DMK PHARMACEUTICALS Corp - Annual Report: 2006 (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, 2006
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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2085B
Quaker Point Rd. Quakertown, PA 18951
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(Address
of Principal Executive Offices) (zip
code)
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Registrant’s
telephone number, including area code: (215)
529-6084
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 o
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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. x
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, 2006 was $14,771,642.
As
of
March 21, 2007, there were 29,834,796 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.
2
CELLEGY
PHARMACEUTICALS, INC. 10-K ANNUAL REPORTFOR THE FISCAL YEAR ENDED DECEMBER
31,
2006
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Page
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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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12
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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17
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Item
2.
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PROPERTIES
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18
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Item
3.
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LEGAL
PROCEEDINGS
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18
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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18
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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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18
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Item
6.
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SELECTED
FINANCIAL DATA
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19
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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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20
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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28
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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28
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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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28
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Item
9A.
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CONTROLS
AND PROCEDURES
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28
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Item
9B.
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OTHER
INFORMATION
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29
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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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29
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Item
11.
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EXECUTIVE
COMPENSATION
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29
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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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30
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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30
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Item
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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30
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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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30
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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, Inc. and subsidiaries (“Cellegy,” “we,” us,” “our” or the
“Company”) is a specialty pharmaceuticals company. On November 28, 2006, for an
aggregate purchase price of approximately $9.0 million, we completed the sale
to
Strakan International Limited, a wholly owned subsidiary of ProStrakan Group
plc
(LSE: PSK) (“ProStrakan”), a publicly-traded pharmaceutical company based in the
United Kingdom, of our rights to Cellegesic® (nitroglycerin ointment), Fortigel®
(testosterone gel), Tostrex® (testosterone gel), Rectogesic® and Tostrelle®
(testosterone gel), and related intellectual property assets. Pursuant to the
Asset Purchase Agreement (“APA”) dated September 26, 2006, ProStrakan also
assumed various existing distribution and other agreements, including in certain
Southeast Asian countries, relating to the assets and intellectual property
that
was included in the sale. Cellegy’s stockholders approved the transaction at a
special meeting of stockholders held on November 22, 2006.
The
transaction with ProStrakan followed the receipt in July 2006 of an Approvable
Letter issued by the United States Food and Drug Administration (“FDA” or the
“Agency”) for Cellegy’s product, Cellegesic. The letter indicated that before
the Company's New Drug Application ("NDA") may be approved and the product
approved for marketing, Cellegy must conduct another clinical trial to
demonstrate efficacy at a level deemed statistically significant by the Agency.
Cellegy concluded that it would not be able to fund the expenditures that would
be required to continue product development efforts on Cellegesic or the other
products sold to ProStrakan, in part given the cost, uncertainty and timing
of
required additional trials relating to those products.
The
Company’s Biosyn, Inc. subsidiary has intellectual property relating to a
portfolio of proprietary product candidates known as microbicides. Biosyn’s
product candidates, which include both contraceptive and non-contraceptive
microbicides, are used intravaginally and are intended to reduce transmission
of
sexually transmitted diseases (“STD’s”) including Human Immunodeficiency Virus
(“HIV”)/ Acquired Immunodeficiency Disease (“AIDS”). Biosyn’s product candidates
include Savvy®, which underwent Phase 3 clinical trials in Africa for anti-HIV
microbicidal efficacy and is currently in a Phase 3 contraception trial in
the
United States and UC-781, a non nucleoside reverse transcriptase (“RT”)
inhibitor..
Nature
of Our Business
Following
the Company’s decision to eliminate its direct research activities and the sale
of assets to ProStrakan in the third and fourth quarters of 2006, the Company’s
operations currently relate primarily to the ownership of its
intellectual property
rights relating to the Biosyn product candidates. These events caused the
Company to cease being a development stage company. The Company’s Board of
Directors (the “Board”) continues to explore alternatives for the Company with
respect to its future course of business. While the Savvy Phase 3 contraception
trial in the United States is ongoing, the Company is not directly involved
with
the conduct and funding thereof and, due to the cessation of the HIV Phase
3
trials in 2005 and 2006, it is uncertain whether Savvy will be commercialized
or
whether the Company will ever realize revenues therefrom. We expect negative
cash flows to continue for the foreseeable future. The Company presently has
enough financial resources to continue operations as they currently exist for
the near term, however, it does not have the technological nor the financial
assets necessary to fund the expenditures that would be required to conduct
the
future clinical and regulatory work necessary to commercialize Savvy without
additional funding. Alternatives with respect to the Company’s remaining
business and assets might include seeking to merge or combine with a third
party
with greater resources and infrastructure, dissolution or liquidation of the
Company, bankruptcy proceedings, or other alternatives. Due to the uncertainty
of the cash flow necessary to explore or implement these alternatives, there
can
be no assurance that the Company will have adequate resources to continue
operations for longer than 12 months.
These
factors raise substantial doubt about our ability to continue as a going
concern. There is no assurance that any of the above options will be implemented
on a timely basis or that we will be able to sell or license our remaining
technology or find suitable candidates for a business combination or other
transaction, if at all. We may be required to accept less than favorable
commercial terms in any such future arrangements. The consolidated 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
business combination or other agreements, therefore making it more difficult
to
obtain required financing on favorable terms or at all. Such an outcome may
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.
4
Summary
of Certain Other Developments During 2006
On
January 16, 2006 Cellegy entered into an amendment of its Exclusive License
and
Distribution Agreement dated July 9, 2004, with ProStrakan. Under the amendment,
ProStrakan agreed to assume responsibility for all of the manufacturing and
other product support functions for Tostrex in Europe.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization (“CONRAD”), for collaboration on the development of
Cellegy’s entire microbicide pipeline, including Savvy, UC-781 and Cyanovirin-N.
CONRAD is a non profit, philanthropic organization dedicated to supporting
the
development of better, safer, and more acceptable methods to prevent pregnancy
and sexually transmitted infections, including HIV/AIDS. The agreement
facilitated CONRAD’s access to Cellegy’s past research results, formulation
developments and other technological intangibles in the microbicdal field in
exchange for CONRAD’s funding of the remaining Phase 3 U.S. contraception trial
expenses. These expenses consist primarily of providing the clinical materials
necessary for the conduct of the trial, along with certain regulatory functions.
Under this agreement, Cellegy retained all commercial rights to its microbicidal
technology.
On
March
24, 2006, the Company announced that ProStrakan had successfully completed
the
European Union Mutual Recognition Procedure (“MRP”) for Rectogesic, and that
following the successful conclusion of the MRP process, national licenses would
be sought and were expected to be issued in due course in the nineteen
additional countries (in addition to the United Kingdom where approvals have
been previously obtained) included in the MRP submission application. Cellegy
received $250,000 for this milestone and under its previous agreement with
PDI,
Inc. (“PDI”) remitted one-half of these proceeds to PDI.
On
April
11, 2006, Epsilon Pharmaceuticals (“Epsilon”) acquired all of the shares of
Cellegy Australia Pty Ltd, formerly a wholly owned subsidiary of Cellegy, in
exchange for cash totaling approximately $1.33 million.
On
April
25, 2006, the Cardiovascular Renal Drugs Advisory Committee (the “Committee”) of
the FDA met to review Cellegy’s NDA relating to Cellegesic. The Committee voted
on three questions in connection with its review, with the following
results:
| 1. |
A
majority of the Committee found that, taking all three studies into
consideration, the data is compelling that there is an effect of
nitroglycerin ointment on the pain
associated with anal fissures.
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| 2. |
A
majority of the Committee agreed that the quadratic model was the
proper
statistical analysis for the purpose of
decision-making.
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| 3. |
In
its final vote, six members of the Committee voted for “Approval” of
Cellegesic and six voted “Approvable pending another study of
effectiveness.” There were no votes for “Not
Approvable.”
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On
June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part
of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic
in
certain major European countries. Following the payment, ProStrakan had no
further payment obligations to Cellegy under the Rectogesic license agreement.
On
July
7, 2006, the FDA issued an Approvable Letter for Cellegy’s Cellegesic product,
but indicated that before the Company's NDA may be approved and the product
approved for marketing, Cellegy must conduct another clinical trial to
demonstrate efficacy at a level deemed statistically significant by the Agency.
The letter indicated that the Agency was requiring an additional study because
it believed the results of the three trials conducted to date did not provide
substantial evidence that the drug is effective, and provided a number of
comments on the results previously presented by Cellegy and recommendations
concerning the design and protocol of the additional required study.
On
August
28, 2006, the Company announced that Family Health International (“FHI”) planned
to stop the Savvy Phase 3 trial being conducted in Nigeria with enrollment
of
approximately 2,000 patients, to determine whether Savvy is safe and effective
for reducing women’s risk of acquiring HIV infection. In November 2005, a
similar trial being conducted in Ghana with enrollment of approximately 2,100
patients was stopped for similar reasons. Each of the trials was part of an
international effort to evaluate microbicides as a tool to reduce the risk
of
HIV infection in people at high risk. The decision to stop these trials followed
recommendations by the studies’ external independent Data Monitoring Committee
(“DMC”). After reviewing the study interim data, DMC members concluded that the
trials as designed were unlikely to provide statistically significant evidence
that Savvy protects against HIV, because of a lower than expected rate of HIV
seroconversion in the trial, which was less than half of the expected rate.
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. Without obvious signals of effectiveness in the interim data, the
study
would be unlikely to detect a reduction in the HIV risk at a level deemed
statistically significant if it were to continue. The Savvy Phase 3
contraception trial underway in the United States is continuing, although the
Company is not directly involved with the conduct and funding of the
trial.
5
Simultaneously
with the signing of the APA with ProStrakan, in September 2006, ProStrakan
loaned Cellegy $2,000,000 pursuant to a secured promissory note, a patent
collateral security and pledge agreement and a trademark collateral and security
agreement. The note had a maturity date of November 30, 2006, accrued interest
at a rate of six percent (6.0%) per annum and was payable in full upon the
closing of the asset sale transaction. The note was secured by a security
interest in favor of the assets that were sold to ProStrakan. The loan was
paid
in full in connection with the closing of the asset sale transaction.
In
connection with the signing and closing of the asset sale transaction with
ProStrakan, Cellegy also resolved its obligations under previous agreements
between the Company and PDI. Cellegy was a party to several agreements with
PDI,
all dated April 11, 2005 (the “Settlement Agreements”), including a Settlement
Agreement and Release, a Secured Promissory Note in the original principal
amount of $3,000,000 (the “Secured Note”), a Non-negotiable Convertible Senior
Note in the original principal amount of $3,500,000 (the “Convertible Note”) and
a Security Agreement. Cellegy’s obligations under the
Secured Note and the Security Agreement were secured by a security interest
in favor of PDI in the “Pledged Collateral,” as defined in the Security
Agreement.
On
September 20, 2006, Cellegy and PDI entered into a letter agreement, pursuant
to
which Cellegy agreed to pay PDI an aggregate amount of $3,000,000 (the “Payoff
Amount”), as follows: (i) within four business days after Cellegy entered into
any definitive agreements relating to certain kinds of merger or asset sale
transactions, the sum of $500,000, which sum represented a nonrefundable
prepayment of a portion of the outstanding unpaid principal and accrued interest
on the Secured Note; and (ii) no later than two business days after the
consummation of such transactions including an asset sale such as the
transaction with ProStrakan, the sum of $2,500,000. PDI agreed that, effective
upon receipt of the full Payoff Amount, it would accept the Payoff Amount as
payment in full of all obligations owing under the Settlement Agreements
(collectively the “Obligations”).
Under
the
letter agreement, upon the receipt by PDI of the full Payoff Amount: (i) the
obligations would be deemed paid in full; all of the security interests and
liens created under the Settlement Agreements in favor of PDI would terminate
and be released; (ii) all other obligations of Cellegy owing to PDI under the
Settlement Agreements or any related document would be released and discharged;
(iii) each of the Settlement Agreements would terminate and be null and void
and
of no further force or effect without any further action of the parties; (iv)
Cellegy may take such actions as it deems necessary, desirable or appropriate
to
cancel or otherwise terminate the Settlement Agreements or the rights
thereunder; (v) PDI will promptly deliver such further termination statements,
releases, and other documents reasonably requested by Cellegy to effectuate
the
termination and release of all of PDI’s security interests and liens in the
assets of Cellegy; and (vi) PDI will promptly deliver any promissory notes
marked “Terminated and Paid in Full” and signed and dated by PDI.
PDI
and
Cellegy also agreed to release each other and related parties from any claims
or
liabilities arising before the date of their agreement or relating to any of
the
Settlement Agreements or the transactions contemplated thereby, other than
as a
result of the released party’s gross negligence or willful misconduct. PDI’s
release was effective upon receipt of the full Payoff Amount.
Also
in
September 2006, the Company entered into a Termination Agreement and Release
of
Claims agreement with Neptune Pharmaceutical Corporation (“Neptune”) and certain
other parties to resolve any possible future obligations to Neptune under the
Company’s Asset Purchase Agreement dated December 31, 1997 between Cellegy
and Neptune, pursuant to which Cellegy acquired certain patents and intellectual
property rights relating to Cellegesic and Rectogesic. The agreement called
for
a series of payments, which may be paid in part in shares of common stock,
upon
successful completion of various development milestones, and imposed certain
other obligations on Cellegy. The termination agreement provided that upon
execution of the asset sale agreement with ProStrakan, Cellegy would pay Neptune
$125,000, and that upon the closing of that transaction, Cellegy would pay
Neptune an additional $125,000. In consideration of these payments, and
effective upon the second payment, Neptune agreed that all payments,
performance, and other obligations and covenants of Cellegy under the original
asset purchase agreement between Neptune and Cellegy would be fully satisfied
and terminated in their entirety, and that no further payments will be owed
to
Neptune. Cellegy made all required payments in connection with the closing
of
the ProStrakan transaction, and as a result no further obligations are owed
to
Neptune.
6
Products
Savvy
Cellegy
obtained rights to the late-stage product candidate, Savvy, with its October
2004 acquisition of Biosyn. Savvy, a microbicidal gel, is intended 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. 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 (“USAID”); the National Institute for Child Health and
Development (“NICHD”); the National Institute for Allergy and Infectious Disease
(“NIAID”); CONRAD; and other governmental and philanthropic
organizations.
In
2004,
Savvy entered three concurrent Phase 3 clinical studies: a contraception study
in the United States and two HIV studies Africa. In Africa, studies were
conducted in Nigeria and in Ghana testing Savvy’s effectiveness in preventing
HIV transmission in women.
On
November 8, 2005, the Ghana trial was discontinued due to a lower than expected
rate of HIV seroconversion in the trial. The predicted annual rate of HIV
seroconversion in the Ghana study population was approximately 3.7% at the
time
of trial initiation, but the observed annual rate was 1.2% eighteen (18) 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. Also, as described in greater detail above, on August
28, 2006, the Company announced that Family Health International (“FHI”) planned
to stop the Savvy®
Phase
3
trial being conducted in Nigeria. The Savvy trials in Ghana and Nigeria began
screening volunteers in September 2004, and each site completed planned
enrollment of approximately 2,000 women in June 2006. No safety issues were
reported during either of these trials.
