UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Forfor the Fiscal Year Ended December 31, 20052006
OR
oTransition 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)
Delaware | 82-0429727 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
|
1800 Byberry2085B Quaker Point Rd., Building 13, Huntingdon Valley, Quakertown, PA 1900618951
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| (Address of Principal Executive Offices) (zip code) |
Registrant’s telephone number, including area code: (215) 914-0900529-6084
Securities registered pursuant to Section 12(b) of the Act:
| | None | | | | None | |
| (Title of each class) | | (Name of each exchange on which registered) |
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.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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. ox
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):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 20052006 was $43,547,000.$14,771,642.
As of March 24, 2006,21, 2007, there were 29,831,62529,834,796 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“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.
FORREPORTFOR THE FISCAL YEAR ENDED DECEMBER 31, 20052006
| | | | | Page |
| | Part I | | |
| Item 1. | | BUSINESS | | 4 | |
| Item 1A. | | RISK FACTORS | | 15 | 12 |
| Item 1B. | | UNRESOLVED STAFF COMMENTS | | 25 | 17 |
| Item 2. | | PROPERTIES | | 25 | 18 |
| Item 3. | | LEGAL PROCEEDINGS | | 25 | 18 |
| Item 4. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | | 2718 |
| |
Part II | | |
| Item 5. | | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES | | 28 | 18 |
| Item 6. | | SELECTED FINANCIAL DATA | | 29 | 19 |
| Item 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 29 | 20 |
| Item 7A. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 38 | 28 |
| Item 8. | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | | 38 | 28 |
| Item 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | | 39 | 28 |
| Item 9A. | | CONTROLS AND PROCEDURES | | 39 | 28 |
| Item 9B. | | OTHER INFORMATION | | 3929 |
| |
Part III | | |
| Item 10. | | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | | 40 | 29 |
| Item 11. | | EXECUTIVE COMPENSATION | | 40 | 29 |
| Item 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | | 40 | 30 |
| Item 13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | | 41 | 30 |
| Item 14. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES | | 4130 |
| |
Part IV | | |
| Item 15. | | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | | 42 | 30 |
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.
Cellegy Pharmaceuticals, Inc. and subsidiaries (“Cellegy,” “we,” us,” “our” or the “Company”) is a development stage specialty biopharmaceuticalpharmaceuticals 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 primarily engagedbased in the development and commercialization of prescription drugs targeting women’s health care, including the reduction in transmission of HIV, and gastrointestinal conditions using proprietary topical formulations and nitric oxide (“NO”) donor technologies. In October 2004, Cellegy completed the acquisition of Biosyn, Inc., a privately held Pennsylvania based biopharmaceutical company, with a late-stage product candidate, Savvy® (C31G vaginal gel), a contraceptive microbicide gel designed to reduce HIV/AIDS transmission in women.
Cellegy is developing Cellegesic™ (nitroglycerin ointment) for the treatment of anal fissures and hemorrhoids. In January 2004, the results of preliminary analysisUnited Kingdom, of our third Phase 3 clinical trial for Cellegesic showed a reduction in anal fissure pain, compared with a placebo control, during the first three weeks of the trial, the primary efficacy endpoint of the study. The company submitted a New Drug Application (“NDA”)rights to Cellegesic® (nitroglycerin ointment), Fortigel® (testosterone gel), Tostrex® (testosterone gel), Rectogesic® and Tostrelle® (testosterone gel), and related intellectual property assets. Pursuant to the U.S.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”) in June 2004.for Cellegy’s product, Cellegesic. The FDA issued a Not Approvable letter for Cellegesic in December 2004.
Cellegy submitted an amended NDA containing new analyses of data from its trials to the FDA in April 2005 and the submission has been under review at the FDA since then. In January 2006, the FDA indicated that before the Company’s submission willCompany's New Drug Application ("NDA") may be reviewed April 25, 2006 by the Cardiovascular and Renal Drug Products Advisory Committee (the “Committee”), an independent panel of external experts. The Committee’s recommendation for approval or non-approval of Cellegesic is expected to be rendered at the conclusion of its review. While the FDA will consider the findings of the Committee, the final regulatory decision rests with the Agency. The FDA has not indicated when its final decision will be communicated. Cellegesic cannot be marketed in the United States unless and until the FDA grants marketing approval for the product.
The U.K. Medicines and Healthcare Products Regulatory Agency (“MHRA”) approved Cellegesic (branded Rectogesic in Europe) for sale in the United Kingdom in August 2004 and the product was launched by our Europeanapproved for marketing, partner, ProStrakan Group Limited (“ProStrakan”), in May 2005. ProStrakan is seeking additional approvals of Rectogesic by other member states of the European Union through the Mutual Recognition Procedure. The Mutual Recognition Procedure has been successfully completed, although additional national licenses will be sought and are expectedCellegy must conduct another clinical trial to be issued in the 19 additional countries included in the submission.
Cellegy is developing two transdermal gel testosterone products, Fortigel™ (testosterone gel) and Tostrelle® (testosterone gel). Fortigel,demonstrate efficacy at a replacement therapy for male hypogonadism, was the subject of a Not Approvable letterlevel deemed statistically significant by the FDA in July 2003. Tostrex® (testosterone gel), which isAgency. Cellegy concluded that it would not be able to fund the brand name for Fortigel in Europe, was approved byexpenditures that would be required to continue product development efforts on Cellegesic or the Medical Products Agency in Sweden (“MPA”) for the treatment of male hypogonadism in December 2004 and was launched byother products sold to ProStrakan, in September, 2005. ProStrakan is currently seekingpart given the cost, uncertainty and timing of required additional approvals of Tostrex by other member states of the European Union through the Mutual Recognition Procedure.trials relating to those products.
Tostrelle is for the treatment of female sexual dysfunction in postmenopausal women andThe Company’s Biosyn, Inc. subsidiary has completed Phase 2 development. In 2004, the FDA indicated that specific guidelines regarding the long-term safety of testosterone for the treatment of female sexual dysfunction are under internal discussion by the Division of Reproductive and Urologic Drug Products. The company is awaiting these guidelines before embarking upon a Phase 3 program.
Biosyn is developingintellectual property relating to a portfolio of proprietary productsproduct 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 HIV/AIDS.Human Immunodeficiency Virus (“HIV”)/ Acquired Immunodeficiency Disease (“AIDS”). Biosyn’s productsproduct candidates include Savvy,Savvy®, which is currently undergoingunderwent Phase 3 clinical trials in Africa for anti-HIV microbicidal efficacy and is currently in a Phase 3 contraception trial in the United States;States and UC-781, vaginal gel,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 Phase 1 trials;the third and Cyanovirin-N, in pre-clinical development.
Cellegesic (nitroglycerin ointment for treatmentfourth quarters of anal fissures and dyspareunia)
Cellegesic is2006, 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 topical, nitroglycerin-based prescription product being developeddevelopment stage company. The Company’s Board of Directors (the “Board”) continues to explore alternatives for the treatmentCompany with respect to its future course of anal fissuresbusiness. While the Savvy Phase 3 contraception trial in the United States is ongoing, the Company is not directly involved with the conduct and dyspareunia. Nitroglycerinfunding 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 drugthird 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 has safelythe 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 effectively been used for many years to treat cardiac conditions, primarily angina pectoris.could otherwise have a material adverse effect on our business, financial condition and results of operations.
Anal fissures are painful tearsSummary 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 liningmicrobicdal field in exchange for CONRAD’s funding of the anal canal. The condition is associatedremaining 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 increased pressurecertain 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 anal canal and a decrease in blood supplynineteen additional countries (in addition to the region. Many chronic cases requireUnited 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 surgical procedure (Lateral Internal Sphincterotomy) that is designedwholly 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 reduce anal pressure by severingreview Cellegy’s NDA relating to Cellegesic. The Committee voted on three questions in connection with its review, with the inner anal sphincter muscle. This procedure, while highly effective, frequently leaves up to 35% of patients incontinent.following results:
There are currently no FDA approved drug therapies for anal fissures, although topical anesthetics | 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. |
| 2. | A majority of the Committee agreed that the quadratic model was the proper statistical analysis for the purpose of decision-making. |
| 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.” |
On June 20, 2006, Cellegy amended its license agreement with ProStrakan concerning Rectogesic. The amendment added several countries and anti-inflammatory agents, which only partiallyterritories in Eastern Europe, including several countries and temporarily relieve the symptomsterritories that were part of the condition, are currently prescribed. Accordingformer Soviet Union, to 2004 Verispan audits, anal fissures afflict an estimated 765,000 Americans, resulting in over one million physician visits each year. These data for 2004 show about 84,000 annual uses of pharmacy-compounded nitroglycerin for the treatment of anal fissures.
Dyspareunia is a condition that is characterized by intense vaginal pain. The condition can be recurrent and frequently causes significant impairment to normal sexual functioning in women. Several publications have reported that between 7% to 15% of American women of sexually active age are affectedterritories covered by the condition. There are no approved treatments for dyspareunia and while many different approaches are used, none are completely satisfactory. In a non placebo controlled clinical study of nitroglycerin ointment conducted by Dr. Jennifer Bermanoriginal agreement. As part of the Universityamendment, ProStrakan paid to Cellegy the sum of California Los Angeles Medical Center,$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 reportedrequiring 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 painrisk of women suffering from vulvodynia, a conditionHIV 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 is a major contributorthe trials as designed were unlikely to dyspareunia. The Company may conduct additional clinical trials using Cellegesic for the treatment of vulvodynia.
Previous Cellegesic Clinical Trial Results. We completed our initial Phase 3 clinical trial using Cellegesic for the treatment of anal fissures and announced the results in November 1999. The trial, which included 304 patients, did not demonstrate aprovide statistically significant evidence that Savvy protects against HIV, because of a lower than expected rate of healing compared with placebo, but did show significant pain reduction. Based on this outcome, we initiated a second Phase 3 trial in 2000 to test the drug’s ability to reduce fissure pain, the primary trial endpoint, with healing of chronic anal fissures as a secondary endpoint. The second Phase 3 clinical trial, which included 229 patients, was completed in September 2001. Positive results were achieved in the primary endpoint, which was accelerating the rate of pain reduction associated with chronic anal fissures. Statistical significance was not achieved in healing.
In June 2001, we filed a rolling NDA with the FDA for the use of Cellegesic for the treatment of pain associated with chronic anal fissures based on partial results of the second Phase 3 trial. We amended the NDA in November 2001 upon completion of the second Phase 3 study. In April 2002, we announced the withdrawal of our Cellegesic NDA after it became clear that the FDA was not going to approve the NDA. After several subsequent discussions and meetings with the FDA, the FDA indicated that it would require another Phase 3 trial before considering approval of the product.
In January 2004, Cellegy announced results of its third Cellegesic Phase 3 clinical trial showing a statistically significant (p<0.05) reduction in anal fissure pain compared with a placebo control during the first three weeks of the trial, the primary efficacy endpoint of the study. As observed in two earlier Phase 3 trials, the most common side effect was mild to moderate headache. The double blind, placebo controlled trial was conducted according to a Special Protocol Assessment (“SPA”) that was agreed to by Cellegy and the FDA. Based on these trial results we filed an NDA with the FDA in July 2004.
Side effects seenHIV seroconversion in the trial, were consistent with those observedwhich 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 previous twointerim 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 studies, with mild to moderate headache the most common side effect. Five subjects dropped out of the study as a result of headache. The SPA required that subjects discontinuing due to nitroglycerin related headache, defined as one that occurs within 30 minutes of application, should have their last daily pain intensity score, as recorded on the day the subject dropped out, carried forward each day through day 21. Clinical judgment, based on each subject’s entire record, was used to determine which of the five subjects discontinued due to nitroglycerin related headaches. Last daily pain intensity scores were carried forward for three of the five subjects. The other two subjects who withdrew from thecontraception trial due to headache had all of their available pain data prior to dropout included in the analysis. The FDA, after conducting its own analysis and raising other issues not covered in the SPA, issued a Not Approvable letter in December 2004.
The Company submitted an amended NDA containing new analyses of data from its trials to the FDA in April 2005, and the submission has been under review at the FDA since then. In January 2006, the FDA indicated that the company’s submission will be reviewed on April 25, 2006 by the Cardiovascular and Renal Drug Products Advisory Committee. The Committee’s recommendation for approval or non-approval of Cellegesic is expected to be rendered at the conclusion of its review. While the FDA will consider the findings of the Committee, the final regulatory decision rests with the Agency. The FDA has not indicated when its final decision will be communicated. Cellegesic cannot be marketedunderway in the United States unlessis continuing, although the Company is not directly involved with the conduct and untilfunding of the FDA grants marketing approval for the product.trial.
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.
Products
Savvy (contraceptive vaginal gel for women, designed to prevent HIV/AIDS)
Cellegy obtained rights to the late-stage product candidate, Savvy, with its October 2004 acquisition of Biosyn. Savvy, a microbicidal gel, is one of the most clinically advanced product candidates in developmentintended for the reduction in transmission of HIV and has also shown promising results in the prevention of other STDs, including those caused by herpes simplex virus and Chlamydia. Savvy has also shown activity against gonorrhea and syphilis.
Savvy is currently undergoing a Phase 3 trial for reduction of HIV transmission in Nigeria in populations of women at risk for HIV infection. The primary endpoint of the study is a 50% reduction in the rate of transmission of HIV in the Savvy group compared with the placebo. The current enrollment for the Nigerian trial is approximately 2,000 women.
In November 2005, the company discontinued its Phase 3 trial for reduction of HIV transmission in Ghana which had enrolled approximately 2,100 women. The Data Monitoring Committee reviewing interim data from the Savvy Ghana Phase 3 HIV prevention trial made the recommendation in November 2005 that continuing the trial would not allow the effect of Savvy (C31G vaginal gel) on HIV to be determined because of a lower than expected rate of HIV seroconversion in the trial. The estimated annual rate of HIV seroconversion in the Ghana study population was 3.7% at the time of trial initiation, but the observed annual rate was 1.2% eighteen months into the trial. This lower rate was possibly due in part to procedures designed to ensure ethical trial design, including counseling on HIV prevention and distribution of condoms. There were no safety issues associated with the Ghana trial.
Consideration is being given to expansion of the ongoing Savvy Phase 3 HIV prevention trial in Nigeria and/or the opening of new trial sites in areas with higher HIV incidence as ways to determine the effectiveness of Savvy. Additionally, data from the Ghana trial will be analyzed for effects on other endpoints including pregnancy. If the data warrant, the Ghana results will be submitted as a supplemental data package for the contraception New Drug Application.
A Phase 3 trial for contraception is ongoing in the United States, with about 686 women enrolled out of an expected total enrollment of 1,600 by the end of 2007.
The active compound in Savvy is C31G, a broad-spectrum compound with antiviral, antibacterial and antifungal activity. Its mechanism of action is via immediate membrane disruption, and it is also spermicidal. Because of its mechanism of action, C31G has a low potential for resistance and is active against drug resistant pathogens.
Certain Phase 3 trial expenses for Savvy, and certain other clinical and preclinical development costs for the Biosyn pipeline, are funded by grant and contract commitments through agencies including: the United States Agency for International Development;Development (“USAID”); the National Institute for Child Health and Development;Development (“NICHD”); the National Institute for Allergy and Infectious Disease; CONRAD (formerly the Contraceptive Research and Development Program)Disease (“NIAID”); CONRAD; and other governmental and philanthropic organizations.
Fortigel (testosterone replacement therapy for male hypogonadism)
Fortigel is a transdermal gel testosterone product designed to treat male hypogonadism, a condition involving deficient levels of the sex hormone testosterone. Low levels of testosterone can result in lethargy, depression and a decline in libido. In severely deficient cases, loss of muscle mass and bone density can occur. Approximately five million men in the United States, primarily in the aging (over 40) male population group, have deficient levels of testosterone.
Fortigel is a transparent, rapid-drying and non-staining gel, designed as a once-a-day application from a unique metered dose dispenser to relatively small areas of the skin. Based on the results of a 201-patient Phase 3 trial announced in November 2001, Cellegy filed an NDA in June of 2002. However, Fortigel was subsequently the subject of a Not Approvable letter by the FDA in July 2003. In its letter, the FDA stated that in its opinion the following deficiencies in the Fortigel NDA were found: (1) there is insufficient information to establish that high supraphysiologic daily Cmax serum testosterone levels achieved in a significant portion of participants in the major clinical study supporting the NDA are safe under conditions of chronic administration; and (2) there is insufficient information provided to demonstrate that the dose of the product can be adjusted to consistently preclude achieving these high supraphysiological testosterone levels. The company has no current plans to develop the product further and is seeking to either sell or out-license the technology.
Tostrex® (testosterone gel), which is the brand name for Fortigel in Europe, was approved in December 2004 by the Medical Products Agency in Sweden for the treatment of male hypogonadism and was launched by ProStrakan in September 2005. ProStrakan is currently seeking additional approvals of Tostrex by other member states of the European Union through the Mutual Recognition Procedure.
Tostrelle (testosterone gel for female hormone replacement therapy)
Normal blood concentrations of testosterone in women range from 10 to 20 times less than those of men. Nevertheless, in both sexes, testosterone plays a key role in building muscle tissue or bone and in maintaining normal sexual desire. In women, the ovaries and adrenal glands continue to synthesize testosterone after menopause, although the rate of production may diminish by as much as 50%. Testosterone deficiency in women frequently leads to diminished libido, decreased bone and muscle mass and reduced energy levels. Approximately 15 million women in the United States suffer from symptoms of testosterone deficiency. At the present time, there are no approved products for the treatment of this condition, although it has been reported that testosterone treatment is frequently being prescribed off-label for women by obstetricians and gynecologists.
Based on the results of pharmacokinetic studies in men receiving Fortigel, scientists calculated the concentration of testosterone required to achieve normal pre-menopausal hormone levels in postmenopausal women. The result is Cellegy’s Tostrelle, a product designed to safely restore normal testosterone levels in hormone deficient women.
Cellegy has successfully completed two Phase 1/2 pharmacokinetic studies in which the proper dosage was determined to restore normal testosterone levels to naturally menopausal and surgically induced menopausal women. In September 2004, we announced results of a second interim analysis of a Phase 2 study using Tostrelle for the treatment of female sexual dysfunction, which showed a 65% increase in sexual activity in women with hypoactive sexual desire disorder (HSDD), a 30% increase over placebo. Based on these results, the Company stopped enrollment in the Phase 2 clinical study. Later in 2004, the Company met with the FDA to review the trial results and the overall Tostrelle program. The FDA informed Cellegy that specific guidelines regarding the long-term safety of testosterone for the treatment of female sexual dysfunction are under internal discussion by the Division of Reproductive and Urologic Drug Products. Cellegy is awaiting these guidelines before embarking upon a Phase 3 program. If the new FDA guidelines prove to be too onerous, limiting or too costly to implement, the Phase 3 program may be significantly delayed or Cellegy may decide not to pursue the further development of Tostrelle.
Rectogesic (nitroglycerin ointment for the treatment of anal fissures)
Rectogesic(nitroglycerin ointment), the brand name for Cellegesic outside of the United States, was approved by the MHRA for sale in the United Kingdom in September 2004 and was launched by ProStrakan in May 2005. Approvals by other member states of the European Union are being sought by ProStrakan through the Mutual Recognition Procedure.
In November 2005, Cellegy renegotiated its marketing agreement with ProStrakan. Under the terms of the amended agreement, ProStrakan will assume responsibility for all manufacturing and other product support functions and will purchase the product directly from the manufacturer rather than from Cellegy. In connection with its revised marketing agreement, Cellegy received a payment of $2 million and may receive certain future milestone payments of up to $750,000 upon approval of the product in certain major European countries.
Rectogesic was approved by the Australian Therapeutic Goods Administration, has been successfully marketed in Australia since 1999, and is now also marketed in New Zealand, Singapore and South Korea. Rectogesic is the only approved product for the treatment of anal fissures.
On March 24, 2006 Cellegy announced that its European marketing partner ProStrakan had successfully completed the European Union Mutual Recognition Procedure for Rectogesic. Following the successful conclusion of the MRP process, national licenses will be sought and are expected to be issued in due course in the 19 additional countries included in the MRP submission application. Cellegy is entitled to receive $250,000 for each marketing regulatory approval obtained in the first of any three countries out of France, Italy, Germany or Spain up to a maximum total amount payable of $750,000. PDI is entitled to receive one-half of these payments under its previous agreements with Cellegy.
Tostrex (testosterone gel)
Tostrex was approved in December 2004, by the MPA for the treatment of male hypogonadism and was launched by ProStrakan in September 2005. ProStrakan is currently seeking additional approvals of Tostrex by other member states of the European Union through the Mutual Recognition Procedure.
Cellegy intends to become a leader in the development and commercialization of selected specialty biopharmaceutical products that are directed towards the treatment of HIV prevention and contraception, female sexual dysfunction and gastrointestinal disorders. Key elements of our business and commercialization strategy include the following:
| · | Self-Marketing to Specialty Physicians in the United States. If economically viable, we plan to self-market our products to a targeted audience of key physician specialists, including Gastroenterologists and Obstetrician-Gynecologists, through the establishment of our own sales force.
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| · | Outside the United States. In most cases, we plan to out-license the overseas rights for the products we develop. During 2004 in two separate transactions, we out-licensed commercial rights to our Tostrex and Rectogesic products in Europe to ProStrakan Group Limited, a specialty pharmaceutical company located in the United Kingdom with European-wide marketing capability.
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| · | Manufacturing. Cellegy has manufacturing arrangements with PendoPharm Inc., an FDA approved contract-manufacturing company based in Canada. PendoPharm, an affiliate of Pharmasciences, has successfully manufactured Cellegesic, Fortigel and Tostrelle for past clinical trials and Rectogesic and Tostrex for European commercial sales. PendoPharm will be the commercial manufacturer of these products in the event of any future regulatory approvals in other markets. In 2005, the Company modified its relationship with PendoPharm concerning the manufacture of Rectogesic, giving control to ProStrakan. Similar control was given to ProStrakan in 2006 regarding the manufacture of Tostrex. We are planning to validate a domestic contract manufacturer to serve as a second manufacturing source for our product candidates. Our products sold in Australia, New Zealand, Singapore and South Korea are currently supplied by a pharmaceutical manufacturer in Australia.
