other clinical and preclinical development costs for the Biosyn pipeline
products acquired by Cellegy, are funded directly by certain grant and contract
commitments from several governmental and non-governmental organizations
(“NGOs”). Nevertheless, these Phase 3 trials and Cellegy’s other planned
clinical trials could require Cellegy to provide substantial funding in 2006.
There can be no assurance that funding from governmental agencies and NGOs
will
continue to be available at previous levels or at all, and any other Phase
3
trials that Cellegy may commence in the future relating to its products could
involve the expenditure of several million dollars through the completion of
the
clinical trials. In addition, delays in the clinical trial process can be
extremely costly in terms of lost sales opportunities and increased clinical
trial costs. The speed with which we complete our clinical trials and our
regulatory submissions, including NDAs, will depend on several factors,
including the following:
|
·
|
the
rate of patient enrollment, which is affected by the size of the
patient
population, the proximity of patients to clinical sites, the difficulty
of
the entry criteria for the study and the nature of the protocol;
|
|
·
|
the
timely completion of clinical site protocol approval and obtaining
informed consent from subjects;
|
|
·
|
analysis
of data obtained from preclinical and clinical activities;
|
|
·
|
changes
in policies or staff personnel at regulatory agencies during the
lengthy
drug application review; and
|
|
·
|
the
availability of experienced staff to conduct and monitor clinical
studies,
internally or through contract research organizations.
|
Adverse
events in our clinical trials may force us to stop development of our product
candidates or prevent regulatory approval of our product candidates, which
could
materially harm our business.
Patients
participating in the clinical trials of our product candidates may experience
serious adverse health events. A serious adverse health event includes death,
a
life-threatening condition, hospitalization, disability, congenital anomaly,
or
a condition requiring intervention to prevent permanent impairment or damage.
The occurrence of any of these events could interrupt, delay or halt clinical
trials of our product candidates and could result in the FDA, or other
regulatory authorities, denying approval of our product candidates for any
or
all targeted indications. An institutional review board or independent data
safety monitoring board, the FDA, other regulatory authorities or we may suspend
or terminate clinical trials at any time. Our product candidates may prove
not
to be safe for human use. Any delay in the regulatory approval of our product
candidates could increase our product development costs and allow our
competitors additional time to develop or market competing
products.
Due
to our reliance on contract research organizations or other third-parties to
assist us in conducting clinical trials, we are unable to directly control
all
aspects of our clinical trials.
Currently,
we rely on contract research organizations, or CROs, and other third parties
to
conduct our clinical trials. As a result, we have had and will continue to
have
less control over the conduct of the clinical trials, the timing and completion
of the trials and the management of data developed through the trial than would
be the case if we were relying entirely upon our own staff. Communicating with
CROs can also be challenging, potentially leading to difficulties in
coordinating activities. CROs may:
|
·
|
have
staffing difficulties;
|
|
·
|
experience
regulatory compliance issues;
|
|
·
|
undergo
changes in priorities or may become financially distressed;
or
|
|
·
|
not
be able to properly control payments to government agencies or clinical
sites, particularly in less developed
countries.
|
These
factors may adversely affect their ability to conduct our trials. We may
experience unexpected cost increases or experience problems with the timeliness
or quality of the work of the CRO. If we must replace these CROs or any other
third party contractor, our trials may have to be suspended until we find
another contract research organization that offers comparable services. The
time
that it takes us to find alternative organizations may cause a delay in the
commercialization of our product candidates or may cause us to incur significant
expenses. Although we do not now intend to replace our CROs, such a change
would
make it difficult to find a replacement organization to conduct our trials
in an
acceptable manner and at an acceptable cost. Any delay in or inability to
complete our clinical trials could significantly compromise our ability to
secure regulatory approval of our product candidates, thereby limiting our
ability to generate product revenue resulting in a decrease in our stock
price.
19
The
type and scope of patent coverage we have may limit the commercial success
of
our products.
Cellegy’s
success depends, in part, on our ability to obtain patent protection for our
products and methods, both in the United States and in other countries. Several
of Cellegy’s products and product candidates, such as Cellegesic, Savvy and
Tostrelle, are based on existing molecules with a history of use in humans
but
which are being developed by us for new therapeutic uses or in novel delivery
systems which enhance therapeutic utility. We cannot obtain composition patent
claims on the compounds themselves, and instead rely on patent claims, if any,
directed to use of the compound to treat certain conditions or to specific
formulations. This is the case, for example, with our United States patents
relating to Cellegesic and Fortigel products. Such method-of-use patents may
provide less protection than a composition-of-matter patent, because of the
possibility of “off-label” use of the composition. Cellegy may not be able to
prevent a competitor from using a different formulation or compound for a
different purpose.
No
assurance can be given that any additional patents will be issued to us, that
the protection of any patents that may be issued in the future will be
significant, or that current or future patents will be held valid if
subsequently challenged. For example, oppositions have been filed with the
European Patent Office regarding our European patent protecting the manufacture
and use of nitroglycerin ointment and related compounds for the treatment of
anal disorders, including fissures and various hemorrhoidal conditions. In
December 2003, we reported that the Board of Opposition of the European
Patent Office had rendered a verbal decision revoking Cellegy’s European patent
relating to its Cellegesic product and related compounds for the treatment
of
anal disorders, including fissures and various hemorrhoidal conditions. Although
Cellegy has appealed this decision, an additional adverse outcome in the appeal
process could have a negative effect on Cellegy, impacting the commercial
success of our partner’s marketing and corporate licensing efforts in Europe and
adversely affecting our royalty revenues and stock price.
The
patent position of companies engaged in businesses such as Cellegy’s business
generally is uncertain and involves complex legal and factual questions. There
is a substantial backlog of patent applications at the United States Patent
and
Trademark Office, or USPTO. Patents in the United States are issued to the
party
that is first to invent the claimed invention. There can be no assurance that
any patent applications relating to Cellegy’s products or methods will issue as
patents, or, if issued, that the patents will not be challenged, invalidated
or
circumvented or that the rights granted there under will provide us a
competitive advantage.
In
addition, many other organizations are engaged in research and product
development efforts in drug delivery and topical formulations that may overlap
with Cellegy’s products. Such organizations may currently have, or may obtain in
the future, legally blocking proprietary rights, including patent rights, in
one
or more products or methods under development or consideration by Cellegy.
These
rights may prevent us from commercializing technology, or may require Cellegy
to
obtain a license from the organizations to use the technology. Cellegy may
not
be able to obtain any such licenses that may be required on reasonable financial
terms, if at all, and cannot be sure that the patents underlying any such
licenses will be valid or enforceable. Moreover, the laws of certain foreign
countries do not protect intellectual property rights relating to United States
patents as extensively as those rights are protected in the United States.
The
issuance of a patent in one country does not assure the issuance of a patent
with similar claims in another country, and claim interpretation and
infringement laws vary among countries, so the extent of any patent protection
is uncertain and may vary in different countries. As with other companies in
the
pharmaceutical industry, we are subject to the risk that persons located in
other countries will engage in development, marketing or sales activities of
products that would infringe our patent rights if such activities were in the
United States.
Our
product sales strategy involving corporate partners is highly
uncertain.
Cellegy
is seeking to enter into agreements with corporate partners regarding
commercialization of our lead product candidates. Cellegy currently has a
limited number of agreements with third parties to commercialize our product
candidates. Cellegy may not be able to establish other future collaborative
arrangements and we may not have the resources or the experience to successfully
commercialize any such products on our own. Failure to enter into other
arrangements could prevent, delay or otherwise jeopardize our ability to develop
and market products in the United States and in markets outside of North
America, reducing our revenues and profitability.
20
With
the
current and future planned corporate partner arrangements, we may rely on our
partners to conduct clinical trials, obtain regulatory approvals and, if
approved, manufacture, distribute, market or co-promote these products. Reliance
on third party partners can create risks to our product commercialization
efforts. Once agreements are completed, particularly if they are completed
at a relatively early stage of product development, Cellegy may have little
or
no control over the development or marketing of these potential products and
little or no opportunity to review clinical data before or after public
announcement of results. Further, any arrangements that may be established
may
not be successful or may be subject to dispute or litigation between the
parties.
We
do not have any history of manufacturing products on a large scale, and we
have
a limited number of critical suppliers.
Cellegy
has no direct experience in manufacturing commercial quantities of products
and
currently does not have any capacity to manufacture products on a large
commercial scale. We currently rely on a limited number of contract
manufacturers, primarily PendoPharm, Inc. and certain of Biosyn’s suppliers, to
manufacture our formulations. Although we are developing other contract
manufacturers, there can be no assurance that we will be able to enter into
acceptable agreements with them or validate facilities successfully on a timely
basis. This is an expensive and time-consuming process and there may be delays
and additional costs relating to the technical transfer and validation of
alternate suppliers. In the future, we may not be able to obtain contract
manufacturing on commercially acceptable terms for compounds or product
formulations in the quantities we need. Manufacturing or quality control
problems, lack of financial resources or qualified personnel could occur with
our contract manufacturers causing product shipment delays, inadequate supply,
or causing the contractor not to be able to maintain compliance with the FDA’s
current Good Manufacturing Practice (“GMP”) requirements necessary to continue
manufacturing. Such problems could limit our ability to produce clinical or
commercial product, cause us to be in breach of contract obligations with our
distributors to supply product to them, reduce our revenues from product sales,
and otherwise adversely affect our business and stock price.
PendoPharm, Inc.
is Cellegy’s contract manufacturer for our North American and European clinical
and commercial supply of prescription products in those territories, while
the
Australian and South Korean product sales are sourced by a pharmaceutical
manufacturer in Australia. In July 2003, PanGeo Pharma, our former contract
manufacturer, filed for bankruptcy protection under Canadian law. Under a
reorganization plan, PanGeo sold its facilities to an affiliate of
Pharmascience, another Canadian manufacturer, and was renamed PendoPharm, Inc.
Cellegy has not experienced any material adverse impact to date from the
previous bankruptcy filing. The manufacturing facility was inspected and
re-certified by Canadian regulatory authorities after its acquisition by
PendoPharm, and PendoPharm has continued to supply product from the
manufacturing facility without interruption. Nevertheless, uncertainty exists
concerning the future operations of PendoPharm manufacturing plant and whether
PendoPharm will be able to meet Cellegy’s clinical and product requirements on a
timely basis, if at all, in the future. In addition, there can be no assurances
relating to PendoPharm’s ability to produce product under GMP as required by the
FDA or by other regulatory agencies. There could be difficulty or delays in
importing raw materials or exporting product into or out of Canada resulting
in
delays in our clinical trials or commercial product sale
We
have limited sales and marketing experience.
We
may
market some of our products, if successfully developed and approved and if
we
obtain sufficient funding, through a direct sales force in the United States.
Cellegy has very limited experience in sales, marketing or distribution. To
market these products directly, we may seek to establish a direct sales force
in
the United States or obtain the assistance of a marketing partner. However,
Cellegy may not have the financial capability or the experience to successfully
establish a direct sales force, marketing or distribution operations, which
could delay or prevent the successful commercialization of our products and
could reduce the ultimate profitability to Cellegy of such products if we needed
to rely on a third party marketing partner to commercialize the
products.
21
If
medical doctors do not prescribe our products or the medical profession does
not
accept our products, our product sales and business would be adversely
affected.
Our
business is dependent on market acceptance of our products by physicians,
healthcare payers, patients and the medical community. Medical doctors’
willingness to prescribe our products depends on many factors,
including:
|
·
|
perceived
efficacy of our products;
|
|
·
|
convenience
and ease of administration;
|
|
·
|
prevalence
and severity of adverse side effects in both clinical trials and
commercial use;
|
|
·
|
availability
of alternative treatments;
|
|
·
|
cost
effectiveness;
|
|
·
|
effectiveness
of our marketing strategy and the pricing of our products;
|
|
·
|
publicity
concerning our products or competing products; and
|
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·
|
our
ability to obtain third-party coverage or reimbursement.
|
Even
if
we receive regulatory approval and satisfy the above criteria, physicians may
not prescribe our products if we do not promote our products effectively.
Factors that could affect our success in marketing our products
include:
|
·
|
the
experience, skill and effectiveness of the sales force and our sales
managers;
|
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·
|
the
effectiveness of our production, distribution and marketing capabilities;
|
|
·
|
the
success of competing products; and
|
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·
|
the
availability and extent of reimbursement from third-party payers.
|
Failure
of our products or product candidates to achieve market acceptance would limit
our ability to generate revenue and could harm our business.
If
testosterone replacement therapies are perceived to create health risks, our
testosterone gel product candidates may be
jeopardized.
Past
studies of female hormone replacement therapy products have reported an increase
in certain health risks with long-term use. As a result of such studies, some
companies that sell or develop female hormone replacement products have
experienced decreased sales of these products, and in some cases, a decline
in
the value of their stock. Publications have, from time to time, suggested
potential health risks associated with testosterone replacement therapy (“TRT”).
It is possible that further studies on the effects of TRT could demonstrate
other health risks. This, as well as negative publicity about the risks of
hormone replacement therapy, including TRT, could adversely affect patient
or
prescriber attitudes and impact the development and successful commercialization
of our Fortigel, Tostrex and Tostrelle product candidates. In addition, in
a
meeting with the FDA, the FDA informed Cellegy that specific guidelines
regarding the long-term safety of testosterone for the treatment of female
sexual dysfunction are under internal discussion by the Division of Reproductive
and Urologic Drug Products. Cellegy is awaiting these guidelines before
embarking on a Phase 3 program. If the new FDA guidelines prove to be too
onerous or too costly to implement, the Phase 3 program may be significantly
delayed or we may decide not to pursue further development of Tostrelle product.
The above factors could adversely affect investor attitudes and the price of
our
common stock.
We
have very limited staffing and will continue to be dependent upon key
personnel.
Our
success is dependent upon the efforts of a small management team and staff.
We
have compensation or employment arrangements and a severance/retention plan
in
place with all of our executive officers, but none of our executive officers
is
legally bound to remain employed for any specific term. These arrangements
may
be terminated by either Cellegy or the officer at any time upon notice. We
do
not have key man life insurance policies covering any of our executive officers
or key employees. If key individuals leave Cellegy, we could be adversely
affected if suitable replacement personnel are not quickly recruited. There
is
competition for qualified personnel in all functional areas, which makes it
difficult to attract and retain the qualified personnel necessary for the
development and growth of our business. Our future success depends upon our
ability to continue to attract and retain qualified scientific, clinical and
administrative personnel.
22
Our
corporate compliance programs cannot guarantee that we are in compliance with
all potentially applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company and
we
rely heavily on third parties to conduct many important functions. We also
have
significantly fewer employees than many other companies that have the same
or
fewer product candidates in late stage clinical development. In addition, as
a
publicly traded company we are subject to significant regulations, including
the
Sarbanes-Oxley Act of 2002, some of which have either only recently been adopted
or are currently proposals subject to change. While we have developed and
instituted a corporate compliance program and continue to update the program
in
response to newly implemented or changing regulatory requirements, we cannot
assure you that we are now or will be in compliance with all such applicable
laws and regulations. If we fail to comply with any of these regulations, we
could be subject to a range of regulatory actions, including suspension or
termination of clinical trials, restrictions on our products or manufacturing
processes, withdrawal of products from the market, significant fines, or other
sanctions or litigation. Failure to comply with potentially applicable laws
and
regulations could also lead to the imposition of fines, cause the value of
our
common stock to decline, and impede our ability to raise capital or lead to
the
de-listing of our stock.
We
are
evaluating our internal controls over financial reporting to allow management
to
report on, and our independent registered public accounting firm to attest
to,
our internal controls, as required by the Sarbanes-Oxley Act. We will be
performing the system and process evaluation and testing (and any necessary
remediation) required to comply with the management certification and auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act (“Section
404”). As a result, we expect to incur significant additional expenses and
diversion of management’s time. Cellegy is considered a non-accelerated filer,
and as such is required to comply with the Section 404 requirements for its
fiscal year ending December 31, 2007. While we anticipate being able to fully
implement the requirements relating to internal controls and all other aspects
of Section 404 by our compliance deadline, we cannot be certain as to the
timing of completion of our evaluation, testing and remediation actions or
the
impact of the same on our operations. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance,
we might be subject to sanctions or investigation by regulatory authorities,
including the SEC. In addition, we may be required to incur a substantial
financial investment to improve our internal systems and the hiring of
additional personnel or consultants.
Risks
Relating to Our Industry
We
face intense competition from larger companies, and in the future Cellegy may
not have the resources required to develop innovative products. Cellegy’s
products are subject to competition from existing
products.
The
pharmaceutical industry is subject to rapid and significant technological
change. In the development and marketing of prescription drugs, Cellegy faces
intense competition. Cellegy is much smaller in terms of size and resources
than
many of its competitors in the United States and abroad, which include, among
others, major pharmaceutical, chemical, consumer product, specialty
pharmaceutical and biotechnology companies, universities and other research
institutions. Cellegy’s competitors may succeed in developing technologies and
products that are safer and more effective than any that we are developing
and
could render Cellegy’s technology and potential products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources, clinical production and marketing capabilities and
regulatory experience. In addition, Cellegy’s products are subject to
competition from existing products. Cellegesic, if ever commercialized, is
expected to compete with over-the-counter products, such as Preparation H
marketed by Wyeth, and various prescription products. As a result, we cannot
assure you that Cellegy’s products under development may not be able to compete
successfully with existing products or with innovative products under
development by other organizations.
Savvy
is
subject to competition from other microbicides that are currently undergoing
clinical trials and which may be sold by prescription or over the counter,
as
well as non-microbicide products such as condoms. Additionally, if a vaccine
for
HIV/AIDS is successfully developed and made available, this could limit the
potential market for Savvy and Biosyn’s other products. As a result, Biosyn’s
products under development may not be able to compete successfully with existing
products or other innovative products under development.
23
We
are subject to the risk of clinical trial and product liability
lawsuits.
The
testing of human health care product candidates entails an inherent risk of
allegations of clinical trial liability, while the marketing and sale of
approved products entails an inherent risk of allegations of product liability.
We are subject to the risk that substantial liability claims from the testing
or
marketing of pharmaceutical products could be asserted against us in the future.
Cellegy has obtained clinical trials insurance coverage relating to our clinical
trials in an aggregate amount of $3 million. If any of our product candidates
are approved for marketing, we may seek additional coverage.
There
can
be no assurance that Cellegy will be able to obtain or maintain insurance on
acceptable terms, particularly in overseas locations, for clinical and
commercial activities or that any insurance obtained will provide adequate
protection against potential liabilities. Moreover, our current and future
coverages may not be adequate to protect us from all of the liabilities that
we
may incur. If losses from liability claims exceed our insurance coverage, we
may
incur substantial liabilities that exceed our financial resources. In addition,
a product or clinical trial liability action against us would be expensive
and
time-consuming to defend, even if we ultimately prevailed. If we are required
to
pay a claim, we may not have sufficient financial resources and our business
and
results of operations may be harmed.
Our
stock price could be volatile.
Our
stock
price has from time to time experienced significant price and volume
fluctuations. Since becoming a public company, our stock price has fluctuated
due to overall market conditions and due to matters or events more specific
to
Cellegy. Events or announcements that could significantly impact our stock
price
include:
|
·
|
Publicity
or announcements regarding regulatory developments relating to our
products;
|
|
·
|
Clinical
trial results, particularly the outcome of our more advanced studies;
or
negative responses from both domestic and foreign regulatory authorities
with regard to the approvability of our
products;
|
|
·
|
Period-to-period
fluctuations in our financial results, including our cash and investment
balance, operating expenses, cash burn rate or revenue levels;
|
|
·
|
Negative
public announcements, additional legal proceeding or financial problems
of
our key suppliers, particularly relating to our Canadian manufacturer
and
our service providers;
|
|
·
|
Common
stock sales in the public market by one or more of our larger
stockholders, officers or
directors;
|
|
·
|
A
negative outcome in existing litigation or other potential legal
proceedings; or
|
|
·
|
Other
potentially negative financial announcements, including delisting
from the
OTCBB, a review of any of our filings by the SEC, changes in accounting
treatment or restatement of previously reported financial results
or
delays in our filings with the
SEC.
|
The
Kingsbridge Structured Secondary Offering (“Kingsbridge SSO”) financing
arrangement may have a dilutive impact on our stockholders. The SSO arrangement
imposes certain limitations on our ability to issue equity or equity-linked
securities.
There
are
4,000,000 shares of our common stock that are reserved for issuance under the
structured secondary offering facility arrangement, or Kingsbridge SSO, that
we
entered into in January 2004 with Kingsbridge Capital Limited, or
Kingsbridge, 260,000 shares of which are related to a warrant that we issued
to
Kingsbridge. In certain circumstances where the registration statement covering
those shares is not effective or available to Kingsbridge, additional shares
may
be issuable to Kingsbridge under the agreement. Such circumstances could
include, for example, suspending Kingsbridge’s ability to sell shares pursuant
to the registration statement because of the existence of material undisclosed
developments relating to Cellegy. If within 15 trading days following any
settlement date on which Cellegy issues shares under the Kingsbridge SSO,
Cellegy suspends Kingsbridge’s ability to sell shares by delivering a notice to
Kingsbridge, referred to as a blackout notice, then if the volume weighted
average market price (“VWAP”) of our common stock, is higher on the trading day
immediately before the blackout notice is delivered than it is on the first
trading date after the blackout trading period is lifted, Cellegy is obligated
to pay to Kingsbridge an amount based on a percentage, ranging from 75% to
25%
depending on when the blackout notice is delivered, of the difference between
the two VWAP prices multiplied by the number of shares purchased by Kingsbridge
under the most recent drawn down and held by Kingsbridge immediately before
the
suspension was imposed. Cellegy may, in its discretion, pay this amount either
in cash or in shares, the value of which is based on the market price of the
common stock on the first trading date after the registration statement became
available again.
24
The
issuance of shares under the Kingsbridge SSO at a discount to the market
price of the common stock, and upon exercise of the warrant, will have a
dilutive impact on other stockholders, and the issuance or even potential
issuance of such shares, if any, could have a negative effect on the market
price of our common stock. If we sell stock to Kingsbridge when our share price
is decreasing, such issuance will have a more dilutive effect and may further
decrease our stock price. A decrease in our stock price or other consequences
of
issuing shares under the Kingsbridge SSO could potentially cause us not to
satisfy one or more requirements for the continued listing of our common stock
on the OTCBB, or could impair or prevent our ability to obtain additional
required financing, resulting in a damaged capital structure.
To
the
extent that Kingsbridge sells shares of our common stock issued under the
Kingsbridge SSO to third parties, our stock price may decrease due to the
additional selling pressure in the market. The perceived risk of dilution from
sales of stock to or by Kingsbridge may cause holders of our common stock to
sell their shares or encourage short sales. This could contribute to decline
in
our stock price.
During
the two-year term of the Kingsbridge SSO, we are subject to certain restrictions
on our ability to engage in certain equity or equity-linked financings without
the consent of Kingsbridge. These restrictions primarily relate to non-fixed
future-priced securities. We may not issue securities that are, or may become,
convertible or exchangeable into shares of common stock where the purchase,
conversion or exchange price for such common stock is determined using a
floating or otherwise adjustable discount to the market price of the common
stock during the two year term of our agreement with Kingsbridge. However,
the
agreement does not prohibit us from conducting most kinds of additional debt
or
equity financings, including Private Investments in Public Equity (“PIPE”),
shelf offerings, and secondary offerings.