A
Phase 3
trial for contraception is ongoing in the United States, with 1,183 women
enrolled out of an expected total enrollment of 1,670 female subjects. While
the
Company currently retains the commercial and technological rights to Savvy
(with
respect to the United States and other developed countries), it is not directly
involved with the oversight and funding of the Savvy Phase 3 trial for
contraception. Due to the cessation of the HIV Phase 3 trials in late 2005
and
2006, it is uncertain whether Savvy will be commercialized or whether the
Company will ever realize revenues there from. CONRAD, through its agreement
entered into with Cellegy in January 2006, has undertaken a portion of the
funding and oversight responsibilities in exchange for access to Biosyn’s
current and past research and related technological intangibles. There can
be no
assurance that Savvy will be successfully approved for contraception or any
other indications or that it would be the first of such products to enter the
marketplace. There can be no assurance that Savvy could be profitably
commercialized or that Cellegy would be able to achieve profitability with
this
product, if approved.
A
second-generation product, UC-781, is a non-nucleoside 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 as well as human anal/rectal
efficacy studies of UC-781 are currently
under way. Biosyn’s expanded microbicides portfolio also includes a naturally
occurring protein, Cyanovirin-N (“CV-N”). The CV-N license agreement between
Biosyn and National Cancer Institute (“NCI”) was terminated in December 2006 and
no further activity regarding CV-N development is proposed.
7
Two
issued
U.S.
patents and over twenty (20) issued foreign patents relate to Savvy gel for
contraception and the reduction in transmission of HIV infection.
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 236,635 options and 81,869
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 remained the same. The purchase price does not include any provisions
for contingent milestone payments of up to $15,000,000 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.
On
April
11, 2006, Epsilon Pharmaceuticals acquired all of the shares of Cellegy
Australia, Pty Ltd, formerly a wholly owned subsidiary of Cellegy, in exchange
for cash totaling approximately $1,300,000.
In
November 2006, Cellegy completed its asset sale transaction to ProStrakan,
described in greater detail above.
Cellegy
In
December 2002, Cellegy entered into a license agreement (the “PDI Agreement”),
with PDI granting PDI the exclusive right to store, promote, sell and distribute
Fortigel in North American markets. Cellegy received an upfront payment of
$15,000,000 on the effective date of December 31, 2002 with an additional
$10,000,000 if Fortigel received all FDA approvals required to manufacture,
sell
and distribute the product in the United States. Under the PDI Agreement,
Cellegy would also receive royalties each year until the expiration of the
last
patent right related to Fortigel, 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 and 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 filed against each other. Under the terms of the
settlement agreement, the license agreement was terminated and all product
rights reverted back to Cellegy. Cellegy paid $2,000,000 to PDI upon signing
the
settlement agreement. Cellegy also issued a $3,000,000 promissory note to PDI
and a $3,500,000 non-negotiable senior convertible debenture. The settlement
of
the Company’s lawsuit with PDI resulted in the recognition of the remaining
$6,500,000 in deferred revenue from PDI as license revenue during the second
quarter of 2005. In connection with the asset sale transaction with ProStrakan
in November 2006, as described above, Cellegy renegotiated its obligations
to
PDI and settled all of its outstanding obligations to PDI for an aggregate
amount of $3,000,000. Cellegy recognized a gain of approximately $2,100,000
in
connection with the settlement.
From
2004
through 2006, Cellegy had license agreements with ProStrakan relating to
development and commercialization of Tostrex and Rectogesic in Europe and in
certain nearby non-European Union (“EU”) countries.
In
November 2005, the Company renegotiated its marketing agreement with ProStrakan
relating to Rectogesic. Under the terms of the amended agreement, ProStrakan
assumed responsibility for all manufacturing and other product support
functions. In connection with this agreement, Cellegy received a payment of
$2,000,000.
8
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan assumed
responsibility for all manufacturing and other product support functions.
Cellegy was to continue to receive milestones and royalties as set forth in
the
original agreement.
Effective
with the sale of assets to ProStrakan in November 2006, the Company’s license
agreements with ProStrakan were terminated, and Cellegy will not receive any
further amounts under these agreements.
Biosyn
In
October 1996, Biosyn acquired C31G Technology from the inventor of the
technology, Edwin B. Michaels. 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.
In
May
2001, Biosyn entered into an exclusive license agreement with Crompton
Corporation, now Chemtura, 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
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing-world only licensing agreement with CONRAD for collaboration on
the
development of Cellegy’s entire microbicide pipeline. CONRAD is a non profit,
philanthropic organization dedicated to supporting the development of better,
safer, and more acceptable methods to prevent pregnancy and sexually transmitted
infections, including HIV/AIDS. .The agreement facilitated CONRAD’s access to
Cellegy’s past research results, formulation developments and other
technological intangibles in the microbicdal field in exchange for CONRAD’s
funding of the remaining Phase 3 U.S. contraception trial expenses. CONRAD
may
terminate the agreement at any time upon 60 days prior notice. In the agreement,
CONRAD agrees to use commercially reasonable efforts to conduct research and
development activities on products in the pipeline. If the agreement is
terminated, the license terminates and the technology and intellectual property
revert back to Biosyn. Under this agreement, Cellegy retained all commercial
rights to its microbicidal technology.
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 Biosyn is obligated to make its commercialized products, if any,
available in developing countries, as well as available to public sector
agencies in developed countries, at prices reasonably above cost or at a
reasonable royalty rate.
Biosyn
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. Due to cancellation of the NCI license, Biosyn has
forfeited the rights for the commercialization of CV-N but all agreements
between Biosyn and research institutions related to CV-N are still
valid.
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
regulations pursuant to, among other laws, the Food, Drug and Cosmetic
Act.
9
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
(“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 to the FDA of a NDA, for a new drug or a Product License
Application (“PLA”) 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 (“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 thirty (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 regimens. Phase 3 trials are expanded clinical trials intended
to
gather additional information on safety and effectiveness necessary 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.
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 a Special Protocol Assessment, can also provide specific written
guidance on the acceptability of protocol designs for selected clinical
trials.
After
successful completion of the required clinical testing, an NDA is generally
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 trial sites to ensure that the facilities are in
compliance with applicable GMP 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 in a timely manner, if at all. Delays in obtaining regulatory
approvals could have a material adverse effect on the applicant. Failure to
comply with applicable regulatory requirements for marketing drugs could subject
the applicant 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/or criminal
prosecution.
10
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 NDAs or other product applications if deficiencies are found at
the
facility. Vendors that supply finished products or components used to
manufacture, package and label products are subject to similar regulation and
periodic inspection. There can be no assurances that manufacturing or quality
control problems will not arise at the manufacturing plants of contract
manufacturers or that such manufacturers will have the financial capabilities
or
management expertise to adequately supply products or maintain compliance with
the regulatory requirements necessary to continue manufacturing
products.
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 EU 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 EU member states. This
authorization is called a Marketing Authorization Approval (“MAA”). 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 MRP. There can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed.
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 therapeutic products will depend in part on the availability
of reimbursement from third-party payers. There can be no assurance that our
products, if any, 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 and 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 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.
11
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 microbicidal products such as condoms. Additionally, if a vaccine
for HIV/AIDS is made available, the potential market for Savvy and Biosyn’s
other product candidates could be limited. There is also a number of existing
contraception products currently on the market which could greatly limit the
marketability of the Savvy contraception product candidate. As a result, there
can be no assurance that Biosyn’s products under development will be able to
compete successfully with existing products or other innovative products under
development.
As
of
March 30, 2007, the Company had five (5) full-time employees at its offices
in
Quakertown, 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 (“SEC”), including reports on the following
forms:
| (i) |
annual
report on Form 10-K,
|
|
(ii)
|
quarterly
reports on Form 10-Q,
|
|
(iii)
|
current
reports on Form 8-K,
|
|
(iv)
|
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
or by
calling 1-800-SEC-0330. Upon written request to the Company at Cellegy
Pharmaceuticals, Inc., 2085 B Quaker Point Drive, Quakertown, Pa, 18951,
Attention: Chief Financial Officer, Cellegy will provide a copy of the 10-K
to
any stockholder.
ITEM
1A: RISK FACTORS
We
sold amaterial
portion of our remaining assets to a third party
and have materially reduced the scope of our current
operations.
We
recently sold a material portion of our assets, including intellectual property
rights and related assets to ProStrakan. The Company’s operations currently
relate primarily to the ownership of the intellectual property rights of our
Biosyn subsidiary.
The
Company is considering alternatives regarding future
operations.
The
Company’s board of directors is continuing to explore alternatives for the
Company with respect to its business and assets. These alternatives might
include seeking to sell remaining assets to third parties, the possible
dissolution or liquidation of the Company, merging or combining with another
company, bankruptcy proceedings or other alternatives. There can be no assurance
that any third party will be interested in acquiring the remaining assets of
the
Company or would agree to a price and other terms that we would deem adequate
for those assets.
We
have a history of losses and do not expect to achieve
profitability.
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.
Without additional funds from sales of assets, intellectual property or
technologies, or from a business combination or a similar transaction, we will
exhaust our resources and will be unable to continue operations, and our
accumulated deficit will continue to increase as we continue to incur losses.
The amount of future net losses and our ability to sell our remaining assets
or
successfully enter a business combination transaction are highly
uncertain.
12
Following
the Company's decision to eliminate its direct research activities and the
sale
of assets to ProStrakan in the third and fourth quarters of 2006, Company’s
operations currently relate primarily to the intellectual property relating
to
the product candidates of its Biosyn subsidiary and the evaluation of its
remaining options and alternatives with respect to its future course of
business. While the Savvy Phase 3 contraception trial in the United States
is
ongoing, the Company is not directly involved with the conduct and funding
thereof and, due to the cessation of the HIV Phase 3 trials in 2005 and 2006,
it
is uncertain whether Savvy will be commercialized or whether the Company will
ever realize revenues therefrom. We therefore expect negative cash flows to
continue for the foreseeable future. The Company presently has enough financial
resources to continue operations as they currently exist for the near term,
however, it does not have the technological nor the financial assets necessary
to fund the expenditures that would be required to conduct the future clinical
and regulatory work necessary to commercialize Savvy without additional funding.
Alternatives with respect to the Company’s remaining business and assets might
include seeking to merge or combine with another third party with greater
resources and infrastructure necessary to conduct development programs and
to
commercialize technology. If a suitable candidate cannot be found, the Company
may choose to liquidate or voluntarily file bankruptcy proceedings. Due to
the
uncertainty of the cash flow necessary to explore or implement these
alternatives, there can be no assurance that the Company will have adequate
resources to continue operations for longer than 12 months.
These
factors raise substantial doubt about our ability to continue as a going
concern. There is no assurance that any of the above options will be implemented
on a timely basis or that we will be able to sell or license our remaining
technology or find suitable candidates for a business combination or other
transaction, if at all. We may be required to accept less than favorable
commercial terms in any such future arrangements. The consolidated 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
business combination or other agreements, therefore making it more difficult
to
obtain required financing on favorable terms or at all. Such an outcome may
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.
We
have received a “going concern” opinion from our independent registered public
accounting firm, which may negatively impact our
business.
Our
audit
opinions from our current and prior independent registered public accounting
firms regarding the consolidated financial statements for the years ended
December 31, 2006, 2005 and 2004 include an explanatory paragraph indicating
that there is substantial doubt about the Company’s ability to continue as a
going concern. Doubts concerning our ability to continue as a going concern
could adversely affect our ability to enter into business combination or other
agreements, therefore making it more difficult to obtain required financing
on
favorable terms or at all. Such an outcome may 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.
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
remaining product candidates UC-781 and CV-N and our research and clinical
activities 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 any 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 our product candidates.
13
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 in a timely manner, 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.
Our
ongoing clinical trial could be delayed, or the FDA could issue a Not Approvable
letter with respect to our current product candidate. Such actions could result
in further clinical trials or necessitate other time consuming or costly actions
to satisfy regulatory requirements.
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 assurance that Cellegy’s remaining clinical trial will demonstrate the
results required to continue advanced trial development and allow us to seek
marketing approval for our product candidate. 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.
Clinical
trials can be extremely costly. Certain costs relating to the Phase 3 trials
for
the Savvy product for contraception and, when they were conducted, for the
reduction in the transmission of HIV, and other clinical and preclinical
development costs for Savvy, were funded directly by certain grant and contract
commitments from several governmental and non-governmental organizations
(“NGOs”). Nevertheless, current or future clinical trials could require
substantial additional funding. There can be no assurance that funding from
governmental agencies and NGOs will continue to be available, 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
(“CRO”).
|
Adverse
events in our clinical trials section 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 trial of our product candidate 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 candidate and could result in the FDA, or other regulatory
authorities, denying approval of our product candidate 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 candidate may prove not to be safe
for
human use. Any delay in the regulatory approval of our product candidate could
increase our product development costs and allow our competitors additional
time
to develop or market competing products.
14
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.
We
have
relied on 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 CRO 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 clinical trials
could significantly compromise our ability to secure regulatory approval of
product candidates, thereby limiting our ability to generate product revenue
resulting in a decrease in our stock price.
The
type and scope of the 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. 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.
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. 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 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, therefore 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 conducted in the United States.
We
have limited sales and marketing experience.
We
may
market products, if any are 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 does
not presently 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 for Cellegy of such products if we
needed to rely on a third party marketing partner to commercialize the
products.
15
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 providers, 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
|
|
·
|
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;
|
|
·
|
the
effectiveness of our production, distribution and marketing
capabilities;
|
|
·
|
the
success of competing products;
and
|
|
·
|
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.
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
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.
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 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”). 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.
16
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. 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 product or product candidates that we may develop
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, any Cellegy products will likely be subject
to competition from existing products. As a result, any future Cellegy products
may never be able to compete successfully with existing products or with
innovative products under development by other organizations.
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 trial 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 prevail. 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 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;
|
|
·
|
Common
stock sales in the public market by one or more of our larger
stockholders, officers or
directors;
|
|
·
|
A
negative outcome in any litigation or potential legal proceedings;
or
|
|
·
|
Other
potentially negative financial announcements including: 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.
|
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
17
The
Company presently leases approximately 1,900 square feet of office space in
Quakertown, Pennsylvania. The lease expires March 31, 2007 after which it
reverts to a monthly lease and includes a 60-day notice requirement. Cellegy
closed its Brisbane, California offices and moved its headquarters to its
present location from Huntingdon Valley, Pennsylvania in October 2006. The
Company believes its current facilities to be adequate for its anticipated
needs.
ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On
November 22, 2006, the Company’s stockholders approved the sale to ProStrakan of
Cellegy’s rights to Cellegesic, Fortigel, Tostrex, Tostran and Tostrelle, and
related intellectual property assets. The closing of the transaction was
completed November 28, 2006. At the meeting, 17,442,747 shares voted in favor
of, 212,930 voted against and 47,446 shares abstained from voting with respect
to the proposed transaction.