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| · | Distribution. Cellegy has entered into distribution agreements for Rectogesic in New Zealand, Singapore and South Korea. Cellegy has also entered into distribution agreements for Tostrex in Israel, Australia, South Korea, South Africa and approximately 10 other Far East markets.
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Cellegy’s research and development programs focus on developing products in the area of women’s health, prevention of HIV transmission, sexual function, anorectal and peripheral vascular disorders. The acquisition of Biosyn in 2004 expanded our pipeline into the area of women’s health. Most of our current research programs are now being conducted at Biosyn, in Huntingdon Valley, Pennsylvania.
Biosyn. Biosyn’s topical microbicide technology expands our product pipeline in women’s health care. In 2004, Biosyn’s lead product, Savvy entered three concurrent Phase 3 clinical studies;studies: a contraception study in the United States and two HIV studies Africa. In Africa, studies were being conducted in Nigeria and in Ghana testing Savvy’s effectiveness in preventing HIV transmission in women. In
On November 8, 2005, the company discontinued its Ghana trial was discontinued due to a lower than expected rate of HIV seroconversion in the trial. The estimatedpredicted 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. There were noAlso, 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 associated with the Ghana trial.were reported during either of these trials.
If theA Phase 3 trial for contraception is ongoing in the United States, is successful, Savvy could bewith 1,183 women enrolled out of an expected total enrollment of 1,670 female subjects. While the first product among many microbicide products in various stages of development to enterCompany currently retains the commercial marketplace.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 assurancesassurance that Savvy will be successfully commercializedapproved for contraception or if commercialized,any other indications or that it would be the first or one of the first, 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 reverse transcriptase (RT)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 arecurrently under way. Biosyn’s expanded microbicides portfolio also includes a naturally occurring protein, Cyanovirin-N (“CV-N”) that may be effective. The CV-N license agreement between Biosyn and National Cancer Institute (“NCI”) was terminated in blocking viral fusion in vitro.December 2006 and no further activity regarding CV-N has demonstrated in vivo efficacy in vaginal and rectal prevention of HIV infection in animal models.
Nitric Oxide Donor Technology. Expanded expertise in nitric oxide pharmacology has led to an understanding of the role of nitric oxide as a signaling molecule, operating at lower concentrations thandevelopment is normally required for vasodilators, especially in tissue under an abnormally vaso-spasmatic or vaso-constrictive state. This discovery presents various potential approaches to treat conditions caused by vaso-constriction, such as peripheral vascular insufficiency found in Raynaud’s disease and selected aspects of female sexual dysfunction.proposed.
Our policy is to protect our technology by, among other things, filing patent applications for technology that we consider important to our business. We intend to file additional patent applications, when appropriate, relating to our technology, improvements to our technology and to specific products that we develop. It is impossible to anticipate the breadth or degree of protection that any such patents will afford, or whether we can meaningfully protect our rights to our unpatented trade secrets. Cellegy also relies upon unpatented trade secrets and know-how, and no assurance can be given that competitors will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets or disclose such technology. It is our policy to require our employees to execute an invention assignment and confidentiality agreement upon employment. Our consultants are required to execute a confidentiality agreement upon the commencement of their consultancy. Each agreement provides that all confidential information developed or made known to the employee or consultant during the course of employment or consultancy will be kept confidential and not disclosed to third parties except in specific circumstances. The invention assignment generally provides that all inventions conceived by the employee shall be the exclusive property of Cellegy. In addition, it is our policy to require collaborators and potential collaborators to enter into confidentiality agreements. There can be no assurance, however, that these agreements will provide meaningful protection of our trade secrets. Currently, Cellegy holds a number of issued and pending US and foreign patents pertaining to our principal products.
Cellegesic and Rectogesic ointment. Two issued U.S. patents and over 20 issued foreign patents relate to our topical nitroglycerin products, Cellegesic and Rectogesic ointments, for the treatment of anal disorders. While the European patent was challenged and subsequently revoked during opposition proceedings in December 2003, Cellegy has filed an appeal to the decision, and the case stands on appeal.
Testosterone gel products for males and females. Three issued U.S. patents, five issued foreign patents and over 5 pending patent applications relate to our topical testosterone products Fortigel, Tostrex and Tostrelle gels.
Savvy Contraceptive gel. Two issued U.S. patents and over 20twenty (20) issued foreign patents relate to Savvy gel for contraception and the reduction in transmission of HIV infection.
In addition, Cellegy also holds issued and pending patents pertaining to our potential back-up products for treatment of anal disorders as well as for our earlier pipeline products for the treatment of female sexual disorders, urogenital disorders, and vascular insufficiency.
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 approximately 318,504 shares of Cellegy common stock. The options issued to acquire Cellegy common stock are fully vested and exercisable. The exercise prices of the options and warrants were adjusted by the exchange ratio in the transaction; the expiration date and other terms of the converted options and warrants remainremained the same. The purchase price does not include any provisions for contingent milestone payments of up to $15$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 2001,2006, Cellegy acquired Vaxis Therapeutics Corporation, a private Canadian company subsequently renamed Cellegy Canada. Its operations were discontinuedcompleted its asset sale transaction to ProStrakan, described in the fourth quarter of 2005 and the company’s assets liquidated by December 31, 2005. All cancer prevention related patents and in-process technology were returned by action of agreement to Parteq Innovations, from whom Cellegy originally acquired the patents.greater detail above.
In June 2000, Cellegy acquired Quay Pharmaceuticals (subsequently renamed Cellegy Australia), an Australian company marketing Rectogesic, for the treatment of anal fissures. Cellegy continues to self-market Rectogesic through Cellegy Australia.
In December 2005, the Company divested its skin care business.
Cellegy
In December 2002, Cellegy entered into a license agreement (the “PDI Agreement”), with PDI Inc. (“PDI”) granting PDI the exclusive right to store, promote, sell and distribute Fortigel in North American markets. Cellegy received an upfront payment of $15.0 million$15,000,000 on the effective date of December 31, 2002 with an additional $10.0 million payable no later than thirty days after Cellegy certifies to PDI that$10,000,000 if Fortigel has received all FDA approvals required to manufacture, sell and distribute the product in the United States. Cellegy recorded costs of $947,000 to selling, general and administrative expenses associated with an investment banking fee for the year ended December 31, 2002 related to the PDI Agreement. Under the PDI Agreement, Cellegy would also receive royalties each year until the expiration of the last patent right related to Fortigel, of 20% - 30% of net sales and Cellegy would be reimbursed for 110% of burdened costs for any product supplied to PDI. In October 2003, Cellegy received a mediation notice from PDI. InPDI 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 had filed against each other. Under the terms of the settlement agreement, the license agreement was terminated and all product rights have reverted back to Cellegy. Cellegy paid $2.0 million$2,000,000 to PDI upon signing the settlement agreement. Cellegy also issued a $3.0 million$3,000,000 promissory note to PDI and a $3.5 million$3,500,000 non-negotiable senior convertible debenture. The settlement of the Company’s lawsuit with PDI resulted in the recognition of the remaining $6.5 million$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.
In JulyFrom 2004 through 2006, Cellegy andhad license agreements with ProStrakan entered intorelating to an exclusive license agreement for the futuredevelopment and commercialization of Tostrex® (testosterone gel) and Rectogesic in Europe. Under the terms of the agreement, ProStrakan will be responsible for regulatory filings, sales, marketing and distribution of Tostrex throughout the European UnionEurope and in certain nearby non-EUnon-European Union (“EU”) countries. Cellegy will be responsible for supplying finished product to ProStrakan through Cellegy’s contract manufacturer.
In December 2004, Cellegy and ProStrakan entered into an exclusive license agreement for the commercialization of Rectogesic in Europe. Under the terms of the original agreement, Cellegy received a non-refundable upfront payment of $1.0 million and is entitled to receive additional milestone payments, along with additional payments based on net sales of Rectogesic in Europe. ProStrakan will be responsible for additional regulatory filings, sales, marketing and distribution of Rectogesic throughout Europe. The agreement covers 38 European territories, including all EU member states. Under the original agreement, Cellegy was responsible for supplying finished product to ProStrakan through its contract manufacturer.
In November 2005, the companyCompany renegotiated its marketing agreement with ProStrakan relating to Rectogesic. Under the terms of the amended agreement, ProStrakan will assumeassumed responsibility for all manufacturing and other product support functions and will purchase the product directly from the manufacturer rather than from Cellegy.functions. In connection with its revised marketingthis agreement, Cellegy received a payment of $2.0 million and may receive certain future milestone payments of up to $750,000 upon approval of the product in certain major European countries.$2,000,000.
In January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning Tostrex. Under the terms of the amended agreement, ProStrakan will assumeassumed responsibility for all manufacturing and other product support functions and will purchase Tostrex directly from Cellegy’s contract manufacturer rather than purchasing the product fromfunctions. Cellegy under the terms of the original agreement. Cellegy willwas 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 the C31G Technology from the entity that originally licensedinventor of the technology, to Biosyn.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,(“NIH”), for the development and commercialization of Cyanovirin-N as a vaginal gel to prevent the sexual transmission of HIV. Under the terms of the agreement, Biosyn paid to NIH a nonrefundable, upfront license fee that was charged to research and development. NIH is entitled to milestone payments upon the achievement of certain development milestones and royalties on product sales.
On February 1,January 31, 2006, Cellegy announced that it had entered into a non-exclusive, developing worlddeveloping-world only licensing agreement with CONRAD for collaboration on the development of Cellegy’s entire microbicide pipeline. TheCONRAD 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 encompassesfacilitated CONRAD’s access to Cellegy’s past research results, formulation developments and other technological intangibles in the licensingmicrobicdal field in exchange for CONRAD’s funding of Savvy currently inthe remaining Phase 3 clinical trialsU.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 United Statespipeline. If the agreement is terminated, the license terminates and Africa; UC-781, currently in expanded Phase 1 trials in the United Statestechnology and Thailand; and Cyanovirin-N, currently in pre-clinical development.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 has entered into various other research and technology agreements. Under these other agreements, Biosyn is working in collaboration with various other parties. Should any discoveries be made under such arrangements, Biosyn may be required to negotiate the licensing of the discovery for the development of the respective technologies. 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 regulationregulations pursuant to, among other laws, the Food, Drug and Cosmetic Act or FD&C Act.
The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include: (i) preclinical tests; (ii) the submission to the FDA of an Investigational New Drug Application, or IND, which must be approved before human clinical trials commence; (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its proposed indication; (iv) the submission of a New Drug Application, or NDA, for a new drug or a Product License Application for a new biologic to the FDA; and (v) FDA review and approval of the NDA or Product License Application before any commercial sale or shipment of the product. Preclinical tests include laboratory evaluation of product formulation and animal studies (if an appropriate animal model is available) to assess the potential safety and efficacy of the product. Formulations must be manufactured according to the FDA’s current Good Manufacturing Practice, or GMP, requirements, and preclinical safety tests must be conducted by laboratories that comply with FDA’s Good Laboratory Practice regulations.
| (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 30thirty (30) days after the IND is received, unless the FDA raises concerns or questions about the conduct of the clinical trials. If concerns or questions are raised, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. In some instances, the IND application process can result in substantial delay and expense. Clinical trials are normally done in three phases, although the phases may overlap. Phase 1 trials are concerned primarily with the safety and pharmacokinetics of the product. Phase 2 trials are designed primarily to demonstrative effectiveness and safety in treating the disease or condition for which the product is indicated. These trials typically explore various dose and regimens. Phase 3 trials are expanded clinical trials intended to gather additional information on safety and effectiveness needednecessary to clarify the product’s benefit-risk relationship, discover less common side effects and adverse reactions, and generate information for proper labeling of the drug, among other things.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 an SPA,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, generally 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 Good Manufacturing PracticesGMP 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 onin a timely basis,manner, if at all. Delays in obtaining regulatory approvals could have a material adverse effect on us. If we failthe applicant. Failure to comply with applicable regulatory requirements for marketing drugs we could be 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 andand/or criminal prosecution of Cellegy, our officers or our employees.prosecution.
Manufacturing. Each domestic drug manufacturing facility must be registered with the FDA. Domestic drug manufacturing establishments are subject to routine inspection by the FDA and other regulatory authorities and must comply with GMP requirements and any applicable state or local regulatory requirements. Foreign manufacturing facilities are also subject to periodic FDA inspections or inspections by foreign regulatory authorities. Among other things, the FDA may withhold approvals of NDA’sNDAs or other product applications if deficiencies are found at the facility. Vendors that supply us finished productproducts or components used to manufacture, package and label products are subject to similar regulation and periodic inspection. We have used and intend to continue to use contract manufacturers that operate in conformance with these requirements to produce our compounds and finished products in commercial quantities. Nevertheless, thereThere can be no assurances that manufacturing or quality control problems will not arise at the manufacturing plants of our contract manufacturers or that such manufacturers will have the financial capabilities or management expertise to be able to adequately supply productproducts or maintain compliance with the regulatory requirements necessary to continue manufacturing our 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 European UnionEU regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for European UnionEU member states. This authorization is called a marketing authorization approval.Marketing Authorization Approval (“MAA”). The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorizationMarketing Authorization may submit an application to the remaining member states. Each member state must then make its own determination regarding approval. This procedure is referred to as the Mutual Recognition Procedure.MRP. There can be substantial delays in obtaining required approvals from both the FDA and foreign regulatory authorities after the relevant applications are filed. We expect to rely principally on corporate partners, licensees and contract research organizations, along with our expertise, to obtain governmental approval in foreign countries of drug formulations utilizing our compounds.
Other Government Regulation. In addition to regulations enforced by the FDA, Cellegy is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other similar federal and state laws regarding, among other things, occupational safety, the use and handling of radioisotopes, environmental protection and hazardous substance control. Although we believe that we have complied with these laws and regulations in all material respects and have not been required to take any action to correct any noncompliance, there can be no assurance that Cellegy will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, chemicals, and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, Cellegy could be held liable for any damages that result and any such liability could exceed our resources.
Health Care Reform. In the United States, there have been, and Cellegy expects there will continue to be, a number of federal and state proposals to implement cost controls and other health care regulatory measures. Future legislation could result in a substantial restructuring of the health care delivery system. While we cannot predict whether any legislative or regulatory proposals will be adopted or the effect such proposals may have on our business, the uncertainty of such proposals could have a negative effect on our ability to raise capital and to identify and reach agreements with potential partners, and the adoption of such proposals could have an adverse effect on Cellegy. In both domestic and foreign markets, sales of our therapeutic products if any, will depend in part on the availability of reimbursement from third-party payers. There can be no assurance that our products, 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. In the developmentchange and marketing of topical prescription drugs, Cellegy faces intense competition. Cellegy is much smaller in terms of size and resources than many of its competitors in the United States and abroad, which include, among others, major pharmaceutical, chemical, consumer product, and biotechnology companies, specialized firms, universities and other research institutions. Cellegy’s competitors may succeed in developing technologies and products that are safer, more effective or less costly than any which are being developed by Cellegy, thus rendering its technology and potential products obsolete and noncompetitive. Many of these competitors have substantially greater financial and technical resources, clinical production and marketing capabilities and regulatory experience than Cellegy.
In addition, Cellegy’s products, if commercialized, are subject to competition from existing products. Cellegesic, which is a prescription product, is expected to compete with over-the-counter products, such as Preparation H marketed by Wyeth, and various other prescription products. Cellegy’s Fortigel product, if approved for marketing, is expected to compete with several products, including a currently marketed transdermal patch product sold by Watson Pharmaceuticals, two transdermal testosterone gel products marketed by Unimed/Solvay and Auxilium Pharmaceuticals and a buccal tablet marketed by Columbia Laboratories. In addition, there may be generic product competition for these prescription products in the future. As a result, Cellegy’s products under development may not be able to compete successfully with existing products or possible generic products under development by other organizations.
Savvy is subject to competition from other microbicides that are currently undergoing clinical trials and which may be sold by prescription or over the counter, as well as non-microbicidenon microbicidal products such as condoms. Additionally, if a vaccine for HIV/AIDS is made available, this could limit the potential market for Savvy and Biosyn’s other products.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, we cannot assure youthere 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.
Therapies for sexual dysfunction and women’s health products represent a potentially large market opportunity. If this market potential is realized, competition will expand. The approval and marketing of competitive products and other products that treat the indications targeted by Cellegy could adversely affect the market acceptance of Cellegy’s products. The presence of directly competitive products could also result in more intense price competition than might otherwise exist. We are aware of other pharmaceutical companies that are developing prescription testosterone replacement products for women, including a female testosterone patch from Procter & Gamble, a testosterone gel product from BioSante Pharmaceuticals, Inc. and a spray product from VIVUS, Inc.
As of March 15, 2006,30, 2007, the Company had 18 full-time employees and 1 part-time employee, including 4five (5) full-time employees at our Brisbane, California office, and 14 full-time employees and 1 part-time employee at our Biosyn subsidiaryits offices in Huntingdon Valley,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 or SEC,(“SEC”), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
| (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. The SEC’s Public Reference Room phone number is or by calling 1-800-SEC-0330. In addition, electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are posted to our website (www.cellegy.com). Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC. Upon written request to the Company at Cellegy Pharmaceuticals, Inc., 1800 Byberry Road, Building 13, Huntingdon Valley,2085 B Quaker Point Drive, Quakertown, Pa, 19006,18951, Attention: Chief Financial Officer, Cellegy will provide a copy of the 10-K to any stockholder.
ITEM 1A: RISK FACTORS
We sold amaterial portionof 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 wedo not expect losses to continue for at least several years.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. Our deficit accumulated during the development stage asWithout additional funds from sales of December 31, 2005, was approximately $132.3 million. We have never operated profitably and, given our planned level of operating expenses,assets, intellectual property or technologies, or from a business combination or a similar transaction, we expect to continue to incur losses through at least 2006. If we are able to obtain sufficient funding, we plan to devote significant resources to pre-clinical studies, clinical trials, administrative, marketing, sales and patent activities. Accordingly, without substantial revenues from new corporate collaborations, royalties on product sales or other revenue sources, we expect to incur substantial operating losses in the foreseeable future as our potential products move through development and as we continue to invest in research and clinical trials. As a result of our continuing losses, we maywill exhaust our resources and maywill be unable to complete the development of our products,continue operations, and our accumulated deficit will continue to increase as we continue to incur losses. Our losses may increase in the future, and even if we achieve our revenue targets, we may not be able to sustain or increase profitability on a quarterly or annual basis. The amount of future net losses and the time requiredour ability to reach profitability,sell our remaining assets or successfully enter a business combination transaction are both highly uncertain. To achieve sustained profitable operations, we must, among other things, successfully discover, develop, and obtain regulatory approvals for and market pharmaceutical products. We cannot assure you that we will ever be able to achieve or sustain profitability.
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 have received a “going concern” opinion from our independent registered public accounting firm, which may negatively impact our business.
Our audit opinion from our independent registered public accounting firm regarding the consolidated financial statementstherefore expect negative cash flows to continue for the years ended December 31, 2004foreseeable 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 2005, included an explanatory paragraph indicatingregulatory 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 there isthe Company will have adequate resources to continue operations for longer than 12 months.
These factors raise substantial doubt about the Company’sour 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 have incurred losses and negative cash flows from operations since inception.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 collaborative relationships with business partners, makecombination or other agreements, therefore making it more difficult to obtain required financing on favorable terms or at all,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 prospectsaudit opinions from our current and prior independent registered public accounting firms regarding the consolidated financial statements for obtaining additional financing are uncertainthe years ended December 31, 2006, 2005 and failure2004 include an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to obtain needed financingcontinue as a going concern. Doubts concerning our ability to continue as a going concern could adversely affect our ability to developenter 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 products or to continue operations.
Throughout our history, we have consumed substantial amounts of cash. Our cash needs may increase during 2006 to fund our research, development and clinical trial programs, administrative and litigation expenses, and Biosyn’s operations to the extent these are not covered by various government and non-government organizations. In addition, one or more such organizations could withdraw, reduce the extent of, delay or terminate their funding commitments.
As of December 31, 2005, Cellegy had approximately $2.3 million in cash and cash equivalents. Cellegy has no current source of significant ongoing revenues or capital beyond existing cash, product sales and grant funding.
The amount of cash required to fund future expenditures and capital requirements will depend on numerous factors including, without limitation:
| · | requirements in support of our development programs; |
| · | progress and results of pre-clinical and clinical testing; |
| · | time and costs involved in obtaining regulatory approvals, including the cost of complying with additional FDA information and/or clinical trial requirements to obtain marketing approval of our product candidates; |
| · | the commercial success of our products that are approved for marketing; |
| · | the costs of filing, prosecuting, defending and enforcing patent claims, oppositions and appeals, and our other intellectual property rights; |
| · | the cost and outcome of the current litigation with PDI, Inc., as well as expenses associated with any other unforeseen litigation; |
| · | our ability to establish new collaborative arrangements; |
| · | the validation of a second contract manufacturing site; and |
| · | the extent of expenses required to support Biosyn’s operations. |
In order to complete the development, manufacturing and other pre-launch marketing activities necessary to commercialize our products, additional financing will be required. Cellegy may seek other alternatives such as private or public equity investments, partnerships with other pharmaceutical companies to co-develop and fund our research and development efforts, sales of technology or assets, additional out-licensing agreements with third parties, or agreements to monetize in the near term our future milestone and royalty payments expected from licenses. There is no assurance that such funding will be available for us to finance our operations on acceptable terms, if at all, and any future equity funding may involve significant dilution to our stockholders.
Insufficient funding may require us to delay, reduce or eliminate some or allprice of our researchcommon stock and development activities, planned clinical trials, administrative programs, personnel, outside services and facility costs; reduce the size and scope of our sales and marketing efforts; delay or reduce the scope of, or eliminate, one or more of our planned commercialization or expansion activities; seek collaborators for our product candidates at an earlier stage thancould otherwise would be desirable and on terms that are less favorable than might otherwise be available; or relinquish, license or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. In addition, even if we do receive additional financing, we may not be able to complete planned clinical trials, development, manufacturing or marketing of any or all of our product candidates.