Under
the
terms of the Kingsbridge SSO, if we fail to issue and sell common stock to
Kingsbridge pursuant to draw downs at least equal to $2.66 million, then we
have
agreed to pay $266,000 to Kingsbridge. We have made draw-downs of less than
this
amount. As a result, unless these provisions are amended or waived, we owe
Kingsbridge $266,000.
Future
sales of shares of our common stock may negatively affect our stock
price.
A
substantial portion of our shares is held by a relatively small number of
stockholders. Sales of a significant number of shares into the public markets,
particularly in light of our relatively small trading volume, may negatively
affect our stock price. We also have outstanding warrants and vested stock
options that can be exercised by the holders to acquire shares of our common
stock. The exercise of these options or warrants could result in significant
dilution to our stockholders at the time of exercise.
In
the
future, we will likely issue additional shares of common stock or other equity
securities, including but not limited to options, warrants or other derivative
securities convertible into our common stock, which could result in significant
dilution to our stockholders and adversely affect our stock price
Changes
in the expensing of stock options could result in unfavorable accounting charges
or require us to change our compensation practices.
For
Cellegy, stock options are a significant component of compensation for existing
employees and to attract new employees. We currently are not required to record
stock-based compensation charges if the employee’s stock option exercise price
equals or exceeds the fair value of our common stock at the date of grant.
The
Financial Accounting Standards Board has issued a new accounting standard
requiring recording of expense for the fair value of stock options granted.
During 2006, when we change our accounting policy to record expense for the
fair
value of stock options granted our net loss may increase. We intend to continue
to include various forms of equity in our compensation plans, such as stock
options and other forms of equity compensation allowed under our plans. If
we
continue our reliance on stock options, our reported losses could
increase.
25
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
In
March
of 2005, Cellegy relocated its South San Francisco offices to the nearby city
of
Brisbane where it is subleasing approximately 5,800 square feet of office space
with an expiration date of May 31, 2007. The company relocated its headquarters
to Biosyn’s Huntingdon Valley, Pennsylvania facilities in September 2005 and
expects to close the Brisbane office during the second quarter of 2006. Biosyn’s
facilities consist of approximately 10,000 square feet of leased laboratory
and
office space with an expiration date of October 31, 2008. The company
believes its current facilities to be adequate for its anticipated
needs.
In
October 2003, the Company received a communication from PDI invoking
mediation procedures under its exclusive license agreement with PDI relating
to
Fortigel. After mediation was completed in December 2003, both PDI and
Cellegy initiated litigation proceedings against each other. Cellegy filed
a
declaratory judgment action in federal district court in San Francisco against
PDI, and PDI initiated an action in federal district court in New York against
Cellegy.
On
April
11, 2005, Cellegy entered into a settlement agreement with PDI resolving the
lawsuits that the companies had filed against each other. Under the terms
of the settlement agreement, the license agreement was terminated and all
product rights reverted to Cellegy. Under
the
settlement agreement, the previous license agreement was terminated and all
product rights reverted to Cellegy. Cellegy paid $2 million to PDI upon signing
the settlement agreement.
Cellegy
also issued a $3.0 million Secured Promissory Note to PDI, payable in 18 months,
with earlier payments of amounts owed under the note required to be made to
the
extent of 50% of licensing fees, royalties or milestone payments (or, in
each case, other payments in the nature thereof) received by Cellegy under
Cellegy’s agreements or arrangements with respect to Cellegy’s Tostrex®
(testosterone gel) and Rectogesic® (nitroglycerin ointment) products in
territories outside of North America, and 50% of licensing fees, royalties
or
milestone payments (or, in each case, other payments in the nature thereof)
received by Cellegy under Cellegy’s agreements or arrangements with respect to
Fortigel licensees in North American markets. These payments are required
to be made to PDI within two business days after Cellegy receives the
payments. These various payments will be made until the amount owed
under the note is paid in full. Cellegy’s obligations under the note are
secured by a security interest in favor of PDI, which is reflected in a security
agreement between Cellegy and PDI, in Cellegy’s interests in the payments
described above and any proceeds there from (and certain related
collateral). In addition, Cellegy is required to make payments on the $3.0
million note with respect to 10% of proceeds received by Cellegy in excess
of $5
million from financing transactions. Payments made in 2005 totaled
$200,000. Amounts owed under the note may be accelerated upon an event of
default, which include (but are not limited to) certain kinds of bankruptcy
filings or certain related actions or proceedings, an uncured
material breach of Cellegy’s obligations under the note, the security interest
no longer being a valid, perfected, first priority security interest, and a
default in indebtedness of Cellegy with an aggregate principal amount in excess
of $2 million that results in the maturity of such indebtedness being
accelerated before its stated maturity. Cellegy made a $100,000 payment to
PDI
in October 2005 shortly after the due date specified in the secured note and
has
paid interest to PDI on that amount. Cellegy also issued to PDI a $3.5 million
principal amount Convertible Senior Note due April 11, 2008. Cellegy may
redeem the note at any time before the maturity date upon not less than 30
or
more than 60 days notice to PDI, at a redemption price equal to the principal
amount; if Cellegy delivers such a redemption notice, PDI may convert the note
into shares of Cellegy common stock at a price of $1.65 per share. In
addition, after the 18 month anniversary of the debenture, PDI may convert
the
note into Cellegy common stock at a price of $1.65 per share. If Cellegy
does redeem the note within the first 18 months; then Cellegy has agreed to
file
a registration statement relating to possible resale of any shares issued to
PDI
after 18 months. 2,121,212 shares would be issuable upon
such conversion. As long as amounts are owed under the note, Cellegy
has agreed not to incur or become responsible for any indebtedness that ranks
contractually senior or pari passu in right of payment to amounts outstanding
under the note. Events of default under the senior note are generally
similar to events of default under the secured note.
26
On
December 1, 2005, the Company received a notice from PDI notifying the Company
that PDI considers that Cellegy to be in default of the Secured Promissory
Note
and the Nonnegotiable Convertible Senior Note which were part of the settlement
agreement. PDI’s notice states that PDI believes that Cellegy is in material
breach of the Secured Promissory Note as a result of Cellegy’s failure to notify
PDI of the receipt of certain payments and of Cellegy’s failure to pay amounts
to which PDI believes it is entitled. PDI also notified Cellegy that PDI
believes that an outstanding principal amount of $2.8 million, plus default
interest, of the Secured Promissory Note and outstanding principal amount of
$3.5 million, plus default interest, of the Nonnegotiable Convertible Senior
Note are immediately due and payable in cash pursuant to the “Event of Default”
provisions of the settlement agreement. Cellegy had previously made certain
payments pursuant to the provisions of the settlement agreement. Among other
things, PDI claimed that it was entitled to $1.0 million of the $2.0 million
payment that Strakan paid to Cellegy in connection with the November 2005
negotiation of the license agreement relating to Rectogesic.
On
December 2, 2005, PDI filed suit in United States District Court for the
Southern District of New York requesting that the court declare that Cellegy
has
breached its obligations under the settlement agreement, order Cellegy to
specifically perform its obligations under the settlement agreement, and awarded
PDI damages in the amount of $6.4 million plus default interest as well as
certain other amounts. Cellegy does not agree that the payments made by Strakan
under the renegotiated agreement fall within the definition of "Pledged
Collateral" in the settlement documents and does not believe that any amount
is
owed to PDI as a result of such payments. The proceedings are in the discovery
stage and no trial date has been set. The Company intends to vigorously defend
itself in the litigation.
ITEM
4:
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
27
PART II
Cellegy’s
common stock currently trades on the OTC Bulletin Board (“OTCBB”) exchange under
the symbol “CLGY.OB”. Cellegy’s common stock was traded on the Nasdaq National
Market until September 14, 2005, when its listing was transferred to the Nasdaq
Small Cap Market. On December 29, 2005, the common stock was delisted from
the
Nasdaq Small Cap Market, and shortly thereafter the common stock began trading
on the OTCBB. The following table sets forth the range of high and low closing
sales prices for the common stock as reported on The NASDAQ Stock Market Small
Cap Market and OTCBB for the periods indicated below.
|
High
|
Low
|
||||
|
2004
|
|||||
|
First
Quarter
|
$6.74
|
$3.14
|
|||
|
Second
Quarter
|
4.65
|
3.65
|
|||
|
Third
Quarter
|
4.62
|
3.46
|
|||
|
Fourth
Quarter
|
5.14
|
2.69
|
|||
|
2005
|
|||||
|
First
Quarter
|
$3.05
|
$1.62
|
|||
|
Second
Quarter
|
2.45
|
1.29
|
|||
|
Third
Quarter
|
1.60
|
1.24
|
|||
|
Fourth
Quarter
|
1.40
|
0.42
|
|||
| 2006 | |||||
| First Quarter through March 15 | 0.93 | 0.42 |
Holders
As
of
March 9, 2006 there were approximately 154 stockholders of record,
excluding beneficial holders of stock held in street name.
We
have
never paid cash or declared dividends on our common stock. We do not anticipate
that we will declare or pay cash dividends on our common stock in the
foreseeable future. Future dividends on our common stock or other securities,
if
any, will be at the discretion of our board of directors and will depend on,
among other
things, our operations, capital requirements and surplus, general financial
condition, contractual restrictions and such other factors as our board of
directors may deem relevant.
Information
with respect to equity compensation plans that is required by this Item will
be
included in our Proxy Statement for the 2006 annual meeting of
stockholders.
Sales
of
unregistered securities during the past year have previously been reported
in
quarterly reports on Form 10-Q or current reports on Form 8-K that we
have filed with the Securities and Exchange Commission.
28
The
following unaudited selected historical information has been derived from the
audited consolidated financial statements of Cellegy. The consolidated financial
information as of December 31, 2005 and 2004 and for each of the three
years in the period ended December 31, 2005 are derived from our audited
consolidated financial statements included elsewhere in this Form 10-K. The
information set forth below should be read in conjunction with the financial
statements, related Notes thereto, and the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Form 10-K.
Statements
of Operations Data: (In thousands except per share
data)
|
Years ended December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Revenues
|
$
|
12,835
|
$
|
2,596
|
$
|
1,620
|
$
|
1,402
|
$
|
877
|
||||||
|
Costs
and expenses1
|
18,115
|
31,370
|
15,512
|
17,163
|
21,847
|
|||||||||||
|
Operating
loss
|
(5,279
|
)
|
(28,774
|
)
|
(13,892
|
)
|
(15,761
|
)
|
(20,970
|
)
|
||||||
|
Other
income (expense)
|
271
|
620
|
360
|
520
|
1,505
|
|||||||||||
|
Net
loss
|
$
|
(5,008
|
)
|
$
|
(28,154
|
)
|
$
|
(13,532
|
)
|
$
|
(15,241
|
)
|
$
|
(19,465
|
)
|
|
|
Basic
and diluted net loss per common share
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
$
|
(0.68
|
)
|
$
|
(0.86
|
)
|
$
|
(1.26
|
)
|
|
|
Dividends
per share of Common Stock
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Weighted
average common shares used in computing basic and diluted net
loss per common share
|
28,497
|
22,021
|
19,964
|
17,643
|
15,503
|
|||||||||||
|
1
|
Includes
a charge of $14,982,000 for purchased research and development relating
to
the Biosyn acquisition in
October 2004.
|
Balance
Sheet Data: (In thousands)
|
December 31,
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Cash,
cash equivalents, restricted cash and investments1
|
$
|
2,251
|
$
|
8,933
|
$
|
11,564
|
$
|
23,858
|
$
|
17,190
|
||||||
|
Total
assets
|
6,450
|
13,863
|
15,331
|
28,379
|
22,367
|
|||||||||||
|
Long
term portion of deferred revenue
|
3,084
|
13,865
|
13,335
|
14,168
|
—
|
|||||||||||
|
Long
term payables
|
212
|
717
|
725
|
717
|
485
|
|||||||||||
|
Deficit
accumulated during the development stage
|
(132,311
|
)
|
(127,303
|
)
|
(99,149
|
)
|
(85,617
|
)
|
(70,377
|
)
|
||||||
|
Total
stockholders’ equity (deficit)
|
|
(6,477
|
)
|
|
(6,743
|
)
|
|
(1,580
|
)
|
|
10,534
|
|
19,845
|
|||
|
1
|
Includes
restricted cash of $0 in 2005, $227,500 in 2004, 2003 and 2002, and
$614,000 in 2001.
|
ITEM
7: MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Cellegy
Pharmaceuticals is a development stage specialty biopharmaceutical company
engaged in the development and commercialization primarily of prescription
drugs
targeting women’s health care conditions, including HIV prevention and sexual
dysfunction, as well as gastrointestinal conditions using proprietary topical
formulations and nitric oxide donor technologies.
Major
Events
In
January 2004, we entered into a Structured Secondary Offering, or SSO,
agreement with Kingsbridge Capital Limited. The agreement requires Kingsbridge
to purchase up to 3.74 million shares of newly issued common stock at times
and
in amounts selected by us over a period of up to two years, subject to certain
restrictions. We filed a registration statement with the Securities and Exchange
Commission relating to shares assumable under the SSO, which was subsequently
declared effective on June 1, 2004. We completed two draw downs in 2004,
issuing a total of 246,399 common shares resulting in net proceeds of
approximately $0.8 million.
29
In
July 2004, Cellegy announced that the United Kingdom’s Committee on Safety
of Medicines, or MHRA, recommended that marketing authorization be granted
by
the Medicines and Healthcare Products Regulatory Agency for Cellegesic™, branded
Rectogesic® outside the United States. In August 2004, the MHRA issued an
approvable letter for Rectogesic.
In
July 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the future commercialization of Tostrex® (testosterone gel) in
Europe and received a $500,000 non-refundable upfront payment. Under the terms
of the agreement, ProStrakan will be responsible for regulatory filings, sales,
marketing and distribution of Tostrex throughout the European Union and in
certain nearby non-EU countries, and Cellegy was responsible for supplying
finished product to ProStrakan through Cellegy’s contract manufacturer. Cellegy
could receive future milestone payments and royalties on net sales of Tostrex.
In January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan will assume
responsibility for all manufacturing and other product support functions and
will purchase Tostrex directly from Cellegy’s contract manufacturer rather than
purchasing the product from Cellegy under the terms of the original agreement.
Cellegy will continue to be eligible to receive milestones and royalties as
set
forth in the original agreement.
In
July 2004, Cellegy completed a private placement financing, primarily with
a number of existing institutional stockholders, issuing 3,020,000 common shares
and warrants to purchase 604,000 shares of common stock, resulting in net
proceeds of $10.2 million. The offering price of the common shares sold was
$3.42 per share and the exercise price of the warrants is $4.62 per
share.
In
October 2004, Cellegy acquired Biosyn, Inc., a privately held
biopharmaceutical company. Under the terms of the agreement, Cellegy issued
approximately 2,462,000 shares of Cellegy’s common stock for all of Biosyn’s
issued and outstanding capital stock. In addition, outstanding Biosyn stock
options and warrants were assumed by Cellegy and converted into options and
warrants to purchase approximately 318,504 shares of Cellegy common stock.
The
options issued to acquire Cellegy common stock are fully vested and exercisable.
The exercise prices of the options and warrants were adjusted by the exchange
ratio in the transaction; the expiration date and other terms of the converted
options and warrants remained the same. The purchase price does not include
any
provisions for contingent milestone payments of up to $15.0 million, which
would
be payable to Biosyn shareholders on the achievement of C31G marketing approval
in the United States and a portion of which would be payable earlier upon
commercial launch in certain major overseas markets.
In
December 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the commercialization of Cellegesic, branded Rectogesic outside
of
the United States, in Europe. In connection therewith, Cellegy received a
non-refundable upfront payment of $1.0 million and was entitled to receive
additional milestone payments and payments for products sold to ProStrakan.
ProStrakan will be responsible for additional regulatory filings, sales,
marketing and distribution of Rectogesic throughout Europe. Under the original
agreement, Cellegy was responsible for supplying finished product to ProStrakan
through its contract manufacturer.
On
April
11, 2005, Cellegy entered into a settlement agreement with PDI resolving
the
lawsuits that the companies had filed against each other. Under the terms
of the settlement agreement, the license agreement was terminated and all
product rights have reverted to Cellegy. Cellegy paid $2.0 million to PDI
upon signing the settlement agreement. Cellegy also issued a $3.0 million
promissory note to PDI, due in October 2006, and a $3.5 million non-negotiable
senior convertible debenture. The settlement of the Company’s lawsuit with PDI
resulted in the recognition of the remaining $6.5 million in deferred revenue
from PDI as license revenue during the quarter ended June 30,
2005.
In
November 2005, Cellegy renegotiated its marketing agreement with ProStrakan.
Under the terms of the amended agreement, ProStrakan will assume responsibility
for all manufacturing and other product support functions and will purchase
the
product directly from the manufacturer rather than from Cellegy. In connection
with its revised marketing agreement, Cellegy received a payment of $2.0 million
and may receive certain future milestone payments of up to $750,000 upon
approval of the product in certain major European countries.
On
January 16, 2006, Cellegy entered into an amendment of its Exclusive License
and
Distribution Agreement dated July 9, 2004, with ProStrakan Group plc, whereby
ProStrakan will assume responsibility for all of the manufacturing and other
product support functions for Tostrex in Europe. In December 2004, the product
was approved by the MPA for sale in Sweden.
30
On
February 1, 2006, Cellegy announced that it had entered into a non-exclusive,
developing world licensing agreement with CONRAD for the collaboration on the
development of Cellegy’s entire microbicide pipeline. The agreement encompasses
the licensing of Savvy currently in Phase 3 clinical trials in the United States
and Africa; UC-781, currently in expanded Phase 1 trials in the United States
and Thailand; and Cyanovirin-N, currently in pre-clinical
development.
On
March
24, 2006, the Company announced that its European marketing partner, ProStrakan
had successfully completed the European Union Mutual Recognition Procedure
for
Rectogesic. Following the successful conclusion of the MRP process, national
licenses will be sought and are expected to be issued in due course in the
19
additional countries (in addition to the United Kingdom where approvals have
been previously obtained) included in the MRP submission application. Cellegy
is
entitled to receive $250,000 for each marketing regulatory approval obtained
in
the first of any three countries out of France, Italy, Germany or Spain up
to a
maximum total amount payable of $750,000. Under its previous agreement with
PDI,
Inc, PDI is entitled to receive one-half of these payments.
Critical
Accounting Policies and Estimates
Use
of Estimates. The
preparation of consolidated financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to
make
estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. We have identified below some of our more significant
accounting policies. For further discussion of our accounting policies, see
Note
1 in the Notes to the Consolidated Financial Statements.
Revenue
Recognition. Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk non-refundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
We
receive certain government and non-government grants that support our research
effort in defined research projects. These grants generally provide for
reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
are incurred. Advanced payments received under these agreements prior to
completion of the related work are recorded as deferred revenue until earned.
Should the research funded by federal grants result in patented technologies,
the federal government would be entitled to a nonexclusive, nontransferable,
irrevocable, paid-up license to utilize such technologies.
At
December 31, 2005, $759,906 of expenses covered under research and development
agreements were earned and recorded as grant revenue but were
unbilled.
Revenues
related to product sales are recognized when title has been transferred to
the
customer and when all of the following criteria are met: a persuasive evidence
of an arrangement exists, delivery has occurred or service has been rendered,
the price is fixed or determinable and collectibility is reasonably assured.
There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at
the
time the payment is received and are subsequently recognized as revenue on
a
straight-line basis over the longer of the life of the agreement or the life
of
the underlying patent.
Royalties
payable to Cellegy under these license agreements will be recognized as earned
when the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Goodwill
and Intangible Assets. Goodwill
and intangible assets consist primarily of goodwill recorded in connection
with
Cellegy’s acquisition of Biosyn. In accordance with SFAS No. 142 “Goodwill
and Other Intangible Assets”, goodwill and other intangible assets are no longer
systematically amortized, but rather Cellegy performs an annual assessment
for
impairment by applying a fair-value based test. This test is generally performed
each year in the fourth quarter. Additionally, goodwill and intangible assets
are reviewed for impairment whenever events or circumstances indicate that
the
carrying amount of the asset may not be recoverable. An impairment loss would
be
recognized based on the difference between the carrying value of the asset
and
its estimated fair value, which would be determined based on either discounted
future cash flows or other appropriate fair value methods. The evaluation of
goodwill and other intangibles for impairment requires management to use
significant judgments and estimates including, but not limited to, projected
future revenue, operating results and cash flows. An impairment would require
Cellegy to charge to earnings the write-down in value of such
assets.
Impairment
of Long Lived Assets.
Cellegy
reviews long-lived assets for impairment whenever events or changes in business
conditions indicate that these carrying values may not be recoverable in the
ordinary course of business. When such an event occurs, management determines
whether there has been an impairment by comparing the anticipated undiscounted
future net cash flows to the related asset’s carrying value. If an asset is
considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised value, depending
on the nature of the asset.
31
Notes
Payable.
Notes
payable include non-interest bearing notes issued by Cellegy to PDI pursuant
to
a lawsuit settlement, and a note issued to the Ben Franklin Institute. The
notes have been recorded at their net present value at the time of
issuance.
Research
and Development Expenses. Research
and development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities, are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and number of subjects that have completed treatment for each
trial.
Milestone
payments that are made upon the occurrence of future contractual events prior
to
receipt of applicable regulatory approvals are charged to research and
development expense. Cellegy may capitalize and amortize certain future
milestone and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Derivative
Instruments. Cellegy
accounts for certain warrants issued in conjunction with its financings as
derivative financial instruments. As a derivative, the fair value of the warrant
is recorded as a liability in the balance sheet and changes in the fair value
of
the warrant are recognized as other income or expense during each period. The
fair value of the warrant is expected to change primarily in response to changes
in Cellegy’s stock price. Significant increases in the fair value of our stock
could give rise to significant expense in the period of the change. Likewise,
a
reduction in our stock price could give rise to significant income in the period
of the change.
Results
of Operations
Biosyn
was acquired on October 22, 2004 and its results were included in consolidation
from its date of acquisition. Cellegy believes that there is no significant
impact from inflation and changing prices on its sales, revenues and net losses
for the periods presented.
Years
Ended December 31, 2005, 2004 and 2003
Revenues. Cellegy
had revenues of $12,835,000, $2,596,000 and $1,620,000 in 2005, 2004 and 2003,
respectively. Revenues in each of the three years presented consist of
licensing, milestone and product sales revenues. Revenues in 2004 and 2005
include grant revenue generated primarily by Biosyn’s operations.
Licensing
revenues. Licensing
revenues were $7,268,000, $844,000 and $833,000 in 2005, 2004 and 2003,
respectively. The $6,424,000 increase in licensing revenue in 2005 as compared
to 2004 was primarily attributable to the settlement of Cellegy’s lawsuit with
PDI in April 2005 which resulted in the recognition of the remaining $6.5
million of deferred revenues from PDI. In 2004 and 2003, Cellegy recorded
licensing revenue of $833,000 from PDI, reflecting the amortization over the
expected commercial life of Fortigel, of the initial $15.0 million received
from
PDI on the agreement date in December 2002. The balance of licensing
revenues in each of the three years presented arose from the amortization to
income of deferred revenue recorded in connection with agreements relating
to
Rectogesic and Tostrex. We expect licensing revenues to decline significantly
in
the future.
In
November 2005, we amended our 2004 agreement with ProStrakan concerning
Rectogesic. Under
the
terms of the amended agreement, ProStrakan will assume responsibility for all
manufacturing and other product support functions and will purchase Rectogesic
directly from Cellegy’s contract manufacturer rather than purchasing the product
from Cellegy under the terms of the original agreement. In return, Cellegy
received a non-refundable payment of $2.0 million and may receive future
milestone payments of up to $750,000 upon approval of the product in certain
major European countries. The $2.0 million non-refundable payment is being
amortized to income over the remaining estimated life of the underlying patent.