PART II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Cellegy’s
common stock currently trades on the Over The Counter Bulletin Board (OTCBB”)
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 de-listed 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 Small Cap Market
and
OTCBB for the periods indicated below.
|
High
|
Low
|
||||||
|
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
|
0.93
|
0.42
|
|||||
|
Second
Quarter
|
0.90
|
0.37
|
|||||
|
Third
Quarter
|
0.65
|
0.07
|
|||||
|
Fourth
Quarter
|
0.18
|
0.05
|
|||||
|
2007
|
|||||||
|
First
Quarter
|
0.10
|
0.03
|
|||||
Holders
As
of
March 22, 2007, there were approximately 136 stockholders of record, excluding
beneficial holders of stock held in street name.
18
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 2007 annual meeting of
stockholders.
The
Company did not have any unregistered sales of securities during
2006.
The
consolidated financial information as of December 31, 2006 and 2005 and for
each of the three years in the period ended December 31, 2006 are derived
from our audited consolidated financial statements included per Item 15.
The
consolidated historical financial information as of December 31, 2004, 2003
and
2002 and for the years ended December 31, 2003 and 2002 are derived
from our audited consolidated financial statements not included 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” per
Item 7.
Statements
of Operations Data: (In thousands except per share
data)
|
Years
Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Revenues
|
$
|
2,660
|
$
|
12,199
|
$
|
2,033
|
$
|
1,236
|
$
|
1,127
|
||||||
|
Costs
and expenses1
|
7,346
|
17,555
|
31,015
|
15,198
|
16,903
|
|||||||||||
|
Operating
loss
|
(4,686
|
)
|
(5,356
|
)
|
(28,982
|
)
|
(13,962
|
)
|
(15,776
|
)
|
||||||
|
Other
income2
|
14,032
|
259
|
612
|
358
|
520
|
|||||||||||
|
Net
income (loss) from continuing operations
|
$
|
9,346
|
$
|
(5,097
|
)
|
$
|
(28,370
|
)
|
$
|
(13,604
|
)
|
$
|
(15,256
|
)
|
||
|
Basic
and diluted net income (loss) from continuing
|
||||||||||||||||
|
operations
per common share
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
(1.29
|
)
|
$
|
(0.68
|
)
|
$
|
(0.86
|
)
|
||
|
Net
income (loss)
|
$
|
9,672
|
$
|
(5,008
|
)
|
$
|
(28,154
|
)
|
$
|
(13,532
|
)
|
$
|
(15,241
|
)
|
||
|
Basic
and diluted net income (loss) per common share
|
$
|
0.32
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
$
|
(0.68
|
)
|
$
|
(0.86
|
)
|
||
|
Weighted
average common shares used in computing
|
||||||||||||||||
|
basic
net income (loss) per common share
|
29,834
|
28,497
|
22,021
|
19,964
|
17,643
|
|||||||||||
|
Weighted
average common shares used in computing
|
||||||||||||||||
|
diluted
net income (loss) per common share
|
29,851
|
28,497
|
22,021
|
19,964
|
17,643
|
|||||||||||
| 1 |
Includes
a charge of $14,982,000 for purchased research and development
relating to
the Biosyn acquisition in
October 2004.
|
|
2
|
Includes
a gain on sale of technology of approximately $12,616,000
for the year
ended December 31, 2006.
|
19
Balance
Sheet Data: (In thousands)
|
December
31,
|
||||||||||||||||
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
||||||||
|
Cash,
cash equivalents, restricted cash and investments1
|
$
|
3,804
|
$
|
2,124
|
$
|
8,701
|
$
|
11,471
|
$
|
21,591
|
||||||
|
Total
assets
|
4,145
|
6,450
|
13,863
|
15,331
|
28,379
|
|||||||||||
|
Log-term
portion of deferred revenue
|
-
|
3,085
|
13,865
|
13,335
|
14,168
|
|||||||||||
|
Long-term
payables
|
322
|
257
|
717
|
725
|
717
|
|||||||||||
|
Accumulated
deficit
|
(122,639
|
)
|
(132,311
|
)
|
(127,303
|
)
|
(99,149
|
)
|
(85,617
|
)
|
||||||
|
Total
stockholders’ equity (deficit)
|
3,063
|
(6,477
|
)
|
(6,743
|
)
|
(1,580
|
)
|
10,534
|
||||||||
| 1. |
Includes
restricted cash of $227,500 in 2004, 2003 and 2002, net of cash
related to
discontinued
operations.
|
General
Cellegy
Pharmaceuticals is a specialty biopharmaceutical company. Following the
Company’s decision to eliminate its direct research activities and the sale of
assets to ProStrakan in late 2006, the Company’s operations currently relate
primarily to the ownership of its intellectual property rights relating to
the
Biosyn product candidates and the evaluation of its remaining options and
alternatives with respect to its future course of business.
In
January 2004, we entered into a Structured Secondary Offering (“SSO”),
agreement with Kingsbridge Capital Limited (“Kingsbridge”). The agreement
required 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 completed two draw downs in 2004,
issuing a total of 246,399 common shares resulting in net proceeds of
approximately $0.8 million. In January 2007, Kingsbridge released Cellegy of
its
obligations under the SSO. In connection therewith, the Company, as of December
31, 2006, reversed financing fees due Kingsbridge of $266,000.
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 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 236,635 options
and 81,869 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 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 Savvy 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.
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 previous license agreement between the two
companies was terminated and all product rights 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 in
2005.
On
November 8, 2005, the Savvy Ghana trial was discontinued due to a lower than
expected rate of HIV seroconversion in the trial. The predicted annual rate
of
HIV seroconversion in the Ghana study population was approximately 3.7% at
the
time of trial initiation, but the observed annual rate was 1.2% eighteen (18)
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. Also, as described in greater detail above, on
August 28, 2006, the Company announced that FHI planned to stop the
Savvy Phase
3
trial being conducted in Nigeria. The Savvy trials in Ghana and Nigeria began
screening volunteers in September 2004 and each site completed planned
enrollment of approximately 2,000 women in June 2006. No safety issues were
reported during either of these trials.
20
In
November 2005, Cellegy renegotiated its marketing agreement with ProStrakan.
Under the terms of the amended agreement, ProStrakan agreed to assume
responsibility for all manufacturing and other product support functions and
agreed to 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.
On
January 16, 2006 Cellegy entered into an amendment of its Exclusive License
and
Distribution Agreement dated July 9, 2004, with ProStrakan. Under the amendment,
ProStrakan agreed to assume responsibility for all of the manufacturing and
other product support functions for Tostrex in Europe.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with the CONRAD, for the collaboration
on
the development of Cellegy’s entire microbicide pipeline. The agreement
encompassed the licensing of Savvy, UC-781 and Cyanovirin-N.
On
March
24, 2006, the Company announced that ProStrakan had successfully completed
the
European Union MRP for Rectogesic, and that following the successful conclusion
of the MRP process, national licenses would be sought and were expected to
be
issued in due course in the nineteen (19) additional countries (in addition
to
the United Kingdom where approvals have been previously obtained) included
in
the MRP submission application. Cellegy received $250,000 for this milestone
and
under its previous agreement with PDI, Inc., (“PDI”) remitted one-half of these
proceeds to PDI.
On
June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part
of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic
in
certain major European countries. Following the payment described above,
ProStrakan had no further payment obligations to Cellegy under the Rectogesic
license agreement.
On
July
7, 2006, the FDA issued an Approvable Letter for Cellegy’s product, Cellegesic,
but indicated that before the Company's NDA may be approved and the product
approved for marketing, Cellegy must conduct another clinical trial to
demonstrate efficacy at a level deemed statistically significant by the Agency.
The letter indicated that the Agency was requiring an additional study because
it believed the results of the three trials conducted to date did not provide
substantial evidence that the drug is effective, and provided a number of
comments on the results previously presented by Cellegy and recommendations
concerning the design and protocol of the additional required study.
On
August
28, 2006, the Company announced that FHI planned to stop the Savvy Phase 3
trial
being conducted in Nigeria with enrollment of approximately 2,000 patients,
to
determine whether Savvy is safe and effective for reducing women’s risk of
acquiring HIV infection. In November 2005, a similar trial being conducted
in
Ghana with enrollment of approximately 2,100 patients was stopped for similar
reasons. Each of the trials was part of an international effort to evaluate
microbicides as a tool to reduce the risk of HIV infection in people at high
risk. The decision to stop these trials followed recommendations by the studies’
external independent DMC. After reviewing the study interim data, DMC members
concluded that the trials as designed were unlikely to provide statistically
significant evidence that Savvy protects against HIV, because of a lower than
expected rate of HIV seroconversion in the trial, which was less than half
of
the expected rate. 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. Without obvious signals of effectiveness in the
interim data, the study would be unlikely to detect a reduction in the HIV
risk
at a level deemed statistically significant if it were to continue.
On
November 28, 2006, Cellegy completed the sale to ProStrakan for $9.0 million
of
its rights to Cellegesic, Fortigel, Tostrex, Tostrelle, and related intellectual
property assets. ProStrakan also assumed various existing distribution and
other
agreements relating to the assets and intellectual property. Cellegy’s
stockholders approved the transaction at a special meeting of stockholders
held
on November 22, 2006. In connection with the sale, Cellegy renegotiated its
outstanding obligations with PDI and settled its these claims for $3.0
million.
21
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.
The
Company received certain government and non-government grants that support
its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
were 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.
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 are recognized as earned
when
the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Goodwill
and Intangible Assets.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”,
goodwill and other intangible assets with indefinite lives 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.
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.
22
Results
of Operations
As
noted
above under “General”, in November 2006, Cellegy sold substantially all its
intellectual property related to Cellegesic, Rectogesic, Tostrex, Fortigel
and
other products to ProStrakan. As such, the Company will record no additional
sales or licensing revenues in connection with these products or the underlying
technologies.
The
operations of Cellegy Australia for the periods presented are shown as
discontinued operations due to the disposition of Cellegy Australia in April
of
2006.
Biosyn
was acquired on October 22, 2004 and its results are included in the
consolidated financial statements from its date of acquisition.
Years
Ended December 31, 2006, 2005 and 2004
Revenues.
Cellegy
had revenues of approximately $2,660,000, $12,199,000, and $2,033,000 in 2006,
2005 and 2004, respectively. Revenues in each of the three years presented
consist of licensing, milestone and product sales revenues. Revenues in all
three years include grant revenue generated primarily by Biosyn’s
operations.
Licensing
revenues. Licensing
revenues were approximately $477,000, $7,268,000, and $844,000 in 2006, 2005
and
2004, 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 unamortized deferred revenues from PDI. 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 to recognize no
licensing revenues in the foreseeable future.
Product
sales. Product
sales were approximately $257,000, $520,000 and $181,000 in 2006, 2005 and
2004,
respectively. Rectogesic was launched in the United Kingdom in May 2005. Sales
revenue recorded in 2006 represent certain inventory items purchased by
ProStrakan in connection with the sale of the Company’s European rights to
Rectogesic in November 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 agreements
with ProStrakan and the sale of the Company’s technology mentioned above,
Cellegy no longer records product revenue from ProStrakan.
Grant
revenues. Grant
revenues were approximately $1,926,000, $4,410,000 and $1,008,000 in 2006,
2005
and 2004, respectively.
Grant
revenues for 2006 were generated by funding from several agencies in support
of
the following development programs: $1,361,000 for Cyanovirin-N, $55,000 for
Savvy, $218,000 for UC-781 and $292,000 for a UC-781/C31G combination product.
Grant revenues for 2005 were as follows: $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. 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. The Company has discontinued its grant funding in
connection with the reduction of it Biosyn research activities and does not
expect to record grant revenues for 2007.
In
addition to the grant funding above, Biosyn benefits indirectly from agency
funding paid to third party contractors in support of 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.
23
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
approximately $257,000, $250,000 and $63,000 in 2006, 2005 and 2004,
respectively. The increase of $187,000 in 2005 as compared to 2004 was due
to
increased sales volume due to the launch of Rectogesic and Tostrex in
2005.
Research
and Development Expenses. 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 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.
Following
the Company’s decision to eliminate its direct research activities and the sale
of assets to ProStrakan in late 2006, the Company’s operations currently relate
primarily to the ownership of its intellectual property rights relating to
the
Biosyn product candidates. Following the FDA’s decision in July 2006, Cellegy
elected not to pursue additional research activities relating to Cellegesic.
The
Company is also not currently devoting significant financial resources to its
Savvy product candidate, due in part to the cessation of the Nigeria and Ghana
HIV clinical trials in August 2006 and November 2005, respectively. It has
also
eliminated its direct research activities relating to its CV-N and UC-781
product candidates and has transferred certain IND’s to CONRAD pursuant to the
parties’ agreement. The Savvy Phase 3 contraception study conducted in the U.S.
is ongoing although the Company is not directly involved with the conduct or
funding of this trial. The manufacturing costs associated with supplying the
clinical materials for the study are being borne by CONRAD in exchange for
access to the Company’s past research in accordance with the January 2006
agreement between the parties.
The
Company may seek buyers for its HIV and contraceptive/microbicidal technology.
There can be no assurance that the Company will find suitable terms or
arrangements, if any, in connection with its attempts to sell its remaining
technology and research programs.
Research
and development expenses were approximately $1,812,000, $8,390,000 and
$9,583,000 in 2006, 2005 and 2004, respectively. Research and development
expenses, which are primarily related to the costs of clinical trials and
regulatory filings, represented 25%, 48% and 60% of our total operating expenses
in 2006, 2005 and 2004, respectively. The Company expects that there will be
no
significant research spending in 2007 absent a change in the Company’s
circumstances.
Cellegy
research and development expenses decreased approximately $6.6 million in 2006
as compared to 2005. Approximately $1.2 million of this decline was attributable
to a decrease in staffing and related costs due the termination of research
programs and the closing of the Biosyn laboratory facilities in 2006, and
approximately $4.5 million of this decrease was due to decreases in clinical
costs of $2.4 million and $1.1 million toxicology and other clinical
costs.
Cellegy’s
research and development expenses decreased at the parent level by approximately
$4.8 million in 2005 as compared to 2004. Approximately $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’s
research expenses increased approximately $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. Research and development expenses in 2004
of
$860,000 were incurred by Biosyn primarily for the development of Savvy included
in the consolidated results during the fourth quarter of 2004, as well as
$635,000 of Cellegy’s research expenditures, 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 for a milestone achieved during 2004.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses (“SG&A”) were approximately $5,026,000
in 2006, $8,916,000 in 2005, and $6,387,000 in 2004.
24
In
2006,
SG&A expenses decreased by approximately $3.9 million as compared to 2005.
The decrease was due primarily to further staffing reductions in 2006 of $1.2
million, and a decrease in professional fees of $2.5 million relating
to office
closures and reductions in consulting, litigation, accounting and legal costs.
SG&A expenses for 2005 include the receipt of a $1.1 million sublease
termination fee for the Company’s early vacation of its previous headquarters.
SG&A
expenses for 2005 increased approximately $2.5 million 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; and 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.
We
expect
selling, general and administrative expenses to decline further in 2007 due
to
the full year effect of the 2006 reductions in staffing and related expenses,
office and other overhead expenses and due to further expected reductions in
legal, consulting and accounting fees.
Acquired-In-Process
Technology. Results
for 2004
included an in-process technology charge of $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 and other
development programs which were 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 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
operations in 2004.