Cellegy believes that available cash resources will be adequate to satisfy our capital needs through at least April 30, 2006 assuming nohave a material adverse financial impact associated with the PDI litigation and any subsequent legal proceedings, although failure to obtain additional funds as described above may affect the timing of development, clinical trials or commercialization activities relating to certain products. Funds provided from sales of subsidiaries, assets, equity or debt financing, or other arrangements, if obtained, would permit satisfaction of capital needs for a longer period of time. A favorable determination by the FDA Advisory Committee and the FDA following the scheduled April 2006 hearingeffect on our Cellegesic NDA may improve the prospects for one or more such transactions.business, financial condition and results of operations.
We could be forced into bankruptcy.
There is a risk that one or more of our creditors could bring lawsuits to collect amounts to which they believe they are entitled. In the event of lawsuits of this type, if we are unable to negotiate settlements or satisfy our obligations, we could voluntarily file bankruptcy proceedings, or we could become the subject of an involuntary bankruptcy proceeding filed by one or more creditors against us.
The outcome of the lawsuit with PDI is uncertain. An unfavorable outcome will have a material adverse affect on our financial position and stock price.
As more fully described under Item 3, “Legal Proceedings”, the Company is presently engaged in a lawsuit with PDI alleging that Cellegy is in material breach of the April 2005 settlement agreement between Cellegy and PDI and related documents, including two promissory notes given by Cellegy to PDI, as a result of Cellegy’s failure to notify PDI of the receipt of certain payments and of Cellegy’s failure to pay amounts to which PDI believes it is entitled. The lawsuit seeks immediate payment of the notes along with payments fordefault interest and damages. An unfavorable outcome to this lawsuit would have a material adverse affect on our business and stock price.
We are subject to regulation by regulatory authorities including the FDA, which could delay or prevent marketing of our products. Unexpected regulatory outcomes could adversely affect our business and stock price.
Cellegy’s remaining product candidates Savvy, Cellegesic, FortigelUC-781 and TostrelleCV-N and our ongoing research and clinical activities relating to those product candidates are subject to extensive regulation by governmental regulatory authorities in the United States and in other countries. Before we obtain regulatory approval for the commercial sale of ourany potential drug products, we must demonstrate through pre-clinical studies and clinical trials that the product is safe and efficacious for use in the clinical indication for which approval is sought. The timing of NDA submissions, the outcome of reviews by the FDA and the initiation and completion of other clinical trials are subject to uncertainty, change and unforeseen delays. Under the Prescription Drug User Fee Act (“PDUFA”), the FDA establishes a target date to complete its review of an NDA. Although the FDA attempts to respond by the relevant PDUFA date to companies that file NDAs, there is no obligation on the FDA’s part to do so. In addition, extensive current pre-clinical and clinical testing requirements and the current regulatory approval process of the FDA in the United States and of certain foreign regulatory authorities, or new government regulations, could prevent or delay regulatory approval of Cellegy’s products.our product candidates.
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 onin a timely basis,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.
One or more of ourOur ongoing or planned clinical trialstrial could be delayed, or the FDA could issue a Not Approvable letter with respect to our current or future product candidates, as it did with our Fortigel NDA in July 2003 and our Cellegesic NDA in December 2004.candidate. Such actions could result in further clinical trials or necessitate other time consuming or costly actions to satisfy regulatory requirements. For example, in January 2004, Cellegy reported positive results from its confirmatory Phase 3 study using Cellegesic for the treatment of chronic anal fissure pain, and we submitted an NDA to the FDA in June 2004. In December 2004, the FDA concluded that the trial data did not satisfy the standards specified in the SPA and did not grant marketing approval for Cellegesic.
The Company submitted an amended NDA containing new analyses of data from its trials to the FDA in April 2005 and has been under review at the FDA since then. In January, 2006 the FDA indicated that the Company’s submission will be reviewed April 25, 2006 by the Cardiovascular and Renal Drug Products Advisory Committee. The Committee’s recommendation for approval or non-approval of Cellegesic is expected to be rendered at the conclusion of its review. While the FDA will consider the findings of the Committee, the final regulatory decision rests with the Agency. The FDA has not indicated when its final decision will be communicated. Cellegesic cannot be marketed in the United States unless and until the FDA grants marketing approval for the product.
Similarly, since there is still no definitive agreement with the FDA regarding requirements for approval of Fortigel, the FDA will require an additional Phase 3 clinical trial. The FDA may also decide to have an Advisory Panel review the submission of our product candidates with an uncertain outcome of such panel’s recommendation, or take other actions having the effect of delaying or preventing commercial introduction of our products. The FDA or other regulatory agencies could impose requirements on future trials that could delay the regulatory approval process for our products. Similarly, there are risks and uncertainties associated with our female clinical trial programs for Tostrelle and Savvy in that sufficient resources for clinical development of these product candidates may not be available or one or both drugs may not prove to be safe and effective by standards established by worldwide regulatory authorities. There can be no assurance that the FDA, or other regulatory agencies, will find any of our trial data or other sections of our regulatory submissions sufficient to approve any of our product candidates for marketing in the United States or in other overseas markets.
Sales of Cellegy’s products outside the United States are subject to different regulatory requirements governing clinical trials and marketing approval. These requirements vary widely from country to country and could delay introduction of Cellegy’s products in those countries. Cellegy may not be able to obtain marketing approval for one or more of its products in any countries in addition to those countries where approvals have already been obtained.
Our clinicalClinical 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 assurancesassurance that Cellegy’s present or futureremaining clinical trialstrial will demonstrate the results required to continue advanced trial development and allow us to seek marketing approval for these or our other product candidates.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 the Biosyn pipeline products acquired by Cellegy, areSavvy, were funded directly by certain grant and contract commitments from several governmental and non-governmental organizations (“NGOs”). Nevertheless, these Phase 3 trials and Cellegy’s other plannedcurrent or future clinical trials could require Cellegy to provide substantial funding in 2006.additional funding. There can be no assurance that funding from governmental agencies and NGOs will continue to be available, at previous levels or at all, and any other Phase 3 trials that Cellegy may commence in the future relating to its products could involve the expenditure of several million dollars through the completion of the clinical trials. In addition, delays in the clinical trial process can be extremely costly in terms of lost sales opportunities and increased clinical trial costs. The speed with which we complete our clinical trials and our regulatory submissions, including NDAs, will depend on several factors, including the following:
| · | the rate of patient enrollment, which is affected by the size of the patient population, the proximity of patients to clinical sites, the difficulty of the entry criteria for the study and the nature of the protocol; |
| | the timely completion of clinical site protocol approval and obtaining informed consent from subjects; |
| · | analysis of data obtained from preclinical and clinical activities; |
| | changes in policies or staff personnel at regulatory agencies during the lengthy drug application review; and |
| | the availability of experienced staff to conduct and monitor clinical studies, internally or through contract research organizations.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 trialstrial of our product candidatescandidate 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 candidatescandidate and could result in the FDA, or other regulatory authorities, denying approval of our product candidatescandidate 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 candidatescandidate may prove not to be safe for human use. Any delay in the regulatory approval of our product candidatescandidate could increase our product development costs and allow our competitors additional time to develop or market competing products.
Due to our reliance on contract research organizations or other third-parties to assist us in conducting clinical trials, we are unable to directly control all aspects of our clinical trials.
Currently, we relyWe have relied on contract research organizations, or CROs, and other third parties to conduct our clinical trials. As a result, we have had and will continue to have less control over the conduct of the clinical trials, the timing and completion of the trials and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Communicating with CROs can also be challenging, potentially leading to difficulties in coordinating activities. CROs may:
| · | have staffing difficulties; |
| | experience regulatory compliance issues; |
| | undergo changes in priorities or may become financially distressed; or |
| | not be able to properly control payments to government agencies or clinical sites, particularly in less developed countries. |
These factors may adversely affect their ability to conduct our trials. We may experience unexpected cost increases or experience problems with the timeliness or quality of the work of the CRO. If we must replace these CROs or any other third party contractor, our trials may have to be suspended until we find another contract research organizationCRO that offers comparable services. The time that it takes us to find alternative organizations may cause a delay in the commercialization of our product candidates or may cause us to incur significant expenses. Although we do not now intend to replace our CROs, such a change would make it difficult to find a replacement organization to conduct our trials in an acceptable manner and at an acceptable cost. Any delay in or inability to complete our clinical trials could significantly compromise our ability to secure regulatory approval of our product candidates, thereby limiting our ability to generate product revenue resulting in a decrease in our stock price.
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. Several of Cellegy’s products and product candidates, such as Cellegesic, Savvy and Tostrelle, are based on existing molecules with a history of use in humans but which are being developed by us for new therapeutic uses or in novel delivery systems which enhance therapeutic utility. We cannot obtain composition patent claims on the compounds themselves, and instead rely on patent claims, if any, directed to use of the compound to treat certain conditions or to specific formulations. This is the case, for example, with our United States patents relating to Cellegesic and Fortigel products. Such method-of-use patents may provide less protection than a composition-of-matter patent, because of the possibility of “off-label” use of the composition. Cellegy may not be able to prevent a competitor from using a different formulation or compound for a different purpose.
No assurance can be given that any additional patents will be issued to us, that the protection of any patents that may be issued in the future will be significant, or that current or future patents will be held valid if subsequently challenged. For example, oppositions have been filed with the European Patent Office regarding our European patent protecting the manufacture and use of nitroglycerin ointment and related compounds for the treatment of anal disorders, including fissures and various hemorrhoidal conditions. In December 2003, we reported that the Board of Opposition of the European Patent Office had rendered a verbal decision revoking Cellegy’s European patent relating to its Cellegesic product and related compounds for the treatment of anal disorders, including fissures and various hemorrhoidal conditions. Although Cellegy has appealed this decision, an additional adverse outcome in the appeal process could have a negative effect on Cellegy, impacting the commercial success of our partner’s marketing and corporate licensing efforts in Europe and adversely affecting our royalty revenues and stock price.
The patent position of companies engaged in businesses such as Cellegy’s business generally is uncertain and involves complex, legal and factual questions. There is a substantial backlog of patent applications at the United States Patent and Trademark Office, or USPTO.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 us a competitive advantage.
In addition, many other organizations are engaged in research and product development efforts in drug delivery and topical formulations that may overlap with Cellegy’s products. Such organizations may currently have, or may obtain in the future, legally blocking proprietary rights, including patent rights, in one or more products or methods under development or consideration by Cellegy. These rights may prevent us from commercializing technology, or may require Cellegy to obtain a license from the organizations to use the technology. Cellegy may not be able to obtain any such licenses that may be required on reasonable financial terms, if at all, and cannot be sure that the patents underlying any such licenses will be valid or enforceable. Moreover, the laws of certain foreign countries do not protect intellectual property rights relating to United States patents as extensively as those rights are protected in the United States. The issuance of a patent in one country does not assure the issuance of a patent with similar claims in another country, and claim interpretation and infringement laws vary among countries, sotherefore 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.
Our product sales strategy involving corporate partners is highly uncertain.
Cellegy is seeking to enter into agreements with corporate partners regarding commercialization of our lead product candidates. Cellegy currently has a limited number of agreements with third parties to commercialize our product candidates. Cellegy may not be able to establish other future collaborative arrangements and we may not have the resources or the experience to successfully commercialize any such products on our own. Failure to enter into other arrangements could prevent, delay or otherwise jeopardize our ability to develop and market products in the United States and in markets outside of North America, reducing our revenues and profitability.
With the current and future planned corporate partner arrangements, we may rely on our partners to conduct clinical trials, obtain regulatory approvals and, if approved, manufacture, distribute, market or co-promote these products. Reliance on third party partners can create risks to our product commercialization efforts. Once agreements are completed, particularly if they are completed at a relatively early stage of product development, Cellegy may have little or no control over the development or marketing of these potential products and little or no opportunity to review clinical data before or after public announcement of results. Further, any arrangements that may be established may not be successful or may be subject to dispute or litigation between the parties.
We do not have any history of manufacturing products on a large scale, and we have a limited number of critical suppliers.
Cellegy has no direct experience in manufacturing commercial quantities of products and currently does not have any capacity to manufacture products on a large commercial scale. We currently rely on a limited number of contract manufacturers, primarily PendoPharm, Inc. and certain of Biosyn’s suppliers, to manufacture our formulations. Although we are developing other contract manufacturers, there can be no assurance that we will be able to enter into acceptable agreements with them or validate facilities successfully on a timely basis. This is an expensive and time-consuming process and there may be delays and additional costs relating to the technical transfer and validation of alternate suppliers. In the future, we may not be able to obtain contract manufacturing on commercially acceptable terms for compounds or product formulations in the quantities we need. Manufacturing or quality control problems, lack of financial resources or qualified personnel could occur with our contract manufacturers causing product shipment delays, inadequate supply, or causing the contractor not to be able to maintain compliance with the FDA’s current Good Manufacturing Practice (“GMP”) requirements necessary to continue manufacturing. Such problems could limit our ability to produce clinical or commercial product, cause us to be in breach of contract obligations with our distributors to supply product to them, reduce our revenues from product sales, and otherwise adversely affect our business and stock price.
PendoPharm, Inc. is Cellegy’s contract manufacturer for our North American and European clinical and commercial supply of prescription products in those territories, while the Australian and South Korean product sales are sourced by a pharmaceutical manufacturer in Australia. In July 2003, PanGeo Pharma, our former contract manufacturer, filed for bankruptcy protection under Canadian law. Under a reorganization plan, PanGeo sold its facilities to an affiliate of Pharmascience, another Canadian manufacturer, and was renamed PendoPharm, Inc. Cellegy has not experienced any material adverse impact to date from the previous bankruptcy filing. The manufacturing facility was inspected and re-certified by Canadian regulatory authorities after its acquisition by PendoPharm, and PendoPharm has continued to supply product from the manufacturing facility without interruption. Nevertheless, uncertainty exists concerning the future operations of PendoPharm manufacturing plant and whether PendoPharm will be able to meet Cellegy’s clinical and product requirements on a timely basis, if at all, in the future. In addition, there can be no assurances relating to PendoPharm’s ability to produce product under GMP as required by the FDA or by other regulatory agencies. There could be difficulty or delays in importing raw materials or exporting product into or out of Canada resulting in delays in our clinical trials or commercial product sale
We have limited sales and marketing experience.
We may market some of our products, if 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 maydoes 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 tofor Cellegy of such products if we needed to rely on a third party marketing partner to commercialize the products.
If medical doctors do not prescribe our products or the medical profession does not accept our products, our product sales and business would be adversely affected.
Our business is dependent on market acceptance of our products by physicians, healthcare payers,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; |
| | 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.
If testosterone replacement therapies are perceived to create health risks, our testosterone gel product candidates may be jeopardized.
Past studies of female hormone replacement therapy products have reported an increase in certain health risks with long-term use. As a result of such studies, some companies that sell or develop female hormone replacement products have experienced decreased sales of these products, and in some cases, a decline in the value of their stock. Publications have, from time to time, suggested potential health risks associated with testosterone replacement therapy (“TRT”). It is possible that further studies on the effects of TRT could demonstrate other health risks. This, as well as negative publicity about the risks of hormone replacement therapy, including TRT, could adversely affect patient or prescriber attitudes and impact the development and successful commercialization of our Fortigel, Tostrex and Tostrelle product candidates. In addition, in a meeting with the FDA, the FDA informed Cellegy that specific guidelines regarding the long-term safety of testosterone for the treatment of female sexual dysfunction are under internal discussion by the Division of Reproductive and Urologic Drug Products. Cellegy is awaiting these guidelines before embarking on a Phase 3 program. If the new FDA guidelines prove to be too onerous or too costly to implement, the Phase 3 program may be significantly delayed or we may decide not to pursue further development of Tostrelle product. The above factors could adversely affect investor attitudes and the price of our common stock.
We have very limited staffing and will continue to be dependent upon key personnel.
Our success is dependent upon the efforts of a small management team and staff. We have compensation or employment arrangements and a severance/retention plan in place with all of our executive officers, but none of our executive officers is legally bound to remain employed for any specific term. These arrangements may be terminated by either Cellegy or the officer at any time upon notice. We do not have key man life insurance policies covering any of our executive officers or key employees. If key individuals leave Cellegy, we could be adversely affected if suitable replacement personnel are not quickly recruited. There is competition for qualified personnel in all functional areas, which makes it difficult to attract and retain the qualified personnel necessary for the development and growth of our business. Our future success depends upon our ability to continue to attract and retain qualified scientific, clinical and administrative personnel.
Our corporate compliance programs cannot guarantee that we are in compliance with all potentially applicable regulations.
The development, manufacturing, pricing, sales, and reimbursement of our products, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. We are a relatively small company and we rely heavily on third parties to conduct many important functions. We also have significantly fewer employees than many other companies that have the same or fewer product candidates in late stage clinical development. In addition, as a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002, some of which have either only recently been adopted or are currently proposals subject to change. While we have developed and instituted a corporate compliance program and continue to update the program in response to newly implemented or changing regulatory requirements, we cannot assure you that we are now or will be in compliance with all such applicable laws and regulations. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, or other sanctions or litigation. Failure to comply with potentially applicable laws and regulations could also lead to the imposition of fines, cause the value of our common stock to decline, and impede our ability to raise capital or lead to the de-listing of our stock.
We are evaluating our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls, as required by the Sarbanes-Oxley Act. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”). As a result, we expect to incur significant additional expenses and diversion of management’s time. Cellegy is considered a non-accelerated filer, and as such is required to comply with the Section 404 requirements for its fiscal year ending December 31, 2007. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our compliance deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, including the SEC. In addition, we may be required to incur a substantial financial investment to improve our internal systems and the hiring of additional personnel or consultants.
Risks Relating to Our Industry
We face intense competition from larger companies, and in the future Cellegy may not have the resources required to develop innovative products. Cellegy’s products are subject to competition from existing products.
The pharmaceutical industry is subject to rapid and significant technological change. In the development and marketing of prescription drugs, Cellegy faces intense competition. Cellegy is much smaller in terms of size and resources than many of its competitors in the United States and abroad, which include, among others, major pharmaceutical, chemical, consumer product, specialty pharmaceutical and biotechnology companies, universities and other research institutions. Cellegy’s competitors may succeed in developing technologies and products that are safer and more effective than any product or product candidates that we are developingmay 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, Cellegy’sany Cellegy products arewill likely be subject to competition from existing products. Cellegesic, if ever commercialized, is expected to compete with over-the-counter products, such as Preparation H marketed by Wyeth, and various prescription products. As a result, we cannot assure you that Cellegy’sany future Cellegy products under development may notnever be able to compete successfully with existing products or with innovative products under development by other organizations.
Savvy is subject to competition from other microbicides that are currently undergoing clinical trials and which may be sold by prescription or over the counter, as well as non-microbicide products such as condoms. Additionally, if a vaccine for HIV/AIDS is successfully developed and made available, this could limit the potential market for Savvy and Biosyn’s other products. As a result, Biosyn’s products under development may not be able to compete successfully with existing products or other innovative products under development.
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 trialstrial insurance coverage relating to our clinical trials in an aggregate amount of $3 million. If any of our product candidates are approved for marketing, we may seek additional coverage.
There can be no assurance that Cellegy will be able to obtain or maintain insurance on acceptable terms, particularly in overseas locations, for clinical and commercial activities or that any insurance obtained will provide adequate protection against potential liabilities. Moreover, our current and future coverages may not be adequate to protect us from all of the liabilities that we may incur. If losses from liability claims exceed our insurance coverage, we may incur substantial liabilities that exceed our financial resources. In addition, a product or clinical trial liability action against us would be expensive and time-consuming to defend, even if we ultimately prevailed.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.volatile.
Our stock price has from time to time experienced significant price and volume fluctuations. Since becoming a public company, our stock price has fluctuated due to overall market conditions and due to matters or events more specific to Cellegy. Events or announcements that could significantly impact our stock price include:
| · | Publicity or announcements regarding regulatory developments relating to our products; |
| | Clinical trial results, particularly the outcome of our more advanced studies; or negative responses from both domestic and foreign regulatory authorities with regard to the approvability of our products; |
| | Period-to-period fluctuations in our financial results, including our cash and investment balance, operating expenses, cash burn rate or revenue levels; |
| | · | Negative public announcements, additional legal proceeding or financial problems of our key suppliers, particularly relating to our Canadian manufacturer and our service providers; |
| | Common stock sales in the public market by one or more of our larger stockholders, officers or directors; |
| | A negative outcome in existingany litigation or other potential legal proceedings; or |
| | Other potentially negative financial announcements including delisting from the OTCBB,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. |
The Kingsbridge Structured Secondary Offering (“Kingsbridge SSO”) financing arrangement may have a dilutive impact on our stockholders. The SSO arrangement imposes certain limitations on our ability to issue equity or equity-linked securities.
There are 4,000,000 shares of our common stock that are reserved for issuance under the structured secondary offering facility arrangement, or Kingsbridge SSO, that we entered into in January 2004 with Kingsbridge Capital Limited, or Kingsbridge, 260,000 shares of which are related to a warrant that we issued to Kingsbridge. In certain circumstances where the registration statement covering those shares is not effective or available to Kingsbridge, additional shares may be issuable to Kingsbridge under the agreement. Such circumstances could include, for example, suspending Kingsbridge’s ability to sell shares pursuant to the registration statement because of the existence of material undisclosed developments relating to Cellegy. If within 15 trading days following any settlement date on which Cellegy issues shares under the Kingsbridge SSO, Cellegy suspends Kingsbridge’s ability to sell shares by delivering a notice to Kingsbridge, referred to as a blackout notice, then if the volume weighted average market price (“VWAP”) of our common stock, is higher on the trading day immediately before the blackout notice is delivered than it is on the first trading date after the blackout trading period is lifted, Cellegy is obligated to pay to Kingsbridge an amount based on a percentage, ranging from 75% to 25% depending on when the blackout notice is delivered, of the difference between the two VWAP prices multiplied by the number of shares purchased by Kingsbridge under the most recent drawn down and held by Kingsbridge immediately before the suspension was imposed. Cellegy may, in its discretion, pay this amount either in cash or in shares, the value of which is based on the market price of the common stock on the first trading date after the registration statement became available again.