Approximately $22,000 was amortized to income in 2005.
Product
sales. Product
sales were $1,157,000, $745,000 and $768,000 in 2005, 2004 and 2003,
respectively. Pacific rim sales of Rectogesic through our Australian subsidiary
were $637,000, $563,000 and $385,000 in 2005, 2004 and 2003, respectively.
The
revenue growth in 2004 was due primarily to effective advertising and selling
programs for Rectogesic throughout Australia. We expect that the growth in
sales
revenues through our Australian subsidiary will continue to increase in 2006
but
at a lower annual rate and activities concerning the research of new
markets and new uses for Rectogesic have been undertaken.
32
Product
sales in 2004 and 2003 included $181,000 and $316,000 in skin care product
sales. There were no skin care product sales in 2005 and, in December 2005,
Cellegy divested this business for approximately $25,000.
Rectogesic
was launched in the United Kingdom in May 2005. Product sales in 2005 included
approximately $471,000 of sales of Rectogesic to ProStrakan in connection with
ProStrakan’s marketing of Rectogesic in the U.K. Due to the renegotiation of its
agreement with ProStrakan mentioned above, Cellegy will no longer record sales
of Rectogesic to ProStrakan.
Tostrex
was launched in Sweden in September 2005. Tostrex sales were not significant
in
2005 and unless additional jurisdictions approve the marketing of Tostrex,
Cellegy does not expect a significant level of sales from this product.
ProStrakan is presently pursuing additional marketing approvals for Tostrex
in
mainland Europe through the Mutual Recognition Procedure.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan will assume
responsibility for all manufacturing and other product support functions and
will purchase Tostrex directly from Cellegy’s contract manufacturer rather than
purchasing the product from Cellegy under the terms of the original agreement.
Cellegy will continue to be eligible to receive milestones and royalties as
set
forth in the original agreement.
Grant
revenues. Grant
revenues for 2005 were $4,410,000 and were $1,008,000 for the period of
October 22 to December 31, 2004. Grant revenue was not significant in
2003.
Grant
revenues for 2005 were generated by funding from several agencies in support
of
the following development programs: $3,146,000 for Cyanovirin-N, $451,000 for
Savvy, $424,000 for UC-781 and $387,000 for a UC-781/C31G combination product.
2004 grant revenues for the period of October 22 to December 31, 2004
were as follows: $562,000 for Cyanovirin-N, $273,000 for Savvy, $76,000 for
UC-781 and $94,000 for a UC-781/C31G combination product. The level of grant
funding under the various grant arrangements is generally dependent upon the
amount of direct labor (primarily laboratory personnel) and direct expenses
such
as supplies, testing services and other direct costs expected to be incurred
in
connection with the given program over its duration. The grant agreements
generally provide for an overhead percentage that is applied to the direct
labor
costs. These amounts, along with the amounts billed to the grantor for direct
costs comprise the total amount billed and recorded as grant revenue. Grant
agreements undergo periodic renegotiation and it is the prerogative of granting
agency or foundation to determine the level and duration of future funding
of
Cellegy’s programs. There can be no assurance that Cellegy will be able to
maintain grant funding at current levels or at levels necessary to properly
fund
its research programs.
In
addition to the grants funding above, Biosyn benefits indirectly from agency
funding paid to third party contractors in support of its ongoing Phase 3
clinical trials. These payments from the funding agencies are made directly
to
the service providers, not to Biosyn. Under the terms of certain of its funding
agreements, Biosyn has been granted the right to commercialize products
supported by the funding in developed and developing countries, and is obligated
to make its commercialized products, if any, available in developing countries,
as well as to public sector agencies in developed countries at prices reasonably
above cost or at a reasonable royalty rate.
Cost
of Product Sales.
Cost of
product sales is comprised primarily of direct labor and raw material
manufacturing costs for commercialized products and also includes shipping
costs
and those costs associated with stability and validation testing of finished
goods prior to shipment. The stability and validation testing components of
cost
of product sales comprise a significant percentage of gross sales since these
costs are substantially fixed in nature. Cost of product sales were $385,000,
$148,000 and $186,000 in
2005,
2004 and 2003, respectively. The increase of $237,000 in 2005 as compared to
2004 is due to increased sales volume generated by Pacific Rim sales and due
to
the launch of Rectogesic and Tostrex in 2005. Due
to
the renegotiation of our agreements with ProStrakan mentioned above, we expect
cost of product sales to decline in 2006.
Research
and Development Expenses. Research
and development expenses were $8,481,000, $9,599,000 and $10,558,000 in 2005,
2004 and 2003, respectively. Research and development expenses, which are
primarily related to the costs of clinical trials and regulatory filings,
represented 48%, 31% and 68% of our total operating expenses in 2005, 2004
and
2003, respectively.
33
On
a
consolidated basis, 2005 research and development expenses decreased
approximately $1.1 million compared to 2004.
Cellegy
research and development expenses at the parent level decreased $4.8 million
in
2005 as compared to 2004. $2.2 million of this decrease was predominantly due
to
the cessation of clinical testing activities for Cellegesic in the U.S., and
a
$1.0 million decrease in clinical material manufacturing costs. The balance
of
the decrease was comprised primarily of decreases in salary costs of $800,000
due to the termination of Cellegesic and Fortigel trials and the termination
of
associated personnel, and reductions in related professional, consulting and
CRO
fees.
Biosyn
research and development expenses are included in our operations for a full
year
for 2005 and for the period of October 22 to December 31, 2004 in
2004. Biosyn’s research expenses increased $4.7 million in 2005 as compared to
the short period in 2004 and offset the 2005 decrease in Cellegy research and
development expenses noted above. Savvy Phase 3 trials were being conducted
in
three major locations in 2005: Ghana and Nigeria for HIV clinical testing and
in
the United States for contraception clinical trials. In late 2005, Cellegy
announced that the first interim analysis had taken place for the Ghana trial
and that while the trial’s Data Monitoring Committee found no reason to
interrupt or stop the trial based on a review of safety, the number of
sero-conversions were approximately
one-third of the expected rate.
As a
result of this finding, Cellegy decided to terminate the Ghana trial. At the
time of the termination, the Ghana HIV trial reached full enrollment. Spending
for major programs in 2005 consisted of $1.6 million in spending related to
Savvy HIV and contraception trial programs, $3.1 million in spending relating
to
Cyanovirin-N and $426,000 on UC-781 programs. Savvy related study costs are
comprised primarily of $1.4 million in clinical material manufacturing of active
and placebo compounds and applicators and related shipping costs to African
trial sites. Cyanovirin-N program costs are comprised of $2.5 million in direct
expenses and UC-781 programs costs are comprised of $343,000 in direct expenses.
Total
research and development in 2004 as compared with 2003 decreased $959,000 due
primarily to a reduction in clinical and regulatory costs in 2004 of $2,865,000
primarily relating to Cellegesic Phase 3 clinical trial expenses and various
Fortigel clinical costs. These were offset somewhat in 2004 by higher research
and development expenses of $860,000 incurred by Biosyn primarily for the
development of Savvy included in the consolidated results during the fourth
quarter of 2004, other Cellegy research expenditures of $635,000, primarily
relating to the validation of Cellegesic and Fortigel manufacturing processes
at
a second contract manufacturer and non-cash expenses of $750,000 relating to
common stock issued to Neptune Pharmaceuticals for a milestone achieved during
2004.
Research
and development expenses consist primarily of internal salaries and allocated
costs as well as external clinical costs, including: clinical site payments,
costs of manufacturing, testing and shipping clinical supplies and service
fees
to clinical research organizations, or CROs, that monitor the clinical sites
and
perform other related trial support services. Additionally, research expenses
consist of regulatory costs, including the cost of filing product approval
applications around the world, and the costs of various consultants to support
the filings.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses were $9,249,000 in 2005, $6,641,000 in
2004,
and $4,768,000 in 2003. Biosyn selling, general and administrative expenses
are
included in Cellegy’s operations for a full year for 2005 and for the period of
October 22 to December 31, 2004 in 2004. California personnel
previously engaged in research or development are now being reported under
selling, general and administrative, as the parent’s efforts in the latter part
of 2005 have shifted substantially towards the management of its manufacturing
activities or towards other administrative functions.
In
2005,
selling, general and administrative expenses increased by $2.7 million in 2005
as compared to 2004. Approximately $1.6 million of this increase is due to
the
inclusion of Biosyn for a full year in 2005 operations. The balance of this
increase was due to: increase in salary expense at the parent level due to
increased severance and retention expenses of $570,000, increase in professional
fees of $515,000 due to accounting and audit fees related to the 2004
reincorporation, legal fees incurred in connection with the PDI litigation
and
patent fees. The overall increase in selling, general and administrative
expenses was partly offset by income of $1,090,000 recognized upon the receipt
of the sublease termination fee. Cellegy announced in the third quarter of
2005
the relocation of its headquarters to its Biosyn facility in Pennsylvania and
it
is expected that the Brisbane, California office will be closed during the
second quarter of 2006.
34
Selling,
general and administrative expenses in 2004 increased by $1,873,000, compared
with 2003 resulting primarily from higher PDI litigation costs in 2004 of
$1,215,000, accounting expenses of approximately $315,000 related to additional
registration statement filings and to consulting cost associated with the
Company’s Sarbanes-Oxley compliance programs, pre-launch Cellegesic marketing
expenses of $540,000, and the inclusion of Biosyn expenses of $266,000.
We
expect
selling, general and administrative expenses in 2006 to decline somewhat due
to
the 2005 reductions in staffing and related expenses such as benefits, and
due
to expected reductions in consulting and accounting fees. These reductions,
however, may be partially offset by PDI litigation expenses expected in
2006.
Acquired-In-Process
Technology. Results
for 2004
included an in-process technology charge or $15.0 million incurred in connection
with the acquisition of Biosyn on October 22, 2004. The in-process programs
include the Phase 3 development of Savvy microbicide vaginal gel. Other
development programs include UC-781 and Cyanovirin-N microbicides which are
in
much earlier stages of testing.
Based
on
a risk assessment of the technology, its stage of development and the estimated
level of effort required to complete the clinical testing to facilitate
regulatory review, management concluded that the technological feasibility
of
the in-process research and development purchased from Biosyn had not yet been
reached and that the technology had no alternative future use. Accordingly,
the
amount allocated to purchase research and development of approximately $15.0
million was charged to income in 2004. Substantial additional manufacturing
optimization and development expenses associated with completing the clinical
trials, as well as legal and regulatory expenses relating to the drug approval
process will be required to gain marketing approval.
Other
Income (Expense). Cellegy
recognized net interest and other income of $208,000 in 2005, $259,000 for
2004,
and $360,000 for 2003. Net interest and other income for 2005 consisted of
$174,000 in interest income, $626,000 in interest expense primarily from the
PDI
notes, $690,000 derivative revaluation income associated with the Kingsbridge
and PIPE warrants and $93,000 primarily consisting of rental income. Net
interest and other income for 2004 was comprised primarily of $110,000 in
interest income, $149,000 in rental income and derivative revaluation income
associated with the Kingsbridge warrants of $390,000. The net interest and
other
income in 2003 consisted of $212,000 in interest income from cash and
investments and $148,000 in rental and other income. Reductions in interest
income over the last three years were due to lower average investment balances
and interest rates.
Liquidity
and Capital Resources
Our
cash
and cash equivalents were $2.3 million, $8.7 million and $7.6 million at
December 31, 2005, 2004 and 2003, respectively.
Cash
and
cash equivalents decreased $6.5 million during 2005 due primarily to the
inclusion of a full year of Biosyn operations in Cellegy’s 2005 consolidated
results, the cash payment of $2.0 million made in connection with settlement
of
PDI’s lawsuit and its associated legal costs, and severance and retention
payments of $521,000. The settlement with PDI included the issuance of two
non-interest bearing long-term notes with an aggregate face value of $6.5
million which Cellegy recorded at their net present value of approximately
$4.7
million. The use of cash from operating activities during 2005 was partially
offset by $5.7 million in net proceeds provided by financing activities from
the
May 2005 sale of common stock, $1.1 million received from Vaxgen as part of
the
sublease termination agreement, $2.0 million from ProStrakan in connection
with
the amendment of the Rectogesic agreement. Restricted cash proceeds of
$227,000 were received as part of the termination of the lease on the Company’s
South San Francisco facility.
Non
cash
events during 2005 include the recognition of $6.5 million in licensing revenue
from PDI recorded in conjunction with the litigation settlement, $1.2 million
in
fixed asset and leasehold improvement write offs due to the Company’s move to
the Brisbane facility, additional fixed asset write offs of certain
manufacturing equipment and modifications of $374,000 and interest expense
of
$532,000 arising from the accretion of the PDI and Ben Franklin notes payable.
Accrued expenses and other current liabilities decreased $690,000 due to the
lower accruals for legal, clinical and consulting fees, offset by increases
in
retention and severance accruals in 2005.
35
Cash
and
cash equivalents increased $1.1 million during 2004. Cash used in operations
of
$13.6 million was somewhat offset primarily by net proceeds of the
2004 private placement financing and Kingsbridge SSO draw downs of
approximately $11.2 million and $1.5 million in payments received pursuant
to
the ProStrakan licenses. Additionally, maturing short term investments of $3.7
million were added to cash and cash equivalents during 2004.
Net
cash
used in operating activities was $13.6 million and $12.8 million in 2004 and
2003, respectively. The $14.6 increase in net loss and the $0.8 million decrease
in cash used in operations during 2004, compared with 2003, was primarily due
to
the $15.0 million non-cash purchased research and development charge associated
with the Biosyn acquisition. This charge was included in the 2004 net loss.
Other major changes in operating cash in 2004 included a non-cash milestone
payment of $750,000 to Neptune, a net decrease in accrued expenses and accounts
payable of $1.4 million due to the extinguishment of certain Biosyn liabilities
by Cellegy after the acquisition, partially offset by higher accrual of legal
and consulting expenses, and an increase in deferred revenue of $1.3 million
related primarily to the ProStrakan license agreements and the Biosyn
acquisition. These were partially offset by a reduction in the loss on fixed
assets of about $600,000 primarily due to the write-off of tenant improvements
at our South San Francisco corporate facility in 2003, lower equity compensation
expense of $0.5 million relating to non-cash bonuses paid in stock in 2003
and a
$0.5 million increase in accounts receivable.
We
prepared the financial statements assuming that we will continue as a going
concern, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. At
December 31, 2005, we had a deficit accumulated during the development
stage of $132.3 million, negative cash flows from operations of $96.2 million,
and cash and cash equivalents of $2.3 million. We expect negative cash flow
from
operations to continue for the foreseeable future, with the need to continue
or
expand development programs and to commercialize products once regulatory
approvals have been obtained. We believe we do not have enough financial
resources to continue operations beyond April 2006. These factors raise
substantial doubt about our ability to continue as a going concern. Our plans,
with regard to these matters, include raising additional required funds through
one or more of the following options, among others: sales of assets, seeking
partnerships with other pharmaceutical companies or private foundations to
co-develop and fund our research and development efforts, pursuing additional
out-licensing arrangements with third parties, re-licensing and monetizing
in
the near term our future milestone and royalty payments expected from existing
licensees and seeking equity or debt financing. In addition, we will continue
to
implement further cost reduction programs and reduce discretionary spending,
if
necessary.
There
is
no assurance that any of the above options will be implemented on a timely
basis
or that we will be able to obtain additional financing on acceptable terms,
if
at all. Alternatively, we may be required to accept less than favorable
commercial terms in any such future arrangements. If adequate funds are not
available on acceptable terms, we could be required to delay development or
commercialization of certain products, to license to third parties the rights
to
commercialize certain products that we would otherwise seek to commercialize
internally or to reduce resources devoted to product development. In addition,
if we do not receive all, or a portion, of the planned Biosyn grant funding,
or
if such funding is delayed, this could impact our ability to complete our Biosyn
development programs on a timely basis, if at all. The financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty. Any failure to dispel any continuing doubts about our ability
to
continue as a going concern could adversely affect out ability to enter into
collaborative relationships with business partners, make it more difficult
to
obtain required financing on favorable terms or at all, negatively affect the
market price of our common stock and could otherwise have a material adverse
effect on our business, financial condition and results of
operations.
36
Future
expenditures and capital requirements depend on numerous factors including,
without limitation, the progress and focus of our research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the progress and outcome of the
PDI
litigation, the costs of filing, prosecuting, defending and enforcing patent
claims, oppositions and appeals, the timing and level of grant funding to
support Biosyn’s clinical programs and operations and our ability to establish
new collaborative arrangements.
Cellegy
believes that available cash resources will be adequate to satisfy our capital
needs through at least April 30, 2006 assuming no material adverse financial
impact associated with the PDI litigation and any subsequent legal proceedings.
At present, our revenues from existing licensing arrangements, funding
agreements and other sources are not sufficient to offset our ongoing operating
expenses or to pay in full our current obligations. Funds provided from sales
of
subsidiaries, assets, equity or debt financing, or other arrangements, if
obtained, would permit satisfaction of capital needs for a longer period of
time. A favorable determination by the FDA Advisory Committee and the FDA
following the scheduled April 2006 hearing on our Cellegesic NDA may improve
the
prospects for one or more such transactions although there can be no assurances
that this will be the case. The existence and extent of our obligations could
adversely affect our business, operations and financial condition. Failure
to
obtain additional funds as described above may affect the timing of development,
clinical trials or commercialization activities relating to certain products
and
could require us to curtail our operations, reduce personnel, sell part or
all
of our assets or seek protection under bankruptcy laws. There is a risk that
one
or more of our creditors could bring lawsuits to collect amounts to which they
believe they are entitled. In the event of lawsuits of this type, if we are
unable to negotiate settlements or satisfy our obligations, we could voluntarily
file bankruptcy proceedings, or we could become the subject of an involuntary
bankruptcy proceeding filed by one or more creditors against
us.
Contractual
Obligations
The
table
below summarizes certain of our future contractual obligations, which include
obligations under our current facilities leases in Brisbane, California and
Huntingdon Valley, Pennsylvania along with capital equipment lease obligations
at December 31, 2005 (in thousands):
|
Total
|
2006
|
2007
|
2008
|
||||||||||
|
Operating
lease
|
$
|
756
|
$
|
332
|
$
|
264
|
$
|
160
|
|||||
|
Capital
lease
|
60
|
55
|
5
|
-
|
|||||||||
| PDI Notes | 6,300 | 2,800 | - | 3,500 | |||||||||
|
Total
|
$
|
7,116
|
$
|
3,187
|
$
|
269
|
$
|
3,660
|
|||||
In
March
2005, we relocated our principal office from South San Francisco to Brisbane,
California. Our sublease for the office in Brisbane has a term that expires
February 28, 2006. In March, 2006, Cellegy extended its sublease agreement
with
Vaxgen. Under the terms of the new agreement, the Company will lease its
existing facilities in Brisbane for $6,000 per month beginning March 1, 2006
through June 30, 2006 and for $13,000 per month until May 31, 2007.
Other
obligations not reflected in the table are comprised primarily of employment
agreements, employee retention agreements, and severance payments of
$129,000 to a former executive officer. License agreements and notes
payable. The above table also excludes milestone, royalty payments and the
repayment obligation, as such amounts are not probable or estimable at this
time. License agreements generally provide for payment by us of annual license
fees, milestone payments and royalties upon successful commercialization of
products.
Under
the
Kingsbridge SSO, we have not issued and sold common stock pursuant to the draw
down provisions equal to at least $2.66 million during the term of the agreement
which expires in January 2006. As a result, unless these provisions are
amended or waived we owe $266,000 to Kingsbridge. In addition, our
December 1997 agreement with Neptune Pharmaceuticals Corporation pursuant
to which we acquired the rights relating to Cellegesic calls for a series of
payments, which may be paid in shares of common stock, upon successful
completion of various development milestones. We issued shares to Neptune in
2001 and 2004 upon completion of certain milestones, valued at $750,000 for
each
milestone. The remaining milestone payments are contingent and become payable
upon certain product development or commercialization milestones, the
achievement and timing of which are subject to material
uncertainties.
Off
Balance Sheet Arrangements
As
more
fully described in Note 8, “Notes Payable”, Cellegy issued a $3.5 million senior
convertible debenture to PDI in 2005 in connection with the settlement of
its
lawsuit with PDI. Cellegy may redeem the note at anytime before the maturity
date upon prior notice to PDI, at a redemption price equal to the principal
amount. If Cellegy delivers such a redemption notice, PDI may convert the
note
into shares of Cellegy common stock at a price of $1.65 per share. In addition,
after the 18th month anniversary of the debenture, PDI may convert the note
into
Cellegy common stock at a price of $1.65 per share. If Cellegy does not redeem
the note within the first 18 months, then Cellegy has agreed to file a
registration statement relating to the possible resale of any shares issued
to
PDI after 18 months. 2,121,212 shares would be issuable upon such
conversion.
37
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment”, which replaces SFAS No. 123. SFAS No. 123R requires public
companies to recognize an expense for share-based payment arrangements including
stock options and employee stock purchase plans. The statement eliminates a
company’s ability to account for share-based compensation transactions using APB
25, and generally requires instead that such transactions be accounted for
using
a fair value based method. SFAS No. 123R requires an entity to measure the
cost of employee services received in exchanged for an award of equity
instruments based on the fair value of the award on the date of the grant,
and
to recognize the cost over the period during which the employee is to provide
service in exchange for the award. SFAS No. 123R is effective for public
companies with a fiscal year that begins after June 15, 2005. The cumulative
effect of this pronouncement applied on a modified prospective basis will be
measured and recognized starting the first quarter of 2006. We anticipate that
the impact of Adopting SFAS No. 123R will result in an annual expense of
approximately $292,000 based on known grants. Upon adoption of SFAS
No. 123R, companies are allowed to select one of three alternative
transition methods. Management is currently evaluating the transition methods,
as well as valuation methodologies and assumptions for employee stock options
in
light of SFAS No. 123R. Current estimates of option values using the
Black-Scholes method (as shown under “Stock Based Compensation”) may not be
indicative of results from valuation methodologies ultimately implemented by
the
Company upon adoption of SFAS No. 123R.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3”. The statement
requires retrospective application of changes in accounting principle to prior
periods’ financial statements, unless it is impracticable to determine either
the period specific effects or the cumulative effect of the change. When it
is
impracticable to determine the period specific effects of an accounting change
on one or more individual prior periods presented, this statement requires
that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable, and that a corresponding adjustment be made to
the
opening balance of the retained earnings for that period rather than being
reported in the income statement. The statement also requires that a change
in
depreciation, amortization, or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate affected by a change
in accounting principle. This pronouncement is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The Company does not
believe adoption of SFAS 154 will have a material effect on its consolidated
financial position, results of operations or cash flows.
ITEM
7A: QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are
incurring market risk associated with the issuance of warrants to Kingsbridge
to
purchase 260,000 shares of our common stock and to the May 2005 investors to
purchase approximately 1.4 million shares of our common stock. We will continue
to calculate the fair value at the end of each quarter and record the difference
to other income or expense until the warrants are exercised. We are incurring
risk associated with increases or decreases in the market price of our common
stock, which will directly impact the fair value calculation and the non-cash
charge or credit recorded to the income statement in future
quarters.
38
ITEM
8: FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and financial information required by Item 8 are set forth
below on pages F-1
through F-38 of this report.
|
Index
to Financial Statements
|
F-1
|
|
|
Report
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit)
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-10
|
|
|
Notes
to Consolidated Financial Statements
|
F-12
|
|
|
Quarterly
Financial Results
|
F-38
|
None.