Other
Income (Expense). Cellegy
recognized interest and other income of approximately $123,000 in 2006, $195,000
in 2005, and $252,000 in 2004. Included in these amounts is interest income
of
approximately $25,000 in 2006, $102,000 in 2005, and $103,000 in 2004. The
Company had also subleased a portion of its facilities in 2004 through early
2005 and recorded rental income in these periods of approximately $149,000
and
$93,000, respectively. Reductions in interest income over the three year period
were due to lower average investment balances and interest rates.
Cellegy
recognized interest and other expense of approximately $808,000 in 2006,
$626,000 in 2005, and $29,000 for 2004. Amounts for 2005 and 2006 consist
primarily of interest expense related to the PDI and Ben Franklin notes payable.
The PDI notes were renegotiated and paid in full in November 2006 and therefore
the Company expects interest expense to decline in 2007.
Gain
on
sale of technology in 2006 includes $9.0 million recognized in connection with
the sale of the Company’s intellectual property discussed above and
approximately $3.6 million of unamortized deferred revenue related to licensing
agreements with ProStrakan under which all obligations were deemed to have
been
fulfilled in connection with the sale. Cellegy renegotiated its outstanding
debt
obligations with PDI in 2006 which resulted in the recognition of approximately
$2.2 million in debt forgiveness which was recorded in other income. Cellegy
renegotiated its license agreement with Neptune in 2006 and obtained a release
from future obligations under this agreement. In connection with the release,
the Company paid Neptune $250,000 which was recorded as other
expense.
The
Company recorded approximately $189,000 and $690,000 derivative revaluation
income associated with the Kingsbridge and PIPE warrants in 2006 and 2005,
respectively due to the precipitous decline in Cellegy’s share price during
these periods and recorded $390,000 related to the Kingsbridge warrants in
2004
for similar reasons.
Discontinued
Operations. On
April
11, 2006, Epsilon purchased all of the shares of Cellegy Australia and the
Company has reflected Cellegy Australia as a discontinued operation. The
subsidiary was part of the Pharmaceutical Segment for the Australian and Pacific
Rim geographic areas. The purchase price for the shares was $1.0 million plus
amounts equal to the liquidated value of Cellegy Australia's cash, accounts
receivable and inventory. The total proceeds of the sale were approximately
$1.3
million. Income from operations of the discontinued operation was approximately
$326,000, $90,000 and $216,000 for 2006, 2005 and 2004,
respectively.
25
Liquidity
and Capital Resources
Our
cash
and cash equivalents were approximately $3.8 million, $2.1 million and $8.5
million at December 31, 2006, 2005 and 2004, respectively.
Cash
and
cash equivalents increased approximately $1.7 million during 2006 as compared
to
2005 due primarily to the sale of technology to ProStrakan for $9.0 million,
proceeds from the sale of the Company’s Australian subsidiary of $1.0 million,
cash received in connection with changes in licensing arrangements with
ProStrakan during 2006 and the liquidation of receivables. Offsetting events
include the resettlement of the PDI notes for $3.0 million, payment of the
Company’s current liabilities along with non-cash events including the reversal
of deferred revenue of approximately $3.6 million recorded in connection with
the technology sale.
Cash
and
cash equivalents decreased approximately $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 the
sale
of the European Rectogesic rights to ProStrakan.
Non
cash
events during 2005 include the recognition of approximately $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.
Cash
and
cash equivalents increased approximately $1.1 million during 2004. Cash used
in
operations of approximately $13.7 million was somewhat offset primarily by
net
proceeds of the 2004 PIPE and Kingsbridge SSO drawdown of approximately
$11.4 million and $1.5 million in payments received pursuant to the ProStrakan
licenses. Additionally, maturing short-term investments of approximately $3.7
million were added to cash and cash equivalents during 2004.
We
prepared the consolidated financial statements assuming that we will continue
as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities during the normal course of business. In preparing
these consolidated financial statements, consideration was given to the
Company’s future business alternatives as described below, which may preclude
the Company from realizing the value of certain assets during their future
course of business. At December 31, 2006, the Company had cash and cash
equivalents of $3.8 million.
In
the
third and fourth quarters of 2006, the Company eliminated its direct research
activities and decided to cease substantially all of its efforts devoted to
establishing a new business. Following these decisions, in the fourth quarter
of
2006, the Company sold a material portion of its intellectual property. The
Company’s operations currently relate primarily to the ownership of its
intellectual property rights of its Biosyn subsidiary and the evaluation of
its
remaining options and alternatives with respect to its future course of
business. While the Savvy Phase 3 contraception trial in the United States
is
ongoing, the Company is not directly involved with the conduct and funding
thereof and, due to the cessation of the HIV Phase 3 trials in 2005 and 2006,
it
is uncertain whether Savvy will be commercialized or whether the Company will
ever realize revenues therefrom. We therefore expect negative cash flows to
continue for the foreseeable future. The Company presently has enough financial
resources to continue operations as they currently exist for the near term,
however, it does not have the technological nor the financial assets necessary
to fund the expenditures that would be required to conduct the future clinical
and regulatory work necessary to commercialize Savvy without additional funding.
Alternatives with respect to the Company’s remaining business and assets might
include seeking to merge or combine with another third party with greater
resources and infrastructure necessary to conduct development programs and
to
commercialize technology. If a suitable candidate cannot be found, the Company
may chose to liquidate or voluntarily file bankruptcy proceedings. Due to the
uncertainty of the cash flow necessary to explore or implement these
alternatives, there can be no assurance that the Company will have adequate
resources to continue operations for longer than 12 months.
These
factors raise substantial doubt about our ability to continue as a going
concern. There is no assurance that any of the above options will be implemented
on a timely basis or that we will be able to sell or license our remaining
technology or find suitable candidates for a business combination or other
transaction, if at all. We may be required to accept less than favorable
commercial terms in any such future arrangements. The consolidated 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
business combination or other agreements, therefore making it more difficult
to
obtain required financing on favorable terms or at all. Such an outcome may
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.
26
Contractual
Obligations
The
table
below summarizes certain of our future contractual obligations as of December
31, 2006:
|
Payments
due by period
|
||||||||||||||||
|
Less
than
|
More
than 5
|
|||||||||||||||
|
Contractual
obligation
|
Total
|
|
one
year
|
|
1-3
years
|
|
3-5
years
|
|
years
|
|||||||
|
Capital
lease obligations1
|
$
|
11,179
|
$
|
11,179
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Operating
lease obligations2
|
8,100
|
8,100
|
||||||||||||||
|
Other
contractual obligations3
|
73,077
|
41,758
|
31,319
|
-
|
-
|
|||||||||||
|
Total
|
$
|
92,356
|
$
|
61,037
|
$
|
31,319
|
$
|
-
|
$
|
-
|
||||||
| 1 |
The
Company’s capital equipment lease obligations for the 2007 year are
$11,179. The term of the lease expires July
2007.
|
|
2
|
The
Company’s obligations under its current facilities lease in Quakertown,
Pennsylvania expires on March 31, 2007, after which time it reverts
to a
month-to-month lease at a current monthly rate of $2,700 per month.
The
lease may be terminated by either party upon 60 days
notice.
|
|
3
|
Includes
obligations under employee severance arrangements, expiring in
September
2008.
|
The
above
table also excludes certain milestone and repayment obligations; as such amounts
are subject to material uncertainties, are contingent upon future events and
are
not probable or estimable at this time. The agreement pursuant to which we
acquired Biosyn provides for contingent milestone payments of $15.0 million
payable to the former shareholders of Biosyn upon approval by the FDA of Savvy
for contraception and HIV prevention or the first commercial sale of Savvy
in
the U.S. for either indication. Of that amount, $2.0 million is payable upon
the
first arm’s length commercial sale of Savvy in Japan based on any regulatory
approval for any indication, and $1.0 million per country is payable upon the
first arm’s length commercial sale of Savvy in Germany, France and the United
Kingdom based on any regulatory approval for any indication. In addition, 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. Also, Chemtura Corporation is entitled to milestone payments from
Biosyn upon the achievement of certain development milestones and royalties
on
products sales, if any, relating to the UC-781 product candidate. In addition,
we have obligations under Biosyn’s promissory note to the Ben Franklin
Technology Center of Southeastern Pennsylvania; however, repayment of this
note
is based on a percentage of future revenues of Biosyn (excluding unrestricted
research and development funding received by Biosyn from non-profit sources),
if
any, until the principal balance of $777,902 is satisfied. There is no
obligation to repay the amounts in the absence of future Biosyn revenues.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109”, which became
effective for fiscal years beginning December 15, 2006. The interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The Company is currently studying this interpretation
to
determine the effect, if any, on the Company’s consolidated financial
statement.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements.
This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. The statement is effective in the fiscal first quarter
of
2008 and the Company will adopt the statement at that time. The Company believes
that the adoption of SFAS No. 157 will not have a material effect on
its results of operations, cash flows or financial position.
27
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which
expresses the Staff’s views regarding the process of quantifying financial
statement misstatements. The bulletin was effective at fiscal year end 2006.
The
implementation of this bulletin had no impact on the Company’s results of
operations, cash flows or financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in
earnings. SFAS No. 159 does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value.
SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We do not expect our adoption of this new standard to have a
material impact on our 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 the May 2005
PIPE 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 or expired. 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
statement of operations in future quarters.
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-32 of this report.
|
Index
to Financial Statements
|
F-1
|
|||
|
Report
of Mayer, Hoffman, McCann, P.C. , Independent Registered Public Accounting
Firm
|
F-2
|
|||
|
Report
of PricewaterhouseCoopers LLP , Independent Registered Public Accounting
Firm
|
F-3
|
|||
|
Consolidated
Balance Sheets
|
F-4
|
|||
|
Consolidated
Statements of Operations
|
F-5
|
|||
|
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Income
(Loss)
|
F-6
|
|||
|
Consolidated
Statements of Cash Flows
|
F-8
|
|||
|
Notes
to Consolidated Financial Statements
|
F-10
|
|||
|
Quarterly
Financial Results
|
F-32
|
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 10-K. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that our disclosure
controls and procedures were effective.
28
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.
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 (the “2007 Proxy Statement”) to be filed no later
than 120 days after the end of the 2006 fiscal year and to be delivered to
stockholders in connection with the 2007 Annual Meeting of Stockholders. Such
information is incorporated herein by reference. Information required by this
Item with respect to executive officers is set forth below:
|
Richard
C. Williams
|
63
|
Chairman
and Interim Chief Executive Officer, Director
|
|||
|
Robert
J. Caso
|
51
|
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.
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.
ITEM
11: EXECUTIVE COMPENSATION
Information
with respect to this Item may be found in the section captioned “Executive
Compensation” appearing in the forthcoming 2007 Proxy Statement and is
incorporated herein by reference.
29
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 2007 Proxy Statement and is incorporated herein by
reference.
Information
with respect to this Item may be found in the section captioned “Certain
Relationships and Related Transactions” appearing in the 2007 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 2007 Proxy Statement and is
incorporated herein by reference.
ITEM
15: EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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.)
|
|
2.3
|
Share
Purchase Agreement dated as of March 31, 2006 by and between the
Registrant and Epsilon Pharmaceuticals Pty. Ltd. (Incorporated by
reference to Exhibit 2.1 to the Company’s Form 10-Q for the quarter ended
June 30, 2006).
|
|
|
2.4
|
Asset
Purchase Agreement dated September 26, 2006, between the Registrant
and
Strakan International Limited (Incorporated by reference to Exhibits
filed
with the Registrant’s Schedule 14A, which includes a Report on Form 8-K,
filed September 27, 2006, with the Securities and Exchange Commission
(the
“Commission”).)
|
|
|
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”).)
|
30
|
*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.
(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. (Incorporated by reference to Exhibit 10.24 to the
Company’s Form 10-K for the year ended December 31, 2005 (the “2005 Form
10-K”).)
|
|
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.)
|
|
*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. (Incorporated by reference to Exhibit 10.24
to the
Company’s Form 10-K for the year ended December 31, 2005 (the “2005 Form
10-K”)).
|
31
|
10.25
|
|
Forms
of Option Agreements under the 2005 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.25 to the 2005 Form 10-K.)
|
|
10.30
|
|
First
Amended and Restated Exclusive License and Distribution Agreement
dated as of November 9, 2005, between Cellegy and ProStrakan International
Limited. (Confidential treatment has been requested for portions
of this
exhibit.) (Incorporated by reference to Exhibit 10.30 to the 2005
Form
10-K.)
|
|
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.) (Incorporated
by reference to Exhibit 10.31 to the 2005 Form 10-K.)
|
|
10.32
|
Termination
Agreement and Release of Claims dated as of September 22, 2006, by
and
between the Registrant and Stephen R. Gorfine, M.D., as representative.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September
27,
2006, with the Securities and Exchange Commission.)
|
|
|
10.33
|
Letter
Agreement dated September 20, 2006, between the Registrant and PDI,
Inc.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September
27,
2006, with the Securities and Exchange Commission.)
|
|
|
10.34
|
Promissory
Note dated September 26, 2006, in favor of Strakan International
Limited.
(Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q for
the period ended September 30, 2006.)
|
|
|
10.35
|
Patent
Collateral Assignment and Security Agreement dated September 26,
2006,
between the Registrant and Strakan International Limited. (Incorporated
by
reference to Exhibit 10.4 to the Company’s Form 10-Q for the period ended
September 30, 2006.)
|
|
|
10.36
|
License
Agreement dated January 30, 2006, by and between CONRAD, Eastern
Virginia
Medical School, and Biosyn, Inc. (Confidential treatment has been
requested for portions of this agreement)
|
|
|
21.1
|
|
Subsidiaries
of the Registrant.
|
|
23.1
|
|
Consent
of Mayer, Hoffman, McCann P.C., Independent Registered Public Accounting
Firm.
|
|
23.2
|
|
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.
|
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
Quakertown, Commonwealth of Pennsylvania, on April 2, 2007.
|
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.
32
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
|
April
2, 2007
|
|||||
|
|
and
Director
|
|
|||||
|
|
|||||||
|
Principal
Financial Officer
|
|||||||
|
and
Principal Accounting Officer:
|
|||||||
|
|
|||||||
|
/s/
ROBERT J. CASO
|
Vice President, Finance, Chief Financial | April 2, 2007 | |||||
|
Robert J. Caso |
Officer and Secretary | ||||||
|
|
|||||||
|
Directors:
|
|||||||
| /s/ JOHN Q. ADAMS | Director | April 2, 2007 | |||||
|
|
|||||||
| /s/ TOBI B.KLAR, M.D. | Director | April 2, 2007 | |||||
|
Tobi
B. Klar, M.D.
|
|||||||
|
/s/
ROBERT B. ROTHERMEL
|
Director | April 2, 2007 | |||||
|
Robert
B. Rothermel
|
|||||||
|
/s/
THOMAS M. STEINBERG
|
Director | April 2, 2007 | |||||
|
|
|||||||
33
|
|
Page
|
|||
|
Reports
of Independent Registered Public Accounting Firm
|
F-2
|
|||
|
Consolidated
Balance Sheets
|
F-4
|
|||
|
Consolidated
Statements of Operations
|
F-5
|
|||
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive
Income (Loss)
|
F-6
|
|||
|
Consolidated
Statements of Cash Flows
|
F-8
|
|||
|
Notes
to Consolidated Financial Statements
|
F-10
|
|||
F-1
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Cellegy
Pharmaceuticals, Inc.