The issuance of shares under the Kingsbridge SSO at a discount to the market price of the common stock, and upon exercise of the warrant, will have a dilutive impact on other stockholders, and the issuance or even potential issuance of such shares, if any, could have a negative effect on the market price of our common stock. If we sell stock to Kingsbridge when our share price is decreasing, such issuance will have a more dilutive effect and may further decrease our stock price. A decrease in our stock price or other consequences of issuing shares under the Kingsbridge SSO could potentially cause us not to satisfy one or more requirements for the continued listing of our common stock on the OTCBB, or could impair or prevent our ability to obtain additional required financing, resulting in a damaged capital structure.
To the extent that Kingsbridge sells shares of our common stock issued under the Kingsbridge SSO to third parties, our stock price may decrease due to the additional selling pressure in the market. The perceived risk of dilution from sales of stock to or by Kingsbridge may cause holders of our common stock to sell their shares or encourage short sales. This could contribute to decline in our stock price.
During the two-year term of the Kingsbridge SSO, we are subject to certain restrictions on our ability to engage in certain equity or equity-linked financings without the consent of Kingsbridge. These restrictions primarily relate to non-fixed future-priced securities. We may not issue securities that are, or may become, convertible or exchangeable into shares of common stock where the purchase, conversion or exchange price for such common stock is determined using a floating or otherwise adjustable discount to the market price of the common stock during the two year term of our agreement with Kingsbridge. However, the agreement does not prohibit us from conducting most kinds of additional debt or equity financings, including Private Investments in Public Equity (“PIPE”), shelf offerings, and secondary offerings.
Under the terms of the Kingsbridge SSO, if we fail to issue and sell common stock to Kingsbridge pursuant to draw downs at least equal to $2.66 million, then we have agreed to pay $266,000 to Kingsbridge. We have made draw-downs of less than this amount. As a result, unless these provisions are amended or waived, we owe Kingsbridge $266,000.
Future sales of shares of our common stock may negatively affect our stock price.
A substantial portion of our shares is held by a relatively small number of stockholders. Sales of a significant number of shares into the public markets, particularly in light of our relatively small trading volume, may negatively affect our stock price. We also have outstanding warrants and vested stock options that can be exercised by the holders to acquire shares of our common stock. The exercise of these options or warrants could result in significant dilution to our stockholders at the time of exercise.
In the future, we will likely issue additional shares of common stock or other equity securities, including but not limited to options, warrants or other derivative securities convertible into our common stock, which could result in significant dilution to our stockholders and adversely affect our stock price
Changes in the expensing of stock options could result in unfavorable accounting charges or require us to change our compensation practices.
For Cellegy, stock options are a significant component of compensation for existing employees and to attract new employees. We currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. The Financial Accounting Standards Board has issued a new accounting standard requiring recording of expense for the fair value of stock options granted. During 2006, when we change our accounting policy to record expense for the fair value of stock options granted our net loss may increase. We intend to continue to include various forms of equity in our compensation plans, such as stock options and other forms of equity compensation allowed under our plans. If we continue our reliance on stock options, our reported losses could increase.
ITEM 1B: UNRESOLVED STAFF COMMENTS
In March of 2005, Cellegy relocated its South San Francisco offices to the nearby city of Brisbane where it is subleasingThe Company presently leases approximately 5,8001,900 square feet of office space with an expiration date of Mayin Quakertown, Pennsylvania. The lease expires March 31, 2007. The company relocated2007 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 Biosyn’sits present location from Huntingdon Valley, Pennsylvania facilities in September 2005 and expects to close the Brisbane office during the second quarter ofOctober 2006. Biosyn’s facilities consist of approximately 10,000 square feet of leased laboratory and office space with an expiration date of October 31, 2008. The companyCompany believes its current facilities to be adequate for its anticipated needs.
In October 2003, the Company received a communication from PDI invoking mediation procedures under its exclusive license agreement with PDI relating to Fortigel. After mediation was completed in December 2003, both PDI and Cellegy initiated litigation proceedings against each other. Cellegy filed a declaratory judgment action in federal district court in San Francisco against PDI, and PDI initiated an action in federal district court in New York against Cellegy.
On April 11, 2005, Cellegy entered into a settlement agreement with PDI resolving the lawsuits that the companies had filed against each other. Under the terms of the settlement agreement, the license agreement was terminated and all product rights reverted to Cellegy. Under the settlement agreement, the previous license agreement was terminated and all product rights reverted to Cellegy. Cellegy paid $2 million to PDI upon signing the settlement agreement.
Cellegy also issued a $3.0 million Secured Promissory Note to PDI, payable in 18 months, with earlier payments of amounts owed under the note required to be made to the extent of 50% of licensing fees, royalties or milestone payments (or, in each case, other payments in the nature thereof) received by Cellegy under Cellegy’s agreements or arrangements with respect to Cellegy’s Tostrex® (testosterone gel) and Rectogesic® (nitroglycerin ointment) products in territories outside of North America, and 50% of licensing fees, royalties or milestone payments (or, in each case, other payments in the nature thereof) received by Cellegy under Cellegy’s agreements or arrangements with respect to Fortigel licensees in North American markets. These payments are required to be made to PDI within two business days after Cellegy receives the payments. These various payments will be made until the amount owed under the note is paid in full. Cellegy’s obligations under the note are secured by a security interest in favor of PDI, which is reflected in a security agreement between Cellegy and PDI, in Cellegy’s interests in the payments described above and any proceeds there from (and certain related collateral). In addition, Cellegy is required to make payments on the $3.0 million note with respect to 10% of proceeds received by Cellegy in excess of $5 million from financing transactions. Payments made in 2005 totaled $200,000. Amounts owed under the note may be accelerated upon an event of default, which include (but are not limited to) certain kinds of bankruptcy filings or certain related actions or proceedings, an uncured material breach of Cellegy’s obligations under the note, the security interest no longer being a valid, perfected, first priority security interest, and a default in indebtedness of Cellegy with an aggregate principal amount in excess of $2 million that results in the maturity of such indebtedness being accelerated before its stated maturity. Cellegy made a $100,000 payment to PDI in October 2005 shortly after the due date specified in the secured note and has paid interest to PDI on that amount. Cellegy also issued to PDI a $3.5 million principal amount Convertible Senior Note due April 11, 2008. Cellegy may redeem the note at any time before the maturity date upon not less than 30 or more than 60 days notice to PDI, at a redemption price equal to the principal amount; if Cellegy delivers such a redemption notice, PDI may convert the note into shares of Cellegy common stock at a price of $1.65 per share. In addition, after the 18 month anniversary of the debenture, PDI may convert the note into Cellegy common stock at a price of $1.65 per share. If Cellegy does redeem the note within the first 18 months; then Cellegy has agreed to file a registration statement relating to possible resale of any shares issued to PDI after 18 months. 2,121,212 shares would be issuable upon such conversion. As long as amounts are owed under the note, Cellegy has agreed not to incur or become responsible for any indebtedness that ranks contractually senior or pari passu in right of payment to amounts outstanding under the note. Events of default under the senior note are generally similar to events of default under the secured note.
On December 1, 2005, the Company received a notice from PDI notifying the Company that PDI considers that Cellegy to be in default of the Secured Promissory Note and the Nonnegotiable Convertible Senior Note which were part of the settlement agreement. PDI’s notice states that PDI believes that Cellegy is in material breach of the Secured Promissory Note as a result of Cellegy’s failure to notify PDI of the receipt of certain payments and of Cellegy’s failure to pay amounts to which PDI believes it is entitled. PDI also notified Cellegy that PDI believes that an outstanding principal amount of $2.8 million, plus default interest, of the Secured Promissory Note and outstanding principal amount of $3.5 million, plus default interest, of the Nonnegotiable Convertible Senior Note are immediately due and payable in cash pursuant to the “Event of Default” provisions of the settlement agreement. Cellegy had previously made certain payments pursuant to the provisions of the settlement agreement. Among other things, PDI claimed that it was entitled to $1.0 million of the $2.0 million payment that Strakan paid to Cellegy in connection with the November 2005 negotiation of the license agreement relating to Rectogesic.
On December 2, 2005, PDI filed suit in United States District Court for the Southern District of New York requesting that the court declare that Cellegy has breached its obligations under the settlement agreement, order Cellegy to specifically perform its obligations under the settlement agreement, and awarded PDI damages in the amount of $6.4 million plus default interest as well as certain other amounts. Cellegy does not agree that the payments made by Strakan under the renegotiated agreement fall within the definition of "Pledged Collateral" in the settlement documents and does not believe that any amount is owed to PDI as a result of such payments. The proceedings are in the discovery stage and no trial date has been set. The Company intends to vigorously defend itself in the litigation.
ITEM 4: 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.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
Cellegy’s common stock currently trades on the OTCOver The Counter Bulletin Board (“OTCBB”(OTCBB”) exchange under the symbol “CLGY.OB”. Cellegy’s common stock was traded on the NasdaqNASDAQ National Market until September 14, 2005, when its listing was transferred to the NasdaqNASDAQ Small Cap Market. On December 29, 2005, the common stock was delistedde-listed from the NasdaqNASDAQ Small Cap Market, and shortly thereafter the common stock began trading on the OTCBB. The following table sets forth the range of high and low closing sales prices for the common stock as reported on The NASDAQ Stock Market Small Cap Market and OTCBB for the periods indicated below.
| | | High | | Low | | | High | | Low | |
2004 | | | | | | |
| First Quarter | | $6.74 | | $3.14 | | |
| Second Quarter | | 4.65 | | 3.65 | | |
| Third Quarter | | 4.62 | | 3.46 | | |
| Fourth Quarter | | 5.14 | | 2.69 | | |
2005 | | | | | | | | | | |
| First Quarter | | $3.05 | | $1.62 | | | $ | 3.05 | | $ | 1.62 | |
| Second Quarter | | 2.45 | | 1.29 | | | | 2.45 | | | 1.29 | |
| Third Quarter | | 1.60 | | 1.24 | | | | 1.60 | | | 1.24 | |
| Fourth Quarter | | 1.40 | | 0.42 | | | | 1.40 | | | 0.42 | |
| 2006 | | | | | | | | | | | | |
| First Quarter through March 15 | | 0.93 | | 0.42 | | |
| 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 9, 200622, 2007, there were approximately 154136 stockholders of record, excluding beneficial holders of stock held in street name.
We have never paid cash or declared dividends on our common stock. We do not anticipate that we will declare or pay cash dividends on our common stock in the foreseeable future. Future dividends on our common stock or other securities, if any, will be at the discretion of our board of directors and will depend on, among other things, our operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our board of directors may deem relevant.
Information with respect to equity compensation plans that is required by this Itemitem will be included in our Proxy Statement for the 20062007 annual meeting of stockholders.
SalesThe Company did not have any unregistered sales of unregistered securities during the past year have previously been reported in quarterly reports on Form 10-Q or current reports on Form 8-K that we have filed with the Securities and Exchange Commission.2006.
The following unaudited selected historical information has been derived from the audited consolidated financial statements of Cellegy. The consolidated financial information as of December 31, 20052006 and 20042005 and for each of the three years in the period ended December 31, 20052006 are derived from our audited consolidated financial statements included elsewhereper 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” included elsewhere in this Form 10-K.per Item 7.
Statements of Operations Data: (In thousands except per share data)
| | | Years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| Revenues | | $ | 12,835 | | $ | 2,596 | | $ | 1,620 | | $ | 1,402 | | $ | 877 | |
Costs and expenses1 | | | 18,115 | | | 31,370 | | | 15,512 | | | 17,163 | | | 21,847 | |
| Operating loss | | | (5,279 | ) | | (28,774 | ) | | (13,892 | ) | | (15,761 | ) | | (20,970 | ) |
| Other income (expense) | | | 271 | | | 620 | | | 360 | | | 520 | | | 1,505 | |
| Net loss | | $ | (5,008 | ) | $ | (28,154 | ) | $ | (13,532 | ) | $ | (15,241 | ) | $ | (19,465 | ) |
| Basic and diluted net loss per common share | | $ | (0.18 | ) | $ | (1.28 | ) | $ | (0.68 | ) | $ | (0.86 | ) | $ | (1.26 | ) |
| Dividends per share of Common Stock | | | — | | | — | | | — | | | — | | | — | |
| Weighted average common shares used in computing basic and diluted net loss per common share | | | 28,497 | | | 22,021 | | | 19,964 | | | 17,643 | | | 15,503 | |
| | | 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. |
Balance Sheet Data: (In thousands)
| | | December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Cash, cash equivalents, restricted cash and investments1 | | $ | 2,251 | | $ | 8,933 | | $ | 11,564 | | $ | 23,858 | | $ | 17,190 | |
| Total assets | | | 6,450 | | | 13,863 | | | 15,331 | | | 28,379 | | | 22,367 | |
| Long term portion of deferred revenue | | | 3,084 | | | 13,865 | | | 13,335 | | | 14,168 | | | — | |
| Long term payables | | | 212 | | | 717 | | | 725 | | | 717 | | | 485 | |
| Deficit accumulated during the development stage | | | (132,311 | ) | | (127,303 | ) | | (99,149 | ) | | (85,617 | ) | | (70,377 | ) |
| Total stockholders’ equity (deficit) | | | (6,477 | ) | | (6,743 | ) | | (1,580 | ) | | 10,534 | | | 19,845 | |
| | | 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 | |
| 11.
| Includes restricted cash of $0 in 2005, $227,500 in 2004, 2003 and 2002, and $614,000 in 2001.net of cash related to discontinued operations. |
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Cellegy Pharmaceuticals is a development stage specialty biopharmaceutical company engagedcompany. Following the Company’s decision to eliminate its direct research activities and the sale of assets to ProStrakan in late 2006, the developmentCompany’s operations currently relate primarily to the ownership of its intellectual property rights relating to the Biosyn product candidates and commercialization primarilythe evaluation of prescription drugs targeting women’s health care conditions, including HIV preventionits remaining options and sexual dysfunction, as well as gastrointestinal conditions using proprietary topical formulations and nitric oxide donor technologies.
Major Eventsalternatives with respect to its future course of business.
In January 2004, we entered into a Structured Secondary Offering or SSO,(“SSO”), agreement with Kingsbridge Capital Limited.Limited (“Kingsbridge”). The agreement requiresrequired Kingsbridge to purchase up to 3.74 million shares of newly issued common stock at times and in amounts selected by us over a period of up to two years, subject to certain restrictions. We filed a registration statement with the Securities and Exchange Commission relating to shares assumable under the SSO, which was subsequently declared effective on June 1, 2004. We completed two draw downs in 2004, issuing a total of 246,399 common shares resulting in net proceeds of approximately $0.8 million.
In July 2004, Cellegy announced that the United Kingdom’s Committee on Safety of Medicines, or MHRA, recommended that marketing authorization be granted by the Medicines and Healthcare Products Regulatory Agency for Cellegesic™, branded Rectogesic® outside the United States. In August 2004, the MHRA issued an approvable letter for Rectogesic.
In July 2004, Cellegy and ProStrakan entered into an exclusive license agreement for the future commercialization of Tostrex® (testosterone gel) in Europe and received a $500,000 non-refundable upfront payment. Under the terms of the agreement, ProStrakan will be responsible for regulatory filings, sales, marketing and distribution of Tostrex throughout the European Union and in certain nearby non-EU countries, and Cellegy was responsible for supplying finished product to ProStrakan through Cellegy’s contract manufacturer. Cellegy could receive future milestone payments and royalties on net sales of Tostrex. In January 2006,2007, Kingsbridge released Cellegy amendedof its 2004 agreement with ProStrakan concerning Tostrex. Under the terms of the amended agreement, ProStrakan will assume responsibility for all manufacturing and other product support functions and will purchase Tostrex directly from Cellegy’s contract manufacturer rather than purchasing the product from Cellegyobligations under the termsSSO. In connection therewith, the Company, as of the original agreement. Cellegy will continue to be eligible to receive milestones and royalties as set forth in the original agreement.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 offering price of the common shares sold was $3.42 per share and the exercise price of the warrants is $4.62 per share.
In October 2004, Cellegy acquired Biosyn, Inc., a privately held biopharmaceutical company. Under the terms of the agreement, Cellegy issued approximately 2,462,000 shares of Cellegy’s common stock for all of Biosyn’s issued and outstanding capital stock. In addition, outstanding Biosyn stock options and warrants were assumed by Cellegy and converted into 236,635 options and 81,869 warrants to purchase approximately 318,504 shares of Cellegy common stock. The options issued to acquire Cellegy common stock are fully vested and exercisable. The exercise prices of the options and warrants were adjusted by the exchange ratio in the transaction; the expiration date and other terms of the converted options and warrants remained the same. The purchase price does not include any provisions for contingent milestone payments of up to $15.0 million, which would be payable to Biosyn shareholders on the achievement of C31GSavvy marketing approval in the United States and a portion of which would be payable earlier upon commercial launch in certain major overseas markets.
In December 2004, Cellegy and ProStrakan entered into an exclusive license agreement for the commercialization of Cellegesic, branded Rectogesic outside of the United States, in Europe. In connection therewith, Cellegy received a non-refundable upfront payment of $1.0 million and was entitled to receive additional milestone payments and payments for products sold to ProStrakan. ProStrakan will be responsible for additional regulatory filings, sales, marketing and distribution of Rectogesic throughout Europe. Under the original agreement, Cellegy was responsible for supplying finished product to ProStrakan through its contract manufacturer.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 have reverted to Cellegy. Cellegy paid $2.0 million to PDI upon signing the settlement agreement. Cellegy also issued a $3.0 million promissory note to PDI, due in October 2006, and a $3.5 million non-negotiable senior convertible debenture. The settlement of the Company’s lawsuit with PDI resulted in the recognition of the remaining $6.5 million in deferred revenue from PDI as license revenue 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 SavvyPhase 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 the quarter ended June 30, 2005.either of these trials.
In November 2005, Cellegy renegotiated its marketing agreement with ProStrakan. Under the terms of the amended agreement, ProStrakan willagreed to assume responsibility for all manufacturing and other product support functions and willagreed 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 and may receive certain future milestone payments of up to $750,000 upon approval of the product in certain major European countries.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 Group plc, whereby ProStrakan willagreed to assume responsibility for all of the manufacturing and other product support functions for Tostrex in Europe. In December 2004, the product was approved by the MPA for sale in Sweden.
On February 1,January 31, 2006, Cellegy announced that it had 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 encompassesencompassed the licensing of Savvy, currently in Phase 3 clinical trials in the United StatesUC-781 and Africa; UC-781, currently in expanded Phase 1 trials in the United States and Thailand; and Cyanovirin-N, currently in pre-clinical development.Cyanovirin-N.
On March 24, 2006, the Company announced that its European marketing partner, ProStrakan had successfully completed the European Union Mutual Recognition ProcedureMRP for Rectogesic. FollowingRectogesic, and that following the successful conclusion of the MRP process, national licenses willwould be sought and arewere expected to be issued in due course in the 19nineteen (19) additional countries (in addition to the United Kingdom where approvals have been previously obtained) included in the MRP submission application. Cellegy is entitled to receivereceived $250,000 for each marketing regulatory approval obtained in the first of any three countries out of France, Italy, Germany or Spain up to a maximum total amount payable of $750,000. Underthis milestone and under its previous agreement with PDI, Inc, PDI is entitled to receiveInc., (“PDI”) remitted one-half of these payments.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.
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 RecognitionRecognition. . Revenues related to cost reimbursement provisions under development contracts are recognized as the costs associated with the projects are incurred. Revenues related to substantive and at risk non-refundable milestone payments specified under development contracts are recognized as the milestones are achieved. We receiveThe Company received certain government and non-government grants that support ourits research effort in defined research projects. These grants generally provideprovided for reimbursement of approved costs incurred as defined in the various grants. Revenues associated with these grants are recognized as costs under each grant arewere incurred. Advanced payments received under these agreements prior to completion of the related work are recorded as deferred revenue until earned. Should the research funded by federal grants result in patented technologies, the federal government would be entitled to a nonexclusive, nontransferable, irrevocable, paid-up license to utilize such technologies.
At December 31, 2005, $759,906 of expenses covered under research and development agreements were earned and recorded as grant revenue but were unbilled.
Revenues related to product sales are recognized when title has been transferred to the customer and when all of the following criteria are met: a persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably assured. There is no right of return for our products.
Revenues under license and royalty agreements are recognized in the period the earnings process is completed based on the terms of the specific agreement. Advanced payments received under these agreements are recorded as deferred revenue at the time the payment is received and are subsequently recognized as revenue on a straight-line basis over the longer of the life of the agreement or the life of the underlying patent.
Royalties payable to Cellegy under these license agreements will beare recognized as earned when the royalties are no longer refundable under certain minimum royalty terms defined in the agreement.
Goodwill and Intangible Assets.Goodwill and intangible assets consist primarily of goodwill recorded in connection with Cellegy’s acquisition of Biosyn. In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill and other intangible assets 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.
Notes Payable. Notes payable include non-interest bearing notes issued by Cellegy to PDI pursuant to a lawsuit settlement, and a note issued to the Ben Franklin Institute. The notes have been recorded at their net present value at the time of issuance.
Research and Development Expenses. Research and development expenses, which include clinical study payments made to clinical sites and clinical research organizations, consulting fees, expenses associated with regulatory filings and internally allocated expenses such as rent, supplies and utilities, are charged to expense as they are incurred. Clinical study expenses are accrued based upon such factors as the number of subjects enrolled and number of subjects that have completed treatment for each trial.
Milestone payments that are made upon the occurrence of future contractual events prior to receipt of applicable regulatory approvals are charged to research and development expense. Cellegy may capitalize and amortize certain future milestone and other payments subsequent to the receipt of applicable regulatory approvals, if any.
Derivative InstrumentsInstruments. . Cellegy accounts for certain warrants issued in conjunction with its financings as derivative financial instruments. As a derivative, the fair value of the warrant is recorded as a liability in the balance sheet and changes in the fair value of the warrant are recognized as other income or expense during each period. The fair value of the warrant is expected to change primarily in response to changes in Cellegy’s stock price. Significant increases in the fair value of our stock could give rise to significant expense in the period of the change. Likewise, a reduction in our stock price could give rise to significant income in the period of the change.
Results of Operations
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 wereare included in consolidationthe consolidated financial statements from its date of acquisition. Cellegy believes that there is no significant impact from inflation and changing prices on its sales, revenues and net losses for the periods presented.