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
our
disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the
period covered by this form 10K. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that our disclosure
controls and procedures were effective in timely providing them with material
information relating to the Company, as required to be disclosed in the reports
the Company files under the Exchange Act.
Changes
in Internal Controls
There
were no changes in the Company’s internal controls over financial reporting
identified in connection with the evaluation by the Chief Executive Officer
and
Chief Financial Officer that occurred during the Company’s last fiscal quarter
that have materially affected or are reasonably likely to materially affect
the
Company’s internal controls over financial reporting.
None.
39
Information
required by this Item with respect to directors and compliance with
Section 16(a) of the Securities Exchange Act of 1934 may be found in
the sections captioned “Election of Cellegy Directors” and “Compliance under
Section 16(a) of the Securities Exchange Act of 1934” appearing in the
definitive Proxy Statement to be filed no later than 120 days after the end
of
the 2005 fiscal year and to be delivered to stockholders in connection with
the
Annual Meeting of Stockholders expected to be held in June 2006 (the “2006
Proxy Statement”). Such information is incorporated herein by reference.
Information required by this Item with respect to executive officers is set
forth below:
|
Richard
C. Williams
|
62
|
Chairman
and Interim Chief Executive Officer, Director
|
|
John
J. Chandler
|
64
|
Vice
President, Corporate Development
|
|
Robert
J. Caso
|
50
|
Vice
President, Finance and Chief Financial
Officer
|
Richard
C. Williams. Mr. Williams
became Chairman and Interim Chief Executive Officer in January 2005. He
first joined Cellegy as Chairman of the Board in November 2003. He is
President and Founder of Conner-Thoele Ltd., a consulting and financial advisory
firm specializing in health care acquisition analysis, strategy formulation
and
post-merger consolidation and restructuring. Mr. Williams served as Vice
Chairman, Strategic Planning of King Pharmaceuticals following the acquisition
by King of Medco Research where he was Chairman. He has held a number of
executive level positions with other pharmaceutical companies. Mr. Williams
is a director of EP Med Systems, a public electrophysiology diagnostic company
and is Chairman and a director of ISTA Pharmaceuticals, a public emerging
ophthalmology company. Mr. Williams received a B.A. degree in economics
from DePauw University and an M.B.A. from the Wharton School of
Finance.
John
J. Chandler. Mr. Chandler
became Vice President, Corporate Development in May 1998. From
January 1995 to March 1998, he served as Vice President, Europe for
the Medical Device Division of American Home Products, now Wyeth. During 1994,
he was Area Director, Europe/Latin America for Wyeth. From 1968 to 1993, he
held
a series of management and senior management positions with American Cyanamid
Company. Mr. Chandler holds an M.B.A. in Marketing from Seton Hall
University and a B.S. in Biology from the Queens College of the City University
of New York.
Robert
J. Caso. Mr. Caso
became Vice President, Finance and Chief Financial Officer in March 2005. From
January 2003 through 2004, he headed a multinational team in connection with
the
implementation of an SAP application for Johnson & Johnson’s Worldwide
Pharmaceutical Group. Subsequent to Johnson & Johnson’s acquisition of
Centocor in 1999, Mr. Caso held the Financial Controller position at Centocor.
From 1988 through 1995 he held various finance positions at Centocor and held
the Corporate Controller position from 1996 to 1999. Mr. Caso has substantial
experience in finance operations, accounting systems, business financing and
domestic and international taxation. Mr. Caso is a Certified Public Accountant
and holds a BS in Accounting from Villanova University and an MBA in Finance
from Lehigh University.
Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with Cellegy.
Information
with respect to this Item may be found in the section captioned “Executive
Compensation” appearing in the forthcoming 2006 Proxy Statement and is
incorporated herein by reference.
Information
with respect to this Item may be found in the section captioned “Security
Ownership of Certain Beneficial Owners and Management” appearing in the
forthcoming 2006 Proxy Statement and is incorporated herein by
reference.
40
Information
with respect to this Item may be found in the section captioned “Certain
Relationships and Related Transactions” appearing in the 2006 Proxy Statement
and is incorporated herein by reference.
Information
with respect to this Item may be found in the section captioned “Principal
Accountant Fees and Services” appearing in the 2006 Proxy Statement and is
incorporated herein by reference.
41
Exhibits
The
following exhibits are attached hereto or incorporated herein by
reference:
|
Exhibit
Number
|
Exhibit Title
|
||||
|
2.1
|
Asset
Purchase Agreement dated December 31, 1997 between the Company and
Neptune Pharmaceutical Corporation. (Confidential treatment has been
granted with respect to portions of this agreement.) (Incorporated
by
reference to Exhibit 4.4 of the Company’s Registration Statement on
Form S-3, file no. 333-46087, filed on February 11, 1998, as
amended.)
|
||||
|
2.2
|
Agreement
and Plan of Share Exchange dated as of October 7, 2004, by and
between the Company and Biosyn, Inc. (Incorporated by reference to
Exhibit 2.1 to the Form 8-K filed October 26,
2004.)
|
||||
|
3.1
|
Amended
and Restated Certificate of Incorporation. (Incorporated by reference
to
Exhibit 3.1 to the Company’s Report on Form 8-K filed with the
Commission on September 3, 2004 (the “September 2004
8-K”).)
|
||||
|
3.2
|
Bylaws
of the Company. (Incorporated by reference to Exhibit 3.2 to the
September 2004 8-K.)
|
||||
|
4.1
|
Specimen
Common Stock Certificate. (Incorporated by reference to Exhibit 4.1
to the September 2004 8-K.)
|
||||
|
*10.1
|
1995
Equity Incentive Plan. (Incorporated by reference to Exhibit 4.03 to
the Company’s Registration Statement on Form S-8, file no. 333-91588,
filed on June 28, 2002.)
|
||||
|
*10.2
|
Form of
Option Agreement under the 1995 Equity Incentive Plan. (Incorporated
by
reference to Exhibit 4.05 to the Company’s Post-effective Amendment
No. 1 to Registration Statement on Form S-8, file no. 333-91588,
filed on September 7, 2004 (the “2004
Form S-8”).)
|
||||
|
*10.3
|
1995
Directors’ Stock Option Plan. (Incorporated by reference to
Exhibit 10.8 to the Company’s Form 10-Q for the fiscal quarter
ended filed June 30, 2002.)
|
||||
|
*10.4
|
Form of
option agreement under the 1995 Directors’ Stock Option Plan.
(Incorporated by reference to Exhibit 4.07 to the 2004 Form S-8
and to Exhibit 10.6 to the Annual Report on Form 10-K for the year
ended
December 31, 2004 (the “2004 Form 10-K”).) (Incorporated by reference to
Exhibit 10.6 to the Annual Report on Form 10-K for the year ended
December
31, 2004 (the "2004 Form 10-K").)
|
||||
|
10.5
|
Sublease
Agreement, dated as of March 18, 2005, by and between the Company and
VaxGen, Inc. (Incorporated by reference to Exhibit 10.6 to the
Annual Report on Form 10-K for the year ended December 31, 2004
(the “2004 Form 10-K”).)
|
||||
|
*10.6
|
Employment
Agreement, effective January 1, 2003, between the Company and K.
Michael Forrest.
|
||||
|
10.7
|
Share
Purchase Agreement dated as of November 27, 2001, by and among the
Company, Vaxis Therapeutics Corporation and certain stockholders
of Vaxis.
(Incorporated by reference to Exhibit 10.14 to the Company’s
Form 10-K for the fiscal year ended December 31,
2001.)
|
||||
|
10.8
|
Exclusive
License Agreement dated as of December 31, 2002, by and between the
Company and PDI, Inc. (Confidential treatment has been requested with
respect to portions of this agreement.) (Incorporated herein by reference
to Exhibit 10.10 to the Company’s Form 10-K for the year ended
December 31, 2002.)
|
||||
|
10.9
|
Common
Stock Purchase Agreement dated January 16, 2004 between Cellegy
Pharmaceuticals, Inc. and Kingsbridge Capital Limited. (Incorporated
by reference to Exhibit 10.9 to the 2003
Form 10-K.)
|
||||
|
10.10
|
Registration
Rights Agreement dated January 16, 2004 between Cellegy
Pharmaceuticals, Inc. and Kingsbridge Capital Limited. (Incorporated
by reference to Exhibit 10.10 to the 2003
Form 10-K.)
|
||||
|
10.11
|
Warrant
dated January 16, 2004 issued to Kingsbridge Capital Limited.
(Incorporated by reference to Exhibit 10.11 to the 2003
Form 10-K.)
|
||||
|
10.12
|
Retention
and Severance Plan. (Incorporated by reference to Exhibit 10.01 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended March
31,
2003.)
|
||||
|
10.13
|
Form of
Agreement of Plan Participation under Retention and Severance Plan.
(Incorporated by reference to Exhibit 10.01 to the Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31,
2003.)
|
||||
42
|
*10.14
|
Letter
agreement dated November 6, 2003 between Cellegy
Pharmaceuticals, Inc. and Richard C. Williams. (Incorporated by
reference to Exhibit 10.14 to the 2003
Form 10-K.)
|
||||
|
*10.15
|
Stock
option agreement dated November 6, 2003 between Cellegy
Pharmaceuticals, Inc. and Richard C. Williams. (Incorporated by
reference to Exhibit 10.15 to the 2003
Form 10-K.)
|
||||
|
*10.16
|
Form of
Indemnity Agreement between the Company and its directors and executive
officers. (Incorporated by reference to Appendix B to the Registrant’s
definitive proxy statement filed with the Commission on April 28,
2004.)
|
||||
|
10.17
|
Registration
Rights Agreement dated as of October 1, 2004 between the Company and
certain former stockholders of Biosyn, Inc. (Incorporated by
reference to Exhibit 10.1 to the Form 8-K filed October 26,
2004.)
|
||||
|
*10.18
|
Employment
agreement dated as of October 7, 2004, between the Company and
Anne-Marie Corner. (Incorporated by reference to Exhibit 10.18 to
the 2004
Form 10-K.)
|
||||
|
10.19
|
Exclusive
License Agreement for Tostrex dated as of July 9, 2004, by and
between ProStrakan International Limited and the Company. (Incorporated
by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2004.) (Confidential treatment
has been requested for portions of this agreement.)
|
||||
|
10.20
|
Exclusive
License and Distribution Agreement for Rectogesic dated as of
December 9, 2004, by and between ProStrakan International Limited and
the Company. (Confidential treatment has been requested for portions
of
this agreement.) (Incorporated by reference to Exhibit 10.20 to the
2004
Form 10-K.)
|
||||
|
10.21
|
Agreement
dated as of October 8, 1996 by and among Biosyn, Inc., Edwin B.
Michaels and E.B. Michaels Research Associates, Inc.
(Confidential treatment has been requested with respect to portions
of
this agreement.) (Incorporated by reference to Exhibit 10.21 to the
2004
Form 10-K.)
|
||||
|
10.22
|
Patent
License Agreement by and among Biosyn, Inc., and certain agencies of
the United States Public Health Service. (Confidential treatment
has been
requested with respect to portions of this agreement.) (Incorporated
by
reference to Exhibit 10.22 to the 2004 Form 10-K.)
|
||||
|
10.23
|
License
Agreement dated as of May 22, 2001, by and between Crompton
Corporation and Biosyn, Inc. (Confidential treatment has been
requested for portions of this agreement.) Incorporated by reference
to
Exhibit 10.23 to the 2004 Form 10-K.)
|
||||
|
10.24
|
2005
Equity Incentive Plan.
|
||||
|
10.25
|
Forms
of Option Agreements under the 2005 Equity Incentive
Plan.
|
||||
|
10.30
|
First
Amended and Restated Exclusive Equity Agreement dated as of November
9, 2005, between Cellegy and ProStrakan International Limited.
(Confidential treatment has been requested for portions of this
exhibit.)
|
||||
|
10.31
|
First
Amended and Restated Exclusive License Agreement dated as of January
16,
2006, between Cellegy and ProStrakan International Limited. (Confidential
treatment has been requested for portions of this
exhibit.)
|
||||
|
21.1
|
Subsidiaries
of the Registrant.
|
||||
|
23.1
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm.
|
||||
|
24.1
|
Power
of Attorney (See signature page.)
|
||||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
||||
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||||
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||||
|
*
|
Represents
a management contract or compensatory plan or
arrangement.
|
43
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Huntingdon Valley, Commonwealth of Pennsylvania, on March 30, 2006.
|
Cellegy
Pharmaceuticals, Inc.
|
||
|
By:
|
/s/
Richard
C. Williams
|
|
|
Richard
C. Williams
|
||
|
Chairman
and Interim Chief Executive
Officer
|
||
Power
of Attorney
Each
person whose signature appears below constitutes and appoints each of Richard
C.
Williams and Robert J. Caso, true and lawful attorney-in-fact, with the power
of
substitution, for him in any and all capacities, to sign amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact,
or
his substitute or substitutes, may do or cause to be done by virtue
thereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
|
Name
|
Title
|
Date
|
||||||||
|
Principal
Executive Officer:
|
||||||||||
|
/s/
RICHARD
C. WILLIAMS
|
Chairman,
Interim Chief Executive Officer
|
March
30, 2006
|
||||||||
|
Richard
C. Williams
|
and
Director
|
|
||||||||
|
Principal
Financial Officer
|
|
|||||||||
|
and
Principal Accounting Officer:
|
||||||||||
|
/s/ROBERT
J. CASO
|
Vice
President, Finance, Chief Financial
|
March
30, 2006
|
||||||||
|
Robert
J. Caso
|
Officer
and Secretary
|
|||||||||
|
Directors:
|
||||||||||
|
/s/
JOHN
Q. ADAMS
|
Director
|
March
30, 2006
|
||||||||
|
John
Q. Adams, Sr.
|
||||||||||
|
/s/
TOBI
B.KLAR, M.D.
|
Director
|
March
30, 2006
|
||||||||
|
Tobi
B. Klar, M.D.
|
||||||||||
|
/s/
ROBERT
B. ROTHERMEL
|
Director
|
March
30, 2006
|
||||||||
|
Robert
B. Rothermel
|
||||||||||
|
/s/
THOMAS
M. STEINBERG
|
Director
|
March
30, 2006
|
||||||||
|
Thomas
M. Steinberg
|
||||||||||
44
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Deficit
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-10
|
|
|
Notes
to Consolidated Financial Statements
|
F-12
|
F-1
To
the
Board of Directors and Stockholders’
of
Cellegy Pharmaceuticals, Inc.:
In
our
opinion,
the
accompanying
consolidated balance sheets and the related consolidated statement of
operations, stockholders' equity (deficit) and comprehensive loss, and cash
flows present fairly, in all material respects, the financial position of
Cellegy Pharmaceuticals, Inc. and its subsidiaries (a development stage company)
at December 31, 2005 and 2004, and the results of their operations and their
cash
flows
for each of the three years in the period ended December 31, 2005, and
cumulatively, for the period from January 1, 2003 to December 31, 2005 in
conformity with accounting principles generally accepted in the United States
of
America. These consolidated financial statements are the responsibility of
the
Company's management, our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the cumulative totals
of the Company for the period from June 26, 1989 (date of inception) to December
31, 2002, which totals reflect a deficit
of 64.7 percent
of the
related total cumulative deficit accumulated during the development stage.
Those
cumulative totals were audited by other auditors whose report dated February
13,
2003, expressed an unqualified opinion on the cumulative amounts. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As
discussed in Note 1 to the consolidated financial statements, the Company has
incurred losses from operations since its inception and negative cash flows
from
operations that raise substantial doubt about its ability to continue as a
going
concern. Management’s plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PricewaterhouseCoopers
LLP
March
30,
2006
F-2
(a
development stage company)
|
December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,250,989
|
$
|
8,705,120
|
|||
|
Short-term
investments
|
11,189
|
—
|
|||||
|
Accounts
receivable
|
1,085,235
|
885,810
|
|||||
|
Prepaid
expenses and other current assets
|
1,428,866
|
282,184
|
|||||
|
Total
current assets
|
4,776,279
|
9,873,114
|
|||||
|
Restricted
cash
|
—
|
227,500
|
|||||
|
Property
and equipment, net
|
496,419
|
1,952,408
|
|||||
|
Goodwill
|
981,081
|
1,031,311
|
|||||
|
Intangible
assets, net
|
196,204
|
778,992
|
|||||
|
Total
assets
|
$
|
6,449,983
|
$
|
13,863,325
|
|||
|
Liabilities
and Stockholders’ Deficit
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
1,756,296
|
$
|
1,691,952
|
|||
|
Accrued
expenses and other current liabilities
|
2,402,237
|
2,724,808
|
|||||
|
Current
portion of deferred revenue
|
302,593
|
1,196,260
|
|||||
|
Current
portion of notes payable
|
4,975,892
|
—
|
|||||
|
Total
current liabilities
|
9,437,018
|
5,613,020
|
|||||
|
Notes
payable
|
212,300
|
717,257
|
|||||
|
Derivative
instrument
|
192,570
|
410,800
|
|||||
|
Deferred
revenue
|
3,084,629
|
13,865,064
|
|||||
|
Total
liabilities
|
12,926,517
|
20,606,141
|
|||||
|
Commitments
and contingencies (Note 12)
|
|||||||
|
Stockholders’
deficit:
|
|||||||
|
Preferred
stock, no par value; 5,000,000 shares authorized; no shares issued
and
outstanding at December 31, 2005 and 2004
|
—
|
—
|
|||||
|
Common
stock, par value $.0001; 50,000,000 shares authorized; 29,831,625
and
26,120,440 shares issued and outstanding at December 31, 2005 and
2004, respectively
|
2,983
|
2,612
|
|||||
|
Additional
paid-in capital
|
125,547,788
|
120,253,688
|
|||||
|
Accumulated
other comprehensive income
|
283,694
|
304,244
|
|||||
|
Deficit
accumulated during the development stage
|
(132,310,999
|
)
|
(127,303,360
|
)
|
|||
|
Total
stockholders’ deficit
|
(6,476,534
|
)
|
(6,742,816
|
)
|
|||
|
Total
liabilities and stockholders’ deficit
|
$
|
6,449,983
|
$
|
13,863,325
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-3
(a
development stage company)
|
Years Ended December 31,
|
Period from
June 26, 1989
(inception) to
December 31,
|
||||||||||||
|
2005
|
2004
|
2003
|
2005
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Licensing
and contract revenue from affiliates
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
1,145,373
|
|||||
|
Licensing,
milestone and development funding
|
7,268,270
|
844,044
|
833,340
|
10,497,062
|
|||||||||
|
Grants
|
4,410,243
|
1,007,500
|
18,833
|
5,984,709
|
|||||||||
|
Product
sales
|
1,156,832
|
744,833
|
768,325
|
7,772,402
|
|||||||||
|
Total
revenues
|
12,835,345
|
2,596,377
|
1,620,498
|
25,399,546
|
|||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Cost
of product sales
|
384,727
|
147,849
|
185,891
|
2,039,341
|
|||||||||
|
Research
and development
|
8,481,105
|
9,599,310
|
10,558,174
|
90,255,973
|
|||||||||
|
Selling,
general and administrative
|
9,248,820
|
6,641,205
|
4,768,529
|
47,609,150
|
|||||||||
|
Acquired
in-process technology
|
—
|
14,981,816
|
—
|
22,331,918
|
|||||||||
|
Total
costs and expenses
|
18,114,652
|
31,370,180
|
15,512,594
|
162,236,382
|
|||||||||
|
Operating
loss
|
(5,279,307
|
)
|
(28,773,803
|
)
|
(13,892,096
|
)
|
(136,836,836
|
)
|
|||||
|
Interest
and other income
|
207,669
|
258,693
|
359,948
|
7,053,024
|
|||||||||
|
Interest
and other expense
|
(625,709
|
)
|
(28,952
|
)
|
—
|
(2,158,390
|
)
|
||||||
|
Derivative
revaluation
|
689,708
|
390,000
|
—
|
1,079,708
|
|||||||||
|
Net
loss
|
(5,007,639
|
)
|
(28,154,062
|
)
|
(13,532,148
|
)
|
(130,862,494
|
)
|
|||||
|
Non-cash
preferred dividends
|
—
|
—
|
1,448,505
|
||||||||||
|
Net
loss applicable to common stockholders
|
$
|
(5,007,639
|
)
|
$
|
(28,154,062
|
)
|
$
|
(13,532,148
|
)
|
$
|
(132,310,999
|
)
|
|
|
Basic
and diluted net loss per common share
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
$
|
(0.68
|
)
|
||||
|
Weighted
average common shares used in computing basic and diluted net loss
per
common share
|
28,497,364
|
22,020,689
|
19,963,552
|
||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive
Loss
|
Series
A Convertible
Preferred Stock |
Series
B Convertible
Preferred Stock |
Series
C Convertible
Preferred Stock |
Common
Stock
|
Additional
|
Accumulated
Other Comprehensive
|
Deficit
Accumulated During
the
Development
|
Total
Stockholders'
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid-In
Capital
|
Income
(Loss)
|
Stage
|
Deficit
|
||||||||||||||||||||||||||
|
Issuance
of convertible preferred stock, net of issuance cost through December
31,
2001
|
27,649
|
$
|
6,801,730
|
-
|
$
|
-
|
477,081
|
$
|
4,978,505
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
11,780,235
|
||||||||||||||||||
|
Issuance
of Series A convertible preferred stock and warrants to purchase
14,191
shares of Series A convertible preferred stock in exchange for
convertible
promissory notes and accrued interest through December 31,
2001
|
625,845
|
1,199,536
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,199,536
|
|||||||||||||||||||||||||
|
Issuance
of convertible preferred stock for services rendered, and license
agreement though December 31, 2001
|
50,110
|
173,198
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
173,198
|
|||||||||||||||||||||||||
|
Issuance
of Series B convertible preferred stock in exchange for convertible
promissory notes
|
-
|
-
|
12,750
|
114,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
114,000
|
|||||||||||||||||||||||||
|
Non-cash
preferred dividends
|
-
|
1,448,505
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,448,505
|
)
|
-
|
||||||||||||||||||||||||
|
Conversion
of preferred stock including dividends to common stock through
December
31, 2001
|
(703,604
|
)
|
(9,622,969
|
)
|
(12,750
|
)
|
(114,000
|
)
|
(477,081
|
)
|
(4,978,505
|
)
|
3,014,644
|
14,715,474
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Issuance
of warrants in connecton with notes payable in financing
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
487,333
|
-
|
-
|
-
|
487,333
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with private placement of common
stock in
July, 1997, net of issuance costs
|
-
|
-
|
-
|
-
|
-
|
-
|
1,547,827
|
3,814,741
|
-
|
-
|
-
|
3,814,741
|
|||||||||||||||||||||||||
The
accompanying notes are an integral part of these
financial statements.