We
have
audited the accompanying consolidated balance sheet of Cellegy Pharmaceuticals
Inc. and its subsidiary as of December 31, 2006 and the related consolidated
statements of operations, changes in stockholders’ equity (deficit), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (PCAOB). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Cellegy
Pharmaceuticals Inc. and its subsidiary as of December 31, 2006, and the results
of its operations and its cash flows for the year then ended in conformity
with
U.S. generally accepted accounting principles.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred recurring losses from operations
and has limited working capital to pursue its business alternatives. These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans with regard to these matters are also
described in Note 1. The 2006 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Mayer
Hoffman McCann P.C.
Plymouth
Meeting, Pennsylvania
April
2,
2007
F-2
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Cellegy
Pharmaceuticals, Inc.
In
our
opinion, the consolidated balance sheet as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income (loss), and cash flows for each of two years in the period
ended December 31, 2005 present fairly, in all material respects, the financial
position of Cellegy Pharmaceuticals, Inc. and its subsidiaries at December
31,
2005, and the results of their operations and their cash flows for each of
the
two years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America. These 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 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 included in the
2005 Form 10-K (not presented herein), the Company has incurred substantial
losses and negative cash flows from operations since its inception, and the
Company does not believe it has enough financial resources to continue
operations beyond April 2006. These conditions raise substantial doubt about
the
Company's ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 1 to the consolidated financial
statements included in the 2005 Form 10-K (not presented herein). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
PricewaterhouseCoopers, LLP
March
30,
2006 except with respect to the effects of the discontinued operations as
discussed in Note 20, as to which the date is April 2, 2007
F-3
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
3,803,832
|
$
|
2,113,008
|
|||
|
Short-term
investments
|
-
|
11,189
|
|||||
|
Accounts
receivable
|
76,791
|
1,066,299
|
|||||
|
Inventory
|
-
|
257,197
|
|||||
|
Prepaid
expenses and other current assets
|
264,554
|
1,077,164
|
|||||
|
Total
current assets
|
4,145,177
|
4,524,857
|
|||||
|
Property
and equipment, net
|
-
|
496,419
|
|||||
|
Intangible
assets, net
|
-
|
196,204
|
|||||
|
Assets
from discontinued operations
|
-
|
1,232,503
|
|||||
|
Total
assets
|
$
|
4,145,177
|
$
|
6,449,983
|
|||
|
Liabilities
and Stockholders' Equity (Deficit)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
174,839
|
$
|
1,743,653
|
|||
|
Accrued
expenses and other current liabilities
|
536,591
|
2,383,698
|
|||||
|
Current
portion of notes payable
|
44,700
|
4,975,892
|
|||||
|
Current
portion of deferred revenue
|
-
|
257,893
|
|||||
|
Liabilities
from discontinued operations
|
-
|
31,182
|
|||||
|
Total
current liabilities
|
756,130
|
9,392,318
|
|||||
|
Notes
payable
|
322,125
|
257,000
|
|||||
|
Derivative
instruments
|
3,987
|
192,570
|
|||||
|
Deferred
revenue
|
-
|
3,084,629
|
|||||
|
Total
liabilities
|
1,082,242
|
12,926,517
|
|||||
|
Stockholders'
equity (deficit):
|
|||||||
|
Preferred
Stock, no par value; 5,000,000 shares authorized;
|
|||||||
|
no
shares issued and outstanding at December 31, 2006 and
2005
|
|||||||
|
Common
stock, par value $.0001; 50,000,000 shares authorized;
|
|||||||
|
29,834,796
and 29,831,625 shares issued and outstanding at December 31, 2006
and
2005, respectively
|
2,984
|
2,983
|
|||||
|
Additional
paid-in capital
|
125,699,145
|
125,547,788
|
|||||
|
Accumulated
other comprehensive income
|
-
|
283,694
|
|||||
|
Accumulated
deficit
|
(122,639,194
|
)
|
(132,310,999
|
)
|
|||
|
Total
stockholders' equity (deficit)
|
3,062,935
|
(6,476,534
|
)
|
||||
|
Total
liabilities and stockholders' equity (deficit)
|
$
|
4,145,177
|
$
|
6,449,983
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-4
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Revenues:
|
||||||||||
|
Licensing,
milestone and development funding
|
$
|
477,082
|
$
|
7,268,270
|
$
|
844,044
|
||||
|
Grants
|
1,925,779
|
4,410,243
|
1,007,500
|
|||||||
|
Product
sales
|
257,197
|
520,200
|
181,386
|
|||||||
|
Total
revenues
|
2,660,058
|
12,198,713
|
2,032,930
|
|||||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of product sales
|
257,197
|
249,673
|
63,485
|
|||||||
|
Research
and development
|
1,812,088
|
8,389,954
|
9,582,799
|
|||||||
|
Selling,
general and administrative
|
5,025,786
|
8,915,760
|
6,387,204
|
|||||||
|
Equipment
fair market value adjustment
|
250,729
|
-
|
-
|
|||||||
|
Acquired
in-process technology
|
-
|
-
|
14,981,816
|
|||||||
|
Total
costs and expenses
|
7,345,800
|
17,555,387
|
31,015,304
|
|||||||
|
Operating
loss
|
(4,685,742
|
)
|
(5,356,674
|
)
|
(28,982,374
|
)
|
||||
|
Other
income (expenses):
|
||||||||||
|
Interest
and other income
|
122,983
|
195,331
|
251,598
|
|||||||
|
Gain
on sale of technology
|
12,615,540
|
-
|
-
|
|||||||
|
Debt
forgiveness
|
2,162,776
|
-
|
-
|
|||||||
|
Contingency
settlement
|
(250,000
|
)
|
-
|
-
|
||||||
|
Interest
and other expense
|
(807,945
|
)
|
(625,709
|
)
|
(28,952
|
)
|
||||
|
Derivative
revaluation
|
188,583
|
689,708
|
390,000
|
|||||||
|
Total
other income (expenses)
|
14,031,937
|
259,330
|
612,646
|
|||||||
|
Net
income (loss) from continuing operations applicable
|
||||||||||
|
to
common stockholders
|
9,346,195
|
(5,097,344
|
)
|
(28,369,728
|
)
|
|||||
|
Discontinued
operations
|
||||||||||
|
Income
from operations of the discontinued component,
|
||||||||||
|
including
gain on the disposal of $249,451, in 2006
|
325,610
|
89,705
|
215,666
|
|||||||
|
Net
income (loss) applicable to common stockholders
|
$
|
9,671,805
|
$
|
(5,007,639
|
)
|
$
|
(28,154,062
|
)
|
||
|
From
continuing operations
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
(1.29
|
)
|
||
|
From
discontinued operations
|
-
|
-
|
0.01
|
|||||||
|
Basic
income (loss) per common share:
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
||
|
From
continuing operations
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
(1.29
|
)
|
||
|
From
discontinued operations
|
-
|
-
|
0.01
|
|||||||
|
Diluted
income (loss) per common share:
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
(1.28
|
)
|
||
|
Weighted
average number of common shares used in per share
|
||||||||||
|
calculations:
|
||||||||||
|
Basic
|
29,833,609
|
28,497,364
|
22,020,689
|
|||||||
|
Diluted
|
29,851,254
|
28,497,364
|
22,020,689
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
F-5
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive Income
(Loss)
|
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Accumulated Other
Comprehensive
|
|
Accumulated
|
|
Total
Stockholders'
|
|
||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
(Loss)
|
|
Deficit
|
|
Equity
(Deficit)
|
|||||||
|
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 $.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
|
|||||||||||||
|
Gain
on foreign currency translation
|
-
|
-
|
-
|
579,099
|
-
|
579,099
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(28,154,062
|
)
|
(28,154,062
|
)
|
|||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
(27,574,963
|
)
|
||||||||||||
|
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-6
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive Income
(Loss) (Continued)
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
||||||||||
|
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Other
Comprehensive
|
|
Accumulated
|
|
Stockholders' Equity |
|
||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
(Loss)
|
|
Deficit
|
|
(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 private
placement of common stock in May 2005, net of issuance
costs of $233,000
|
3,621,819
|
362
|
5,720,826
|
-
|
-
|
5,721,188
|
|||||||||||||
|
Derivative
instrument in connection with May 2005 PIPE
|
-
|
-
|
(471,479
|
)
|
-
|
-
|
(471,479
|
)
|
|||||||||||
|
Unrealized
gain on investments
|
-
|
-
|
2,591
|
8,598
|
-
|
11,189
|
|||||||||||||
|
Loss
on foreign currency translation
|
-
|
-
|
-
|
(29,148
|
)
|
-
|
(29,148
|
)
|
|||||||||||
|
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
|
)
|
|||||||||||
|
Exercise
of options to purchase common stock
|
3,171
|
1
|
895
|
-
|
-
|
896
|
|||||||||||||
|
Noncash
compensation expense related to stock options
|
-
|
-
|
150,462
|
-
|
-
|
150,462
|
|||||||||||||
|
Unrealized
loss on investments
|
-
|
-
|
-
|
(8,598
|
)
|
-
|
(8,598
|
)
|
|||||||||||
|
Loss
on foreign currency translation
|
-
|
-
|
-
|
(275,096
|
)
|
-
|
(275,096
|
)
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
9,671,805
|
9,671,805
|
|||||||||||||
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
9,388,111
|
|||||||||||||
|
Balances
at December 31, 2006
|
29,834,796
|
$
|
2,984
|
$
|
125,699,145
|
$
|
-
|
$
|
(122,639,194
|
)
|
$
|
3,062,935
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
F-7
Cellegy
Pharmaceuticals, Inc.
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income (loss)
|
$
|
9,671,805
|
$
|
(5,007,639
|
)
|
$
|
(28,154,062
|
)
|
||
|
Adjustments
to reconcile net income (loss) from continuing
|
||||||||||
|
operations
to net cash used in operating activites:
|
||||||||||
|
Acquired
in-process technology
|
-
|
-
|
14,981,816
|
|||||||
|
Bad
debt expense and other noncash items
|
21,861
|
199,798
|
-
|
|||||||
|
Depreciation
and amortization expenses
|
121,132
|
360,236
|
415,078
|
|||||||
|
Intangible
assets amortization and impairment
|
196,204
|
582,788
|
164,066
|
|||||||
|
Loss
on sale of property and equipment
|
375,286
|
1,000,840
|
30,710
|
|||||||
|
Equity
compensation expense
|
150,462
|
651
|
109,149
|
|||||||
|
Derivative
revaluation
|
(188,583
|
)
|
(689,708
|
)
|
(390,000
|
)
|
||||
|
Interest
accretion on notes payable
|
762,872
|
531,759
|
-
|
|||||||
|
PDI
settlement
|
(2,162,776
|
)
|
2,000,000
|
-
|
||||||
|
Gain
on sale of technology
|
(12,615,540
|
)
|
-
|
-
|
||||||
|
Gain
on sale of Australian subsidiary
|
(249,451
|
)
|
-
|
-
|
||||||
|
Issuance
of common stock for services rendered, interest
|
||||||||||
|
and
Neptune milestones
|
-
|
-
|
750,000
|
|||||||
|
Changes
in operating assets and liabilitites:
|
||||||||||
|
Prepaid
expenses and other current assets
|
778,106
|
(602,428
|
)
|
142,077
|
||||||
|
Inventory
|
257,197
|
-
|
-
|
|||||||
|
Accounts
receivable
|
989,507
|
(265,416
|
)
|
(398,900
|
)
|
|||||
|
Other
assets
|
-
|
58,642
|
-
|
|||||||
|
Accounts
payable
|
(1,568,814
|
)
|
83,345
|
(285,952
|
)
|
|||||
|
Accrued
expenses and other current liabilities
|
(1,847,107
|
)
|
(773,375
|
)
|
(1,179,173
|
)
|
||||
|
Other
long-term liabilities
|
(7,663
|
)
|
(489,658
|
)
|
(261,807
|
)
|
||||
|
Deferred
revenue
|
273,018
|
(13,718,802
|
)
|
476,075
|
||||||
|
Net
cash used in operating activities
|
(5,042,484
|
)
|
(16,728,967
|
)
|
(13,600,923
|
)
|
||||
|
Investing
activities:
|
||||||||||
|
Purchases
of property and equipment
|
-
|
(103,497
|
)
|
(203,988
|
)
|
|||||
|
Purchases
of investments
|
-
|
(11,189
|
)
|
-
|
||||||
|
Proceeds
from the sale of short-term investments
|
11,189
|
-
|
-
|
|||||||
|
Maturity
of investments
|
-
|
-
|
3,686,919
|
|||||||
|
Proceeds
from restricted cash
|
-
|
227,500
|
-
|
|||||||
|
Proceeds
from sale of Australian subsidiary
|
1,331,033
|
-
|
-
|
|||||||
|
Acquisition
of Vaxis, Quay and Biosyn
|
-
|
-
|
(303,966
|
)
|
||||||
|
Proceeds
from the sale of technology
|
9,000,000
|
-
|
-
|
|||||||
|
Transfer
of cash balance upon disposition of discontinued/
|
||||||||||
|
held
for sale operations
|
(185,554
|
)
|
93,794
|
(138,281
|
)
|
|||||
|
Net
cash provided by investing activities
|
10,156,668
|
206,608
|
3,040,684
|
|||||||
|
Financing
activities:
|
||||||||||
|
Issuance
of notes payable
|
2,000,000
|
4,444,133
|
-
|
|||||||
|
Repayment
of notes payable
|
(5,458,500
|
)
|
-
|
-
|
||||||
|
Net
proceeds from issuance of common stock
|
896
|
5,747,037
|
11,457,601
|
|||||||
|
Net
cash provided by (used in) financing activities
|
(3,457,604
|
)
|
10,191,170
|
11,457,601
|
||||||
|
Effect
of exchange rate changes on cash
|
34,244
|
(29,148
|
)
|
19,599
|
||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,690,824
|
(6,360,337
|
)
|
916,961
|
||||||
|
Cash
and cash equivalents, beginning of year
|
2,113,008
|
8,473,345
|
7,556,384
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
3,803,832
|
$
|
2,113,008
|
$
|
8,473,345
|
||||
The
accompanying notes are an integral part of these financial statements.
F-8
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Cash Flows (Continued)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Supplemental
cash flow information:
|
||||||||||
|
Interest
paid
|
$
|
23,029
|
$
|
85,958
|
$
|
-
|
||||
|
Supplemental
disclosure of noncash transactions:
|
||||||||||
|
Issuance
of common stock for notes payable
|
-
|
5,720,826
|
-
|
|||||||
|
Issuance
of warrants in connection with Kingsbridge
|
||||||||||
|
financings
|
-
|
-
|
800,800
|
|||||||
|
Issuance
of warrants in connection with notes payable
|
||||||||||
|
financing
|
-
|
471,479
|
-
|
|||||||
|
Issuance
of common stock for milestone payments
|
-
|
-
|
750,000
|
|||||||
|
Fair
value of assets acquired, net of liabilities assumed
|
||||||||||
|
for
Biosyn acquisition
|
-
|
-
|
11,856,000
|
|||||||
|
Interest
expense amortization for long-term obligations
|
762,872
|
-
|
-
|
|||||||
The
accompanying notes are an integral part of these financial
statements.