Years Ended December 31, 2006, 2005 2004 and 20032004
Revenues. Cellegy had revenues of $12,835,000, $2,596,000approximately $2,660,000, $12,199,000, and $1,620,000$2,033,000 in 2006, 2005 2004 and 2003,2004, respectively. Revenues in each of the three years presented consist of licensing, milestone and product sales revenues. Revenues in 2004 and 2005all 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 $833,000 in 2005, 2004, and 2003, respectively. The $6,424,000 increase in licensing revenue in 2005 as compared to 2004 was primarily attributable to the settlement of Cellegy’s lawsuit with PDI in April 2005 which resulted in the recognition of the remaining $6.5 million of unamortized deferred revenues from PDI. In 2004 and 2003, Cellegy recorded licensing revenue of $833,000 from PDI, reflecting the amortization over the expected commercial life of Fortigel, of the initial $15.0 million received from PDI on the agreement date in December 2002. The balance of licensing revenues in each of the three years presented arose from the amortization to income of deferred revenue recorded in connection with agreements relating to Rectogesic and Tostrex. We expect to recognize no licensing revenues to decline significantly in the foreseeable future.
In November 2005, we amended our 2004 agreement with ProStrakan concerning Rectogesic.Under the terms of the amended agreement, ProStrakan will assume responsibility for all manufacturing and other product support functions and will purchase Rectogesic directly from Cellegy’s contract manufacturer rather than purchasing the product from Cellegy under the terms of the original agreement. In return, Cellegy received a non-refundable payment of $2.0 million and may receive future milestone payments of up to $750,000 upon approval of the product in certain major European countries. The $2.0 million non-refundable payment is being amortized to income over the remaining estimated life of the underlying patent. Approximately $22,000 was amortized to income in 2005.
Product sales. Product sales were $1,157,000, $745,000approximately $257,000, $520,000 and $768,000 in 2005, 2004 and 2003, respectively. Pacific rim sales of Rectogesic through our Australian subsidiary were $637,000, $563,000 and $385,000 in 2005, 2004 and 2003, respectively. The revenue growth in 2004 was due primarily to effective advertising and selling programs for Rectogesic throughout Australia. We expect that the growth in sales revenues through our Australian subsidiary will continue to increase$181,000 in 2006, but at a lower annual rate and activities concerning the research of new markets and new uses for Rectogesic have been undertaken.
Product sales in 2004 and 2003 included $181,000 and $316,000 in skin care product sales. There were no skin care product sales in 2005 and in December 2005, Cellegy divested this business for approximately $25,000.
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 agreementagreements with ProStrakan and the sale of the Company’s technology mentioned above, Cellegy will no longer record sales of Rectogesic torecords product revenue from ProStrakan.
Tostrex was launched in Sweden in September 2005. Tostrex sales were not significant in 2005 and unless additional jurisdictions approve the marketing of Tostrex, Cellegy does not expect a significant level of sales from this product. ProStrakan is presently pursuing additional marketing approvals for Tostrex in mainland Europe through the Mutual Recognition Procedure.
In January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning Tostrex. Under the terms of the amended agreement, ProStrakan will assume responsibility for all manufacturing and other product support functions and will purchase Tostrex directly from Cellegy’s contract manufacturer rather than purchasing the product from Cellegy under the terms of the original agreement. Cellegy will continue to be eligible to receive milestones and royalties as set forth in the original agreement.
Grant revenues. Grant revenues for 2005 were approximately $1,926,000, $4,410,000 and were $1,008,000 for the period of October 22 to December 31, 2004. Grant revenue was not significant in 2003.2006, 2005 and 2004, respectively.
Grant revenues for 20052006 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. 2004 grantGrant revenues for the period of October 22 to December 31, 2004 were as follows: $562,000 for Cyanovirin-N, $273,000 for Savvy, $76,000 for UC-781 and $94,000 for a UC-781/C31G combination product.
The level of grant funding under the various grant arrangements is generally dependent upon the amount of direct labor (primarily laboratory personnel) and direct expenses such as supplies, testing services and other direct costs expected to be incurred in connection with the given program over its duration. The grant agreements generally provide for an overhead percentage that is applied to the direct labor costs. These amounts, along with the amounts billed to the grantor for direct costs comprise the total amount billed and recorded as grant revenue. Grant agreements undergo periodic renegotiation and it is the prerogative of granting agency or foundation to determine the level and duration of future funding of Cellegy’s programs. There can be no assurance that Cellegy will be able to maintainThe Company has discontinued its grant funding at current levels or at levels necessaryin connection with the reduction of it Biosyn research activities and does not expect to properly fund its research programs.record grant revenues for 2007.
In addition to the grantsgrant funding above, Biosyn benefits indirectly from agency funding paid to third party contractors in support of its ongoing Phase 3 clinical trials. These payments from the funding agencies are made directly to the service providers, not to Biosyn. Under the terms of certain of its funding agreements, Biosyn has been granted the right to commercialize products supported by the funding in developed and developing countries, and is obligated to make its commercialized products, if any, available in developing countries, as well as to public sector agencies in developed countries at prices reasonably above cost or at a reasonable royalty rate.
Cost of Product Sales. Cost of product sales is comprised primarily of direct labor and raw material manufacturing costs for commercialized products and also includes shipping costs and those costs associated with stability and validation testing of finished goods prior to shipment. The stability and validation testing components of cost of product sales comprise a significant percentage of gross sales since these costs are substantially fixed in nature. Cost of product sales were $385,000, $148,000approximately $257,000, $250,000 and $186,000$63,000 in 2006, 2005 2004 and 2003,2004, respectively. The increase of $237,000$187,000 in 2005 as compared to 2004 iswas due to increased sales volume generated by Pacific Rim sales and due to the launch of Rectogesic and Tostrex in 2005. Due to the renegotiation of our agreements with ProStrakan mentioned above, we expect cost of product sales to decline in 2006.
Research and Development Expenses. Research and development expenses 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 $8,481,000, $9,599,000approximately $1,812,000, $8,390,000 and $10,558,000$9,583,000 in 2006, 2005 2004 and 2003,2004, respectively. Research and development expenses, which are primarily related to the costs of clinical trials and regulatory filings, represented 48%25%, 31%48% and 68%60% of our total operating expenses in 2006, 2005 and 2004, and 2003, respectively.
On The Company expects that there will be no significant research spending in 2007 absent a consolidated basis, 2005 research and development expenses decreased approximately $1.1 million compared to 2004.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 decreasedby 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 research and development expenses are included in our operations for a full year for 2005 and for the period of October 22 to December 31, 2004 in 2004. Biosyn’s research expenses increased 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. Savvy Phase 3 trials were being conducted in three major locations in 2005: Ghana and Nigeria for HIV clinical testing and in the United States for contraception clinical trials. In late 2005, Cellegy announced that the first interim analysis had taken place for the Ghana trial and that while the trial’s Data Monitoring Committee found no reason to interrupt or stop the trial based on a review of safety, the number of sero-conversions were approximately one-third of the expected rate. As a result of this finding, Cellegy decided to terminate the Ghana trial. At the time of the termination, the Ghana HIV trial reached full enrollment. Spending for major programs in 2005 consisted of $1.6 million in spending related to Savvy HIV and contraception trial programs, $3.1 million in spending relating to Cyanovirin-N and $426,000 on UC-781 programs. Savvy related study costs are comprised primarily of $1.4 million in clinical material manufacturing of active and placebo compounds and applicators and related shipping costs to African trial sites. Cyanovirin-N program costs are comprised of $2.5 million in direct expenses and UC-781 programs costs are comprised of $343,000 in direct expenses.
Total researchResearch and development in 2004 as compared with 2003 decreased $959,000 due primarily to a reduction in clinical and regulatory costsexpenses in 2004 of $2,865,000 primarily relating to Cellegesic Phase 3 clinical trial expenses and various Fortigel clinical costs. These$860,000 were offset somewhat in 2004 by higher research and development expenses of $860,000 incurred by Biosyn primarily for the development of Savvy included in the consolidated results during the fourth quarter of 2004, other Cellegyas well as $635,000 of Cellegy’s research expenditures, of $635,000, primarily relating to the validation of Cellegesic and Fortigel manufacturing processes at a second contract manufacturer, and non-cash expenses of $750,000 relating to common stock issued to Neptune Pharmaceuticals for a milestone achieved during 2004.
Research and development expenses consist primarily of internal salaries and allocated costs as well as external clinical costs, including: clinical site payments, costs of manufacturing, testing and shipping clinical supplies and service fees to clinical research organizations, or CROs, that monitor the clinical sites and perform other related trial support services. Additionally, research expenses consist of regulatory costs, including the cost of filing product approval applications around the world, and the costs of various consultants to support the filings.
Selling, General and Administrative ExpensesExpenses. . Selling, general and administrative expenses (“SG&A”) were $9,249,000approximately $5,026,000 in 2006, $8,916,000 in 2005, $6,641,000and $6,387,000 in 2004, and $4,768,000 in 2003. Biosyn selling, general and administrative expenses are included in Cellegy’s operations for a full year for 2005 and for the period of October 22 to December 31, 2004 in 2004. California personnel previously engaged in research or development are now being reported under selling, general and administrative, as the parent’s efforts in the latter part of 2005 have shifted substantially towards the management of its manufacturing activities or towards other administrative functions.
In 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 tooffice closures and reductions in consulting, litigation, accounting and legal costs. SG&A expenses for 2005 selling, general and administrativeinclude 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 by $2.7approximately $2.5 million in 2005 as compared to 2004. Approximately $1.6 million of this increase is due to the inclusion of Biosyn for a full year in 2005 operations. The balance of this increase was due to: increase in salary expense at the parent level due to increased severance and retention expenses of $570,000,$570,000; increase in professional fees of $515,000 due to accounting and audit fees related to the 2004 reincorporation,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. Cellegy announced in the third quarter of 2005 the relocation of its headquarters to its Biosyn facility in Pennsylvania and it is expected that the Brisbane, California office will be closed during the second quarter of 2006.
Selling, general and administrative expenses in 2004 increased by $1,873,000, compared with 2003 resulting primarily from higher PDI litigation costs in 2004 of $1,215,000, accounting expenses of approximately $315,000 related to additional registration statement filings and to consulting cost associated with the Company’s Sarbanes-Oxley compliance programs, pre-launch Cellegesic marketing expenses of $540,000, and the inclusion of Biosyn expenses of $266,000.
We expect selling, general and administrative expenses in 2006 to decline somewhatfurther in 2007 due to the 2005full year effect of the 2006 reductions in staffing and related expenses, such as benefits,office and other overhead expenses and due to further expected reductions in legal, consulting and accounting fees. These reductions, however, may be partially offset by PDI litigation expenses expected in 2006.
Acquired-In-Process Technology. Results for 2004 included an in-process technology charge orof $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. Othergel and other development programs include UC-781 and Cyanovirin-N microbicides which arewere in much earlier stages of testing.
Based on a risk assessment of the technology, its stage of development and the estimated level of effort required to complete the clinical testing to facilitate regulatory review, management concluded that the technological feasibility of the in-process research and development purchased from Biosyn had not yet been reached and that the technology had no alternative future use. Accordingly, the amount allocated to purchase research and development of approximately $15.0 million was charged to incomeoperations in 2004. Substantial additional manufacturing optimization and development expenses associated with completing the clinical trials, as well as legal and regulatory expenses relating to the drug approval process will be required to gain marketing approval.
Other Income (Expense). Cellegy recognized net interest and other income of $208,000approximately $123,000 in 2006, $195,000 in 2005, $259,000 forand $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 $360,000 for 2003. Netrecorded 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 incomeexpense of approximately $808,000 in 2006, $626,000 in 2005, and $29,000 for 2004. Amounts for 2005 consistedand 2006 consist primarily of $174,000 in interest income, $626,000 in interest expense primarily fromrelated 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 $93,000 primarily consisting of rental income. Net interest2005, respectively due to the precipitous decline in Cellegy’s share price during these periods and other income for 2004 was comprised primarily of $110,000 in interest income, $149,000 in rental income and derivative revaluation income associated withrecorded $390,000 related to the Kingsbridge warrants in 2004 for similar reasons.
Discontinued Operations.On April 11, 2006, Epsilon purchased all of $390,000.the shares of Cellegy Australia and the Company has reflected Cellegy Australia as a discontinued operation. The net interestsubsidiary was part of the Pharmaceutical Segment for the Australian and other income in 2003 consistedPacific Rim geographic areas. The purchase price for the shares was $1.0 million plus amounts equal to the liquidated value of $212,000 in interest incomeCellegy Australia's cash, accounts receivable and inventory. The total proceeds of the sale were approximately $1.3 million. Income from cashoperations of the discontinued operation was approximately $326,000, $90,000 and investments$216,000 for 2006, 2005 and $148,000 in rental and other income. Reductions in interest income over the last three years were due to lower average investment balances and interest rates.2004, respectively.
Liquidity and Capital Resources
Our cash and cash equivalents were $2.3approximately $3.8 million, $8.7$2.1 million and $7.6$8.5 million at December 31, 2006, 2005 and 2004, respectively.
Cash and 2003, respectively.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 VaxgenVaxGen as part of the sublease termination agreement, $2.0 million from ProStrakan in connection with the amendmentsale of the European Rectogesic agreement. Restricted cash proceeds of $227,000 were received as part of the termination of the lease on the Company’s South San Francisco facility.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 $13.6approximately $13.7 million was somewhat offset primarily by net proceeds of the 2004 private placement financingPIPE and Kingsbridge SSO draw downsdrawdown of approximately $11.2$11.4 million and $1.5 million in payments received pursuant to the ProStrakan licenses. Additionally, maturing short termshort-term investments of approximately $3.7 million were added to cash and cash equivalents during 2004.
Net cash used in operating activities was $13.6 million and $12.8 million in 2004 and 2003, respectively. The $14.6 increase in net loss and the $0.8 million decrease in cash used in operations during 2004, compared with 2003, was primarily due to the $15.0 million non-cash purchased research and development charge associated with the Biosyn acquisition. This charge was included in the 2004 net loss. Other major changes in operating cash in 2004 included a non-cash milestone payment of $750,000 to Neptune, a net decrease in accrued expenses and accounts payable of $1.4 million due to the extinguishment of certain Biosyn liabilities by Cellegy after the acquisition, partially offset by higher accrual of legal and consulting expenses, and an increase in deferred revenue of $1.3 million related primarily to the ProStrakan license agreements and the Biosyn acquisition. These were partially offset by a reduction in the loss on fixed assets of about $600,000 primarily due to the write-off of tenant improvements at our South San Francisco corporate facility in 2003, lower equity compensation expense of $0.5 million relating to non-cash bonuses paid in stock in 2003 and a $0.5 million increase in accounts receivable.
We prepared the consolidated financial statements assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments induring 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, 2005, we2006, the Company had a deficit accumulated during the development stage of $132.3 million, negative cash flows from operations of $96.2 million, and cash and cash equivalents of $2.3$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 flow from operationsflows to continue for the foreseeable future, with the need to continue or expand development programs and to commercialize products once regulatory approvals have been obtained. We believe we do not havefuture. The Company presently has enough financial resources to continue operations beyond April 2006. 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. Our plans, with regard to these matters, include raising additional required funds through one or more of the following options, among others: sales of assets, seeking partnerships with other pharmaceutical companies or private foundations to co-develop and fund our research and development efforts, pursuing additional out-licensing arrangements with third parties, re-licensing and monetizing in the near term our future milestone and royalty payments expected from existing licensees and seeking equity or debt financing. In addition, we will continue to implement further cost reduction programs and reduce discretionary spending, if necessary.
There is no assurance that any of the above options will be implemented on a timely basis or that we will be able to obtain additional financing on acceptable terms,sell or license our remaining technology or find suitable candidates for a business combination or other transaction, if at all. Alternatively, weWe may be required to accept less than favorable commercial terms in any such future arrangements. If adequate funds are not available on acceptable terms, we could be required to delay development or commercialization of certain products, to license to third parties the rights to commercialize certain products that we would otherwise seek to commercialize internally or to reduce resources devoted to product development. In addition, if we do not receive all, or a portion, of the planned Biosyn grant funding, or if such funding is delayed, this could impact our ability to complete our Biosyn development programs on a timely basis, if at all. The 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 outour ability to enter into collaborative relationships with business partners, makecombination or other agreements, therefore making it more difficult to obtain required financing on favorable terms or at all,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.
Future expenditures and capital requirements depend on numerous factors including, without limitation, the progress and focus of our research and development programs, the progress of pre-clinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the progress and outcome of the PDI litigation, the costs of filing, prosecuting, defending and enforcing patent claims, oppositions and appeals, the timing and level of grant funding to support Biosyn’s clinical programs and operations and our ability to establish new collaborative arrangements.
Cellegy believes that available cash resources will be adequate to satisfy our capital needs through at least April 30, 2006 assuming no material adverse financial impact associated with the PDI litigation and any subsequent legal proceedings. At present, our revenues from existing licensing arrangements, funding agreements and other sources are not sufficient to offset our ongoing operating expenses or to pay in full our current obligations. Funds provided from sales of subsidiaries, assets, equity or debt financing, or other arrangements, if obtained, would permit satisfaction of capital needs for a longer period of time. A favorable determination by the FDA Advisory Committee and the FDA following the scheduled April 2006 hearing on our Cellegesic NDA may improve the prospects for one or more such transactions although there can be no assurances that this will be the case. The existence and extent of our obligations could adversely affect our business, operations and financial condition. Failure to obtain additional funds as described above may affect the timing of development, clinical trials or commercialization activities relating to certain products and could require us to curtail our operations, reduce personnel, sell part or all of our assets or seek protection under bankruptcy laws. There is a risk that one or more of our creditors could bring lawsuits to collect amounts to which they believe they are entitled. In the event of lawsuits of this type, if we are unable to negotiate settlements or satisfy our obligations, we could voluntarily file bankruptcy proceedings, or we could become the subject of an involuntary bankruptcy proceeding filed by one or more creditors against us.
Contractual Obligations
The table below summarizes certain of our future contractual obligations which include obligations under our current facilities leases in Brisbane, California and Huntingdon Valley, Pennsylvania along with capital equipment lease obligations atas of December 31, 2005 (in thousands):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 | | $ | - | | $ | - | |
| | | Total | | 2006 | | 2007 | | 2008 | |
| Operating lease | | $ | 756 | | $ | 332 | | $ | 264 | | $ | 160 | |
| Capital lease | | | 60 | | | 55 | | | 5 | | | - | |
| PDI Notes | | | 6,300 | | | 2,800 | | | - | | | 3,500 | |
| Total | | $ | 7,116 | | $ | 3,187 | | $ | 269 | | $ | 3,660 | |
| 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. |
In March 2005, we relocated our principal office from South San Francisco to Brisbane, California. Our sublease for the office in Brisbane has a term that expires February 28, 2006. In March, 2006, Cellegy extended its sublease agreement with Vaxgen. Under the terms of the new agreement, the Company will lease its existing facilities in Brisbane for $6,000 per month beginning March 1, 2006 through June 30, 2006 and for $13,000 per month until May 31, 2007.
Other obligations not reflected in the table are comprised primarily of employment agreements, employee retention agreements, and severance payments of $129,000 to a former executive officer. License agreements and notes payable. The above table also excludes certain milestone royalty payments and the repayment obligation,obligations; as such amounts are subject to material uncertainties, are contingent upon future events and are not probable or estimable at this time. License agreements generally provide for payment by us of annual license fees, milestone payments and royalties upon successful commercialization of products.
Under the Kingsbridge SSO, we have not issued and sold common stock pursuant to the draw down provisions equal to at least $2.66 million during the term of theThe agreement which expires in January 2006. As a result, unless these provisions are amended or waived we owe $266,000 to Kingsbridge. In addition, our December 1997 agreement with Neptune Pharmaceuticals Corporation pursuant to which we acquired the rights relating to Cellegesic callsBiosyn provides for a series of payments, which may be paid in shares of common stock, upon successful completion of various development milestones. We issued shares to Neptune in 2001 and 2004 upon completion of certain milestones, valued at $750,000 for each milestone. The remainingcontingent milestone payments are contingentof $15.0 million payable to the former shareholders of Biosyn upon approval by the FDA of Savvy for contraception and becomeHIV prevention or the first commercial sale of Savvy in the U.S. for either indication. Of that amount, $2.0 million is payable upon certain product development or commercialization milestones, the achievementfirst arm’s length commercial sale of Savvy in Japan based on any regulatory approval for any indication, and timing$1.0 million per country is payable upon the first arm’s length commercial sale of which are subjectSavvy in Germany, France and the United Kingdom based on any regulatory approval for any indication. In addition, Biosyn is required to material uncertainties.
Off Balance Sheet Arrangements
As more fully described in Note 8, “Notes Payable”, Cellegy issued a $3.5 million senior convertible debenture to PDI in 2005 in connection with the settlement of its lawsuit with PDI. Cellegy may redeem the note at anytime before the maturity date upon prior notice to PDI, at a redemption pricemake annual royalty payments equal to the principal amount. If Cellegy delivers such a redemption notice, PDI may convert the note into sharessum of Cellegy common stock at a price1% of $1.65 per share. In addition, after the 18th month anniversarynet product sales of up to $100 million, 0.5% of the debenture, PDI may convertnet 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 note into Cellegy common stock at a priceachievement of $1.65 per share. If Cellegy does not redeem the note within the first 18 months, then Cellegy has agreed to file a registration statementcertain development milestones and royalties on products sales, if any, relating to the possible resaleUC-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, shares issueduntil the principal balance of $777,902 is satisfied. There is no obligation to PDI after 18 months. 2,121,212 shares would be issuable upon such conversion.
repay the amounts in the absence of future Biosyn revenues.