F-5
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
(Continued)
|
|
Series
A Convertible Preferred Stock
|
Series
B Convertible
Preferred Stock |
Series
C Convertible
Preferred Stock |
Common
Stock
|
Additional
Paid-In
|
Accumulated
Other Comprehensive
|
Deficit
Accumulated During
the
Development
|
Total
Stockholders'
|
|||||||||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Stage
|
Deficit
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the public offering of common
stock in
November 1997, net of issuance cost
|
-
|
-
|
-
|
-
|
-
|
-
|
2,012,500
|
13,764,069
|
-
|
-
|
-
|
13,764,069
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the acquisition of Neptune
Pharmaceuticals
|
-
|
-
|
-
|
-
|
-
|
-
|
462,809
|
3,842,968
|
-
|
-
|
3,842,968
|
||||||||||||||||||||||||||
|
Issuance
of common stock in connection with IPO in Aug. 1995
|
-
|
-
|
-
|
-
|
-
|
-
|
1,322,500
|
6,383,785
|
-
|
-
|
-
|
6,383,785
|
|||||||||||||||||||||||||
|
Issuance
of common stock for cash through December 31, 2001
|
-
|
-
|
-
|
-
|
-
|
-
|
953,400
|
126,499
|
-
|
-
|
-
|
126,499
|
|||||||||||||||||||||||||
|
Issuance
of common stock for services rendered through December 31,
2001
|
-
|
-
|
-
|
-
|
-
|
-
|
269,115
|
24,261
|
-
|
-
|
-
|
24,261
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the private placement of common
stock
in July 1999, net of issuance costs
|
-
|
-
|
-
|
-
|
-
|
-
|
1,616,000
|
10,037,662
|
-
|
-
|
-
|
10,037,662
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the private placement of common
stock
in October 2000, net of issuance cost of $22,527
|
-
|
-
|
-
|
-
|
-
|
-
|
1,500,000
|
11,602,473
|
-
|
-
|
-
|
11,602,473
|
|||||||||||||||||||||||||
|
Repurchase
of common shares in 1992
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,586
|
)
|
(324
|
)
|
-
|
-
|
-
|
(324
|
)
|
||||||||||||||||||||||
|
Issuance
of common stock in exchange for notes payable
|
-
|
-
|
-
|
-
|
-
|
-
|
42,960
|
268,500
|
-
|
-
|
-
|
268,500
|
|||||||||||||||||||||||||
|
Fair
value of warrants issued in Quay acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
489,477
|
-
|
-
|
-
|
489,477
|
|||||||||||||||||||||||||
|
Compensation
expenses related to the extension of option exercise
periods
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
338,481
|
-
|
-
|
-
|
338,481
|
|||||||||||||||||||||||||
|
Common
stock issued in connection with Quay acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
169,224
|
977,105
|
-
|
-
|
-
|
977,105
|
|||||||||||||||||||||||||
|
Exercise
of options to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
432,377
|
1,545,728
|
-
|
-
|
-
|
1,545,728
|
|||||||||||||||||||||||||
The
accompanying notes are an integral part of these
financial statements.
F-6
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
(Continued)
|
|
Series
A Convertible Preferred Stock
|
Series
B Convertible
Preferred
Stock
|
Series
C Convertible
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Accumulated
Other Comprehensive
|
Deficit
Accumulated During
the
Development
|
Total
Stockholders'
|
|||||||||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Stage
|
Deficit
|
|||||||||||||||||||||||||
|
Exercise
of warrants to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
571,086
|
966,479
|
-
|
-
|
-
|
966,479
|
|||||||||||||||||||||||||
|
Compensation
expense related to options and warrants issued to
non-employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
951,263
|
-
|
-
|
-
|
951,263
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the public offering of common
stock in
June 2001, net of issuance costs of $184,795
|
-
|
-
|
-
|
-
|
-
|
-
|
2,747,143
|
15,199,206
|
-
|
-
|
-
|
15,199,206
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with Vaxis acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
533,612
|
3,852,631
|
-
|
-
|
-
|
3,852,631
|
|||||||||||||||||||||||||
|
Issuance
of common stock in connection with the achievement of Neptune
milestones
|
-
|
-
|
-
|
-
|
-
|
-
|
104,113
|
750,000
|
-
|
-
|
-
|
750,000
|
|||||||||||||||||||||||||
|
Unrealized
gain/(loss) on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
103,385
|
-
|
103,385
|
|||||||||||||||||||||||||
|
Gain/(loss)
on foreign currency translation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(19,927
|
)
|
-
|
(19,927
|
)
|
|||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(68,928,043
|
)
|
(68,928,043
|
)
|
|||||||||||||||||||||||
|
Total
Comprehensive Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(68,844,585
|
)
|
||||||||||||||||||||||||
|
Balances
at December 31, 2001
|
-
|
-
|
-
|
-
|
-
|
-
|
17,295,724
|
90,137,811
|
-
|
83,458
|
(70,376,548
|
)
|
19,844,721
|
||||||||||||||||||||||||
|
Exercise
of options to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
156,632
|
454,983
|
-
|
-
|
-
|
454,983
|
|||||||||||||||||||||||||
|
Issuace
of common stock in connection with the private placement of common
stock
in November 2002, net of issuance costs of $275,000
|
-
|
-
|
-
|
-
|
-
|
-
|
2,200,000
|
5,225,000
|
-
|
-
|
-
|
5,225,000
|
|||||||||||||||||||||||||
|
Compensation
expense related to option modifications
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
249,746
|
-
|
-
|
-
|
249,746
|
|||||||||||||||||||||||||
|
Compensation
expense for options related to non-employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
72,224
|
-
|
-
|
-
|
72,224
|
|||||||||||||||||||||||||
|
Components
of comprehensive loss:
|
|||||||||||||||||||||||||||||||||||||
|
Unrealized
gain/(loss) on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(82,916
|
)
|
-
|
(82,916
|
)
|
|||||||||||||||||||||||
|
Gain/(loss)
on foreign currency translation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
11,289
|
-
|
11,289
|
|||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,240,602
|
)
|
(15,240,602
|
)
|
|||||||||||||||||||||||
|
Total
Comprehensive Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,312,229
|
)
|
||||||||||||||||||||||||
|
Balances
at December 31, 2002
|
-
|
-
|
-
|
-
|
-
|
-
|
19,652,356
|
96,139,764
|
-
|
11,831
|
(85,617,150
|
)
|
10,534,445
|
||||||||||||||||||||||||
The
accompanying notes are an integral part of these
financial statements.
F-7
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
(Continued)
|
|
Series
A Convertible Preferred Stock
|
Series
B Convertible
Preferred
Stock
|
Series
C Convertible
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Accumulated
Other Comprehensive
|
Deficit
Accumulated During
the
Development
|
Total
Stockholders'
|
|||||||||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Stage
|
Deficit
|
|||||||||||||||||||||||||
|
Exercise
of options to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
273,196
|
537,700
|
-
|
-
|
-
|
537,700
|
|||||||||||||||||||||||||
|
Compensation
expense for options related to non-employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
153,784
|
-
|
-
|
-
|
153,784
|
|||||||||||||||||||||||||
|
Issuance
of shares to CEO upon renewal of employment contract
|
-
|
-
|
-
|
-
|
-
|
-
|
107,118
|
425,000
|
-
|
-
|
-
|
425,000
|
|||||||||||||||||||||||||
|
Issuance
of common stock for services
|
-
|
-
|
-
|
-
|
-
|
-
|
12,330
|
50,000
|
-
|
-
|
-
|
50,000
|
|||||||||||||||||||||||||
|
Financing
fees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(12,264
|
)
|
-
|
-
|
-
|
(12,264
|
)
|
|||||||||||||||||||||||
|
Components
of comprehensive loss:
|
|||||||||||||||||||||||||||||||||||||
|
Unrealized
gain/(loss) on investments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(424
|
)
|
-
|
(424
|
)
|
|||||||||||||||||||||||
|
Gain/(loss)
on foreign currency translation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
263,448
|
-
|
263,448
|
|||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,532,148
|
)
|
(13,532,148
|
)
|
|||||||||||||||||||||||
|
Total
Comprehensive Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,269,124
|
)
|
||||||||||||||||||||||||
|
Balances
at December 31, 2003
|
-
|
-
|
-
|
-
|
-
|
-
|
20,045,000
|
97,293,984
|
-
|
274,855
|
(99,149,298
|
)
|
(1,580,459
|
)
|
|||||||||||||||||||||||
|
Conversion
of common stock to shares with 0.0001 par value
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(97,291,979
|
)
|
97,291,979
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Exercise
of options to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
142,174
|
14
|
303,815
|
-
|
-
|
303,829
|
|||||||||||||||||||||||||
|
Compensation
expense for options related to non-employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
28,288
|
-
|
-
|
28,288
|
|||||||||||||||||||||||||
|
Compensation
expense related to option modifications
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
80,860
|
-
|
-
|
80,860
|
|||||||||||||||||||||||||
|
Issuance
of common stock and warrants in connection with the private placement
of
common stock in July 2004, net of issuance costs of
$16,741
|
-
|
-
|
-
|
-
|
-
|
-
|
3,020,000
|
302
|
10,310,402
|
-
|
-
|
10,310,704
|
|||||||||||||||||||||||||
|
Kingsbridge
drawdown, net of issuance costs of $156,928
|
-
|
-
|
-
|
-
|
-
|
-
|
246,399
|
25
|
843,043
|
-
|
-
|
843,068
|
|||||||||||||||||||||||||
|
Derivative
instrument in connection with Kingsbridge financing
|
(800,800
|
)
|
-
|
-
|
(800,800
|
)
|
|||||||||||||||||||||||||||||||
|
Issuance
of common stock in connection with the achievement of Neptune
milestones
|
-
|
-
|
-
|
-
|
-
|
-
|
204,918
|
20
|
749,980
|
-
|
-
|
750,000
|
|||||||||||||||||||||||||
|
Shares
issued in connection with the Biosyn acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
2,461,949
|
246
|
10,478,026
|
-
|
-
|
10,478,272
|
|||||||||||||||||||||||||
|
Options
issued in connection with the Biosyn acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
968,095
|
-
|
-
|
968,095
|
|||||||||||||||||||||||||
|
Components
of comprehensive loss
|
|||||||||||||||||||||||||||||||||||||
|
Gain/(loss)
on foreign currency translation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
29,389
|
-
|
29,389
|
|||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(28,154,062
|
)
|
(28,154,062
|
)
|
|||||||||||||||||||||||
|
Total
Comprehensive Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(28,124,673
|
)
|
||||||||||||||||||||||||
|
Balances
at December 31, 2004
|
-
|
-
|
-
|
-
|
-
|
-
|
26,120,440
|
$
|
2,612
|
$
|
120,253,688
|
$
|
304,244
|
$
|
(127,303,360
|
)
|
$
|
(6,742,816
|
)
|
||||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-8
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
(Continued)
|
|
Series
A Convertible
Preferred
Stock
|
Series
B Convertible
Preferred
Stock
|
Series
C Convertible
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Accumulated
Other Comprehensive
|
Deficit
Accumulated During
the
Development
|
Total
Stockholders'
|
|||||||||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Stage
|
Deficit
|
|||||||||||||||||||||||||
|
Exercise
of options to purchase common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
89,366
|
9
|
41,511
|
-
|
-
|
41,520
|
|||||||||||||||||||||||||
|
Compensation
expense for options related to non employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
651
|
-
|
-
|
651
|
|||||||||||||||||||||||||
|
Issuance
of common stock and warrants in connection with the private
placement of
common stock in May 2005, net of issuance cost of $233,000
|
-
|
-
|
-
|
-
|
-
|
-
|
3,621,819
|
362
|
5,720,826
|
-
|
-
|
5,721,188
|
|||||||||||||||||||||||||
|
Derivitative
instrument issued in connection with the May, 2005 PIPE
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(471,479
|
)
|
-
|
-
|
(471,479
|
)
|
|||||||||||||||||||||||
|
Components
of comprehensive loss
Gain/(Loss) on foreign currency translation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(29,148
|
)
|
-
|
(29,148
|
)
|
|||||||||||||||||||||||
|
Unrealized
Gain on Market Securities
|
-
|
-
|
-
|
-
|
-
|
2,591
|
8,598
|
-
|
11,189
|
||||||||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,007,639
|
)
|
(5,007,639
|
)
|
|||||||||||||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
- |
(5,025,598
|
)
|
||||||||||||||||||||||||
|
Balances
at December 31, 2005
|
-
|
$ |
-
|
-
|
$ |
-
|
-
|
$ |
-
|
29,831,625
|
$
|
2,983
|
$
|
125,547,788
|
$
|
283,694
|
$
|
(132,310,999
|
)
|
$
|
(6,476,534
|
)
|
|||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-9
(a
development stage company)
|
Years ended December 31,
|
Period from
June 26, 1989
(inception) to
December 31,
|
||||||||||||
|
2005
|
2004
|
2003
|
2005
|
||||||||||
|
Operating
activities
|
|||||||||||||
|
Net
loss.
|
$
|
(5,007,639
|
)
|
$
|
(28,154,062
|
)
|
$
|
(13,532,148
|
)
|
$
|
(130,862,494
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|||||||||||||
|
Acquired
in-process technology.
|
—
|
14,981,816
|
—
|
22,331,918
|
|||||||||
|
Depreciation
|
360,236
|
415,078
|
373,507
|
3,377,937
|
|||||||||
|
Bad
debt expense and other non-cash items.
|
199,798
|
—
|
—
|
199,798
|
|||||||||
|
Intangible
assets amortization
|
582,788
|
164,066
|
193,409
|
1,923,931
|
|||||||||
|
Loss
(gain) on sale of fixed assets.
|
1,000,840
|
30,710
|
666,875
|
1,611,949
|
|||||||||
|
Equity
compensation expense
|
651
|
109,149
|
578,784
|
2,300,299
|
|||||||||
|
Derivative
revaluation
|
(689,708
|
)
|
(390,000
|
)
|
—
|
(1,079,708
|
)
|
||||||
|
Interest
accretion on notes payable
|
531,759
|
—
|
—
|
531,759
|
|||||||||
|
PDI
Settlement
|
2,000,000
|
2,000,000
|
|||||||||||
|
Amortization
of discount on notes payable and deferred financing costs.
|
—
|
—
|
—
|
24,261
|
|||||||||
|
Issuance
of common stock for services
|
—
|
—
|
50,000
|
1,040,918
|
|||||||||
|
Issuance
of common stock for services rendered, interest and Neptune
milestones
|
—
|
750,000
|
—
|
1,317,503
|
|||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||||
|
Prepaid
expenses and other current assets.
|
(602,428
|
)
|
142,077
|
(3,566
|
)
|
(907,832
|
)
|
||||||
|
Accounts
receivable
|
(265,416
|
)
|
(398,900
|
)
|
72,833
|
(855,880
|
)
|
||||||
|
Other
assets
|
58,642
|
—
|
—
|
308,642
|
|||||||||
|
Accounts
payable
|
83,345
|
|
(285,952
|
)
|
720,061
|
474,271
|
|
||||||
|
Other
long term liabilities
|
(489,658
|
)
|
(261,807
|
)
|
—
|
(34,846
|
)
|
||||||
|
Deferred
revenue
|
(13,718,802
|
)
|
476,075
|
(832,000
|
)
|
925,273
|
|||||||
|
Accrued
expenses and other current liabilities.
|
(773,375
|
) |
(1,179,173
|
)
|
(1,057,540
|
)
|
(838,701
|
)
|
|||||
|
Net
cash provided by operating activities
|
(16,728,967
|
)
|
(13,600,923
|
)
|
(12,769,785
|
)
|
(96,211,002
|
)
|
|||||
|
Investing
activities
|
|||||||||||||
|
Purchases
of property and equipment
|
(103,497
|
)
|
(203,988
|
)
|
(362,335
|
)
|
(5,507,240
|
)
|
|||||
|
Purchases
of investments
|
(11,189
|
)
|
—
|
(11,019,220
|
)
|
(98,920,763
|
)
|
||||||
|
Sale
of investments.
|
—
|
—
|
5,334,000
|
43,509,646
|
|||||||||
|
Maturity
of investments
|
—
|
3,686,919
|
4,000,000
|
55,304,678
|
|||||||||
|
Proceeds
from restricted cash.
|
227,500
|
—
|
—
|
613,999
|
|||||||||
|
Proceeds
from sale of property
|
—
|
—
|
50,337
|
237,674
|
|||||||||
|
Acquisition
of Vaxis, Quay and Biosyn.
|
—
|
(303,966
|
)
|
—
|
(815,522
|
)
|
|||||||
|
Net
cash provided by (used in) investing activities
|
112,814
|
3,178,965
|
)
|
(1,997,218
|
)
|
(5,577,528
|
)
|
||||||
|
Financing
activities
|
|||||||||||||
|
Proceeds
from notes payable.
|
—
|
—
|
—
|
8,047,424
|
|||||||||
|
Issuance
of notes payable.
|
4,444,133
|
—
|
—
|
4,444,133
|
|||||||||
|
Repayment
of notes payable.
|
—
|
—
|
—
|
(6,610,608
|
)
|
||||||||
|
Net
proceeds from issuance of common stock
|
5,747,037
|
11,457,601
|
525,436
|
86,841,626
|
|||||||||
|
Other
assets
|
—
|
|
—
|
—
|
(614,000
|
)
|
|||||||
|
Issuance
of convertible preferred stock, net of issuance cost.
|
—
|
—
|
—
|
11,757,735
|
|||||||||
|
Deferred
financing costs.
|
—
|
—
|
—
|
(80,170
|
)
|
||||||||
|
Net
cash provided by (used in) financing activities
|
10,191,170
|
11,457,601
|
525,436
|
103,786,140
|
|||||||||
|
Effect
of exchange rate changes on cash.
|
(29,148
|
)
|
19,599
|
262,928
|
253,379
|
||||||||
|
Net
increase (decrease) in cash and cash equivalents.
|
(6,454,131
|
)
|
1,055,242
|
(13,978,639
|
)
|
2,250,989
|
|||||||
|
Cash
and cash equivalents, beginning of period.
|
8,705,120
|
7,649,878
|
21,628,517
|
—
|
|||||||||
|
Cash
and cash equivalents, end of period
|
$
|
2,250,989
|
$
|
8,705,120
|
$
|
7,649,878
|
$
|
2,250,989
|
|||||
The
accompanying notes are an integral part of these financial
statements
F-10
(a
development stage company)
|
Years ended December 31,
|
Period from
June 26, 1989
(inception) to
December 31,
|
||||||||||||
|
2005
|
2004
|
2003
|
2005
|
||||||||||
|
Supplemental
cash flow information
|
|||||||||||||
|
Interest
paid
|
$
|
85,958
|
$
|
—
|
$
|
—
|
$
|
725,945
|
|||||
|
Supplemental
disclosure of non-cash transactions:
|
|||||||||||||
|
Issuance
of common stock in connection with acquired-in-process
technology
|
—
|
—
|
—
|
7,350,102
|
|||||||||
|
Conversion
of preferred stock to common stock
|
—
|
—
|
—
|
14,715,474
|
|||||||||
|
Issuance
of common stock for notes payable
|
5,720,826
|
—
|
—
|
5,998,026
|
|||||||||
|
Issuance
of warrants in connection with Kingsbridge financing
|
—
|
800,800
|
—
|
800,800
|
|||||||||
|
Issuance
of warrants in connection with notes payable financing
|
471,479
|
—
|
—
|
958,812
|
|||||||||
|
Issuance
of convertible preferred stock for notes payable
|
—
|
—
|
—
|
1,268,316
|
|||||||||
|
Issuance
of common stock for milestone payments.
|
—
|
750,000
|
—
|
1,500,000
|
|||||||||
|
Fair
value of assets acquired net of liabilities assumed for Biosyn
acquisition
|
|
—
|
|
11,856,000
|
|
—
|
|
11,856,000
|
|||||
The
accompanying notes are an integral part of these
financial statements
F-11
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Description
of Business and Principles of Consolidation
The
consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Biosyn, Inc.
(“Biosyn”), Cellegy Australia Pty, Ltd. and Cellegy Canada, Inc. (collectively
the “Company” or “Cellegy”). Biosyn was acquired on October 22, 2004. Biosyn’s
results were included in consolidation from its date of acquisition. Cellegy
Canada, Inc.’s operations ceased in the fourth quarter of 2005 with all of the
subsidiary’s assets liquidated. Canada’s 2005 results were included in the
consolidation up until the liquidation. All inter-company balances and
transactions have been eliminated in consolidation.
Cellegy
is a development stage specialty biopharmaceutical company, originally
incorporated in California in 1989 and reincorporated in Delaware in 2004,
engaged in the development and commercialization of prescription drugs targeting
primarily women’s health care, including the reduction in transmitting of HIV,
female sexual dysfunction and gastrointestinal conditions using proprietary
topical formulations and nitric oxide donor technologies. In October 2004,
Cellegy completed the acquisition of Biosyn which is developing a portfolio
of
proprietary product candidates known as microbicides that are used
intravaginally to reduce transmission of sexually transmitted diseases, or
STDs,
including HIV/AIDS. Biosyn’s product candidates, which include both
contraceptive and non-contraceptive microbicides, include Savvy® (C31G vaginal
gel), which is undergoing Phase 3 clinical trials in the United States and
Africa; UC-781 vaginal gel, in Phase 1 trials; and Cyanovirin-N, in pre-clinical
development.
The
Company’s other products under development, Cellegesic™ (nitroglycerin ointment)
for the treatment of anal fissures and hemorrhoids, and Fortigel™ (testosterone
gel), a replacement therapy for male hypogonadism, have not yet been approved
for marketing by the United States FDA. However, Cellegesic is currently
approved for marketing in Australia, New Zealand, Singapore and South Korea
under the brand name Rectogesic®. The product has also been approved by the
United Kingdom’s Medicines and Healthcare Products Regulatory Agency in
August 2004 for sale in the United Kingdom. Fortigel was approved by the
Swedish Medical Products Agency in December 2004 for the treatment of male
hypogonadism under the brand name Tostrex.
Liquidity
and Capital Resources
We
prepared the financial statements assuming that we will continue as a going
concern, which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. At
December 31, 2005, we had a deficit accumulated during the development
stage of $132.3 million, negative cash flows from operations of $96.2 million,
and cash and cash equivalents of $2.3 million. We expect negative cash flow
from
operations to continue for the foreseeable future, with the need to continue
or
expand development programs and to commercialize products once regulatory
approvals have been obtained. We believe we do not have enough financial
resources to continue operations beyond April 2006. These factors raise
substantial doubt about our ability to continue as a going concern. Our plans,
with regard to these matters, include raising additional required funds through
one or more of the following options, among others: sales of assets, seeking
partnerships with other pharmaceutical companies or private foundations to
co-develop and fund our research and development efforts, pursuing additional
out-licensing arrangements with third parties, re-licensing and monetizing
in
the near term our future milestone and royalty payments expected from existing
licensees and seeking equity or debt financing. In addition, we will continue
to
implement further cost reduction programs and reduce discretionary spending,
if
necessary.
There
is
no assurance that any of the above options will be implemented on a timely
basis
or that we will be able to obtain additional financing on acceptable terms,
if
at all. Alternatively, we may be required to accept less than favorable
commercial terms in any such future arrangements. If adequate funds are not
available on acceptable terms, we could be required to delay development or
commercialization of certain products, to license to third parties the rights
to
commercialize certain products that we would otherwise seek to commercialize
internally or to reduce resources devoted to product development. In addition,
if we do not receive all, or a portion, of the planned Biosyn grant funding,
or
if such funding is delayed, this could impact our ability to complete our Biosyn
development programs on a timely basis, if at all. The financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty. Any failure to dispel any continuing doubts about our ability
to
continue as a going concern could adversely affect out ability to enter into
collaborative relationships with business partners, make it more difficult
to
obtain required financing on favorable terms or at all, negatively affect the
market price of our common stock and could otherwise have a material adverse
effect on our business, financial condition and results of
operations.
F-12
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosures of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk non-refundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
The
Company receives certain government and non-government grants that support
the
Company’s research effort in defined research projects. These grants generally
provide for reimbursement of approved costs incurred as defined in the various
grants. Revenues associated with these grants are recognized as costs under
each
grant are incurred. Advanced payments received under these agreements prior
to
completion of the related work are recorded as deferred revenue until earned.