F-9
1.
Accounting
Policies
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. (“Cellegy Australia”) and Cellegy
Canada, Inc. (“Canada”) (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
intercompany balances and transactions have been eliminated in
consolidation.
Cellegy
was previously a development stage 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 had 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
noncontraceptive microbicides, include Savvy, which is undergoing Phase 3
clinical trials in the United States; UC-781 vaginal gel, in Phase 1 trials;
and
Cyanovirin-N.
Liquidity
and Capital Resources
We
prepared the consolidated financial statements assuming that we will continue
as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities during the normal course of business. In preparing
these consolidated financial statements, consideration was given to the
Company’s future business alternatives as described below, which may preclude
the Company from realizing the value of certain assets during their future
course of business. At December 31, 2006, the Company had cash and cash
equivalents of $3.8 million.
In late
2006, the Company eliminated its direct research activities and all of its
efforts devoted to establishing a new business. As a result, the Company ceased
being a development stage company. Following these decisions, in the fourth
quarter of 2006, the Company sold a material portion of its intellectual
property. The Company’s operations currently relate primarily to the
intellectual property of its Biosyn subsidiary and the evaluation of its
remaining options and alternatives with respect to its future course of
business. While the Savvy Phase 3 contraception trial in the United States
is
ongoing, the Company is not directly involved with the conduct and funding
thereof and, due to the cessation of the HIV Phase 3 trials in 2005 and 2006,
it
is uncertain whether Savvy will be commercialized or whether the Company will
ever realize revenues therefrom. We therefore expect negative cash flows to
continue for the foreseeable future. The Company presently has enough financial
resources to continue operations as they currently exist for the near term,
however, it does not have the technological nor the financial assets necessary
to fund the expenditures that would be required to conduct the future clinical
and regulatory work necessary to commercialize Savvy without additional funding.
Alternatives with respect to the Company’s remaining business and assets might
include seeking to merge or combine with another third party with greater
resources and infrastructure necessary to conduct development programs and
to
commercialize technology. If a suitable candidate cannot be found, the Company
may chose to liquidate or voluntarily file bankruptcy proceedings. Due to the
uncertainty of the cash flow necessary to explore or implement these
alternatives, there can be no assurance that the Company will have adequate
resources to continue operations for longer than twelve (12)
months.
These
factors raise substantial doubt about our ability to continue as a going
concern. There is no assurance that any of the above options will be implemented
on a timely basis or that we will be able to sell our remaining technology
or
find suitable candidates for a business combination or other transaction, if
at
all. We may be required to accept less than favorable commercial terms in any
such future arrangements. The consolidated 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 business combination
or
other agreements, therefore making it more difficult to obtain required
financing on favorable terms or at all. Such an outcome may 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-10
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 consolidated 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 nonrefundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
The
Company received certain government and non-government grants that support
its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
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. In 2006, the Company discontinued
its grant funding in connection with the elimination of its Biosyn
direct research activities.
Revenues
related to product sales are recognized when title has been transferred to
the
customer and when all of the following criteria are met; i.e., 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 are 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.
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 expenses. 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 as of December 31,
2006 and 2005. As of December 31, 2006, the Company’s cash and cash equivalents
are maintained at two financial institutions in the United States. 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’ equity (deficit) as accumulated other
comprehensive income until their disposition. The cost of securities sold is
based on the specific identification method.
F-11
Realized
gains or losses and declines in value, deemed to be other than temporary on
available-for-sale securities, and are included in other income
(expenses).
Accounts
Receivable
Accounts
receivable are carried at cost, less an allowance for losses. The Company does
not accrue finance or interest charges. On a quarterly basis, the Company
evaluates its accounts receivable and establishes an allowance for losses,
based
on the history of past write-offs and collections and current economic
conditions.
Inventory
Inventory
is valued at the lower of cost or market.
Concentration
of Credit Risk
As
of
December 31, 2006, the Company had its cash in demand deposits and money
market funds.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of property and equipment are computed using
the
straight-line method over the estimated useful lives of the respective
assets.
|
Estimated Useful Lives
|
||||
|
Furniture
and fixtures
|
3
years
|
|||
|
Office
equipment
|
3
years
|
|||
|
Laboratory
equipment
|
5
years
|
|||
|
Leasehold
improvements
|
10
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 and amortization are removed from the accounts and the related
gain
or loss is reflected in operations.
In
September 2006, the Company either disposed of, or wrote down, substantially
all
its property and equipment in connection with the closure of its California
office and the reduction of Biosyn’s research and development
activities.
Intangible
Assets
Statement
of Accounting Standards (“SFAS”) No. 142 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 (“FCT”)
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 accumulated other
comprehensive income (loss).
F-12
Accumulated
Other Comprehensive Income
Accumulated
other comprehensive income generally represents all changes in stockholders’
equity (deficit) except those resulting from investments or contributions by
stockholders. The Company’s unrealized gains and losses on available-for-sale
securities and FCT adjustments represent the only components of accumulated
other comprehensive income that are excluded from the Company’s net income
(loss).
|
Years
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Realized
gain on investments
|
$
|
8,598
|
$
|
20,045
|
|||
|
FCT
adjustments
|
275,096
|
284,199
|
|||||
|
Accumulated
other comprehensive income
|
$
|
283,694
|
$
|
304,244
|
|||
Stock-based
Compensation
Effective
January 1, 2006, the Company began recording compensation expense associated
with stock options and other forms of equity compensation in accordance with
SFAS No. 123 (revised 2004), Share-Based
Payment (“SFAS
No. 123R”), as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to
January 1, 2006, the Company accounted for stock options according to the
provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (“APB
Opinion No. 25”), and related interpretations and, therefore, no related
compensation expense was recorded for awards granted with no intrinsic value.
The Company adopted the modified prospective transition method provided for
under SFAS No. 123R and, consequently, has not retroactively adjusted results
from prior periods. Under this transition method, compensation cost associated
with stock options recognized in the year ended December 31, 2006, includes:
1)
amortization related to the remaining unvested portion of all stock option
awards granted prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation;
and 2)
amortization relating to all stock option awards granted or modified on or
subsequent to January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS No. 123R.
As
a
result of the adoption of SFAS No. 123R, the Company’s net income for the year
ended December 31, 2006, was approximately $150,000 lower than under the
Company’s previous accounting method for share-based compensation.
Prior
to
the adoption of SFAS No. 123R, the Company presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Consolidated
Statements of Cash Flows. SFAS No. 123R requires that cash flows resulting
from
tax deductions in excess of the cumulative compensation cost recognized for
options exercised (excess tax benefits) be classified as financing cash flows.
The Company has sufficient net operating loss carryforwards to generally
eliminate cash payments for income taxes. Therefore, no cash has been retained
as a result of excess tax benefits relating to share-based payments made to
directors and employees.
For
stock
options granted prior to the adoption of SFAS No. 123R, if compensation expense
for the Company’s various stock option plans had been determined based upon
estimated fair values at the grant dates in accordance with SFAS No. 123, the
Company’s pro forma net loss and basic and diluted income per common share would
have been as follows (in thousands):
|
Years
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
loss from continuing operations, as reported
|
$
|
(5,097,344
|
)
|
$
|
(28,369,728
|
)
|
|
|
Add:
Stock-based employee costs included in reported net loss
|
-
|
80,860
|
|||||
|
Deduct:
Stock-based employee compensation costs determined
|
|||||||
|
under
the fair value based method for all awards
|
(421,750
|
)
|
(790,518
|
)
|
|||
|
Net
loss, pro-forma
|
$
|
(5,519,094
|
)
|
$
|
(29,079,386
|
)
|
|
|
Basic
net loss per common share
|
|||||||
|
As
reported
|
$
|
(0.18
|
)
|
$
|
(1.29
|
)
|
|
|
Pro-Forma
|
$
|
(0.19
|
)
|
$
|
(1.32
|
)
|
|
|
Diluted
net loss per common share
|
|||||||
|
As
reported
|
$
|
(0.18
|
)
|
$
|
(1.29
|
)
|
|
|
Pro-Forma
|
$
|
(0.19
|
)
|
$
|
(1.32
|
)
|
|
F-13
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
|
||||||
|
Risk-free
interest rate
|
4.4
|
%
|
3.6
|
%
|
|||
|
Dividend
yield
|
-
|
%
|
-
|
%
|
|||
|
Volatility
|
78.0
|
%
|
86.0
|
%
|
|||
|
Expected
life in years
|
5.9
|
4.3
|
|||||
The
Company did not grant any options during 2006. The weighted average per share
grant date fair value of options granted during the years
ended December 31, 2005 and 2004, was $1.81 and $4.37,
respectively.
The
Company accounts for equity instruments issued to nonemployees 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
June
2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109,” which became
effective for fiscal years beginning December 15, 2006. The interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The Company is currently studying this interpretation
to
determine the effect, if any, on the Company’s consolidated financial
statements.
In
September 2006, FASB issued SFAS No. 157, Fair
Value Measurements.
This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. The statement is effective in the fiscal first quarter
of
2008 and the Company will adopt the statement at that time. The Company believes
that the adoption of SFAS No. 157 will not have a material effect on
its results of operations, cash flows or financial position.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which
expresses the Staff’s views regarding the process of quantifying financial
statement misstatements. The bulletin was effective at fiscal year-end 2006.
The
implementation of this bulletin had no impact on the Company’s results of
operations, cash flows or financial position.
F-14
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported
in
earnings. SFAS No. 159 does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value.
SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We do not expect our adoption of this new standard to have a
material impact on our financial position, results of operations or cash
flows.
Basic
and Diluted Net Income (Loss) per Common Share
Basic
net
income (loss) per common share is computed using the weighted average number
of
common shares outstanding during the period. Diluted net income (loss) per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. For years ended December
31, 2005 and 2004, there is no difference between basic and diluted net income
(loss) per common share, as presented in the consolidated statements of
operations, because all options and warrants are antidilutive. The total number
of shares that had their impact excluded were:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
|
2005
|
|
2004
|
||||||
|
Options
|
1,381,589
|
3,658,764
|
4,345,777
|
|||||||
|
Warrants
|
2,374,593
|
2,374,593
|
945,869
|
|||||||
|
Total
number of shares excluded
|
3,756,182
|
6,033,357
|
5,291,646
|
|||||||
Excluded
in the years ended December 31, 2005 and 2004, are 2,121,212 shares that would
have been issuable upon conversion of the $3.5 million nonnegotiable senior
convertible debenture due PDI, Inc. (“PDI”). (see Note 8)
Certain
reclassifications have been made to prior year amounts to conform with current
year presentation.
2. Accounts
Receivable
Accounts
receivable consist of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Unbilled
grants receivable
|
$
|
-
|
$
|
759,906
|
|||
|
Trade
receivables, net of allowance of $35,000 in 2005
|
-
|
183,945
|
|||||
|
Grant
receivables
|
62,605
|
62,941
|
|||||
|
Other
receivables
|
14,186
|
59,507
|
|||||
|
$
|
76,791
|
$
|
1,066,299
|
||||
At
December 31, 2005, the Company had an investment in marketable securities of
$11,189. In January 2006, the Company liquidated the investment, realizing
a
gain of $8,598. At December 31, 2006, the Company had no
investments.
4. Prepaid
Expenses and Other Current Assets
At
December 31, 2006 and 2005, this account includes the following:
|
2006
|
2005
|
||||||
|
Prepaid
insurance
|
$
|
236,815
|
$
|
195,749
|
|||
|
Security
deposits
|
18,100
|
34,506
|
|||||
|
Prepaid
compensation
|
-
|
803,444
|
|||||
|
9,639
|
43,465
|
||||||
|
$
|
264,554
|
$
|
1,077,164
|
||||
F-15
5. Intangible
Assets, Net
The
Company’s intangible assets and related accumulated amortization at
December 31, 2006 and 2005, respectively, were as follows:
|
|
|
Year
Ended December 31, 2006
|
|
Year
Ended December 31, 2005
|
|
|||||||||||||||||||||||
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|||||||||||||||
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
|||||||||||||||
|
|
|
Amount
|
|
Amortiation
|
|
Amount
|
|
Amount
|
|
Amortiation
|
|
Amount
|
||||||||||||||||
|
Capitalized
Workforce - Biosyn acquisition
|
$
|
381,558
|
$
|
|
(381,558
|
)
|
$
|
|
-
|
$
|
381,558
|
$
|
|
(185,354
|
)
|
$
|
196,204
|
|||||||||||
Subsequent
to the purchase of Biosyn in 2004, several of its key people left the Company
in
2006, 2005 and 2004. The departure of these employees required the reduction
in
the carrying value of the intangible asset recorded in 2006, 2005 and 2004
in
connection with the acquisition. Estimating the fair market value of the key
people remaining resulted in an impairment of the asset as of December 31,
2006,
2005 and 2004 of $149,352, $253,946 and $25,939, respectively. These amounts
were recognized as impairment expense in their respective years.
Amortization
recorded for the years ended December 31, 2006, 2005 and 2004, was $46,852,
$158,876 and $26,478, respectively.
6. Property
and Equipment, Net
Property
and equipment, net consist of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Furniture
and fixtures
|
$
|
-
|
$
|
81,247
|
|||
|
Office
equipment
|
19,855
|
337,247
|
|||||
|
Laboratory
equipment
|
-
|
517,970
|
|||||
|
Leasehold
improvements
|
-
|
81,599
|
|||||
|
19,855
|
1,018,063
|
||||||
|
(19,855
|
)
|
(521,644
|
)
|
||||
|
|
$ | - |
$
|
496,419
|
|||
F-16
Depreciation
and amortization expenses for the years ended 2006, 2005 and 2004, was
approximately $121,000, $360,000 and $415,000, respectively. In March 2005,
the
Company relocated its South San Francisco offices to Brisbane, California.
On
September 30, 2006, the Company closed its offices in Brisbane, California
and
disposed of certain fixed assets. At that time, the Company relocated its
Huntingdon Valley, Pennsylvania headquarters to Quakertown, Pennsylvania and
either disposed of or wrote down all of its research and development equipment
and certain other fixed assets, and recorded impairment charges of approximately
$251,000.
In
March
2005, the Company relocated its South San Francisco office 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.
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,
2006 and 2005, were as follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Accrued
clinical expenses
|
$
|
-
|
$
|
641,995
|
|||
|
Accrued
legal fees
|
22,262
|
60,830
|
|||||
|
Accrued
retention and severance
|
99,989
|
1,039,571
|
|||||
|
Accrued
accounting and consulting fees
|
175,000
|
45,934
|
|||||
|
Insurance
payable
|
163,554
|
140,788
|
|||||
|
Other
|
75,786
|
454,580
|
|||||
|
Total
|
$
|
536,591
|
$
|
2,383,698
|
|||
8. Notes
Payable
Ben
Franklin Note
Biosyn
issued a note to Ben Franklin Technology Center of Southeastern Pennsylvania
(“Ben Franklin Note”) in October 1992, in connection with funding the
development of a compound to prevent the transmission of AIDS.