Recent Accounting Pronouncements
In December 2004,June 2006, the FASB issued SFASFASB Interpretation No. 123R, “Share-Based Payment”48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”, which replaces SFASbecame 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. 123. SFAS No. 123R requires public companies to recognize an expense157, Fair Value Measurements. This statement defines fair value, establishes a framework for share-based payment arrangements including stock optionsmeasuring fair value in generally accepted accounting principles, and employee stock purchase plans.expands disclosures about fair value measurements. The statement eliminates a company’s ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair value based method. SFAS No. 123R requires an entity to measure the cost of employee services received in exchanged for an award of equity instruments based on the fair value of the award on the date of the grant, and to recognize the cost over the period during which the employee is to provide service in exchange for the award. SFAS No. 123R is effective for public companies with ain the fiscal year that begins after June 15, 2005. The cumulative effect of this pronouncement applied on a modified prospective basis will be measured and recognized starting the first quarter of 2006. We anticipate2008 and the Company will adopt the statement at that time. The Company believes that the impact of Adopting SFAS No. 123R will result in an annual expense of approximately $292,000 based on known grants. Upon adoption of SFAS No. 123R, companies are allowed to select one of three alternative transition methods. Management is currently evaluating the transition methods, as well as valuation methodologies and assumptions for employee stock options in light of SFAS No. 123R. Current estimates of option values using the Black-Scholes method (as shown under “Stock Based Compensation”) may157 will not be indicative of results from valuation methodologies ultimately implemented by the Company upon adoption of SFAS No. 123R.
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”. The statement requires retrospective application of changes in accounting principle to prior periods’ financial statements, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. When it is impracticable to determine the period specific effects of an accounting change on one or more individual prior periods presented, this statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable, and that a corresponding adjustment be made to the opening balance of the retained earnings for that period rather than being reported in the income statement. The statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This pronouncement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe adoption of SFAS 154 will have a material effect on its consolidatedresults 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.
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 Kingsbridge to purchase 260,000 shares of our common stock and 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.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 income 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-38F-32 of this report.
| Index to Financial Statements | | | F-1 | |
Report of PricewaterhouseCoopers LLP,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-3 | F-4 | |
| Consolidated Statements of Operations | | F-4 | F-5 | |
| Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) | | F-5 | F-6 | |
| Consolidated Statements of Cash Flows | | F-10 | F-8 | |
| Notes to Consolidated Financial Statements | | F-12 | F-10 | |
| Quarterly Financial Results | | F-38 | 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 10K.Form 10-K. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures were effective in timely providing them with material information relating to the Company, as required to be disclosed in the reports the Company files under the Exchange Act.effective.
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 20052006 fiscal year and to be delivered to stockholders in connection with the 2007 Annual Meeting of Stockholders expected to be held in June 2006 (the “2006 Proxy Statement”).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 | 62 | 63 | | Chairman and Interim Chief Executive Officer, Director |
John J. Chandler | 64 | Vice President, Corporate Development |
| Robert J. Caso | 50 | 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.
John J. Chandler.Mr. Chandler became Vice President, Corporate Development in May 1998. From January 1995 to March 1998, he served as Vice President, Europe for the Medical Device Division of American Home Products, now Wyeth. During 1994, he was Area Director, Europe/Latin America for Wyeth. From 1968 to 1993, he held a series of management and senior management positions with American Cyanamid Company. Mr. Chandler holds an M.B.A. in Marketing from Seton Hall University and a B.S. in Biology from the Queens College of the City University of New York.
Robert J. Caso. Mr. Caso became Vice President, Finance and Chief Financial Officer in March 2005. From January 2003 through 2004, he headed a multinational team in connection with the implementation of an SAP application for Johnson & Johnson’s Worldwide Pharmaceutical Group. Subsequent to Johnson & Johnson’s acquisition of Centocor in 1999, Mr. Caso held the Financial Controller position at Centocor. From 1988 through 1995 he held various finance positions at Centocor and held the Corporate Controller position from 1996 to 1999. Mr. Caso has substantial experience in finance operations, accounting systems, business financing and domestic and international taxation. Mr. Caso is a Certified Public Accountant and holds a BS in Accounting from Villanova University and an MBA in Finance from Lehigh University.
Executive officers are chosen by and serve at the discretion of the Board of Directors, subject to any written employment agreements with Cellegy.
Information with respect to this Item may be found in the section captioned “Executive Compensation” appearing in the forthcoming 20062007 Proxy Statement and is incorporated herein by reference.
Information with respect to this Item may be found in the section captioned “Security Ownership of Certain Beneficial Owners and Management” appearing in the forthcoming 20062007 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 20062007 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 20062007 Proxy Statement and is incorporated herein by reference.
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.) |
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| 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.) |
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| 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). |
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| 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”).) |
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| 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”).) |
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| 3.2 | | Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the September 2004 8-K.) |
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| 4.1 | | Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the September 2004 8-K.) |
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| *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.) |
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| *10.2 | | Form of Option Agreement under the 1995 Equity Incentive Plan. (Incorporated by reference to Exhibit 4.05 to the Company’s Post-effective Amendment No. 1 to Registration Statement on Form S-8, file no. 333-91588, filed on September 7, 2004 (the “2004 Form S-8”).) |
| *10.3 | | 1995 Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q for the fiscal quarter ended filed June 30, 2002.) |
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| *10.4 | | Form of option agreement under the 1995 Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 4.07 to the 2004 Form S-8 and to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”).)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").) |
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| 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”).) |
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| *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”).) |
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| 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.) |
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| 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”)). |
| 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 EquityLicense 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 Huntingdon Valley,Quakertown, Commonwealth of Pennsylvania, on March 30, 2006.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
| Name | | | | Title | | | | Date | |
Principal Executive Officer: | | | | | |
| | | | | |
| /s/ RICHARD C. WILLIAMS | | Chairman, Interim Chief Executive Officer | | March 30, 2006April 2, 2007 | |
Richard C. Williams | | and Director | | | |
| | | | | |
Principal Financial Officer | | | | | |
and Principal Accounting Officer: | | | | | |
| | | | | | |
| | | | | |
| /s/ROBERT J. CASO | | Vice President, Finance, Chief Financial | | March 30, 2006 April 2, 2007 | |
Robert J. Caso | | Officer and Secretary | | |
| | | | | |
Directors: | | | | | |
/s/ JOHN Q. ADAMS | | Director | | March 30, 2006 |
John Q. Adams, Sr. | | | | |
| | | | | | |
/s/ TOBI B.KLAR, M.D. /s/ JOHN Q. ADAMS | | Director | | March 30, 2006 April 2, 2007 | |
Tobi B. Klar, M.D.
John Q. Adams, Sr. | | | | | |
| | | | | |
| | | | | |
| /s/ TOBI B.KLAR, M.D. | | Director | | April 2, 2007 | |
Tobi B. Klar, M.D. | | | | | |
| | | | | |
| | | | | |
| /s/ ROBERT B. ROTHERMEL | | Director | | March 30, 2006 April 2, 2007 | |
Robert B. Rothermel | | | | | |
| | | | | |
| | | | | |
| /s/ THOMAS M. STEINBERG | | Director | | March 30, 2006 April 2, 2007 | |
Thomas M. Steinberg | | | | | |
| | | Page | |
ReportReports of Independent Registered Public Accounting Firm | | | F-2 | |
| Consolidated Balance Sheets | | F-3 | F-4 | |
| Consolidated Statements of Operations | | F-4 | F-5 | |
Consolidated Statements of Changes in Stockholders’ DeficitEquity (Deficit) and Comprehensive Income (Loss) | | F-5 | F-6 | |
| Consolidated Statements of Cash Flows | | F-10 | F-8 | |
| Notes to Consolidated Financial Statements | | F-12 | F-10 | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders’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
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Cellegy Pharmaceuticals, Inc.
In our opinion, the consolidated balance sheetssheet as of December 31, 2005 and the related consolidated statementstatements of operations, stockholders' equity (deficit) and comprehensive loss,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 (a development stage company) at December 31, 2005, and 2004, and the results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 2005, and cumulatively, for the period from January 1, 2003 to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management, ourmanagement. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the cumulative totals of the Company for the period from June 26, 1989 (date of inception) to December 31, 2002, which totals reflect a deficit of 64.7 percent of the related total cumulative deficit accumulated during the development stage. Those cumulative totals were audited by other auditors whose report dated February 13, 2003, expressed an unqualified opinion on the cumulative amounts. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements 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 negative cash flows fromthe Company does not believe it has enough financial resources to continue operations thatbeyond April 2006. These conditions raise substantial doubt about itsthe Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1.1 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
(a development stage company)
| | | 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 | |
| | | December 31, | |
| | | 2005 | | 2004 | |
Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 2,250,989 | | $ | 8,705,120 | |
| Short-term investments | | | 11,189 | | | — | |
| Accounts receivable | | | 1,085,235 | | | 885,810 | |
| Prepaid expenses and other current assets | | | 1,428,866 | | | 282,184 | |
| Total current assets | | | 4,776,279 | | | 9,873,114 | |
| Restricted cash | | | — | | | 227,500 | |
| Property and equipment, net | | | 496,419 | | | 1,952,408 | |
| Goodwill | | | 981,081 | | | 1,031,311 | |
| Intangible assets, net | | | 196,204 | | | 778,992 | |
| Total assets | | $ | 6,449,983 | | $ | 13,863,325 | |
Liabilities and Stockholders’ Deficit | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 1,756,296 | | $ | 1,691,952 | |
| Accrued expenses and other current liabilities | | | 2,402,237 | | | 2,724,808 | |
| Current portion of deferred revenue | | | 302,593 | | | 1,196,260 | |
| Current portion of notes payable | | | 4,975,892 | | | — | |
| Total current liabilities | | | 9,437,018 | | | 5,613,020 | |
| Notes payable | | | 212,300 | | | 717,257 | |
| Derivative instrument | | | 192,570 | | | 410,800 | |
| Deferred revenue | | | 3,084,629 | | | 13,865,064 | |
| Total liabilities | | | 12,926,517 | | | 20,606,141 | |
| Commitments and contingencies (Note 12) | | | | | | | |
| Stockholders’ deficit: | | | | | | | |
| Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2005 and 2004 | | | — | | | — | |
| Common stock, par value $.0001; 50,000,000 shares authorized; 29,831,625 and 26,120,440 shares issued and outstanding at December 31, 2005 and 2004, respectively | | | 2,983 | | | 2,612 | |
| Additional paid-in capital | | | 125,547,788 | | | 120,253,688 | |
| Accumulated other comprehensive income | | | 283,694 | | | 304,244 | |
| Deficit accumulated during the development stage | | | (132,310,999 | ) | | (127,303,360 | ) |
| Total stockholders’ deficit | | | (6,476,534 | ) | | (6,742,816 | ) |
| Total liabilities and stockholders’ deficit | | $ | 6,449,983 | | $ | 13,863,325 | |
The accompanying notes are an integral part of these financial statements.
(a development stage company)
| | | Years Ended December 31, | | Period from June 26, 1989 (inception) to December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2005 | |
| Revenues: | | | | | | | | | |
| Licensing and contract revenue from affiliates | | $ | — | | $ | — | | $ | — | | $ | 1,145,373 | |
| Licensing, milestone and development funding | | | 7,268,270 | | | 844,044 | | | 833,340 | | | 10,497,062 | |
| Grants | | | 4,410,243 | | | 1,007,500 | | | 18,833 | | | 5,984,709 | |
| Product sales | | | 1,156,832 | | | 744,833 | | | 768,325 | | | 7,772,402 | |
| Total revenues | | | 12,835,345 | | | 2,596,377 | | | 1,620,498 | | | 25,399,546 | |
| Costs and expenses: | | | | | | | | | | | | | |
| Cost of product sales | | | 384,727 | | | 147,849 | | | 185,891 | | | 2,039,341 | |
| Research and development | | | 8,481,105 | | | 9,599,310 | | | 10,558,174 | | | 90,255,973 | |
| Selling, general and administrative | | | 9,248,820 | | | 6,641,205 | | | 4,768,529 | | | 47,609,150 | |
| Acquired in-process technology | | | — | | | 14,981,816 | | | — | | | 22,331,918 | |
| Total costs and expenses | | | 18,114,652 | | | 31,370,180 | | | 15,512,594 | | | 162,236,382 | |
| Operating loss | | | (5,279,307 | ) | | (28,773,803 | ) | | (13,892,096 | ) | | (136,836,836 | ) |
| Interest and other income | | | 207,669 | | | 258,693 | | | 359,948 | | | 7,053,024 | |
| Interest and other expense | | | (625,709 | ) | | (28,952 | ) | | — | | | (2,158,390 | ) |
| Derivative revaluation | | | 689,708 | | | 390,000 | | | — | | | 1,079,708 | |
| Net loss | | | (5,007,639 | ) | | (28,154,062 | ) | | (13,532,148 | ) | | (130,862,494 | ) |
| Non-cash preferred dividends | | | | | | — | | | — | | | 1,448,505 | |
| Net loss applicable to common stockholders | | $ | (5,007,639 | ) | $ | (28,154,062 | ) | $ | (13,532,148 | ) | $ | (132,310,999 | ) |
| Basic and diluted net loss per common share | | $ | (0.18 | ) | $ | (1.28 | ) | $ | (0.68 | ) | | | |
| Weighted average common shares used in computing basic and diluted net loss per common share | | | 28,497,364 | | | 22,020,689 | | | 19,963,552 | | | | |
The accompanying notes are an integral part of these financial statements.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss
| | | Series A Convertible
Preferred Stock | | Series B Convertible
Preferred Stock | | Series C Convertible
Preferred Stock | | Common Stock | | Additional | | Accumulated Other Comprehensive | | Deficit Accumulated During the Development | | Total Stockholders' | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Income (Loss) | | Stage | | Deficit | |
| Issuance of convertible preferred stock, net of issuance cost through December 31, 2001 | | | 27,649 | | $ | 6,801,730 | | | - | | $ | - | | | 477,081 | | $ | 4,978,505 | | | - | | $ | - | | | - | | $ | - | | $ | - | | $ | 11,780,235 | |
| Issuance of Series A convertible preferred stock and warrants to purchase 14,191 shares of Series A convertible preferred stock in exchange for convertible promissory notes and accrued interest through December 31, 2001 | | | 625,845 | | | 1,199,536 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,199,536 | |
| Issuance of convertible preferred stock for services rendered, and license agreement though December 31, 2001 | | | 50,110 | | | 173,198 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 173,198 | |
| Issuance of Series B convertible preferred stock in exchange for convertible promissory notes | | | - | | | - | | | 12,750 | | | 114,000 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 114,000 | |
| Non-cash preferred dividends | | | - | | | 1,448,505 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (1,448,505 | ) | | - | |
| Conversion of preferred stock including dividends to common stock through December 31, 2001 | | | (703,604 | ) | | (9,622,969 | ) | | (12,750 | ) | | (114,000 | ) | | (477,081 | ) | | (4,978,505 | ) | | 3,014,644 | | | 14,715,474 | | | - | | | - | | | - | | | - | |
| Issuance of warrants in connecton with notes payable in financing | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 487,333 | | | - | | | - | | | - | | | 487,333 | |
| Issuance of common stock in connection with private placement of common stock in July, 1997, net of issuance costs | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,547,827 | | | 3,814,741 | | | - | | | - | | | - | | | 3,814,741 | |
| | | 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.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive Loss (Continued)Income (Loss)
| | | Series A Convertible Preferred Stock | | Series B Convertible
Preferred Stock | | Series C Convertible
Preferred Stock | | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Deficit Accumulated During the Development | | Total Stockholders' | |
| | | | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Stage | | Deficit | |
| Issuance of common stock in connection with the public offering of common stock in November 1997, net of issuance cost | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,012,500 | | | 13,764,069 | | | - | | | - | | | - | | | 13,764,069 | |
| Issuance of common stock in connection with the acquisition of Neptune Pharmaceuticals | | | - | | | - | | | - | | | - | | | - | | | - | | | 462,809 | | | 3,842,968 | | | - | | | | | | - | | | 3,842,968 | |
| Issuance of common stock in connection with IPO in Aug. 1995 | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,322,500 | | | 6,383,785 | | | - | | | - | | | - | | | 6,383,785 | |
| Issuance of common stock for cash through December 31, 2001 | | | - | | | - | | | - | | | - | | | - | | | - | | | 953,400 | | | 126,499 | | | - | | | - | | | - | | | 126,499 | |
| Issuance of common stock for services rendered through December 31, 2001 | | | - | | | - | | | - | | | - | | | - | | | - | | | 269,115 | | | 24,261 | | | - | | | - | | | - | | | 24,261 | |
| Issuance of common stock in connection with the private placement of common stock in July 1999, net of issuance costs | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,616,000 | | | 10,037,662 | | | - | | | - | | | - | | | 10,037,662 | |
| Issuance of common stock in connection with the private placement of common stock in October 2000, net of issuance cost of $22,527 | | | - | | | - | | | - | | | - | | | - | | | - | | | 1,500,000 | | | 11,602,473 | | | - | | | - | | | - | | | 11,602,473 | |
| Repurchase of common shares in 1992 | | | - | | | - | | | - | | | - | | | - | | | - | | | (3,586 | ) | | (324 | ) | | - | | | - | | | - | | | (324 | ) |
| Issuance of common stock in exchange for notes payable | | | - | | | - | | | - | | | - | | | - | | | - | | | 42,960 | | | 268,500 | | | - | | | - | | | - | | | 268,500 | |
| Fair value of warrants issued in Quay acquisition | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 489,477 | | | - | | | - | | | - | | | 489,477 | |
| Compensation expenses related to the extension of option exercise periods | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 338,481 | | | - | | | - | | | - | | | 338,481 | |
| Common stock issued in connection with Quay acquisition | | | - | | | - | | | - | | | - | | | - | | | - | | | 169,224 | | | 977,105 | | | - | | | - | | | - | | | 977,105 | |
| Exercise of options to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 432,377 | | | 1,545,728 | | | - | | | - | | | - | | | 1,545,728 | |
| | Common Stock | | Additional Paid-in | | Accumulated OtherComprehensive | | | | | |
| | 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.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive LossIncome (Loss) (Continued)
| | | Series A Convertible Preferred Stock | | Series B Convertible Preferred Stock | | Series C Convertible Preferred Stock | | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Deficit Accumulated During the Development | | Total Stockholders' | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Stage | | Deficit | |
| Exercise of warrants to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 571,086 | | | 966,479 | | | - | | | - | | | - | | | 966,479 | |
| Compensation expense related to options and warrants issued to non-employees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 951,263 | | | - | | | - | | | - | | | 951,263 | |
| Issuance of common stock in connection with the public offering of common stock in June 2001, net of issuance costs of $184,795 | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,747,143 | | | 15,199,206 | | | - | | | - | | | - | | | 15,199,206 | |
| Issuance of common stock in connection with Vaxis acquisition | | | - | | | - | | | - | | | - | | | - | | | - | | | 533,612 | | | 3,852,631 | | | - | | | - | | | - | | | 3,852,631 | |
| Issuance of common stock in connection with the achievement of Neptune milestones | | | - | | | - | | | - | | | - | | | - | | | - | | | 104,113 | | | 750,000 | | | - | | | - | | | - | | | 750,000 | |
| Unrealized gain/(loss) on investments | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 103,385 | | | - | | | 103,385 | |
| Gain/(loss) on foreign currency translation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (19,927 | ) | | - | | | (19,927 | ) |
| Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (68,928,043 | ) | | (68,928,043 | ) |
| Total Comprehensive Loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (68,844,585 | ) |
| Balances at December 31, 2001 | | | - | | | - | | | - | | | - | | | - | | | - | | | 17,295,724 | | | 90,137,811 | | | - | | | 83,458 | | | (70,376,548 | ) | | 19,844,721 | |
| Exercise of options to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 156,632 | | | 454,983 | | | - | | | - | | | - | | | 454,983 | |
| Issuace of common stock in connection with the private placement of common stock in November 2002, net of issuance costs of $275,000 | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,200,000 | | | 5,225,000 | | | - | | | - | | | - | | | 5,225,000 | |
| Compensation expense related to option modifications | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 249,746 | | | - | | | - | | | - | | | 249,746 | |
| Compensation expense for options related to non-employees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 72,224 | | | - | | | - | | | - | | | 72,224 | |
| Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain/(loss) on investments | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (82,916 | ) | | - | | | (82,916 | ) |
| Gain/(loss) on foreign currency translation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 11,289 | | | - | | | 11,289 | |
| Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (15,240,602 | ) | | (15,240,602 | ) |
| Total Comprehensive Loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (15,312,229 | ) |
| Balances at December 31, 2002 | | | - | | | - | | | - | | | - | | | - | | | - | | | 19,652,356 | | | 96,139,764 | | | - | | | 11,831 | | | (85,617,150 | ) | | 10,534,445 | |
| | | | | | | | | Accumulated | | | | Total | |
| | Common Stock | | Additional Paid-in | | Other Comprehensive | | Accumulated | | | |
| | 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.
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.