Should the research funded by federal grants result in patented technologies,
the federal government would be entitled to a nonexclusive, nontransferable,
irrevocable, paid-up license to utilize such technologies.
At
December 31, 2005, $759,906 of grants receivable under research and
development agreements were unbilled. These amounts represent future billings
by
the Company for reimbursement of expenses funded by grants previously recorded
in grant revenue. Unbilled grants at December 31, 2004 were
$833,630.
Revenues
related to product sales are recognized when title has been transferred to
the
customer and when all of the following criteria are met: a persuasive evidence
of an arrangement exists, delivery has occurred or service has been rendered,
the price is fixed or determinable and collectibility is reasonably assured.
There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at
the
time the payment is received and are subsequently recognized as revenue on
a
straight-line basis over the longer of the life of the agreement or the life
of
the underlying patent.
Royalties
payable to Cellegy under these license agreements will be recognized as earned
when the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Research
and Development
Research
and Development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and number of subjects that have completed treatment for each
trial.
F-13
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Milestone
payments that are made upon the occurrence of future contractual events prior
to
receipt of applicable regulatory approvals are charged to research and
development expense. The Company may capitalize and amortize certain future
milestones and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of demand deposits and highly liquid financial
instruments with original maturities of three months or less. The carrying
value
of cash and cash equivalents approximates fair value at December 31, 2005
and 2004. The Company’s cash and cash equivalents are maintained at two
financial institutions in the United States, and one financial institution
in
Australia. Deposits in these financial institutions may, from time to time,
exceed federally insured limits.
Short
Term Investments
The
Company considers all of its investments as available-for-sale securities and
reports these investments at their estimated fair market value using available
market information. Unrealized gains or losses on available-for-sale securities
are included in stockholders’ deficit as other comprehensive income (loss) until
their disposition. The cost of securities sold is based on the specific
identification method.
Realized
gains or losses and declines in value deemed to be other than temporary on
available-for-sale securities are included in other income or
expense.
Restricted
Cash
Cash
held
by financial institutions to secure a letter of credit related to the Company’s
long-term lease was classified as restricted cash and was shown separately
in
the balance sheet as a non-current asset. In 2005 the lease was terminated
and
the letter of credit cancelled.
Concentration
of Credit Risk
At
December 31, 2005, the Company had its cash in money market funds.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
and
amortization of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets.
|
Estimated Useful Life
|
|||||
|
Furniture
and fixtures
|
3
years
|
||||
|
Office
equipment
|
3
years
|
||||
|
Laboratory
equipment
|
5
years
|
||||
Amortization
for leasehold improvements and equipment held under capital leases is taken
over
the shorter of the estimated useful life of the asset or the remaining lease
term. Upon sale or retirement, the asset’s cost and related accumulated
depreciation are removed from the accounts and the related gain or loss is
reflected in operations.
Goodwill
and Intangible Assets
Goodwill
represents the difference between the purchase price and the estimated fair
value of the net assets acquired when accounted for by the purchase method
of
accounting. In accordance with FAS 142, “Goodwill and Intangible Assets”, we do
not amortize goodwill. Management reviews goodwill for impairment either on
an
annual basis or quarterly if an event occurs that might reduce the fair value
of
the long-lived asset below its carrying value. All other long-lived and
intangible assets are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of the asset may not be recoverable.
An impairment loss would be recognized based on the difference between the
carrying value of the asset and its estimated fair value, which would be
determined based on either discounted future cash flows or other appropriate
fair value methods. The evaluation of goodwill and other intangibles for
impairment requires management to use significant judgments and estimates
including, but not limited to, projected future revenue, operating results
and
cash flows.
F-14
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
SFAS
No. 142 also requires that intangible assets with definite lives be
amortized over their estimated useful lives. The Company amortizes intangible
assets on a straight-line basis over their estimated useful lives.
Impairment
of Long Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes
in
business conditions indicate that these carrying values may not be recoverable
in the ordinary course of business. When such an event occurs, management
determines whether there has been impairment by comparing the anticipated
undiscounted future net cash flows to the related asset’s carrying value. If an
asset is considered impaired, the asset is written down to fair value, which
is
determined based either on discounted cash flows or appraised value, depending
on the nature of the asset.
Foreign
Currency Translation
The
foreign subsidiaries’ functional currencies are their local currencies. The
gains and losses resulting from translating the foreign subsidiaries’ financial
statements into United States dollars have been reported in other comprehensive
income (loss).
Comprehensive
Income (Loss)
Comprehensive
income (loss) generally represents all changes in stockholders’ deficit except
those resulting from investments or contributions by stockholders. The Company’s
unrealized gains and losses on available-for-sale securities and foreign
currency translation adjustments represent the only components of comprehensive
loss that are excluded from the Company’s net loss. Total accumulated other
comprehensive income consists of the following:
|
December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Gain
(loss) on foreign exchange translation
|
$
|
275,096
|
$
|
284,199
|
$
|
254,810
|
||||
|
Unrealized
gain (loss) on investments
|
8,598
|
20,045
|
20,045
|
|||||||
|
Accumulated
other comprehensive income (loss)
|
$
|
283,694
|
$
|
304,244
|
$
|
274,855
|
||||
Stock-Based
Compensation
The
Company accounts for its stock option grants in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”) and related Interpretations. The Company has elected to follow the
disclosure-only alternative prescribed by SFAS No. 123, “Accounting for
Stock-Based Compensation”, as amended by SFAS No. 148 “Accounting for
Stock-Based Compensation-Transition and Disclosure”. Under APB 25, compensation
expense is based on the difference, if any, on the date of the grant between
the
fair value of the Company’s common stock and the option’s exercise
price.
F-15
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Had
compensation cost for the Company’s stock-based compensation plans been
determined in a manner consistent with the fair value approach described in
SFAS
No. 123, the Company’s pro forma net loss and net loss per share as
reported would have been increased to the pro forma amounts indicated
below:
|
Years ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
loss, as reported
|
$
|
(5,007,639
|
)
|
$
|
(28,154,062
|
)
|
$
|
(13,532,148
|
)
|
|
|
Add:
Stock based employee costs included in reported net loss
|
—
|
80,860
|
425,000
|
|||||||
|
Deduct:
Stock-based employee compensation costs determined under the fair
value
based method for all awards
|
(421,750
|
)
|
(790,518
|
)
|
(1,839,447
|
)
|
||||
|
Net
loss, pro forma
|
$
|
(5,429,389
|
)
|
$
|
(28,863,720
|
)
|
$
|
(14,946,595
|
)
|
|
|
Basic
and diluted net loss per common share, as reported
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
$
|
(0.68
|
)
|
|
|
Basic
and diluted net loss per common share, pro forma
|
$
|
(0.19
|
)
|
$
|
(1.31
|
)
|
$
|
(0.75
|
)
|
|
The
Company valued its options on the date of grant using the Black-Scholes
valuation model with the following weighted average assumptions:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
2003
|
|||||
|
Risk-free
interest rate
|
4.4%
|
3.6%
|
2.9%
|
||||
|
Dividend
yield
|
0%
|
0%
|
0%
|
||||
|
Volatility
|
0.78
|
0.86
|
0.98
|
||||
|
Expected
life of options in years
|
5.9
|
4.3
|
4.3
|
||||
The
weighted average per share grant date fair value of options granted during
the
years ended December 31,
2005, 2004, and 2003 was $1.81, $4.37
and
$3.28 respectively.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”)
Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.” Under EITF Issue No. 96-18, the fair value of the equity
instrument is calculated using the Black-Scholes valuation model at each
reporting period with charges amortized to the results of operations over the
instrument’s vesting period.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment”, which replaces SFAS No. 123. SFAS No. 123R requires public
companies to recognize an expense for share-based payment arrangements including
stock options and employee stock purchase plans. The statement eliminates a
company’s ability to account for share-based compensation transactions using APB
25, and generally requires instead that such transactions be accounted for
using
a fair value based method. SFAS No. 123R requires an entity to measure the
cost of employee services received in exchanged for an award of equity
instruments based on the fair value of the award on the date of the grant,
and
to recognize the cost over the period during which the employee is to provide
service in exchange for the award. SFAS No. 123R is effective for public
companies with a fiscal year that begins after June 15, 2005. The cumulative
effect of this pronouncement when adopted by the Company, applied on a modified
prospective basis, would be measured and recognized starting the first quarter
of 2006. We anticipate that the impact of adopting SFAS No. 123R will result
in
an annual expense of approximately $292,000 based on known grants. Upon adoption
of SFAS No. 123R, companies are allowed to select one of three alternative
transition methods. Management is currently evaluating the transition methods,
as well as valuation methodologies and assumptions for employee stock options
in
light of SFAS No. 123R. Current estimates of option values using the
Black-Scholes method (as shown under “Stock Based Compensation”) may not be
indicative of results from valuation methodologies ultimately implemented by
the
Company upon adoption of SFAS No. 123R.
F-16
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3”. The statement
requires retrospective application of changes in accounting principle to prior
periods’ financial statements, unless it is impracticable to determine either
the period specific effects or the cumulative effect of the change. When it
is
impracticable to determine the period specific effects of an accounting change
on one or more individual prior periods presented, this statement requires
that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable, and that a corresponding adjustment be made to
the
opening balance of the retained earnings for that period rather than being
reported in the income statement. The statement also requires that a change
in
depreciation, amortization, or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate affected by a change
in accounting principle. This pronouncement is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The Company does not
believe adoption of SFAS 154 will have a material effect on its consolidated
financial position, results of operations or cash flows.
Basic
and Diluted Net Loss per Common Share
Basic
net
loss per common share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per common share
incorporates 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 common share, as presented in the statement of operations,
because all options and warrants are anti-dilutive. The total number of shares
that had their impact excluded were:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
2003
|
|||||
|
Options
|
3,658,764
|
4,345,777
|
4,198,216
|
||||
|
Warrants
|
2,374,593
|
|
945,869
|
—
|
|||
|
Total
number of shares excluded
|
6,033,357
|
5,291,646
|
4,198,216
|
||||
Excluded
also are 2,121,212 shares that would be issuable upon conversion of the PDI
Notes (see also Note 16).
Accounts
receivable consists of the following:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Unbilled
grants receivable
|
$ |
759,906
|
$ |
833,630
|
|||
|
Trade
receivables net of allowances of $35,000 in 2005
|
265,031
|
26,036
|
|||||
|
Other
receivables
|
60,298
|
26,144
|
|||||
|
Total
|
$ |
1,085,235
|
$ |
885,810
|
|||
F-17
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
At
December 31, 2005, the Company had an investment in Marketable Securities of
approximately $11,000. In January 2006 the investment was liquidated realizing
a
gain of approximated $8,500. At December 31, 2004, the Company had no
investments.
4.
Prepaid Expenses and Other Current Assets
At
December 31, 2005 and December 31, 2004 this account includes the
following:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Prepaid
Insurance
|
$ |
196,000
|
$ |
186,000
|
|||
|
Prepaid
Rent
|
35,000
|
—
|
|||||
|
Prepaid
Compensation
|
803,000
|
—
|
|||||
|
Inventory
|
351,000
|
52,000
|
|||||
|
Other
|
44,000
|
44,000
|
|||||
|
Total
|
$ |
1,429,000
|
$ |
282,000
|
|||
5. Intangible
Assets, net
The
Company’s intangible assets and related accumulated amortization at
December 31, 2005 and December 31, 2004, respectively, were as
follows:
|
December 31, 2005
|
December 31, 2004
|
||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||||||
|
Capitalized
non-compete agreement with Vaxis
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
463,544
|
$
|
(293,578
|
)
|
$
|
169,966
|
||||||
|
Capitalized
workforce—Biosyn acquisition
|
381,558
|
(185,354
|
)
|
196,204
|
635,504
|
(26,478
|
)
|
609,026
|
|||||||||||
|
$
|
381,558
|
$
|
(185,354
|
)
|
$
|
196,204
|
$
|
1,099,048
|
$
|
(320,056
|
)
|
$
|
778,992
|
||||||
Subsequent
to the purchase of Biosyn in 2004, several of its key people left the Company
in
2005. Their departure required the reduction in the carrying value of the work
force in place intangible asset recorded in 2004. Estimating the fair market
value of the key people remaining resulted in an impairment of the asset as
of
December 31, 2005 of approximately $254,000. This amount was recognized as
impairment expense in the fourth quarter of 2005.
In
2005,
Cellegy Canada, Inc. was liquidated and the intangible asset for the Vaxis
non-compete agreement was fully amortized. The $50,000 decrease in goodwill
in
2005 is due to changes in foreign currency.
Amortization
recorded for the years ended December 31, 2005, 2004 and 2003 were
approximately $324,000, $111,000 and $176,000, respectively.
F-18
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Estimated
amortization expense for each of the three years ended December 31, 2006
through 2008 is as follows:
|
Estimated
future amortization expense:
|
|||
|
For
the twelve months ended December 31:
|
|||
|
2006
|
$69,000
|
||
|
2007
|
$69,000
|
||
|
2008
|
$58,000
|
6. Property
and Equipment, net
Property
and equipment, net consist of the following:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Furniture
and fixtures
|
$
|
81,247
|
$
|
199,202
|
|||
|
Office
equipment
|
337,247
|
261,718
|
|||||
|
Laboratory
equipment
|
517,970
|
1,296,113
|
|||||
|
Leasehold
improvements
|
81,599
|
2,081,313
|
|||||
|
1,018,063
|
3,838,346
|
||||||
|
Less:
accumulated depreciation and amortization
|
(521,644
|
)
|
(1,885,938
|
)
|
|||
|
Total
|
$
|
496,419
|
$
|
1,952,408
|
|||
Depreciation
expense for the years ended December 31, 2005, 2004 and 2003 was
$360,000, $420,000 and 370,000 respectively. In March 2005, the Company
relocated its South San Francisco offices to Brisbane, California. At that
time
all leasehold improvements and some office equipment were left at the facility.
The Company received cash from the subsequent tenant for these items which
was
recognized as a net gain of approximately $484,000 on disposal of fixed assets.
In December 2005, the Company also wrote off assets for production equipment
and
leasehold improvements for production facilities. The loss on the disposal
of
these fixed assets for the year 2005 was approximately $324,000 and $105,000
respectively.
7. Accrued
Expenses and Other Current Liabilities
The
Company accrues for goods and services received but for which billings have
not
been received. Accrued expenses and other current liabilities at December 31,
2005 and 2004 were as follows:
|
Years ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Accrued
clinical expenses
|
$
|
641,995
|
$
|
612,937
|
|||
|
Accrued
legal fees
|
60,830
|
453,953
|
|||||
|
Accrued
employee bonuses, retention and severance
|
1,039,571
|
507,723
|
|||||
|
Accrued
consulting fees
|
45,934
|
339,142
|
|||||
|
Other
|
613,909
|
811,053
|
|||||
|
Total
|
$
|
2,402,239
|
$
|
2,724,808
|
|||
F-19
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
8.
Notes Payable
Ben
Franklin Note
Included
in notes payables is a note issued by Biosyn to Ben Franklin Technology Center
of Southeastern Pennsylvania (“Ben Franklin Note”) in October 1992 for funds
provided by Ben Franklin for the development of a compound to prevent
transmission of AIDS.
The
note
is recorded at its estimated fair value of $205,000 and was assumed by Cellegy
in connection with its acquisition of Biosyn. The repayment terms of the
non-interest bearing obligation include the remittance of an annual fixed
percentage of 3% applied to future revenues of Biosyn, if any, until the
principal balance of $777,902 is satisfied. Under the terms of the obligation,
revenues are defined to exclude the value of unrestricted research and
development funding received by Biosyn from non-profit sources. There is no
obligation to repay the amounts in the absence of future Biosyn revenues. The
Company will accrete the discount of $572,902 to earnings using the interest
rate method over the discount period of five years, which was estimated in
connection with the note’s valuation at the time of the acquisition.
PDI
Notes
The
notes
were issued in April 2005 by Cellegy to PDI, Inc. (“PDI”) pursuant to a lawsuit
settlement agreement signed by both parties in April 2005. The terms of the
notes issued to PDI are as follows:
The
$3.0 million secured promissory note has an outstanding balance of $2.8 million
and a net present value of $2.5 million at December 31, 2005 and is payable
in
October 2006. There is no stated interest rate and no periodic payments are
required. Cellegy is required to make current payments on the note to the
extent of (i) 50% of licensing fees, royalties or milestone payment, (or, in
each case, these payments in the nature thereof )received by Cellegy with
respect to any of Cellegy’s agreements or arrangements with respect to
Tostrex
or
Rectogesic
products
in territories outside of North America, and (ii) 50% of licensing fees,
royalties or milestone payments (or, in each case, other payments in the nature
thereof) received by Cellegy with respect to any of Cellegy’s agreements or
arrangements with respect to Fortigel in North American markets. These
payments are required to be made to PDI within two business days after Cellegy
receives the payments. Cellegy’s obligations under the note are secured by a
security interest in favor of PDI, which is reflected in a security agreement
between Cellegy and PDI, in Cellegy’s interests in the payments described above
and any proceeds therefrom (and certain related collateral). In addition,
Cellegy is required to make payments on the $3.0 million note with respect
to
10% of proceeds received by Cellegy in excess of $5.0 million from financing
transactions. Payments made in 2005 totaled $200,000.
Amounts
owed under the note may be accelerated upon an event of default, which is
defined to include, but not limited to, any of the following: Cellegy’s failure
to pay any amounts owed under the note when due; certain kinds of bankruptcy
filings or certain related actions or proceedings; any breach of any of
Cellegy’s covenants, conditions or agreements in the note or security agreement
following notice from PDI that remains uncured for 30 days; the security
interest no longer being a valid, perfected, first priority security interest;
and a default in indebtedness of Cellegy with an aggregate principal amount
in
excess of $2.0 million that results in the maturity of such indebtedness being
accelerated before its stated maturity. The net present value of collateralized
$3.0 million note will be recalculated based on its remaining principal whenever
a payment is made by Cellegy. Cellegy made a $100,000 payment to PDI in October
2005 shortly after the due date specified in the secured note and has paid
interest to PDI on that amount.
The
$3.5
million non-negotiable senior convertible debenture was recorded at a net
present value of $2.5 million as of December 31, 2005 and has a maturity date
of
April 11, 2008, three years from the PDI settlement date of April 11, 2005.
There is no stated interest rate and no periodic payments are required. Cellegy
may redeem the note at anytime before the maturity date upon prior notice to
PDI, at a redemption price equal to the principal amount. If Cellegy delivers
such a redemption notice, PDI may convert the note into shares of Cellegy common
stock at a price of $1.65 per share. In addition, after the 18th month
anniversary of the debenture, PDI may convert the note into Cellegy common
stock
at a price of $1.65 per share. If Cellegy does not redeem the note within the
first 18 months, then Cellegy has agreed to file a registration statement
relating to the possible resale of any shares issued to PDI after 18 months.
2,121,212 shares would be issuable upon such conversion. As long as amounts
are
owed under the note, Cellegy has agreed not to incur or become responsible
for
any indebtedness that ranks contractually senior or pari passu in right of
payment to amounts outstanding under the note. Events of default under the
senior note are generally similar to events of default under the secured
note.
F-20
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Cellegy
has classified the notes as current for financial reporting purposes
because of the payments expected to be made within the next year and due to
other uncertainties noted above. In addition, on December 1, 2005 the company
received a notice from PDI, Inc. notifying the company that PDI considers
Cellegy in default of the secured promissory note and the non-negotiable
convertible senior note which were part of the settlement entered into between
Cellegy and PDI on April 11, 2005. PDI’s notice states that PDI believes that
Cellegy is in material breach of the secured promissory note as a result of
Cellegy’s failure to notify PDI of the receipt of certain payments and of
Cellegy’s failure to pay amounts to which PDI believes it is entitled.
In
November 2005, Cellegy renegotiated its Exclusive License and Distribution
Agreement with ProStrakan Group Limited (“ProStrakan”)relating to Rectogesic.
Under the renegotiated agreement, ProStrakan assumed all responsibility for
manufacturing and product support functions and will purchase the product
directly from the manufacturer rather than purchasing from Cellegy under the
terms of the original agreement. In return, ProStrakan paid Cellegy $2.0
million. PDI claims that it is entitled to $1.0 million of that payment. Cellegy
does not agree that the payment made by ProStrakan falls within the definition
of “Pledged Collateral” in the settlement agreement and related documents and
does not believe that any amount is owed to PDI as a result of such payments.
The Company plans to vigorously defend itself against such claims.
The
Company accretes interest and principal to the PDI notes using a rate of 15%
using the effective interest rate method.
The
Ben
Franklin note has a face value of $778,000 and net present value of $205,000
at
December 31, 2005. The note has no scheduled repayment term. Payment
is based on 3% of Biosyn’s revenues excluding research and development
grants.
At
December 31, 2005, future minimum payments on the above notes were payable
as
follows (in thousands):
|
2006
|
$
|
2,800
|
||
|
2007
|
—
|
|||
|
2008
|
3,500
|
|||
|
2009
and thereafter
|
778
|
|||
|
Total
payments
|
7,078
|
|||
|
Less:
Amount representing discount
|
(1,897
|
)
|
||
|
Net
present value of notes at December 31, 2005
|
$
|
5,181
|
F-21
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements (Continued)
9.
Equity Financing
On
May
12, 2005, Cellegy raised approximately $5.7 million after offering expenses
in a
private placement of its common stock and warrants to existing and new
institutional and individual investors. The transaction consisted of the
sale of approximately 3,621,819 shares of common stock and the issuance of
Class
A Warrants to purchase approximately 714,362 shares of common stock at an
exercise price of $2.25 per share. The Class A Warrants can be called if
the Company’s common stock trades for 20 consecutive days over $5.00. The
Company also issued Class B Warrants to purchase approximately 714,362 shares
of
common stock at an exercise price of $2.50 per share. Class A and B
Warrants can be called by the Company if the Company’s closing bid price of a
share of Common Stock equals or exceeds $5.00 or $5.50, respectively, for any
twenty (20) consecutive trading days commencing after the Registration Statement
has been declared effective at a redemption price equal to $0.01 per share
of
common stock. Three directors of Cellegy purchased a total of 50,000
shares in the offering at the closing market price of the common stock on the
date of the transaction for $2.13 per share. The directors did not receive
any warrants. The purchase price for shares purchased by the non-director
investors was $1.65 per share. Pursuant to the transaction agreements, the
Company has filed a registration statement on Form S-3 with the Securities
and
Exchange Commission, which was declared effective on July 8, 2005, covering
the
possible resale of the shares from time to time in the future.
10.
Derivative Instruments
The
warrants are revalued at the end of each reporting period as long as they remain
outstanding. The estimated fair value of all warrants, using the Black-Scholes
valuation model, recorded as derivative liability at December 31, 2005 and
December 31, 2004 was $193,000 and $411,000. The changes in the estimated fair
value of the warrants have been recorded as other income and expense in the
income statement. For the years ended December 31, 2005 and December 31, 2004,
the Company recognized $689,000 and $390,000 respectively as other income from
derivative revaluation.
Current
and long-term deferred revenue totaling $3.4 million at December 31, 2005
and $15.1 million at December 31, 2004 represents the remaining unamortized
and unearned portion of upfront licensing fees received from licensees for
the
right to store, promote, sell and /or distribute the Company’s products. These
amounts include $6.5 million in income recognition as a result of the PDI
settlement in April 2005 with the remaining balances being amortized into income
over the life of the licensing agreement or the life of the patent for the
product being licensed, whichever is longer.