The
Ben
Franklin Note was recorded at its estimated fair value of $205,000 and was
assumed by Cellegy in connection with its acquisition of Biosyn in 2004. 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 nonprofit sources. There is
no
obligation to repay the amounts in the absence of future Biosyn revenues. The
Company is accreting the discount of $572,902 against 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. At
December 31, 2006, the outstanding balance of the note is $322,125.
PDI
Notes
In
connection with a settlement agreement dated April 11, 2005, PDI issued two
non-interest bearing notes; a $3.0 million secured promissory note payable
on
October 12, 2006, and a $3.5 million nonnegotiable senior convertible debenture
with a maturity date of April 11, 2008 (the “PDI Notes”). The PDI Notes were
settled for $3.0 million in September 2006.
F-17
The
$3.0
million secured promissory note was payable on October 12, 2006. There was
no
stated interest rate and no periodic payments were required. Original
payment terms included payments to the extent of 50% of future funds to be
received by Cellegy as licensing fees, royalties or milestone payments or
similar payments from licensees of Tostrex and Rectogesic products in
territories outside of North America, 50% of licensing fees, royalties or
milestone payments or similar payments from Fortigel licensees in North American
markets, and 10% of proceeds received by Cellegy in excess of $5.0 million
from
financings. The net present value of the secured promissory note was
recalculated based on its remaining principal whenever a payment was made by
Cellegy. Payments in 2006 and 2005 totaled $458,500 and $200,000,
respectively.
Prior
to
the settlement and repayment, the $3.5 million nonnegotiable senior convertible
debenture had a maturity date of April 11, 2008, three years from the PDI
settlement date of April 11, 2005. There was no stated interest rate and no
periodic payments were required. Cellegy could have redeemed the note at anytime
before the maturity date upon prior notice to PDI, at a redemption price equal
to the principal amount. If Cellegy delivered such a redemption notice, PDI
could have converted 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 could have converted the note into Cellegy
common stock at a price of $1.65 per share. If Cellegy did not redeem the note
within the first 18 months, then Cellegy agreed to file a Registration Statement
relating to the possible resale of any shares issued to PDI after 18 months;
approximately 2.1 million shares would have been issued upon such conversion.
As
long as amounts were owed under the note, Cellegy agreed not to incur or become
responsible for any indebtedness that ranked contractually senior or pari passu
in right of payment to amounts outstanding under the note.
In
an
agreement dated September 20, 2006, the Company agreed to pay PDI an aggregate
amount of $3.0 million as full and final settlement of the PDI Notes. In
accordance with the terms of the settlement, Cellegy remitted $500,000 to PDI
on
September 28, 2006, and remitted $2.5 million on November 29, 2006. PDI and
the
Company agreed to release each other and related parties from any claims or
liabilities arising before the date of their agreement relating to any of the
terms of the previous settlement agreement, other than as a result of the
released person’s gross negligence or willful misconduct.
The
Company recorded debt forgiveness of approximately $2.2 million as a result
of
the settlement in other income. For the years ended December 31, 2006 and 2005,
the Company recorded interest expense relating to the PDI Notes of $645,384
and
$531,759, respectively.
ProStrakan
Note
In
September 2006, ProStrakan loaned Cellegy $2.0 million, evidenced by a secured
promissory note (the “ProStrakan Note”). The ProStrakan Note had a maturity date
of November 30, 2006. Interest on the unpaid principal amount of the ProStrakan
Note accrued at a rate of 6% per annum and overdue amounts bear interest at
an
additional annual rate of 3% per annum. Accrued unpaid interest is due and
payable on the maturity date or, if earlier, on the date of any prepayment
of
the note.
On
November 29, 2006, the Company satisfied the ProStrakan Note by making a
principal payment of $2.0 million and approximately $20,000 in
interest.
MPI
Note
The
Company in 2004, settled a dispute with MPI, Inc. (“MPI”) and agreed to pay
$60,000 as full and final settlement (the “MPI Note”). The MPI Note has no
stated interest rate. The settlement agreement allowed the Company to take
certain credits against the MPI Note based upon the cumulative amount of
contracts entered into by the Company with MPI over a thirty-month period ending
in January 2007, at which time the remaining balance is payable. During that
period, MPI credited the Company $15,300 under this provision of the agreement
and, as of December 31, 2006, the outstanding balance of the MPI Note is
$44,700.
At
December 31, 2006, future minimum payments on the notes were payable as
follows:
|
2007
|
$
|
44,700
|
||
|
2008
|
-
|
|||
|
2009
and thereafter
|
777,902
|
|||
|
Less:
amount representing discount
|
(455,777
|
)
|
||
|
Net
present value of notes at December 31, 2006
|
$
|
366,825
|
F-18
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 3,621,819 shares of common stock and the issuance of Class A Warrants
to
purchase 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 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 relating to the warrants 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, $2.13 per share. The directors did not receive any warrants.
The purchase price for shares purchased by the nondirector investors was $1.65
per share. Pursuant to the transaction agreements, the Company filed a
Registration Statement 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
Warrants
issued in connection with the May 2005, financing and the Kingsbridge SSO are
considered derivative instruments and are revalued at the end of each reporting
period as long as they remain outstanding. The estimated fair value of these
warrants using the Black-Scholes valuation model and recorded as derivative
liability at December 31, 2006 and 2005, was approximately $4,000 and $193,000.
The changes in the estimated fair value of the warrants have been recorded
as
other income (expenses) in the consolidated statements of operations. For the
years ended December 31, 2006, 2005 and 2004, the Company recognized
approximately $189,000, $690,000 and $390,000, respectively, as other income
from derivative revaluation.
At
December 31, 2006, the Company had no current and long-term deferred revenue.
Upon the consummation of the sale of its intellectual property to ProStrakan
in
November 2006, the Company recognized all of the remaining current and long-term
deferred revenue as part of the gain on the sale of technology, as all remaining
obligations under the license agreements were deemed to have been fulfilled
in
connection with the sale of assets. Current and long-term deferred revenue
totaling approximately $3.3 million at December 31, 2005, 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 approximately $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 under a non-cancelable operating lease. Operating
lease expense is recorded on a straight-line basis over the term of the lease.
The Company also previously subleased a portion of its operating facility during
the years ended December 31, 2005 and 2004. Rental income was recorded on a
straight-line basis over the term of the sublease.
F-19
Future
minimum lease payments at December 31, 2006, are as follows:
|
Future
|
||||
|
Minimum
|
||||
|
Lease
|
||||
|
Year
Ended December 31,
|
Commitment
|
|||
|
2007
|
$
|
8,100
|
||
Rent
expense, net of sublease income, was $205,000, $269,000 and $382,000 for the
years ended December 31, 2006, 2005 and 2004, respectively. The Company
received $93,000 and $149,000 in sublease income, which is reflected in interest
and other income, during the years ended December 31, 2005 and 2004,
respectively.
Capital
Leases
The
Company has a capital lease commitment covering certain lab equipment, which
includes an option to purchase the equipment for a nominal cost at the
termination of the lease. Future minimum lease payments for equipment under
the
capital lease at December 31, 2006, are as follows:
|
Year
Ended December 31,
|
||||
|
2007
|
$
|
11,179
|
||
|
Less:
amount representing interest
|
(717
|
)
|
||
|
Present
value of minimum lease payments
|
$
|
10,462
|
||
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. Cellegy paid $2.0 million to PDI upon
signing the settlement agreement. Additionally, PDI issued non-interest bearing
notes payable with face values totaling $6.5 million. These notes were settled
for $3.0 million in September 2006 (see Note 8).
13. 401(k) Plan
The
Company maintained a savings and retirement plan under
Section 401(k) of the Internal Revenue Code until it was terminated in
August 2006. All employees were eligible to participate on the first day of
the
calendar quarter following three months of employment with the Company. Under
the plan, employees could contribute up to 15% of their salaries per year
subject to statutory limits. The Company provided 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, 2006, 2005 and 2004, were not
significant.
Biosyn
Acquisition
On
October 22, 2004, Cellegy completed its 100% acquisition of Biosyn. 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 SFAS 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.
F-20
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,
was as follows:
|
Current
assets
|
$
|
300,000
|
||
|
Property
and equipment
|
299,000
|
|||
|
Acquired
workforce
|
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
|
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 related
primarily to the development of Savvy, which was being tested for its potential
to prevent HIV/AIDS and other sexually transmitted diseases in women and which
had an estimated fair value of approximately $15.4 million. Two other
development programs, UC-781 and Cyanovirin-N, had a combined estimated fair
value of approximately $1.6 million. For purposes of the valuation, the Savvy
program was assumed to require significant additional scientific and clinical
testing and was expected to be completed in 2006 with cash inflows from product
sales in the United States to begin in 2007, assuming no unforeseen adverse
events or delays and assuming that regulatory approvals are obtained.
F-21
The
UC-781 and Cyanovirin-N development programs were at a much earlier stage than
Savvy. For purposes of the valuation, significant 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 were expected to be required to gain marketing acceptance.
Under
the
income approach, the 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 Savvy, discount rates ranging
from
34% - 37% were applied to cash flows with an additional approximately 52%
probability applied to the cash flows representing, for purposes of this
valuation, the estimated probability of the C31G Phase 3 trials being successful
and ultimately receiving FDA approval in the United States. These factors are
commensurate with the overall risk and percent complete of the Savvy 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
concluded that the 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 consolidated statements
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 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.
On
August
28, 2006, the Company announced that Family Health International (“FHI”) planned
to stop the Savvy Phase 3 trial being conducted in Nigeria to determine whether
Savvy is safe and effective for reducing women’s risk of acquiring HIV
infection. The trial was part of an international effort to evaluate
microbicides as a tool to reduce the risk of HIV infection in people at high
risk. The decision followed a recommendation by the Data Management Committee
(“DMC”) after its review of the study data in which DMC members concluded that
the Nigeria trial was unlikely to provide convincing evidence that Savvy
protects against HIV. Without obvious signals of effectiveness in the interim
data, the study would be unlikely to detect a reduction in the HIV risk if
it
were to continue. The Savvy trial in Nigeria began screening volunteers in
September 2004, and completed planned enrollment with 2,152 women in June 2006.
Cellegy
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 was 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 was entitled to 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 (18) years, which represents the estimated life of the
underlying patent.
F-22
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 nonrefundable payment of $1.0 million and was 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
was responsible for additional regulatory filings, sales, marketing and
distribution of Rectogesic throughout Europe. In all, the agreement covered
thirty-eight (38) European territories, including all EU member states. Cellegy
was responsible for supplying finished product to ProStrakan through its
contract manufacturer. The $1.0 million upfront fee received by the Company
was
recorded as deferred revenue to be amortized to income over ten (10) years,
which represented the estimated life of the underlying patent.
In
November 2005, the Company amended its December 2004 agreement with ProStrakan
concerning Rectogesic. Under
the
terms of the amended agreement, ProStrakan assumed responsibility for all
manufacturing and other product support functions. In return, Cellegy received
a
nonrefundable payment of $2.0 million which was recorded as deferred revenue
and
was amortized to income over the remaining estimated life of the underlying
patent considered in connection with the December 2004 agreement.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan assumed
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 was entitled to continue to receive milestones and royalties as set
forth in the original agreement.
On
June
20, 2006, the Company amended its December 2004 agreement with ProStrakan
concerning Rectogesic. This second amendment added several countries and
territories in Eastern Europe, including several countries and territories
that
were part of the former Soviet Union, to the territories covered by the original
agreement. As part of the amendment, ProStrakan paid to Cellegy the sum of
$500,000 representing a prepayment of the milestone due upon approval of
Rectogesic in certain major European countries.
On
November 28, 2006, Cellegy sold to ProStrakan for $9.0 million its rights to
Cellegesic, Fortigel, Tostrex, Tostrelle, and related intellectual property
assets. ProStrakan also assumed various existing distribution and other
agreements relating to the assets and intellectual property. Cellegy’s
stockholders approved the transaction at a special meeting of stockholders
held
on November 22, 2006. ProStrakan has no further obligations to Cellegy under
the
previous license agreement. The Company recorded a gain on sale of technology
of
approximately $12,6 million as other income which includes $9.0 million
recognized in connection with the sale of the Company’s intellectual property
discussed above and approximately $3.6 million of unamortized deferred revenue
related to licensing agreements under which all obligations were deemed to
have
been fulfilled in connection with the sale.
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 its inventor, Edwin
B. Michaels. 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. There were no royalty payments incurred for the years
ended December 31, 2006, 2005 and 2004.
In
May 2001, Biosyn entered into an exclusive license agreement with Crompton,
(now Chemtura) 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 39,050 warrants to purchase Cellegy stock
in
connection with the acquisition and are 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. There were no royalty payments
incurred for the years ended December 31, 2006, 2005 and 2004.
F-23
In
February 2003, Biosyn acquired exclusive worldwide rights from the National
Institutes of Health (“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. There were no royalty payments
incurred for the years ended December 31, 2006, 2005 and 2004.
On
January 31, 2006, Cellegy announced that it had entered into a nonexclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization (“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, UC-781
and
Cyanovirin-N. The agreement provided CONRAD with access to Biosyn’s current and
past microbicidal research.
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 previously entered into various other collaborating research and technology
agreements. 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.
Common
Stock Private Placements
In
January 2004, the Company entered into the Kingsbridge SSO, which required
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 did not prohibit additional debt or equity
financings, including Private Investment in Public Equity (“PIPE”), shelf
offerings, secondary offerings or any other non-fixed or future priced
securities. If the market value of the Company’s common stock falls below $1.25
per share, Cellegy would not be able to conduct drawdowns on the Kingsbridge
SSO. The timing and amount of any drawdowns were 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 prices of the common stock were at discounts ranging from 8% to 12%
of
the average market price of the common stock prior to each future drawdown.
The
lower discount applied 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 could, 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 $800,000. The agreement included
certain financial penalties if Cellegy did not exercise cumulative draw downs
of
at least approximately $2.7 million. In January 2007, Kingsbridge released
Cellegy from its obligations under the Kingsbridge SSO, including the potential
penalty provisions, and agreed to the cancellation of the existing stock
warrants.
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 approximately $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 3,621,819 shares of common stock. The Company also issued Class A
Warrants to purchase 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 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 relating to the warrants 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 nondirector investors
was $1.65 per share. Pursuant to the transaction agreements, the Company
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.
F-24
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 de-listed 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’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
stockholders’ approval, except as required by applicable law. The 2005 Plan is
not subject to ERISA and is not qualified under Section 401(a) of the
Code.
The
2005
Plan provides for the granting 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, 2006, the future compensation
expense to be recognized for unvested options is approximately $20,000 over
the
remaining weighted average period of 1.75 years.