(a development stage company)Cellegy Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive LossCash Flows (Continued)
| | | Series A Convertible Preferred Stock | | Series B Convertible Preferred Stock | | Series C Convertible Preferred Stock | | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Deficit Accumulated During the Development | | Total Stockholders' | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Stage | | Deficit | |
| Exercise of options to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 273,196 | | | 537,700 | | | - | | | - | | | - | | | 537,700 | |
| Compensation expense for options related to non-employees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 153,784 | | | - | | | - | | | - | | | 153,784 | |
| Issuance of shares to CEO upon renewal of employment contract | | | - | | | - | | | - | | | - | | | - | | | - | | | 107,118 | | | 425,000 | | | - | | | - | | | - | | | 425,000 | |
| Issuance of common stock for services | | | - | | | - | | | - | | | - | | | - | | | - | | | 12,330 | | | 50,000 | | | - | | | - | | | - | | | 50,000 | |
| Financing fees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (12,264 | ) | | - | | | - | | | - | | | (12,264 | ) |
| Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain/(loss) on investments | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (424 | ) | | - | | | (424 | ) |
| Gain/(loss) on foreign currency translation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 263,448 | | | - | | | 263,448 | |
| Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (13,532,148 | ) | | (13,532,148 | ) |
| Total Comprehensive Loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (13,269,124 | ) |
| Balances at December 31, 2003 | | | - | | | - | | | - | | | - | | | - | | | - | | | 20,045,000 | | | 97,293,984 | | | - | | | 274,855 | | | (99,149,298 | ) | | (1,580,459 | ) |
| Conversion of common stock to shares with 0.0001 par value | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (97,291,979 | ) | | 97,291,979 | | | - | | | - | | | - | |
| Exercise of options to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 142,174 | | | 14 | | | 303,815 | | | - | | | - | | | 303,829 | |
| Compensation expense for options related to non-employees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 28,288 | | | - | | | - | | | 28,288 | |
| Compensation expense related to option modifications | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 80,860 | | | - | | | - | | | 80,860 | |
| Issuance of common stock and warrants in connection with the private placement of common stock in July 2004, net of issuance costs of $16,741 | | | - | | | - | | | - | | | - | | | - | | | - | | | 3,020,000 | | | 302 | | | 10,310,402 | | | - | | | - | | | 10,310,704 | |
| Kingsbridge drawdown, net of issuance costs of $156,928 | | | - | | | - | | | - | | | - | | | - | | | - | | | 246,399 | | | 25 | | | 843,043 | | | - | | | - | | | 843,068 | |
| Derivative instrument in connection with Kingsbridge financing | | | | | | | | | | | | | | | | | | | | | | | | | | | (800,800 | ) | | - | | | - | | | (800,800 | ) |
| Issuance of common stock in connection with the achievement of Neptune milestones | | | - | | | - | | | - | | | - | | | - | | | - | | | 204,918 | | | 20 | | | 749,980 | | | - | | | - | | | 750,000 | |
| Shares issued in connection with the Biosyn acquisition | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,461,949 | | | 246 | | | 10,478,026 | | | - | | | - | | | 10,478,272 | |
| Options issued in connection with the Biosyn acquisition | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 968,095 | | | - | | | - | | | 968,095 | |
| Components of comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain/(loss) on foreign currency translation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 29,389 | | | - | | | 29,389 | |
| Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (28,154,062 | ) | | (28,154,062 | ) |
| Total Comprehensive Loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (28,124,673 | ) |
| Balances at December 31, 2004 | | | - | | | - | | | - | | | - | | | - | | | - | | | 26,120,440 | | $ | 2,612 | | $ | 120,253,688 | | $ | 304,244 | | $ | (127,303,360 | ) | $ | (6,742,816 | ) |
| | | 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.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss (Continued)
| | | Series A Convertible Preferred Stock | | Series B Convertible Preferred Stock | | Series C Convertible Preferred Stock | | Common Stock | | Additional Paid-In | | Accumulated Other Comprehensive | | Deficit Accumulated During the Development | | Total Stockholders' | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Stage | | Deficit | |
| Exercise of options to purchase common stock | | | - | | | - | | | - | | | - | | | - | | | - | | | 89,366 | | | 9 | | | 41,511 | | | - | | | - | | | 41,520 | |
| Compensation expense for options related to non employees | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 651 | | | - | | | - | | | 651 | |
| Issuance of common stock and warrants in connection with the private placement of common stock in May 2005, net of issuance cost of $233,000 | | | - | | | - | | | - | | | - | | | - | | | - | | | 3,621,819 | | | 362 | | | 5,720,826 | | | - | | | - | | | 5,721,188 | |
| Derivitative instrument issued in connection with the May, 2005 PIPE | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (471,479 | ) | | - | | | - | | | (471,479 | ) |
Components of comprehensive loss
Gain/(Loss) on foreign currency translation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (29,148 | ) | | - | | | (29,148 | ) |
| Unrealized Gain on Market Securities | | | | | | - | | | - | | | - | | | - | | | - | | | | | | | | | 2,591 | | | 8,598 | | | - | | | 11,189 | |
| Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (5,007,639 | ) | | (5,007,639 | ) |
| Total comprehensive loss | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (5,025,598 | ) |
| Balances at December 31, 2005 | | | - | | $ | - | | | - | | $ | - | | | - | | $ | - | | | 29,831,625 | | $ | 2,983 | | $ | 125,547,788 | | $ | 283,694 | | $ | (132,310,999 | ) | $ | (6,476,534 | ) |
The accompanying notes are an integral part of these financial statements.
(a development stage company)
| | | Years ended December 31, | | Period from June 26, 1989 (inception) to December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2005 | |
Operating activities | | | | | | | | | |
| Net loss. | | $ | (5,007,639 | ) | $ | (28,154,062 | ) | $ | (13,532,148 | ) | $ | (130,862,494 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | | |
| Acquired in-process technology. | | | — | | | 14,981,816 | | | — | | | 22,331,918 | |
| Depreciation | | | 360,236 | | | 415,078 | | | 373,507 | | | 3,377,937 | |
| Bad debt expense and other non-cash items. | | | 199,798 | | | — | | | — | | | 199,798 | |
| Intangible assets amortization | | | 582,788 | | | 164,066 | | | 193,409 | | | 1,923,931 | |
| Loss (gain) on sale of fixed assets. | | | 1,000,840 | | | 30,710 | | | 666,875 | | | 1,611,949 | |
| Equity compensation expense | | | 651 | | | 109,149 | | | 578,784 | | | 2,300,299 | |
| Derivative revaluation | | | (689,708 | ) | | (390,000 | ) | | — | | | (1,079,708 | ) |
| Interest accretion on notes payable | | | 531,759 | | | — | | | — | | | 531,759 | |
| PDI Settlement | | | 2,000,000 | | | | | | | | | 2,000,000 | |
| Amortization of discount on notes payable and deferred financing costs. | | | — | | | — | | | — | | | 24,261 | |
| Issuance of common stock for services | | | — | | | — | | | 50,000 | | | 1,040,918 | |
| Issuance of common stock for services rendered, interest and Neptune milestones | | | — | | | 750,000 | | | — | | | 1,317,503 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
| Prepaid expenses and other current assets. | | | (602,428 | ) | | 142,077 | | | (3,566 | ) | | (907,832 | ) |
| Accounts receivable | | | (265,416 | ) | | (398,900 | ) | | 72,833 | | | (855,880 | ) |
| Other assets | | | 58,642 | | | — | | | — | | | 308,642 | |
| Accounts payable | | | 83,345 | | | (285,952 | ) | | 720,061 | | | 474,271 | |
| Other long term liabilities | | | (489,658 | ) | | (261,807 | ) | | — | | | (34,846 | ) |
| Deferred revenue | | | (13,718,802 | ) | | 476,075 | | | (832,000 | ) | | 925,273 | |
| Accrued expenses and other current liabilities. | | | (773,375 | ) | | (1,179,173 | ) | | (1,057,540 | ) | | (838,701 | ) |
| Net cash provided by operating activities | | | (16,728,967 | ) | | (13,600,923 | ) | | (12,769,785 | ) | | (96,211,002 | ) |
Investing activities | | | | | | | | | | | | | |
| Purchases of property and equipment | | | (103,497 | ) | | (203,988 | ) | | (362,335 | ) | | (5,507,240 | ) |
| Purchases of investments | | | (11,189 | ) | | — | | | (11,019,220 | ) | | (98,920,763 | ) |
| Sale of investments. | | | — | | | — | | | 5,334,000 | | | 43,509,646 | |
| Maturity of investments | | | — | | | 3,686,919 | | | 4,000,000 | | | 55,304,678 | |
| Proceeds from restricted cash. | | | 227,500 | | | — | | | — | | | 613,999 | |
| Proceeds from sale of property | | | — | | | — | | | 50,337 | | | 237,674 | |
| Acquisition of Vaxis, Quay and Biosyn. | | | — | | | (303,966 | ) | | — | | | (815,522 | ) |
| Net cash provided by (used in) investing activities | | | 112,814 | | | 3,178,965 | ) | | (1,997,218 | ) | | (5,577,528 | ) |
Financing activities | | | | | | | | | | | | | |
| Proceeds from notes payable. | | | — | | | — | | | — | | | 8,047,424 | |
| Issuance of notes payable. | | | 4,444,133 | | | — | | | — | | | 4,444,133 | |
| Repayment of notes payable. | | | — | | | — | | | — | | | (6,610,608 | ) |
| Net proceeds from issuance of common stock | | | 5,747,037 | | | 11,457,601 | | | 525,436 | | | 86,841,626 | |
| Other assets | | | | | | — | | | — | | | (614,000 | ) |
| Issuance of convertible preferred stock, net of issuance cost. | | | — | | | — | | | — | | | 11,757,735 | |
| Deferred financing costs. | | | — | | | — | | | — | | | (80,170 | ) |
| Net cash provided by (used in) financing activities | | | 10,191,170 | | | 11,457,601 | | | 525,436 | | | 103,786,140 | |
| Effect of exchange rate changes on cash. | | | (29,148 | ) | | 19,599 | | | 262,928 | | | 253,379 | |
| Net increase (decrease) in cash and cash equivalents. | | | (6,454,131 | ) | | 1,055,242 | | | (13,978,639 | ) | | 2,250,989 | |
| Cash and cash equivalents, beginning of period. | | | 8,705,120 | | | 7,649,878 | | | 21,628,517 | | | — | |
| Cash and cash equivalents, end of period | | $ | 2,250,989 | | $ | 8,705,120 | | $ | 7,649,878 | | $ | 2,250,989 | |
The accompanying notes are an integral part of these financial statements
(a development stage company)
| | | Years ended December 31, | | Period from June 26, 1989 (inception) to December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2005 | |
Supplemental cash flow information | | | | | | | | | |
| Interest paid | | $ | 85,958 | | $ | — | | $ | — | | $ | 725,945 | |
Supplemental disclosure of non-cash transactions: | | | | | | | | | | | | | |
| Issuance of common stock in connection with acquired-in-process technology | | | — | | | — | | | — | | | 7,350,102 | |
| Conversion of preferred stock to common stock | | | — | | | — | | | — | | | 14,715,474 | |
| Issuance of common stock for notes payable | | | 5,720,826 | | | — | | | — | | | 5,998,026 | |
| Issuance of warrants in connection with Kingsbridge financing | | | — | | | 800,800 | | | — | | | 800,800 | |
| Issuance of warrants in connection with notes payable financing | | | 471,479 | | | — | | | — | | | 958,812 | |
| Issuance of convertible preferred stock for notes payable | | | — | | | — | | | — | | | 1,268,316 | |
| Issuance of common stock for milestone payments. | | | — | | | 750,000 | | | — | | | 1,500,000 | |
| Fair value of assets acquired net of liabilities assumed for Biosyn acquisition | | | — | | | 11,856,000 | | | — | | | 11,856,000 | |
The accompanying notes are an integral part of these financial statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Description of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Cellegy Pharmaceuticals, Inc. and its wholly ownedwholly-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 inter-companyintercompany balances and transactions have been eliminated in consolidation.
Cellegy iswas previously a development stage specialty biopharmaceutical company, originally incorporated in California in 1989 and reincorporated in Delaware in 2004, engaged in the development and commercialization of prescription drugs targeting primarily women’s health care, including the reduction in transmitting of HIV, female sexual dysfunction and gastrointestinal conditions using proprietary topical formulations and nitric oxide donor technologies. In October 2004, Cellegy completed the acquisition of Biosyn which is developinghad a portfolio of proprietary product candidates known as microbicides that are used intravaginally to reduce transmission of sexually transmitted diseases, or STDs, including HIV/AIDS. Biosyn’s product candidates, which include both contraceptive and non-contraceptivenoncontraceptive microbicides, include Savvy® (C31G vaginal gel),Savvy, which is undergoing Phase 3 clinical trials in the United States and Africa;States; UC-781 vaginal gel, in Phase 1 trials; and Cyanovirin-N, in pre-clinical development.
The Company’s other products under development, Cellegesic™ (nitroglycerin ointment) for the treatment of anal fissures and hemorrhoids, and Fortigel™ (testosterone gel), a replacement therapy for male hypogonadism, have not yet been approved for marketing by the United States FDA. However, Cellegesic is currently approved for marketing in Australia, New Zealand, Singapore and South Korea under the brand name Rectogesic®. The product has also been approved by the United Kingdom’s Medicines and Healthcare Products Regulatory Agency in August 2004 for sale in the United Kingdom. Fortigel was approved by the Swedish Medical Products Agency in December 2004 for the treatment of male hypogonadism under the brand name Tostrex.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 and commitments induring 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, 2005, we2006, the Company had a deficit accumulated during the development stage of $132.3 million, negative cash flows from operations of $96.2 million, and cash and cash equivalents of $2.3$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 flow from operationsflows to continue for the foreseeable future, with the need to continue or expand development programs and to commercialize products once regulatory approvals have been obtained. We believe we do not havefuture. The Company presently has enough financial resources to continue operations beyond April 2006. 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. Our plans, with regard to these matters, include raising additional required funds through one or more of the following options, among others: sales of assets, seeking partnerships with other pharmaceutical companies or private foundations to co-develop and fund our research and development efforts, pursuing additional out-licensing arrangements with third parties, re-licensing and monetizing in the near term our future milestone and royalty payments expected from existing licensees and seeking equity or debt financing. In addition, we will continue to implement further cost reduction programs and reduce discretionary spending, if necessary.
There is no assurance that any of the above options will be implemented on a timely basis or that we will be able to obtain additional financing on acceptable terms,sell our remaining technology or find suitable candidates for a business combination or other transaction, if at all. Alternatively, weWe may be required to accept less than favorable commercial terms in any such future arrangements. If adequate funds are not available on acceptable terms, we could be required to delay development or commercialization of certain products, to license to third parties the rights to commercialize certain products that we would otherwise seek to commercialize internally or to reduce resources devoted to product development. In addition, if we do not receive all, or a portion, of the planned Biosyn grant funding, or if such funding is delayed, this could impact our ability to complete our Biosyn development programs on a timely basis, if at all. The 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 outour ability to enter into collaborative relationships with business partners, makecombination or other agreements, therefore making it more difficult to obtain required financing on favorable terms or at all,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.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the 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 non-refundablenonrefundable milestone payments specified under development contracts are recognized as the milestones are achieved. The Company receivesreceived certain government and non-government grants that support the Company’sits research effort in defined research projects. These grants generally provideprovided for reimbursement of approved costs incurred as defined in the various grants. Revenues associated with these grants are recognized as costs under each grant are incurred. Advanced payments received under these agreements prior to completion of the related work are recorded as deferred revenue until earned. Should the research funded by federal grants result in patented technologies, the federal government would be entitled to a nonexclusive, nontransferable, irrevocable, paid-up license to utilize such technologies.
At December 31, 2005, $759,906 of grants receivable under research and development agreements were unbilled. These amounts represent future billings by In 2006, the Company for reimbursementdiscontinued its grant funding in connection with the elimination of expenses funded by grants previously recorded in grant revenue. Unbilled grants at December 31, 2004 were $833,630.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: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 will beare recognized as earned when the royalties are no longer refundable under certain minimum royalty terms defined in the agreement.
Research and Development
Research and Developmentdevelopment 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.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Milestone payments that are made upon the occurrence of future contractual events prior to receipt of applicable regulatory approvals are charged to research and development expense.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 atas of December 31, 20052006 and 2004. The2005. As of December 31, 2006, the Company’s cash and cash equivalents are maintained at two financial institutions in the United States, and one financial institution in Australia.States. Deposits in these financial institutions may, from time to time, exceed federally insured limits.
Short TermShort-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’ deficitequity (deficit) as accumulated other comprehensive income (loss) until their disposition. The cost of securities sold is based on the specific identification method.
Notes to Financial Statements (Continued)
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 expense.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.
Restricted CashInventory
Cash held by financial institutions to secure a letterInventory is valued at the lower of credit related to the Company’s long-term lease was classified as restricted cash and was shown separately in the balance sheet as a non-current asset. In 2005 the lease was terminated and the letter of credit cancelled.cost or market.
Concentration of Credit Risk
AtAs of December 31, 2005,2006, 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.depreciation and amortization. Depreciation and amortization of property and equipment isare computed using the straight-line method over the estimated useful lives of the respective assets.
| | | Estimated Useful LifeLives | |
| 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.
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price and the estimated fair valueStatement of the net assets acquired when accounted for by the purchase method of accounting. In accordance with FAS 142, “Goodwill and Intangible Assets”, we do not amortize goodwill. Management reviews goodwill for impairment either on an annual basis or quarterly if an event occurs that might reduce the fair value of the long-lived asset below its carrying value. All other long-lived and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or other appropriate fair value methods. The evaluation of goodwill and other intangibles for impairment requires management to use significant judgments and estimates including, but not limited to, projected future revenue, operating results and cash flows.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
SFASAccounting Standards (“SFAS”) No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives. The Company amortizes intangible assets on a straight-line basis over their estimated useful lives.
Impairment of Long LivedLong-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).
Notes to Financial Statements (Continued)
Accumulated Other Comprehensive Income (Loss)
ComprehensiveAccumulated other comprehensive income (loss) generally represents all changes in stockholders’ deficitequity (deficit) except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and losses on available-for-sale securities and foreign currency translationFCT adjustments represent the only components of accumulated other comprehensive lossincome that are excluded from the Company’s net loss. Total accumulated other comprehensive income consists of the following:(loss).
| | | | December 31, | |
| | | | 2005 | | | 2004 | | | 2003 | |
| Gain (loss) on foreign exchange translation | | $ | 275,096 | | $ | 284,199 | | $ | 254,810 | |
| Unrealized gain (loss) on investments | | | 8,598 | | | 20,045 | | | 20,045 | |
| Accumulated other comprehensive income (loss) | | $ | 283,694 | | $ | 304,244 | | $ | 274,855 | |
| | | 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-BasedStock-based Compensation
TheEffective January 1, 2006, the Company accounts for itsbegan recording compensation expense associated with stock option grantsoptions 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, “AccountingAccounting for Stock Issued to Employees” (“Employees (“APB Opinion No. 25”), and related Interpretations.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 electedsufficient net operating loss carryforwards to followgenerally 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 disclosure-only alternative prescribed byadoption of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure”. Under APB 25,123R, if compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s common stock and the option’s exercise price.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Had compensation cost for the Company’s stock-based compensationvarious stock option plans had been determined based upon estimated fair values at the grant dates in a manner consistentaccordance with the fair value approach described in SFAS No. 123, the Company’s pro forma net loss and net lossbasic and diluted income per common share as reported would have been increased to the pro forma amounts indicated below:as follows (in thousands):
| | | Years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| Net loss, as reported | | $ | (5,007,639 | ) | $ | (28,154,062 | ) | $ | (13,532,148 | ) |
| Add: Stock based employee costs included in reported net loss | | | — | | | 80,860 | | | 425,000 | |
| Deduct: Stock-based employee compensation costs determined under the fair value based method for all awards | | | (421,750 | ) | | (790,518 | ) | | (1,839,447 | ) |
| Net loss, pro forma | | $ | (5,429,389 | ) | $ | (28,863,720 | ) | $ | (14,946,595 | ) |
| Basic and diluted net loss per common share, as reported | | $ | (0.18 | ) | $ | (1.28 | ) | $ | (0.68 | ) |
| Basic and diluted net loss per common share, pro forma | | $ | (0.19 | ) | $ | (1.31 | ) | $ | (0.75 | ) |
| | | 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 | ) |
Notes to Financial Statements (Continued)
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, | | | Years Ended December 31, | |
| | | 2005 | 2004 | 2003 | | 2005 | | 2004 | |
| Risk-free interest rate | | 4.4% | 3.6% | 2.9% | | | 4.4 | % | | 3.6 | % |
| Dividend yield | | 0% | 0% | | | - | % | | - | % |
| Volatility | | 0.78 | 0.86 | 0.98 | | | 78.0 | % | | 86.0 | % |
| Expected life of options in years | | 5.9 | 4.3 | 4.3 | |
| 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 2004, and 20032004, was $1.81 $4.37 and $3.28$4.37, respectively.
The Company accounts for equity instruments issued to non-employeesnonemployees 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 2004,15, 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. 123R, “Share-Based Payment”, which replaces SFAS No. 123. SFAS No. 123R requires public companies to recognize an expense157, Fair Value Measurements. This statement defines fair value, establishes a framework for share-based payment arrangements including stock optionsmeasuring fair value in generally accepted accounting principles, and employee stock purchase plans.expands disclosures about fair value measurements. The statement eliminates a company’s ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair value based method. SFAS No. 123R requires an entity to measure the cost of employee services received in exchanged for an award of equity instruments based on the fair value of the award on the date of the grant, and to recognize the cost over the period during which the employee is to provide service in exchange for the award. SFAS No. 123R is effective for public companies with ain the fiscal year that begins after June 15, 2005. The cumulative effect of this pronouncement when adopted by the Company, applied on a modified prospective basis, would be measured and recognized starting the first quarter of 2006. We anticipate2008 and the Company will adopt the statement at that time. The Company believes that the impact of adopting SFAS No. 123R will result in an annual expense of approximately $292,000 based on known grants. Upon adoption of SFAS No. 123R, companies are allowed to select one of three alternative transition methods. Management is currently evaluating the transition methods, as well as valuation methodologies and assumptions for employee stock options in light of SFAS No. 123R. Current estimates of option values using the Black-Scholes method (as shown under “Stock Based Compensation”) may157 will not be indicative of results from valuation methodologies ultimately implemented by the Company upon adoption of SFAS No. 123R.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”. The statement requires retrospective application of changes in accounting principle to prior periods’ financial statements, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. When it is impracticable to determine the period specific effects of an accounting change on one or more individual prior periods presented, this statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable, and that a corresponding adjustment be made to the opening balance of the retained earnings for that period rather than being reported in the income statement. The statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This pronouncement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe adoption of SFAS 154 will have a material effect on its consolidatedresults 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.
Notes to Financial Statements (Continued)
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 LossIncome (Loss) per Common Share
Basic net lossincome (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net lossincome (loss) per common share incorporates the incremental shares issued upon the assumed exercise of stock options and warrants, when dilutive. ThereFor years ended December 31, 2005 and 2004, there is no difference between basic and diluted net lossincome (loss) per common share, as presented in the statementconsolidated statements of operations, because all options and warrants are anti-dilutive.antidilutive. The total number of shares that had their impact excluded were:
| | | Years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| Options | | 3,658,764 | | 4,345,777 | | 4,198,216 | |
| Warrants | | 2,374,593 | | 945,869 | | — | |
| Total number of shares excluded | | 6,033,357 | | 5,291,646 | | 4,198,216 | |
| | | 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 alsoin the years ended December 31, 2005 and 2004, are 2,121,212 shares that would behave been issuable upon conversion of the $3.5 million nonnegotiable senior convertible debenture due PDI, NotesInc. (“PDI”). (see also Note 16).8)
2. Accounts Receivable
Accounts receivable consistsconsist of the following:
| | | | Years ended December 31, | |
| | | 2005 | | 2004 | |
| Unbilled grants receivable | | $ | 759,906 | | $ | 833,630 | |
| Trade receivables net of allowances of $35,000 in 2005 | | | 265,031 | | | 26,036 | |
| Other receivables | | | 60,298 | | | 26,144 | |
| Total | | $ | 1,085,235 | | $ | 885,810 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| | | 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 Securitiesmarketable securities of approximately $11,000.$11,189. In January 2006, the Company liquidated the investment, was liquidated realizing a gain of approximated $8,500.$8,598. At December 31, 2004,2006, the Company had no investments.