Operating
Leases
The
Company leases its facilities and certain equipment under non-cancelable
operating leases. Rent expense is recorded on a straight-line basis over the
term of the lease. During the third quarter of 2002, the Company subleased
a
portion of its facility. Rental income is recorded on a straight-line basis
over
the term of the sublease. The sublease was terminated in 2005 and the rental
income ceased as of the termination. Future minimum lease payments at
December 31, 2005, are as follows:
|
Years ended December 31,
|
Future Minimum
Lease Commitments
|
||||
|
2006
|
$
|
331,467
|
|||
|
2007
|
264,483
|
||||
|
2008
|
160,167
|
||||
|
Total
|
$
|
756,117
|
|||
F-22
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Rent
expense, net of sublease income, was $269,000, $382,000, and $336,000 for the
years ended December 31, 2005, 2004, and 2003, respectively. The Company
received $93,000, $149,000 and $148,000 in sublease income, which is reflected
in other income (expense), during the year ended December 31, 2005, 2004
and 2003, respectively.
Capital
Leases
Included
in property, plant and equipment is laboratory equipment and computer equipment
under long-term leases of $107,000, with related accumulated depreciation of
$53,000 which included an option to purchase the assets for a nominal cost
at
the termination of the lease. There were no capital lease assets and
amortization expenses
prior to the Biosyn acquisition. Future minimum lease payments for assets under
capital leases at December 31, 2005 are as follows:
|
Years
ended December 31:
|
||||
|
2006
|
$
|
55,000
|
||
|
2007
|
5,000
|
|||
|
Total
minimum lease payments
|
60,000
|
|||
|
Less
amount representing interest
|
(13,000
|
)
|
||
|
Present
value of minimum lease payments
|
47,000
|
|||
|
Less
current maturities
|
(44,000
|
)
|
||
|
Long-term
obligation
|
$
|
3,000
|
||
Other
Agreements
In
December 1997, the Company acquired patent and related intellectual
property rights relating to Cellegesic, a topical product candidate for the
treatment of anal fissures and hemorrhoids from Neptune Pharmaceuticals
Corporation. The agreement calls for a series of additional payments, payable
in
shares of common stock, upon successful completion of various development
milestones. Upon completion of certain milestones in 2001 and 2004, the Company
issued 104,113 and 204,918 shares of common stock, respectively, valued at
$750,000 for each of those milestones. These were charged to research and
development expense. The remaining milestones, if achieved, would become payable
over the next several years.
On
November 27, 2001, Cellegy acquired Vaxis Therapeutics Corporation
(“Vaxis”), a private Canadian company. The Vaxis purchase agreement contains
earn-out provisions through 2008 that are based on commercial sales of any
products developed by the Company or other revenues generated from the acquired
research. There have been no earn-out payments made under this agreement through
December 31, 2005. In 2005, Canadian operations were terminated and its
assets were liquidated.
Legal
Proceedings
In
October 2003, the Company received a communication from PDI invoking
mediation procedures under its exclusive license agreement with PDI relating
to
Fortigel. After mediation was completed in December 2003, both PDI and
Cellegy initiated litigation proceedings against each other. Cellegy filed
a
declaratory judgment action in federal district court in San Francisco against
PDI, and PDI initiated an action in federal district court in New York against
Cellegy.
On
April
11, 2005, Cellegy entered into a settlement agreement with PDI resolving
the
lawsuits that the companies had filed against each other. Under the terms
of the settlement agreement, the license agreement was terminated and all
product rights reverted to Cellegy. Under
the
settlement agreement, the previous license agreement was terminated and all
product rights reverted to Cellegy. Cellegy paid $2 million to PDI upon signing
the settlement agreement.
Cellegy
also issued a $3.0 million Secured Promissory Note to PDI, payable in 18
months,
with earlier payments of amounts owed under the note required to be made
to the
extent of 50% of licensing fees, royalties or milestone payments (or, in
each case, other payments in the nature thereof) received by Cellegy under
Cellegy’s agreements or arrangements with respect to Cellegy’s Tostrex®
(testosterone gel) and Rectogesic® (nitroglycerin ointment) products in
territories outside of North America, and 50% of licensing fees, royalties
or
milestone payments (or, in each case, other payments in the nature thereof)
received by Cellegy under Cellegy’s agreements or arrangements with respect to
Fortigel licensees in North American markets. These payments are required
to be made to PDI within two business days after Cellegy receives the
payments. These various payments will be made until the amount owed
under the note is paid in full. Cellegy’s obligations under the note are
secured by a security interest in favor of PDI, which is reflected in a security
agreement between Cellegy and PDI, in Cellegy’s interests in the payments
described above and any proceeds there from (and certain related
collateral). In addition, Cellegy is required to make payments on the $3.0
million note with respect to 10% of proceeds received by Cellegy in excess
of $5 million from financing transactions. Payments made in 2005 totaled
$200,000. Amounts owed under the note may be accelerated upon an event of
default, which include (but are not limited to) certain kinds of bankruptcy
filings or certain related actions or proceedings, an uncured
material breach of Cellegy’s obligations under the note, the security interest
no longer being a valid, perfected, first priority security interest, and
a
default in indebtedness of Cellegy with an aggregate principal amount in
excess
of $2 million that results in the maturity of such indebtedness being
accelerated before its stated maturity. Cellegy made a $100,000 payment to
PDI
in October 2005 shortly after the due date specified in the secured note
and has
paid interest to PDI on that amount. Cellegy also issued to PDI a $3.5 million
principal amount Convertible Senior Note due April 11, 2008. Cellegy may
redeem the note at any time before the maturity date upon not less than 30
or
more than 60 days notice to PDI, at a redemption price equal to the principal
amount; if Cellegy delivers such a redemption notice, PDI may convert the
note
into shares of Cellegy common stock at a price of $1.65 per share. In
addition, after the 18 month anniversary of the debenture, PDI may convert
the
note into Cellegy common stock at a price of $1.65 per share. If Cellegy
does redeem the note within the first 18 months; then Cellegy has agreed
to file
a registration statement relating to possible resale of any shares issued
to PDI
after 18 months. 2,121,212 shares would be issuable upon
such conversion. As long as amounts are owed under the note, Cellegy
has agreed not to incur or become responsible for any indebtedness that ranks
contractually senior or pari passu in right of payment to amounts outstanding
under the note. Events of default under the senior note are generally
similar to events of default under the secured note.
F-23
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
The
Company maintains a savings and retirement plan under
Section 401(k) of the Internal Revenue Code. All employees are
eligible to participate on the first day of the calendar quarter following
three
months of employment with the Company. Under the plan, employees may contribute
up to 15% of salaries per year subject to statutory limits. The Company provides
a matching contribution equal to 25% of the employee’s rate of contribution, up
to a maximum contribution rate of 4% of the employee’s annual salary. Expenses
related to the plan for the years ended December 31, 2005, 2004 and 2003
were not significant.
Biosyn
Acquisition
On
October 22, 2004, Cellegy completed its 100% acquisition of Biosyn,
developer of a contraceptive gel product for the reduction in transmission
of
HIV/AIDS in women. The acquisition was accounted for as an acquisition of assets
as the operations of Biosyn did not meet the definition of a business as defined
in Emerging Issues Task Force Issue No. 98-3 “Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”.
Assets acquired and liabilities assumed were recorded at their estimated fair
values. The value of the merger consideration, including certain acquisition
and
closing costs, exceeded the fair value of the net assets acquired. In accordance
with paragraph 9 of Statement of Financial Accounting Standards No. 142
“Goodwill and Other Intangible Assets”, such excess was allocated among the
relative fair values of the assets acquired. Amounts allocated to identifiable
intangible assets are amortized over their estimated useful lives. Amounts
allocated to purchased research and development were expensed immediately.
Under
the terms of the acquisition, 12,000 preferred shares and 5,031,267 shares
of
Biosyn common stock outstanding at the closing of the acquisition were exchanged
for approximately 2,462,000 shares of Cellegy’s common stock. Cellegy also
liquidated approximately $3.5 million of Biosyn’s debt at the time of the
acquisition.
In
addition, outstanding Biosyn stock options and warrants were assumed by Cellegy
and converted into options and warrants to purchase 318,504 shares of Cellegy
common stock. The options issued to acquire Cellegy common stock are fully
vested and exercisable. The exercise prices of the options and warrants were
adjusted by the exchange ratio in the transaction. The expiration date and
other
terms of the converted options and warrants remain the same.
The
purchase price is as follows:
|
Issuance
of Cellegy common stock
|
$
|
10,478,000
|
||
|
Value
of replacement options and warrants to acquire Cellegy common
stock
|
968,000
|
|||
|
Transaction
costs
|
410,000
|
|||
|
Total
purchase price
|
$
|
11,856,000
|
The
total
purchase price above does not include any provisions for contingent milestone
payments of up to $15.0 million, which would be payable to Biosyn shareholders
on the achievement of C31G marketing approval in the United States and a portion
of which will be payable upon commercial launch in major overseas
markets.
The
fair
value of the Cellegy shares used in determining the purchase price was $4.26
per
common share. The fair value of the converted options and warrants issued by
Cellegy was determined using the Black-Scholes option pricing model assuming
a
market price of $4.26 per share, exercise prices ranging from $0.06 to
$21.02 per
share
and averaging $5.89 per share, expected lives ranging from 0.2 to 4.3 years
and
averaging 3.7 years, risk free interest rates ranging from 1.50% to 3.36% and
averaging 3.13%, and volatility ranging from 27% to 92% and averaging
77%.
The
allocation of purchase price at the acquisition date of October 22, 2004 is
as follows:
|
Current
assets
|
$
|
300,000
|
||
|
Property
and equipment
|
299,000
|
|||
|
Acquired
work force
|
635,000
|
|||
|
Purchased
research and development
|
14,982,000
|
|||
|
Current
liabilities
|
(4,225,000
|
)
|
||
|
Long
term debt and capital leases
|
(135,000
|
)
|
||
|
Net
assets
|
$
|
11,856,000
|
F-25
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
The
purchase price allocation was based on the estimated fair values of the assets
and liabilities assumed at the date of the closing of the
acquisition.
The
results of the valuation of the purchased research and development was $17.0
million using primarily the income approach and applying risk-adjusted discount
rates to the estimated future revenues and expenses attributable to in-process
drug development programs. The most significant in-process program relates
primarily to the development of a microbacidal vaginal gel, which may have
the
potential to prevent HIV / AIDS and other sexually transmitted diseases in
women. This product candidate, called Savvy® (C31G vaginal gel), has an
estimated fair value of $15.4 million. Two other development programs, called
UC-781 and Cyanovirin-N, have a combined estimated fair value of $1.6 million.
The in-process C31G program requires significant additional scientific and
clinical testing which for purposes of this valuation is expected to be
completed in the second half of 2006 with cash inflows from product sales in
the
United States forecasted to begin in 2007, assuming no unforeseen adverse events
or delays and assuming that regulatory approvals are obtained. The C31G Phase
3
clinical trials are approximately 40% complete based on cost and patient
enrollment. The UC-781 and Cyanovirin-N development programs are at a much
earlier stage than C31G. Additional manufacturing optimization and development
expenses associated with completing the clinical trials, as well as legal and
regulatory expenses relating to the drug approval process, will be required
to
gain marketing acceptance.
The
primary risk in completing the projects is the successful completion of the
clinical testing and the regulatory review process. This process is time
consuming and expensive, subject to significant challenges and risks before
the
products can be approved and commercialized. The Company must demonstrate
product safety and efficacy to standards agreed to with regulatory authorities.
Unsuccessful clinical results or delays in the approval process could have
significant consequences, jeopardizing marketing launch of the product resulting
in lower potential revenues and lowered economic returns.
Under
the
income approach, value is based on the calculation of the present value of
future economic benefits to be derived from the ownership of the assets,
analyzing the earnings potential of the in-process development programs while
factoring in the underlying risk associated with obtaining those earnings.
Value
indications were developed by discounting future net cash flows to their present
value using market-based rates of return. For C31G, discount rates ranging
from
34% - 37% were applied to cash flows with an additional approximate 52%
probability applied to the cash flows representing, for purposes of this
valuation, the estimated probability of the C31G Phase 3 trials beings
successful and ultimately receiving FDA approval in the United States. These
factors are commensurate with the overall risk and percent complete of the
C31G
program. Because of the earlier development stage of the UC-781 and Cyanovirin-N
in-process programs, the primary valuation method
used for these potential products was the current transaction approach. This
uses management’s estimated value of the consideration paid for the
acquisition.
Management
has concluded that technological feasibility of the purchased in-process
research and development has not yet been reached and that the technology had
only limited alternative future uses, if any. Accordingly, the amount allocated
to purchased research and development was charged to the statement of
operations. In addition to the income and the current transaction approaches,
other methodologies including the cost and comparable transaction approaches,
were considered to validate the results obtained. These other approaches were,
however, given a minor weighting in achieving the valuations. The results of
these approaches do not necessarily indicate what a third party would be willing
to pay to acquire the in-process projects.
An
aggregate amount of $15.0 million was allocated to purchased research and
development. The estimated fair the value of the purchased research and
development was reduced by $2.0 million of the amount by which fair value of
the
net asset acquired exceeded the value of the acquisition consideration. The
Company recorded a non-cash charge to operations in the fourth quarter of 2004
of $15.0 million for the purchased research and development.
F-26
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
The
acquisition was completed on October 22, 2004 and Biosyn’s results of
operations subsequent to that date are included in the Company’s consolidated
statements of operations. The Company has prepared unaudited pro forma financial
information showing revenues and net loss for the combined entity for the years
ended December 31, 2004 and 2003, respectively, as if the merger occurred
as of the beginning of those periods. The following unaudited pro forma
financial information is not intended to represent or be indicative of the
consolidated results of operations of the Company that would have been reported
had the acquisition been completed as of the dates presented and should not
be
taken as representative of the future consolidated results of operations or
financial condition of the Company.
|
Years Ended December 31,
|
|||||||
|
2004
|
2003
|
||||||
|
Revenues
|
$
|
6,304,377
|
$
|
6,847,023
|
|||
|
Net
loss
|
(14,028,996
|
)
|
(16,444,850
|
)
|
|||
|
Basic
and diluted net loss per common share
|
$
|
(0.64
|
)
|
$
|
(0.73
|
)
|
|
Cellegy
In
December 2002, Cellegy entered into a license agreement, or the PDI
Agreement, with PDI, Inc., or PDI, granting PDI the exclusive right to
store, promote, sell and distribute Fortigel in North American markets. Cellegy
received an upfront payment of $15.0 million on the effective date of
December 31, 2002 with an additional $10.0 million payable no later than
thirty days after the Company certifies to PDI that Fortigel has received all
FDA approvals required to manufacture, sell and distribute the product in the
United States. The Company recorded costs of $947,000 to selling, general and
administrative expenses associated with an investment banking fee for the year
ended December 31, 2002 related to the PDI Agreement. Under the PDI
Agreement, the Company would also receive royalties each year until the
expiration of the last patent right related to Fortigel of 20% - 30% of net
sales and the Company would be reimbursed for 110% of burdened costs for any
product supplied to PDI. In April 2005, pursuant to a settlement with PDI
concerning litigation initiated in December of 2003, the companies terminated
their agreement and all rights to Fortigel reverted back to Cellegy. See also
Note 12.
In
July 2004, Cellegy and ProStrakan entered into to an exclusive license
agreement for the future commercialization of Tostrex® (testosterone gel) in
Europe. Under the terms of the agreement, ProStrakan will be responsible for
regulatory filings, sales, marketing and distribution of Tostrex throughout
the
European Union and in certain nearby non-EU countries. Under the original
agreement, the Company was responsible for supplying finished product to
ProStrakan through Cellegy’s contract manufacturer. Assuming successful
commercial launch, Cellegy could receive up to $5.75 million in total payments
including a $500,000 non-refundable upfront payment made in July 2004, and
a royalty on net sales of Tostrex. The advanced payment received by the Company
was recorded as deferred revenue to be amortized to income over eighteen years,
which represents the estimated life of the underlying patent.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan will assume
responsibility for all manufacturing and other product support functions and
will purchase Tostrex directly from Cellegy’s contract manufacturer rather than
purchasing the product from Cellegy under the terms of the original agreement.
Cellegy will continue to receive milestones and royalties as set forth in the
original agreement.
In
December 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the commercialization of Cellegesic, branded Rectogesic outside
of
the United States, in Europe. Under the terms of the agreement, Cellegy received
a non-refundable payment of $1.0 million and is entitled to receive an
additional $4.6 million in milestone payments, along with additional payments
based on sales of product to ProStrakan for distribution in Europe. ProStrakan
will be responsible for additional regulatory filings, sales, marketing and
distribution of Rectogesic throughout Europe. In all, the agreement covers
38
European territories, including all EU member states. Cellegy will be
responsible for supplying finished product to ProStrakan through its contract
manufacturer. In addition, ProStrakan has granted a right of first negotiation
to Cellegy for its oral estradiol-glucoside product, which is currently in
Phase
1 clinical development or an alternative product in the area of
gastroenterology. The $1.0 million upfront fee received by the Company is being
amortized to income over 10 years, which represents the estimated life of the
underlying patent.
F-27
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
In
November 2005, the Company amended its 2004 agreement with ProStrakan concerning
Rectogesic. Under
the
terms of the amended agreement, ProStrakan will assume responsibility for all
manufacturing and other product support functions and will purchase Rectogesic
directly from Cellegy’s contract manufacturer rather than purchasing the product
from Cellegy under the terms of the original agreement. In return, Cellegy
received a non-refundable payment of $2.0 million and may receive future
milestone payments of up to $750,000 upon approval of the product in certain
major European countries. The $2.0 million payment is being amortized to income
over the remaining estimated life of the underlying patent considered in
connection with the 2004 agreement.
Biosyn
In
October 1989, Biosyn entered into an agreement whereby it obtained an
exclusive license to develop and market products using the C31G Technology.
In
October 1996, Biosyn acquired the C31G Technology from the entity that
originally licensed the technology to Biosyn. As part of the agreement, Biosyn
is required to make annual royalty payments equal to the sum of 1% of net
product sales of up to $100 million, 0.5% of the net product sales over $100
million and 1% of any royalty payments received by Biosyn under license
agreements. The term of the agreement lasts until December 31, 2011 or upon
the expiration of the C31G Technology’s patent protection, whichever is later.
Biosyn’s current C31G patents expire between 2011 and 2018.
In
May 2001, Biosyn entered into an exclusive license agreement with Crompton
Corporation under which Biosyn obtained the rights to develop and commercialize
UC-781, a non-nucleoelostide reverse transcriptase inhibitor, as a topical
microbicide. Under the terms of the agreement, Biosyn paid Crompton a
nonrefundable, upfront license fee that was expensed in research and
development. Crompton also received a warrant to purchase Biosyn common stock,
which converted into a Cellegy warrant in connection with the acquisition and
is
exercisable for a period of two years upon initiation of Phase 3 trials of
UC-781. Crompton is entitled to milestone payments upon the achievement of
certain development milestones and royalties on product sales. If UC-781 is
successfully developed as a microbicide, then Biosyn has exclusive worldwide
commercialization rights.
In
February 2003, Biosyn acquired exclusive worldwide rights from the National
Institutes of Health, or NIH, for the development and commercialization of
protein Cyanovirin-N as a vaginal gel to prevent the sexual transmission of
HIV.
NIH is entitled to milestone payments upon achievement of certain development
milestones and royalties on product sales.
On
February 1, 2006 Cellegy announced that it had entered into a non-exclusive,
developing world licensing agreement with CONRAD for the collaboration on the
development of Cellegy’s entire microbicide pipeline. The agreement encompasses
the licensing in the developing countries (as defined in the agreements) of
Savvy clinical trials in the United States and Africa; UC-781, currently in
expanded Phase 1 trials in the United States and Thailand; and Cyanovirin-N,
currently in pre-clinical development.
Under
the
terms of certain of its funding agreements, Biosyn has been granted the right
to
commercialize products supported by the funding in developed and developing
countries, and is obligated to make its commercialized products, if any,
available in developing countries, as well as to public sector agencies in
developed countries at prices reasonably above cost or at a reasonable royalty
rate.
Biosyn
has entered into various other research and technology agreements. Under these
other agreements, Biosyn is working in collaboration with various other parties.
Should any discoveries be made under such arrangements, Biosyn may be required
to negotiate the licensing of the technology for the development of the
respective discoveries. There are no significant funding commitments under
any
of these other agreements.
F-28
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Common
Stock Private Placements
In
January 2004, the Company entered into a Structured Secondary Offering
facility agreement with Kingsbridge Capital Limited (“Kingsbridge SSO”). The
Kingsbridge SSO requires Kingsbridge to purchase up to 3.74 million shares
of
newly issued common stock at times and in amounts selected by Cellegy over
a
period of up to two years, subject to certain restrictions. The Company filed
a
registration statement with the SEC, which was subsequently amended and declared
effective on June 1, 2004. The Kingsbridge SSO agreement does not prohibit
additional debt or equity financings, including Private Investment in Public
Equity (“PIPEs”), shelf offerings, secondary offerings or any other non-fixed or
future priced securities. If the common stock falls below $1.25 per share,
Cellegy will not be able to conduct drawdowns on the Kingsbridge SSO. The timing
and amount of any draw downs are at Cellegy’s sole discretion, subject to
certain timing conditions, and are limited to certain maximum amounts depending
in part on the then current market capitalization of the Company. The purchase
price of the common stock will be at discounts ranging from 8% to 12% of the
average market price of the common stock prior to each future draw down. The
lower discount applies to higher stock prices. In connection with the agreement,
Cellegy issued warrants to Kingsbridge to purchase 260,000 common shares at
an
exercise price of $5.27 per share. Cellegy can, at its discretion and based
on
its cash needs, determine how much, if any, of the equity line it will draw
down
in the future, subject to the other conditions in the agreement. The Company
completed two drawdowns in 2004, issuing a total of 246,399 common shares
resulting in net proceeds of approximately $0.8 million.
In
July 2004, Cellegy completed a private placement financing, primarily with
existing institutional stockholders, issuing 3,020,000 common shares and
warrants to purchase 604,000 shares of common stock, with an offering price
of
the common shares of $3.42 per share and the exercise price of the warrants
of
$4.62 per share. Net proceeds were $10.3 million.
On
May
12, 2005, Cellegy raised approximately $5.7 million after offering expenses,
in
a private placement of its common stock and warrants, to existing and new
institutional and individual investors. The transaction consisted of the
sale of approximately 3,621,819 shares of common stock. The Company also
issued Class A Warrants to purchase approximately 714,362 shares of common
stock
at an exercise price of $2.25 per share. The Class A warrants can be
called by the Company if the Company’s common stock trades for 20 consecutive
days over $5.00. The Company also issued Class B Warrants to purchase
approximately 714,362 shares of common stock at an exercise price of $2.50
per
share. Class A and B Warrants can be called by the Company if the
Company’s closing bid price of a share of Common Stock equals or exceeds $5.00
or $5.50, respectively, for any twenty (20) consecutive trading days commencing
after the Registration Statement has been declared effective at a redemption
price equal to $0.01 per share of common stock. Three directors of Cellegy
purchased a total of 50,000 shares in the offering at the closing market price
of the common stock on the date of the transaction for $2.13 per share.
The directors did not receive any warrants. The purchase price for shares
purchased by the non-director investors was $1.65 per share. Pursuant to
the transaction agreements, the Company has filed a registration statement
on
Form S-3 with the Securities and Exchange Commission, which was declared
effective on July 8, 2005, covering the possible resale of the shares from
time
to time in the future.