F-25
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
Average
Exercise
|
|
||
|
|
|
Option
|
|
Price
|
|||
|
Balance
at December 31, 2005
|
49,500
|
$
|
1.34
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(1,500
|
)
|
(1.39
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2006
|
48,000
|
1.34
|
|||||
The
following table summarizes those stock options outstanding related to the 2005
Plan at December 31, 2006:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||||||||||
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|||||||
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
Number
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
||||||||
|
48,000
|
8.75
years
|
$
|
1.34
|
$
|
-
|
16,000
|
8.75
years
|
$
|
1.34
|
$
|
-
|
|||||||||||
There
were 16,000 options vested and exercisable under the 2005 Plan as of December
31, 2006.
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 thereunder, however, no further
stock options or other awards will be made pursuant to the Prior Plan. As
of
December 31, 2006, the future compensation expense to be recognized for unvested
options is approximately $60,000 over the remaining weighted average period
of
1.40 years.
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
AverageExercise
|
|
||
|
|
|
Option
|
|
Price
|
|||
|
Balance
at December 31, 2005
|
2,240,473
|
$
|
4.67
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(2,017,529
|
)
|
(4.54
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2006
|
222,944
|
3.12
|
|||||
The
following table summarizes those stock options outstanding and exercisable
related to the Prior Plan at December 31, 2006:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||||||||||
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
||||||||
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
||||||||
|
222,944
|
6.93
years
|
$
|
3.12
|
$
|
-
|
133,027
|
6.26
years
|
$
|
3.73
|
$
|
-
|
|||||||||||
No
future
options may be offered under the Prior Plan.
1995
Directors’ Stock Option Plan
In
1995,
Cellegy adopted the 1995 Directors’ Stock Option Plan (the “Directors’ Plan”) to
provide for the issuance of nonqualified 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.
F-26
The
Directors’ Plan provides for the grant of initial and annual nonqualified 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. As
of
December 31, 2006, the future compensation expense to be recognized for unvested
options is approximately $20,000 over the remaining weighted average period
of
0.40 years.
Activity
under the Directors’ Plan is summarized as follows:
|
|
|
|
|
Weighted
|
|
||
|
|
|
Shares
|
|
Average
|
|
||
|
|
|
Under
|
|
Exercise
|
|
||
|
|
|
Option
|
|
Price
|
|||
|
Balance
at December 31, 2005
|
307,500
|
$
|
4.74
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(214,500
|
)
|
(5.86
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2006
|
93,000
|
4.44
|
|||||
The
following table summarizes those stock options outstanding and exercisable
related to the Directors’ Plan at December 31, 2006:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||||||||||
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
||||||||
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
Number
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
||||||||
|
93,000
|
5.77
years
|
$
|
4.44
|
$
|
-
|
77,000
|
5.42
years
|
$
|
4.47
|
$
|
-
|
|||||||||||
As
of
December 31, 2006 and 2005, there were no options available for future grants
under the Directors’ Plan.
NonPlan
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 of $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 shares 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, 2006, 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. Aggregate intrinsic value of options exercised in 2006 was
$1,804.
F-27
|
|
|
|
|
Weighted
|
|
||
|
|
|
Shares
|
|
Average
|
|
||
|
|
|
Under
|
|
Exercise
|
|
||
|
|
|
Option
|
|
Price
|
|||
|
Balance
at December 31, 2005
|
74,505
|
$
|
5.37
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(32,105
|
)
|
(4.25
|
)
|
|||
|
Exercised
|
(3,171
|
)
|
(0.14
|
)
|
|||
|
Balance
at December 31, 2006
|
39,229
|
6.93
|
|||||
The
following table summarizes information about stock options outstanding and
exercisable related to Biosyn option grants at December 31,
2006:
|
Options
Outstanding and Exercisable
|
||||||||||
|
|
|
Weighted
Average
|
|
Weighted
|
|
|
|
|||
|
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||
|
Number
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||
|
of
Options
|
|
Life
|
|
Price
|
|
Value
|
||||
|
39,229
|
3.51
years
|
$
|
6.93
|
$
|
-
|
|||||
Shares
Reserved
As
of
December 31, 2006, the Company has reserved shares of common stock for
future issuance as follows:
|
Biosyn
options
|
39,229
|
|||
|
Kingsbridge
SSO
|
3,493,601
|
|||
|
Director's
Plan
|
93,000
|
|||
|
Warrants
|
2,374,593
|
|||
|
Nonplan
options
|
1,000,000
|
|||
|
1995
Equity Incentive Plan
|
221,208
|
|||
|
2005
Equity Incentive Plan
|
952,000
|
|||
|
Total
|
8,173,631
|
Warrants
The
Company has the following warrants outstanding to purchase common stock as
of
December 31, 2006:
|
|
|
|
|
Exercise
|
|
|
|
|
|
||||
|
|
|
Warrant
|
|
Price
Per
|
|
|
|
|
|
||||
|
|
|
Shares
|
|
Share
|
|
Date
Issued
|
|
Expiration
Date
|
|||||
|
June
2004 PIPE
|
604,000
|
$
|
4.62
|
July
27, 2004
|
July
27, 2009
|
||||||||
|
Kingsbridge
SSO
|
260,000
|
5.27
|
January
16, 2004
|
Cancelled
January 12, 2007
|
|||||||||
|
Biosyn
warrants
|
81,869
|
5.84-17.52
|
October
22, 2004
|
2008
- 2014
|
|||||||||
|
May
2005 PIPE
|
|||||||||||||
|
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
|
||||||||||||
The
Kingsbridge SSO warrants were cancelled in January 2007.
Non
Cash Compensation Expense Related to Stock Options
For
the
year ended December 31, 2006, the Company recorded non cash compensation
expense of approximately $150,000, of which approximately $136,000 and $14,000
were charged to SG&A and R&D expenses, respectively. For the year ended
December 31, 2005, the Company recorded non cash compensation expense of $651.
For the year ended December 31, 2004, the Company recorded non cash
compensation expense of $109,000, of which approximately $70,000 and $39,000
were charged to SG&A and R&D expenses, respectively.
F-28
At
December 31, 2006, the Company had net operating loss carryforwards of
approximately $89.3 million and $45.7 million for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
between the years 2007 and 2026. The state net operating loss carryforwards
expire between the years 2007 and 2016. At December 31, 2006, the Company
also had research and development credit carryforwards of approximately $2.8
million and $1.4 million for federal and state purposes, respectively. The
federal credits expire between the years 2007 and 2026 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 that could limit the Company’s
ability to utilize these carryforwards. The Company most likely has 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. A future sale or merger of the Company, as
contemplated and described in Footnote 1, may also impact the ability for the
Company to utilize its current net operating loss carryforwards. 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
2006 and 2005, not available to be recorded as a benefit due to the exercise
of
nonqualified employee stock options is approximately $643,000.
Under
the
provisions of paragraph 30 of SFAS No. 109, Accounting
for Income Taxes (“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 the consolidated 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 non-current
intangible assets related to the acquisition, and (c) third to reduce income
tax
expense. The future tax benefit of the Biosyn pre-acquisition net operating
losses, tax credits, and other deductible temporary differences, when they
are
ultimately recognized, will be recorded in accordance with paragraph 30 of
SFAS
No. 109.
Significant
components of the Company’s deferred tax liabilities and assets are as follows
(in thousands):
|
December
31,
|
|
||||||
|
|
|
2006
|
|
2005
|
|||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforward
|
$
|
31,900
|
$
|
31,400
|
|||
|
Deferred
revenue
|
-
|
3,000
|
|||||
|
Credit
carry forward
|
3,700
|
3,800
|
|||||
|
Capitalized
research and development
|
9,800
|
10,100
|
|||||
|
Depreciation
and amortization
|
1,300
|
1,400
|
|||||
|
Intangible
assets
|
-
|
(100
|
)
|
||||
|
Other,
net
|
500
|
400
|
|||||
|
Total
deferred tax assets
|
47,200
|
50,000
|
|||||
|
Valuation
allowance
|
(47,200
|
)
|
(50,000
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
F-29
Reconciliation
of the statutory federal income tax rate to the Company’s effective income
tax rate (dollars in thousands):
|
Years
Ended December 31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Net
income (loss)
|
$
|
9,672
|
$
|
(5,008
|
)
|
||||||||
|
Tax
(benefit) at Federal statutory rate
|
$
|
3,289
|
34.00
|
%
|
$
|
(1,703
|
)
|
(34.00)
|
%
|
||||
|
Meals
and entertainment
|
3
|
0.03
|
8
|
0.10
|
|||||||||
|
Stock
compensation expense
|
20
|
0.21
|
38
|
0.80
|
|||||||||
|
Gain
on sale of subsidiary
|
30
|
0.31
|
-
|
-
|
|||||||||
|
Research
credits
|
8
|
0.08
|
(15
|
)
|
(0.30
|
)
|
|||||||
|
Deferred
taxes:
|
|||||||||||||
|
Utilized
|
(3,350
|
)
|
(34.64
|
)
|
-
|
-
|
|||||||
|
Not
benefited
|
-
|
-
|
1,672
|
33.40
|
|
||||||||
|
Provision
for taxes
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
|||||
The
valuation allowance for deferred tax assets for 2006 and 2005 decreased by
approximately $2.8 million and $200,000, respectively.
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 Accounting
Policies (Note 1).
Revenues
from external sources by major geographic area are as follows:
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
North
America
|
||||||||||
|
Pharmaceuticals
|
$
|
1,925,779
|
$
|
11,758,236
|
$
|
1,840,840
|
||||
|
Skin
care
|
-
|
-
|
181,386
|
|||||||
|
Europe
|
||||||||||
|
Pharmaceuticals
|
734,279
|
440,477
|
10,704
|
|||||||
|
Revenue
from continuing operations
|
$
|
2,660,058
|
$
|
12,198,713
|
$
|
2,032,930
|
||||
Revenues
from product sales to one customer represented approximately 38% and 7% of
total
revenue in 2005 and 2004, respectively.
Net
operating income (loss) from continuing operations by geographic region is
as
follows:
|
Years
Ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
North
America
|
||||||||||
|
Pharmaceuticals
|
$
|
9,119,113
|
$
|
(4,912,541
|
)
|
$
|
(25,689,095
|
)
|
||
|
Skin
care
|
-
|
-
|
(2,531,258
|
)
|
||||||
|
Europe
|
||||||||||
|
Pharmaceuticals
|
227,082
|
(184,803
|
)
|
(149,375
|
)
|
|||||
|
Net
income (loss) from continuing operations
|
$
|
9,346,195
|
$
|
(5,097,344
|
)
|
$
|
(28,369,728
|
)
|
||
F-30
Assets
by
major geographic region are as follows:
|
December
31,
|
||||||||||
|
Assets
|
2006
|
2005
|
2004
|
|||||||
|
North
America
|
$
|
4,145,177
|
$
|
5,217,480
|
$
|
12,532,030
|
||||
|
Pacific
Rim
|
-
|
1,232,503
|
1,331,295
|
|||||||
|
Total
assets
|
$
|
4,145,177
|
$
|
6,449,983
|
$
|
13,863,325
|
||||
19. Related
Party Transactions
The
Company pays fees to its board members for services to the board, including
the
audit, nominating, and compensation committees. The total cash
payments to
these
directors during 2006, 2005 and 2004, were $104,250, $75,500 and $180,703,
respectively.
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.
20. Discontinued
Operations
On
April
11, 2006, Epsilon purchased all of the shares of Cellegy Australia. The
subsidiary was part of the Pharmaceutical Segment for the Australian and Pacific
Rim geographic areas. The purchase price for the shares was $1.0 million plus
amounts equal to the liquidated value of Cellegy Australia's cash, accounts
receivable and inventory. The total amount received was approximately $1.3
million. Below is a summary of the assets and liabilities included in the
sale:
|
Cash
|
$
|
185,554
|
||
|
Inventory
|
69,427
|
|||
|
Accounts
Receivable
|
52,305
|
|||
|
Goodwill
|
955,415
|
|||
|
Current
liabilities
|
13,747
|
Cellegy
recorded a pretax gain of approximately $88,000 which is reflected in other
income. There was no income tax effect to this transaction as Cellegy had a
full
valuation on its deferred taxes and more than likely will not pay any taxes
on
the transaction.
Cellegy's
discontinued operations reflect the operating results for the disposal group
through the date of disposition and recognize the subsidiary's foreign currency
translation balance as income in the current period pursuant to SFAS No. 52,
Foreign
Currency Translation.
Below
is a summary of those results:
|
Years
Ended December 31,
|
|
|||||||||
|
|
|
2006
|
|
2005
|
|
2004
|
||||
|
Net
revenue
|
$
|
165,805
|
$
|
636,632
|
$
|
563,447
|
||||
|
Cost
of revenues
|
26,586
|
135,054
|
84,364
|
|||||||
|
Gross
Profit
|
139,219
|
501,578
|
479,083
|
|||||||
|
R&D
expenses
|
-
|
(91,151
|
)
|
(16,511
|
)
|
|||||
|
S,
G & A expenses
|
(64,614
|
)
|
(333,060
|
)
|
(254,002
|
)
|
||||
|
Operating
income
|
74,605
|
77,367
|
208,570
|
|||||||
|
Interest
income
|
1,554
|
12,338
|
7,096
|
|||||||
|
Gain
on foreign currency translation
|
249,451
|
-
|
-
|
|||||||
|
Income
from discontinued operations
|
$
|
325,610
|
$
|
89,705
|
$
|
215,666
|
||||
F-31
In
January 2007, Kingsbridge released Cellegy of its obligations under the SSO.
In
connection therewith, the Company, as of December 31, 2006, reversed financing
fees due Kingsbridge of $266,000.
The
Company had previously established an agreement with DPT Laboratories, Inc.
(“DPT”) to create an alternate manufacturing site. In January 2007, DPT agreed
to forgive the Company of its obligations under the agreement and reversed
$255,000 of amounts invoiced in 2005. The Company recorded this item as a
reversal of clinical manufacturing expense in 2006.
(Amounts in thousands, except per share data)
|
Year
Ended December 31, 2006
|
|
||||||||||||
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
||||
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|||||
|
Revenues
|
$
|
1,236
|
$
|
1,227
|
$
|
172
|
$
|
25
|
|||||
|
Operating
Income (loss)
|
(2,227
|
)
|
(957
|
)
|
(1,397
|
)
|
(105
|
)
|
|||||
|
Net
Income (loss) from continuing operations
|
(2,487
|
)
|
(1,094
|
)
|
(1,640
|
)
|
14,567
|
||||||
|
Basic
net income (loss) per common share
|
(0.08
|
)
|
(0.04
|
)
|
(0.05
|
)
|
0.50
|
||||||
|
Diluted
net income (loss) per common share
|
(0.08
|
)
|
(0.04
|
)
|
(0.05
|
)
|
0.50
|
||||||
|
|
|
Year
Ended December 31, 2005
|
|
||||||||||
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
||||
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|||||
|
Revenues
|
$
|
1,453
|
$ |
7,613
|
$
|
1,738
|
$
|
1,395
|
|||||
|
Operating
income (loss)
|
(5,220
|
)
|
4,911
|
(2,746
|
)
|
(2,302
|
)
|
||||||
|
Net
income (loss) from continuing operations
|
(5,098
|
)
|
4,796
|
(2,867
|
)
|
(1,928
|
)
|
||||||
|
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
|
)
|
||||||
F-32