PDI
Senior Convertible Debenture
As
more
fully described in Note 8, “Notes Payable”, Cellegy issued a $3.5 million
senoior convertible debenture to PDI in 2005 in connection with the settlement
of its lawsuit with PDI. Cellegy may redeem the note at any time before the
maturity date upon prior notice to PDI, at a redemption price equal to the
principal amount. If Cellegy delivers such a redemption notice, PDI may convert
the note into shares of Cellegy common stock at a price of $1.65 per share.
In
addition, after the 18th month anniversary of the debenture, PDI may convert
the
note into Cellegy common stock at a price of $1.65 per share. If Cellegy does
not redeem the note within the first 18 months, then Cellegy has agreed to
file
a registration statement relating to the possible resale of any shares issued
to
PDI after 18 months. 2,121,212 shares would be issuable upon such
conversion.
F-29
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Delaware
Reincorporation
In
September 2004, the Company reincorporated in the state of Delaware. In
connection with the reincorporation, each outstanding share of Cellegy
California common stock, no par value, was automatically converted into one
share of Cellegy Delaware common stock, $0.0001 par value per share. Each stock
certificate representing issued and outstanding shares of Cellegy California
common stock continues to represent the same number of shares of Cellegy
Delaware common stock. The Company recorded as additional paid-in capital,
the
cumulative excess value of the no par common shares that were converted to
shares with par value of $.0001 as of the reincorporation date.
Preferred
Stock
The
Company’s Restated Certificate of Incorporation provides that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The
Board
of Directors is authorized to establish from time to time the number of shares
to be included in, and the designation of, any such series and to determine
or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and to increase
or
decrease the number of shares of any such series without any further vote or
action by the stockholders.
Stock
Market Listing
On
September 14, 2005 the Company received a determination letter from the Nasdaq
Listing Qualifications Panel transferring its stock listing to the Nasdaq Small
Cap Market. On December 29, 2005 Cellegy was delisted from the Nasdaq Small
Cap
Market. The delisting resulted from the Company not satisfying the $35 million
market capitalization requirement under Nasdaq Marketplace Rule
4310(c)(2)(B)(ii). The Company also does not comply with alternative standards
for continued listing on the Nasdaq Small Cap Market. The Company’s
stock
currently trades on the Over the Counter Bulletin Board.
Stock
Option Plans
2005
Equity Incentive Plan
The
Company’s Stockholders approved a new 2005 Equity Incentive Plan (the “2005
Plan”) at the Annual Meeting of Stockholders held September 28, 2005. The 2005
Plan replaces the 1995 Equity Incentive Plan (“Prior Plan”) which had
expired. The 2005 Plan will be administered by the Board and the Board has
delegated administration to the Compensation Committee. The Board of Directors
may at any time amend, alter, suspend or discontinue the 2005 Plan without
stockholder approval, except as required by applicable law. The 2005 Plan is
not
subject to the ERISA and is not qualified under Section 401(a) of the
Code.
The
2005
Plan provides for the grant of options and other awards to employees, directors
and consultants. Options granted under the 2005 Plan may be either incentive
stock options or nonqualified stock options. Incentive stock options may be
granted only to employees. The Compensation Committee determines who will
receive options or other awards under the 2005 Plan and their terms, including
the exercise price, number of shares subject to the option or award, and the
vesting and exercisability thereof. Options granted under the 2005 Plan
generally have a term of ten years from the grant date, and exercise price
typically is equal to the closing price of the common stock on the grant date.
Options typically vest over a three-year or four-year period. Options granted
under the 2005 Plan typically expire if not exercised within 90 days from the
date on which the optionee is no longer an employee, director or consultant.
The
vesting and exercisability of options may also be accelerated upon certain
change of control events. As of December 31, 2005 there were outstanding options
to purchase 49,500 shares under the 2005 Plan and 950,500 shares were available
for options or other awards under the 2005 Plan.
F-30
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
|
Shares
Under
Option
|
Weighted
Average
Exercise Price
|
||||||
|
Beginning
Balance
|
-
|
$ |
-
|
||||
|
Granted
|
49,500
|
1.34
|
|||||
|
Canceled
|
-
|
-
|
|||||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2005
|
49,500
|
1.34
|
|||||
The
following table summarizes those stock options outstanding related to the 2005
Plan at December 31, 2005:
|
Options Outstanding
|
||||||||||
| Range of Exercise Prices |
Weighted
Average
Number of
Options
|
Weighted
Average
Remaining
Contractual Life
|
ExercisePrice
|
|||||||
|
$1.34
|
48,000
|
9.6
years
|
$ | 1.34 | ||||||
|
$1.35
- $1.60
|
1,500
|
9.7
years
|
1.39
|
|||||||
|
Total
|
49,500
|
9.7
years
|
1.34 | |||||||
There
were no options exercisable under the 2005 plan as of December 31,
2005.
Prior
Plan
The
total
number of shares reserved and available for issuance pursuant to the exercise
of
Awards under the Prior Plan is 4,850,000 shares. The Prior Plan will continue
to
govern the stock options previously granted under the Prior Plan. However,
no
further stock options or other awards will be made pursuant to the Prior
Plan.
|
Shares
Under
Option
|
Weighted
Average
Exercise Price
|
||||||
|
Balance
at December 31, 2002
|
3,962,492
|
$4.83
|
|||||
|
Granted
|
363,500
|
3.05
|
|||||
|
Canceled
|
(1,123,080
|
)
|
5.11
|
||||
|
Exercised
|
(273,196
|
)
|
1.97
|
||||
|
Balance
at December 31, 2003
|
2,929,716
|
4.77
|
|||||
|
Granted
|
35,000
|
4.47
|
|||||
|
Canceled
|
(29,900
|
)
|
3.73
|
||||
|
Exercised
|
(133,174
|
)
|
2.10
|
||||
|
Balance
at December 31, 2004
|
2,801,642
|
4.90
|
|||||
|
Granted
|
287,150
|
1.89
|
|||||
|
Exercised
|
(14,920
|
)
|
2.35
|
||||
|
Cancelled
|
(835,135
|
)
|
4.54
|
||||
|
Balance
at December 31, 2005
|
2,238,737
|
4.67
|
|||||
The
following table summarizes those stock options outstanding and exercisable
related to the Prior Plan at December 31, 2005:
F-31
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||
|
Range of Exercise Prices
|
Weighted
Average Number of Options |
Weighted
Average
Remaining
Contractual Life
|
Exercise
Price
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
||||||||||||
|
$1.35
- $2.30
|
618,952
|
5.4
years
|
$1.85
|
361,802
|
$1.80
|
||||||||||||
|
$2.89
- $4.00
|
563,951
|
2.5
years
|
3.50
|
520,119
|
3.55
|
||||||||||||
|
$4.38
- $6.50
|
506,000
|
1.7
years
|
5.10
|
489,125
|
5.12
|
||||||||||||
|
$7.00
- $8.93
|
496,834
|
2.0
years
|
7.97
|
496,834
|
7.97
|
||||||||||||
|
$15.00
|
53,000
|
2.2
years
|
15.00
|
53,000
|
15.00
|
||||||||||||
|
Total
|
2,238,737
|
3.0
years
|
4.67
|
1,920,880
|
5.08
|
||||||||||||
At
December 31, 2004 and 2003, options to purchase 2,801,642 shares of common
stock with an average price of $4.90 and 2,173,078 shares of common stock with
an average price of $4.77were vested and exercisable, respectively. No future
options may be granted under the Prior Plan.
Directors’
Stock Option Plan
In
1995,
Cellegy adopted the 1995 Directors’ Stock Option Plan (the “Directors’ Plan”) to
provide for the issuance of non-qualified stock options to eligible outside
Directors. When the plan was established, Cellegy reserved 150,000 shares for
issuance. From 1996 to 2005, a total of 350,000 shares were reserved for
issuance under the Directors’ Plan. The 2005 Plan replaces the Directors’
Plan.
The
Directors’ Plan provides for the grant of initial and annual non-qualified stock
options to non-employee directors. Initial options vest over a four-year period
and subsequent annual options vest over three years. The exercise price of
options granted under the Directors’ Plan is the fair market value of the common
stock on the grant date. Options generally expire 10 years from the grant date,
and generally expire within 90 days of the date the optionee is no longer a
director. The vesting and exercisability of options may also be accelerated
upon
certain change of control events.
Activity
under the Directors’ Plan is summarized as follows:
|
Shares
Under
Option
|
Weighted
Average
Exercise Price
|
||||||
|
Balance
at December 31, 2002
|
292,500
|
$4.61
|
|||||
|
Granted
|
60,000
|
5.00
|
|||||
|
Canceled
|
(84,000
|
)
|
4.41
|
||||
|
Balance
at December 31, 2003
|
268,500
|
4.75
|
|||||
|
Granted
|
48,000
|
4.30
|
|||||
|
Exercised
|
(9,000
|
)
|
2.64
|
||||
|
Balance
at December 31, 2004
|
307,500
|
4.74
|
|||||
|
Granted
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Balance
at December 31, 2005
|
307,500
|
4.74
|
|||||
F-32
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements (Continued)
The
following table summarizes those stock options outstanding and exercisable
related to the Directors’ Plan at December 31, 2005:
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||
|
Range of Exercise Prices
|
Number of
Options
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average
Exercise
Price
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
||||||||||||||
|
$1.34
- $3.25
|
35,000
|
6.3
years
|
$2.62
|
35,000
|
$2.62
|
||||||||||||||
|
$4.30
- $5.50
|
254,500
|
3.7
years
|
4.90
|
218,500
|
4.98
|
||||||||||||||
|
$6.50
- $8.50
|
18,000
|
2.6
years
|
6.72
|
18,000
|
6.72
|
||||||||||||||
|
Total
|
307,500
|
3.6
years
|
4.74
|
271,500
|
4.79
|
||||||||||||||
At
December 31, 2004 and 2003, options to purchase 307,500 shares of common
stock with a weighted average exercise price of $4.74 and 251,167 shares of
common stock with a weighted average exercise price of $4.79 were vested and
exercisable, respectively. At December 31, 2005, there were no options
available for future grants under the Directors’ Plan.
Non-Plan
Options
In
November 2003, the Company granted an initial stock option to
Mr. Richard Williams, on his appointment to become Chairman of the Board,
to purchase 1,000,000 shares of common stock. 400,000 of the options have an
exercise price equal to $2.89 per share, the closing price of the stock on
the
grant date and 600,000 of the options have an exercise price of $5.00 per share.
The option was vested and exercisable in full on the grant date, although a
portion of the option, covering up to 600,000 initially and declining over
time,
is subject to cancellation if they have not been exercised in the event that
Mr. Williams voluntarily resigns as Chairman and a director within certain
future time periods. As of December 31, 2005, none of these options
have been exercised.
In
October 2004, in conjunction with its acquisition of Biosyn, Cellegy issued
stock options to certain Biosyn option holders to purchase 236,635 shares of
Cellegy common stock. All options issued were immediately vested and
exercisable. During 2005, 74,446 options were exercised and 99,162 were
cancelled. The following table summarizes information about stock options
outstanding and
exercisable related to Biosyn option grants at December 31,
2005:
|
Options Outstanding and Exercisable
|
|||||||||||||
|
Range of Exercise Prices
|
Number of
Options
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average
Exercise
Price
|
||||||||||
|
$0.06
|
11,872
|
1.8
years
|
$0.06
|
||||||||||
|
$0.29
|
20,233
|
7.6
years
|
0.29
|
||||||||||
|
$1.46
- $6.83
|
8,564
|
8.5
years
|
1.46
|
||||||||||
|
$8.76
|
3,855
|
6.1
years
|
8.76
|
||||||||||
|
$14.60
- $21.02
|
18,503
|
3.1
years
|
18.68
|
||||||||||
|
Total
|
63,027
|
5.2
years
|
6.30
|
||||||||||
F-33
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
Shares
Reserved
As
of
December 31, 2005, the Company has reserved shares of common stock for
future issuance as follows:
|
Biosyn
options
|
63,027
|
||
| Director's Plan | 307,500 | ||
|
Warrants
|
2,374,593
|
||
|
Non-plan
options
|
1,000,000
|
||
|
Neptune
agreement
|
1,080,082
|
||
|
Kingsbridge
SSO
|
3,493,601
|
||
|
1995
Equity Incentive Plan
|
2,238,737 | ||
|
2005
Equity Incentive Plan
|
950,500
|
||
|
Total
|
11,508,040
|
Warrants
The
Company has the following warrants outstanding to purchase common stock as
of
December 31, 2005:
|
Warrant Shares
|
Exercise
Price
Per
Share
|
Date Issued
|
Expiration Date
|
||||||||||
|
June
2004 PIPE Financing
|
604,000
|
$
|
4.62
|
July
27, 2004
|
July
27, 2009
|
||||||||
|
Biosyn
warrants
|
81,869
|
5.84
- 17.52
|
Oct.
22, 2004
|
2006
- 2014
|
|||||||||
|
Kingsbridge
SSO
|
260,000
|
5.27
|
Jan.
16, 2004
|
Jan.
16, 2009
|
|||||||||
| May 2005 PIPE Financing | |||||||||||||
|
Series
A
|
714,362
|
2.25
|
May
13, 2005
|
May
13, 2010
|
|||||||||
|
Series
B
|
714,362
|
|
2.50
|
May
13, 2005
|
May
13, 2010
|
||||||||
|
Total
|
2,374,593
|
||||||||||||
Non-Cash
Compensation Expense Related to Stock Options
For
the
year ended December 31, 2005, 2004 and 2003, The Company recorded $651,
$109,000 and $579,000, respectively.
At
December 31, 2005 the Company had net operating loss carryforwards of
approximately $87.9 million and $44.2 million for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
between the years 2006 and 2025. The state net operating loss carryforwards
expire between the years 2006 and 2015. At December 31, 2005, the Company
also had research and development credit carryforwards of approximately $2.9
million and $1.5 million for federal and state purposes, respectively. The
federal credits expire between the years 2006 and 2025 and the state credits
do
not expire. The
Tax
Reform Act of 1986 (the Act) provides for a limitation on the annual use of
net
operating loss and research and development tax credit carryforwards following
certain ownership changes (as defined by the Act) that could limit the Company’s
ability to utilize these carryforwards. The Company may have experienced various
ownership changes, as defined by the Act, as a result of past financings.
Accordingly, the Company’s ability to utilize the aforementioned carryforwards
may be limited. Additionally, U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes; therefore the Company may
not
be able to take full advantage of these carryforwards for Federal income tax
purposes. The
Company determined that the net operating loss carryforwards relating to Biosyn
are limited due to its acquisition in 2004 and has reflected the estimated
amount of usable net operating loss carryforwards in its deferred tax assets
below.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The amount of deferred tax assets
in
2005 and 2004 not available to be recorded as a benefit due to the exercise
of
non-qualified employee stock options is approximately $643,000 and $599,000,
respectively.
Under
the
provisions of paragraph 30 of SFAS No. 109, if a valuation allowance is
recognized for the deferred tax asset for an acquired entity's deductible
temporary differences or operating loss or tax credit carryforwards at the
acquisition date, the tax benefits for those items that are first recognized
in
financial statements after the acquisition date shall be applied (a) first
to
reduce to zero any goodwill related to the acquisition, (b) second to reduce
to
zero other noncurrent intangible assets related to the acquisition, and (c)
third to reduce income tax expense. The future tax benefit of the Bisosyn
pre-acquisisiton net operating losses, tax credits, and other deductible
temporary differences, when they are ultiimately recgonized, will be recorded
in
accordance with paragraph 30 of SFAS 109.
Significant
components of the Company’s deferred tax liabilities and assets are as follows
(in thousands):
F-34
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements
(Continued)
|
December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
31,400
|
$
|
35,700
|
|||
|
Deferred
revenue
|
3,000
|
6,000
|
|||||
|
Credit
carryforwards
|
3,800
|
3,600
|
|||||
|
Capitalized
research and development
|
10,100
|
2,100
|
|||||
|
Depreciation
and amortization
|
1,400
|
2,000
|
|||||
| Intangible assets | (100 | ) | (300 | ) | |||
|
Other,
net
|
400
|
1,100
|
|||||
|
Total
deferred tax assets
|
50,000
|
50,200
|
|||||
|
Valuation
allowance
|
(50,000
|
)
|
(50,200
|
)
|
|||
|
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
|||
Reconciliation
of the statutory federal income tax rate to the Company’s effective income
tax rate (dollars in thousands):
|
2005
|
2004
|
||||||||||||
|
|
|
||||||||||||
|
Net
loss
|
$
|
(5,008
|
)
|
$
|
(28,154
|
)
|
|||||||
|
Tax
at Federal statutory rate
|
(1,703
|
)
|
34.0
|
%
|
(9,572
|
)
|
34.0
|
%
|
|||||
|
Meals
and entertainment
|
8
|
-0.1
|
%
|
9
|
-0.1
|
%
|
|||||||
|
Stock
compensation expense
|
38
|
-0.8
|
%
|
(240
|
)
|
0.1
|
%
|
||||||
|
Purchased
research and development
|
—
|
—
|
%
|
5,349
|
-19.0
|
%
|
|||||||
|
Research
credits
|
(15
|
)
|
0.3
|
%
|
(121
|
)
|
0.4
|
%
|
|||||
|
Deferred
taxes not benefited
|
1,672
|
-33.4
|
%
|
4,575
|
-16.2
|
%
|
|||||||
|
Provision
for taxes
|
$
|
—
|
—
|
%
|
$
|
—
|
—
|
%
|
|||||
The
valuation allowance for deferred tax assets for 2005 decreased by approximately
$200,000 and increased in 2004 by approximately $14.0 million.
Cellegy’s
revenues consisted of
Rectogesic Sales in Europe, Australia, New Zealand, Singapore and South Korea,
as well as licensing revenue relating to Fortigel, Rectogesic and Tostrex.
Revenues also consist of grant funding from various domestic agencies and
foundations. The Company has divested skin care business in December 2005.
The Company has not reflected the sale of the skin care business as a
discontinued operation due to immateriality.
Management
regularly assesses segment operating performance and makes decisions as to
how
resources are allocated based upon segment performance. The accounting policies
of the reportable segments are consistent with those described in the Summary
of
Significant Accounting Policies (Footnote 1).
F-35
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements (Continued)
Revenues
from external sources by major geographic area are as follows:
|
Revenues
|
Years
ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
North
America
|
||||||||||
|
Pharmaceuticals
|
$
|
11,758,235
|
$
|
1,840,840
|
$
|
919,513
|
||||
|
Skin
care
|
—
|
181,386
|
316,000
|
|||||||
|
Europe
|
||||||||||
|
Pharmaceuticals
|
440,477
|
10,704
|
—
|
|||||||
|
Skin
care
|
—
|
—
|
—
|
|||||||
|
Australia
& Pacific Rim
|
||||||||||
|
Pharmaceuticals
|
636,632
|
563,447
|
384,985
|
|||||||
|
Skin
care
|
—
|
—
|
—
|
|||||||
|
$
|
12,835,345
|
$
|
2,596,377
|
$
|
1,620,498
|
|||||
Revenues
from product sales to one customer represented approximately 38%, 7% and 20%
of
total revenue from 2005, 2004 and 2003 respectively.
Operating
income (loss) by geographic region is as follows:
|
Operating Income
(Loss)
|
Years
ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
North
America
|
||||||||||
|
Pharmaceuticals
|
$
|
(4,912,541
|
)
|
$
|
(25,689,094
|
)
|
$
|
(10,125,038
|
)
|
|
|
Skin
care
|
—
|
(2,531,258
|
)
|
(3,479,572
|
)
|
|||||
|
Europe
|
||||||||||
|
Pharmaceuticals
|
(184,803
|
)
|
(149,375
|
)
|
—
|
|||||
|
Skin
care
|
—
|
—
|
—
|
|||||||
|
Australia
& Pacific Rim
|
||||||||||
|
Pharmaceuticals
|
89,705
|
215,666
|
72,462
|
|||||||
|
Skin
care
|
—
|
—
|
—
|
|||||||
|
$
|
(5,007,639
|
)
|
$
|
(28,154,061
|
)
|
$
|
(13,532,148
|
)
|
||
F-36
Cellegy
Pharmaceuticals, Inc.
(a
development stage company)
Notes
to Consolidated Financial Statements (Continued)
Assets
by
major geographic region are as follows:
|
Assets
|
Years
ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
North
America
|
$
|
4,957,406
|
$
|
12,532,030
|
$
|
15,151,186
|
||||
|
Australia
& Pacific Rim
|
1,232,502
|
1,331,295
|
179,621
|
|||||||
|
$
|
6,189,908
|
$
|
13,863,325
|
$
|
15,330,807
|
|||||
19.
Related Party Transactions
The
Company pays fees to their board members for their services to the board
including the audit, nominating, and compensation committees. The total cash
payments to
these
directors during 2005, 2004 and 2003 were $75,500, $180,703, and $103,000,
respectively. In mid 2005, at the request of the directors, the Company
deferred the payment of board fees.
There
were no consulting fees paid in cash to any board members in 2005, 2004 and
2003. The Company recognized $131,000 in non-cash compensation expense during
2003 associated with the valuation of vested stock options previously issued
under a consulting agreement to a former board member.
Three
directors, Messrs. Adams, Rothermel and Williams purchased a total of 50,000
shares in connection with the May 2005 PIPE financing at the closing market
price of the common stock on the date of the transaction.
On
March
24, 2006 the Company announced that its European marketing partner, ProStrakan
had successfully completed the European Union Mutual Recognition Procedure
for
Rectogesic. Following the successful conclusion of the MRP process, national
licenses will be issued in due course in the 19 additional countries (in
addition to the United Kingdom, where approvals have previously been obtained)
included in the MRP submission application. Cellegy is entitled to receive
$250,000 for each marketing regulatory approval obtained in the first of any
three countries out of France, Italy, Germany or Spain up to a maximum total
amount payable of $750,000. Under Cellegy’s previous agreements with PDI, Inc.,
PDI is entitled to receive one-half of these payments.
F-37
(Amounts in thousands, except per share data)
|
2005
|
|||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
Revenues
|
$
|
1,606
|
$
|
7,749
|
$
|
1,952
|
$
|
1,528
|
|||||
|
Operating
income (loss)
|
(5,210
|
)
|
4,947
|
(2,676
|
)
|
(2,340
|
)
|
||||||
|
Net
Income (loss)
|
(5,086
|
)
|
4,835
|
(2,793
|
)
|
(1,964
|
)
|
||||||
|
Basic
net income (loss) per common share
|
|
(0.19
|
)
|
|
0.17
|
|
(0.09
|
)
|
|
(0.08
|
)
|
||
| Diluted net income (loss) per common share |
(0.19
|
)
|
0.16 | (0.09 |
)
|
|
(0.08 |
)
|
|||||
|
2004
|
|||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
Revenues
|
$
|
338
|
$
|
430
|
$
|
483
|
$
|
1,345
|
|||||
|
Operating
loss1
|
(3,245
|
)
|
(2,837
|
)
|
(3,194
|
)
|
(19,498
|
)
|
|||||
|
Net
loss1
|
(3,058
|
)
|
(2,708
|
)
|
(3,143
|
)
|
(19,245
|
)
|
|||||
|
Basic
and diluted net loss per common share
|
|
(0.15
|
)
|
|
(0.13
|
)
|
|
(0.14
|
)
|
|
(0.76
|
)
|
|
1 Includes
a charge of $14,982,000 for acquired in-process technology relating to the
Biosyn acquisition in October 2004.
F-38