4.Prepaid Expenses and Other Current Assets
At December 31, 20052006 and December 31, 20042005, this account includes the following:
| | | | Years ended December 31, | |
| | | 2005 | | 2004 | |
| Prepaid Insurance | | $ | 196,000 | | $ | 186,000 | |
| Prepaid Rent | | | 35,000 | | | — | |
| Prepaid Compensation | | | 803,000 | | | — | |
| Inventory | | | 351,000 | | | 52,000 | |
| Other | | | 44,000 | | | 44,000 | |
| Total | | $ | 1,429,000 | | $ | 282,000 | |
| | | | |
| | | 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 | |
Notes to Financial Statements (Continued)
Inventories are valued atPrepaid compensation of approximately $803,000 represents the lowerunamortized portion of cost$902,000 in retention payments offered and accepted by employees in 2005. The retention payments were paid if the employee maintained his or market. Asher employment with the Company through the retention period indicated in the individual’s offer letter. The retention payment was in lieu of December 31, 2005, Cellegy had inventoryall other severance or similar payments that the Company may have been obligated to make under any other existing agreement, arrangement or understanding, but would be in addition to any accrued salary and vacation earned through the date of $257,000 located in Canadatermination. The retention periods terminated between January 15, 2006 and $94,000 in Australia. All of Cellegy’s Canadian inventory was sold in January 2006 for $257,000.June 30, 2006.
5. Intangible Assets, netNet
The Company’s intangible assets and related accumulated amortization at December 31, 20052006 and December 31, 2004,2005, respectively, were as follows:
| | | December 31, 2005 | | December 31, 2004 | |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| Capitalized non-compete agreement with Vaxis | | $ | — | | $ | — | | $ | — | | $ | 463,544 | | $ | (293,578 | ) | $ | 169,966 | |
| Capitalized workforce—Biosyn acquisition | | | 381,558 | | | (185,354 | ) | | 196,204 | | | 635,504 | | | (26,478 | ) | | 609,026 | |
| | | $ | 381,558 | | $ | (185,354 | ) | $ | 196,204 | | $ | 1,099,048 | | $ | (320,056 | ) | $ | 778,992 | |
| | 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 2005. Their2006, 2005 and 2004. The departure of these employees required the reduction in the carrying value of the work force in place intangible asset recorded in 2004.2006, 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 approximately $254,000. This amount was$149,352, $253,946 and $25,939, respectively. These amounts were recognized as impairment expense in the fourth quarter of 2005.
In 2005, Cellegy Canada, Inc. was liquidated and the intangible asset for the Vaxis non-compete agreement was fully amortized. The $50,000 decrease in goodwill in 2005 is due to changes in foreign currency.their respective years.
Amortization recorded for the years ended December 31, 2006, 2005 and 2004, was $46,852, $158,876 and 2003 were approximately $324,000, $111,000 and $176,000,$26,478, respectively.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Estimated amortization expense for each of the three years ended December 31, 2006 through 2008 is as follows:
Estimated future amortization expense: | | | |
| For the twelve months ended December 31: | | | |
| 2006 | | $69,000 | |
| 2007 | | $69,000 | |
| 2008 | | $58,000 | |
6.Property and Equipment, netNet
Property and equipment, net consist of the following:
| | | Years ended December 31, | | | December 31, | |
| | | 2005 | | 2004 | | | 2006 | | 2005 | |
| Furniture and fixtures | | $ | 81,247 | | $ | 199,202 | | | $ | - | | $ | 81,247 | |
| Office equipment | | | 337,247 | | | 261,718 | | | | 19,855 | | | 337,247 | |
| Laboratory equipment | | | 517,970 | | | 1,296,113 | | | | - | | | 517,970 | |
| Leasehold improvements | | | 81,599 | | | 2,081,313 | | | | - | | | 81,599 | |
| | | | 1,018,063 | | | 3,838,346 | | | | 19,855 | | | 1,018,063 | |
| Less: accumulated depreciation and amortization | | | (521,644 | ) | | (1,885,938 | ) | | | (19,855 | ) | | (521,644 | ) |
| Total | | $ | 496,419 | | $ | 1,952,408 | | |
| | | | $ | - | | $ | 496,419 | |
Notes to Financial Statements (Continued)
Depreciation expenseand amortization expenses for the years ended December 31,2006, 2005 and 2004, was approximately $121,000, $360,000 and 2003 was $360,000, $420,000 and 370,000$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 and $105,000 respectively.$324,000.
77. .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, 20052006 and 20042005, were as follows:
| | | Years ended December 31, | | | December 31, | |
| | | 2005 | | 2004 | | | 2006 | | 2005 | |
| Accrued clinical expenses | | $ | 641,995 | | $ | 612,937 | | | $ | - | | $ | 641,995 | |
| Accrued legal fees | | | 60,830 | | | 453,953 | | | | 22,262 | | | 60,830 | |
| Accrued employee bonuses, retention and severance | | | 1,039,571 | | | 507,723 | | |
| Accrued consulting fees | | | 45,934 | | | 339,142 | | |
| 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 | | | 613,909 | | | 811,053 | | | | 75,786 | | | 454,580 | |
| Total | | $ | 2,402,239 | | $ | 2,724,808 | | | $ | 536,591 | | $ | 2,383,698 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
8.Notes Payable
Ben Franklin Note
Included in notes payables isBiosyn issued a note issued by Biosyn to Ben Franklin Technology Center of Southeastern Pennsylvania (“Ben Franklin Note”) in October 1992, for funds provided by Ben Franklin forin connection with funding the development of a compound to prevent the transmission of AIDS.
The note isBen Franklin Note was recorded at its estimated fair value of $205,000 and was assumed by Cellegy in connection with its acquisition of Biosyn.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 non-profitnonprofit sources. There is no obligation to repay the amounts in the absence of future Biosyn revenues. The Company will accreteis accreting the discount of $572,902 toagainst 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
The notes were issued in April 2005 by Cellegy to PDI, Inc. (“PDI”) pursuant toIn connection with a lawsuit settlement agreement signed by both partiesdated 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 April 2005. The terms of the notes issued to PDI are as follows:September 2006.
Notes to Financial Statements (Continued)
The $3.0 million secured promissory note has an outstanding balance of $2.8 million and a net present value of $2.5 million at December 31, 2005 and iswas payable inon October 12, 2006. There iswas no stated interest rate and no periodic payments arewere required. Cellegy is required to make currentOriginal payment terms included payments on the note to the extent of (i) 50% of future funds to be received by Cellegy as licensing fees, royalties or milestone payment, (or, in each case, these payments in the nature thereof )received by Cellegy with respect to anyor similar payments from licensees of Cellegy’s agreements or arrangements with respect to Tostrex orand Rectogesic products in territories outside of North America, and (ii) 50% of licensing fees, royalties or milestone payments (or, in each case, otheror similar payments in the nature thereof) received by Cellegy with respect to any of Cellegy’s agreements or arrangements with respect tofrom Fortigel licensees in North American markets. These payments are required to be made to PDI within two business days after Cellegy receives the payments. Cellegy’s obligations under the note are secured by a security interest in favor of PDI, which is reflected in a security agreement between Cellegymarkets, and PDI, in Cellegy’s interests in the payments described above and any proceeds therefrom (and certain related collateral). In addition, Cellegy is required to make payments on the $3.0 million note with respect to 10% of proceeds received by Cellegy in excess of $5.0 million from financing transactions. Payments made in 2005 totaled $200,000.
Amounts owed under the note may be accelerated upon an event of default, which is defined to include, but not limited to, any of the following: Cellegy’s failure to pay any amounts owed under the note when due; certain kinds of bankruptcy filings or certain related actions or proceedings; any breach of any of Cellegy’s covenants, conditions or agreements in the note or security agreement following notice from PDI that remains uncured for 30 days; the security interest no longer being a valid, perfected, first priority security interest; and a default in indebtedness of Cellegy with an aggregate principal amount in excess of $2.0 million that results in the maturity of such indebtedness being accelerated before its stated maturity.financings. The net present value of collateralized $3.0 millionthe secured promissory note will bewas recalculated based on its remaining principal whenever a payment iswas made by Cellegy. Cellegy made a $100,000 payment to PDIPayments in October2006 and 2005 shortly after the due date specified in the secured notetotaled $458,500 and has paid interest to PDI on that amount.$200,000, respectively.
ThePrior to the settlement and repayment, the $3.5 million non-negotiablenonnegotiable senior convertible debenture was recorded at a net present value of $2.5 million as of December 31, 2005 and hashad a maturity date of April 11, 2008, three years from the PDI settlement date of April 11, 2005. There iswas no stated interest rate and no periodic payments arewere required. Cellegy may redeemcould 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 deliversdelivered such a redemption notice, PDI may convertcould have converted the note into shares of Cellegy common stock at a price of $1.65 per share. In addition, after the 18th18th month anniversary of the debenture, PDI may convertcould have converted the note into Cellegy common stock at a price of $1.65 per share. If Cellegy doesdid not redeem the note within the first 18 months, then Cellegy has agreed to file a registration statementRegistration Statement relating to the possible resale of any shares issued to PDI after 18 months. 2,121,212months; approximately 2.1 million shares would be issuablehave been issued upon such conversion. As long as amounts arewere owed under the note, Cellegy has agreed not to incur or become responsible for any indebtedness that ranksranked contractually senior or pari passu in right of payment to amounts outstanding under the note. Events
In an agreement dated September 20, 2006, the Company agreed to pay PDI an aggregate amount of default$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 senior note are generally similar to eventsagreement and, as of default underDecember 31, 2006, the secured note.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 | |
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Cellegy has classified the notes as current for financial reporting purposes because of the payments expected to be made within the next year and due to other uncertainties noted above. In addition, on December 1, 2005 the company received a notice from PDI, Inc. notifying the company that PDI considers Cellegy in default of the secured promissory note and the non-negotiable convertible senior note which were part of the settlement entered into between Cellegy and PDI on April 11, 2005. PDI’s notice states that PDI believes that Cellegy is in material breach of the secured promissory note as a result of Cellegy’s failure to notify PDI of the receipt of certain payments and of Cellegy’s failure to pay amounts to which PDI believes it is entitled.
In November 2005, Cellegy renegotiated its Exclusive License and Distribution Agreement with ProStrakan Group Limited (“ProStrakan”)relating to Rectogesic. Under the renegotiated agreement, ProStrakan assumed all responsibility for manufacturing and product support functions and will purchase the product directly from the manufacturer rather than purchasing from Cellegy under the terms of the original agreement. In return, ProStrakan paid Cellegy $2.0 million. PDI claims that it is entitled to $1.0 million of that payment. Cellegy does not agree that the payment made by ProStrakan falls within the definition of “Pledged Collateral” in the settlement agreement and related documents and does not believe that any amount is owed to PDI as a result of such payments. The Company plans to vigorously defend itself against such claims.
The Company accretes interest and principal to the PDI notes using a rate of 15% using the effective interest rate method.
The Ben Franklin note has a face value of $778,000 and net present value of $205,000 at December 31, 2005. The note has no scheduled repayment term. Payment is based on 3% of Biosyn’s revenues excluding research and development grants.
At December 31, 2005, future minimum payments on the above notes were payable as follows (in thousands):
| 2006 | | $ | 2,800 | |
| 2007 | | | — | |
| 2008 | | | 3,500 | |
| 2009 and thereafter | | | 778 | |
| Total payments | | | 7,078 | |
| Less: Amount representing discount | | | (1,897 | ) |
| Net present value of notes at December 31, 2005 | | $ | 5,181 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
9.Equity Financing
On May 12, 2005, Cellegy raised approximately $5.7 million after offering expenses in a private placement of its common stock and warrants to existing and new institutional and individual investors. The transaction consisted of the sale of approximately 3,621,819 shares of common stock and the issuance of Class A Warrants to purchase approximately 714,362 shares of common stock at an exercise price of $2.25 per share. The Class A Warrants can be called if the Company’s common stock trades for 20 consecutive days over $5.00. The Company also issued Class B Warrants to purchase approximately 714,362 shares of common stock at an exercise price of $2.50 per share. Class A and B Warrants can be called by the Company if the Company’s closing bid price of a share of Common Stockcommon 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 non-directornondirector investors was $1.65 per share. Pursuant to the transaction agreements, the Company has filed a registration statement on Form S-3Registration 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
The warrantsWarrants 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 allthese warrants using the Black-Scholes valuation model and recorded as derivative liability at December 31, 2006 and 2005, was approximately $4,000 and December 31, 2004 was $193,000 and $411,000.$193,000. The changes in the estimated fair value of the warrants have been recorded as other income and expense(expenses) in the income statement.consolidated statements of operations. For the years ended December 31, 2006, 2005 and December 31, 2004, the Company recognized $689,000approximately $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 $3.4approximately $3.3 million at December 31, 2005, and $15.1 million at December 31, 2004 represents the remaining unamortized and unearned portion of upfront licensing fees received from licensees for the right to store, promote, sell and /orand/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 and certain equipment under a non-cancelable operating leases. Rentlease. Operating lease expense is recorded on a straight-line basis over the term of the lease. During the third quarter of 2002, theThe Company also previously subleased a portion of its facility.operating facility during the years ended December 31, 2005 and 2004. Rental income iswas recorded on a straight-line basis over the term of the sublease. The sublease was terminated in 2005 and the rental income ceased as of the termination.
Notes to Financial Statements (Continued)
Future minimum lease payments at December 31, 2005,2006, are as follows:
Years ended December 31, | | | | Future Minimum Lease Commitments | |
| 2006 | | $ | 331,467 | |
| 2007 | | | 264,483 | |
| 2008 | | | 160,167 | |
| Total | | $ | 756,117 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| | | Future | |
| | | Minimum | |
| | | Lease | |
Year Ended December 31, | | Commitment | |
| 2007 | | $ | 8,100 | |
Rent expense, net of sublease income, was $205,000, $269,000 $382,000, and $336,000$382,000 for the years ended December 31, 2006, 2005 2004, and 2003,2004, respectively. The Company received $93,000 $149,000 and $148,000$149,000 in sublease income, which is reflected in interest and other income, (expense), during the yearyears ended December 31, 2005 2004 and 2003,2004, respectively.
Capital Leases
Included in property, plant andThe Company has a capital lease commitment covering certain lab equipment, is laboratory equipment and computer equipment under long-term leases of $107,000, with related accumulated depreciation of $53,000 which includedincludes an option to purchase the assetsequipment for a nominal cost at the termination of the lease. There were no capital lease assets and amortization expenses prior to the Biosyn acquisition. Future minimum lease payments for assetsequipment under the capital leaseslease at December 31, 20052006, are as follows:
| Years ended December 31: | | | |
| 2006 | | $ | 55,000 | |
| 2007 | | | 5,000 | |
| Total minimum lease payments | | | 60,000 | |
| Less amount representing interest | | | (13,000 | ) |
| Present value of minimum lease payments | | | 47,000 | |
| Less current maturities | | | (44,000 | ) |
| Long-term obligation | | $ | 3,000 | |
| |
Other AgreementsYear Ended December 31, | | | |
| 2007 | | $ | 11,179 | |
| Less: amount representing interest | | | (717 | ) |
| Present value of minimum lease payments | | $ | 10,462 | |
In December 1997, the Company acquired patent and related intellectual property rights relating to Cellegesic, a topical product candidate for the treatment of anal fissures and hemorrhoids from Neptune Pharmaceuticals Corporation. The agreement calls for a series of additional payments, payable in shares of common stock, upon successful completion of various development milestones. Upon completion of certain milestones in 2001 and 2004, the Company issued 104,113 and 204,918 shares of common stock, respectively, valued at $750,000 for each of those milestones. These were charged to research and development expense. The remaining milestones, if achieved, would become payable over the next several years.
On November 27, 2001, Cellegy acquired Vaxis Therapeutics Corporation (“Vaxis”), a private Canadian company. The Vaxis purchase agreement contains earn-out provisions through 2008 that are based on commercial sales of any products developed by the Company or other revenues generated from the acquired research. There have been no earn-out payments made under this agreement through December 31, 2005. In 2005, Canadian operations were terminated and its assets were liquidated.
Legal Proceedings
In October 2003, the Company received a communication from PDI invoking mediation procedures under its exclusive license agreement with PDI relating to Fortigel. After mediation was completed in December 2003, both PDI and Cellegy initiated litigation proceedings against each other. Cellegy filed a declaratory judgment action in federal district courtFederal District Court in San Francisco against PDI, and PDI initiated an action in federal district courtFederal District Court in New York against Cellegy.
On April 11, 2005, Cellegy entered into a settlement agreement with PDI resolving the lawsuits that the companies had filed against each other. Under the terms of the settlement agreement, the license agreement was terminated and all product rights reverted to Cellegy. Under the settlement agreement, the previous license agreement was terminated and all product rights reverted to Cellegy. Cellegy paid $2$2.0 million to PDI upon signing the settlement agreement.
Cellegy also Additionally, PDI issued anon-interest bearing notes payable with face values totaling $6.5 million. These notes were settled for $3.0 million Secured Promissoryin September 2006 (see Note to PDI, payable in 18 months, with earlier payments of amounts owed under the note required to be made to the extent of 50% of licensing fees, royalties or milestone payments (or, in each case, other payments in the nature thereof) received by Cellegy under Cellegy’s agreements or arrangements with respect to Cellegy’s Tostrex® (testosterone gel) and Rectogesic® (nitroglycerin ointment) products in territories outside of North America, and 50% of licensing fees, royalties or milestone payments (or, in each case, other payments in the nature thereof) received by Cellegy under Cellegy’s agreements or arrangements with respect to Fortigel licensees in North American markets. These payments are required to be made to PDI within two business days after Cellegy receives the payments. These various payments will be made until the amount owed under the note is paid in full. Cellegy’s obligations under the note are secured by a security interest in favor of PDI, which is reflected in a security agreement between Cellegy and PDI, in Cellegy’s interests in the payments described above and any proceeds there from (and certain related collateral)8). In addition, Cellegy is required to make payments on the $3.0 million note with respect to 10% of proceeds received by Cellegy in excess of $5 million from financing transactions. Payments made in 2005 totaled $200,000. Amounts owed under the note may be accelerated upon an event of default, which include (but are not limited to) certain kinds of bankruptcy filings or certain related actions or proceedings, an uncured material breach of Cellegy’s obligations under the note, the security interest no longer being a valid, perfected, first priority security interest, and a default in indebtedness of Cellegy with an aggregate principal amount in excess of $2 million that results in the maturity of such indebtedness being accelerated before its stated maturity. Cellegy made a $100,000 payment to PDI in October 2005 shortly after the due date specified in the secured note and has paid interest to PDI on that amount. Cellegy also issued to PDI a $3.5 million principal amount Convertible Senior Note due April 11, 2008. Cellegy may redeem the note at any time before the maturity date upon not less than 30 or more than 60 days notice to PDI, at a redemption price equal to the principal amount; if Cellegy delivers such a redemption notice, PDI may convert the note into shares of Cellegy common stock at a price of $1.65 per share. In addition, after the 18 month anniversary of the debenture, PDI may convert the note into Cellegy common stock at a price of $1.65 per share. If Cellegy does redeem the note within the first 18 months; then Cellegy has agreed to file a registration statement relating to possible resale of any shares issued to PDI after 18 months. 2,121,212 shares would be issuable upon such conversion. As long as amounts are owed under the note, Cellegy has agreed not to incur or become responsible for any indebtedness that ranks contractually senior or pari passu in right of payment to amounts outstanding under the note. Events of default under the senior note are generally similar to events of default under the secured note.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)13.
The Company maintainsmaintained a savings and retirement plan under Section 401(k) of the Internal Revenue Code.Code until it was terminated in August 2006. All employees arewere eligible to participate on the first day of the calendar quarter following three months of employment with the Company. Under the plan, employees maycould contribute up to 15% of their salaries per year subject to statutory limits. The Company providesprovided 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 2004 and 20032004, were not significant.
Biosyn Acquisition
On October 22, 2004, Cellegy completed its 100% acquisition of Biosyn, developer of a contraceptive gel product for the reduction in transmission of HIV/AIDS in women.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”.Business.” Assets acquired and liabilities assumed were recorded at their estimated fair values. The value of the merger consideration, including certain acquisition and closing costs, exceeded the fair value of the net assets acquired. In accordance with paragraph 9 of Statement of Financial Accounting StandardsSFAS No. 142, “Goodwill and Other Intangible Assets”,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.
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 freerisk-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, iswas as follows:
| Current assets | | $ | 300,000 | |
| Property and equipment | | | 299,000 | |
| Acquired work force | | | 635,000 | |
| Purchased research and development | | | 14,982,000 | |
| Current liabilities | | | (4,225,000 | ) |
| Long term debt and capital leases | | | (135,000 | ) |
| Net assets | | $ | 11,856,000 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| 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 relatesrelated primarily to the development of a microbacidal vaginal gel,Savvy, which may have thewas being tested for its potential to prevent HIV / HIV/AIDS and other sexually transmitted diseases in women. This product candidate, called Savvy® (C31G vaginal gel), haswomen and which had an estimated fair value of approximately $15.4 million. Two other development programs, called UC-781 and Cyanovirin-N, havehad a combined estimated fair value of approximately $1.6 million. The in-process C31GFor purposes of the valuation, the Savvy program requireswas assumed to require significant additional scientific and clinical testing which for purposes of this valuation isand was expected to be completed in the second half of 2006 with cash inflows from product sales in the United States forecasted to begin in 2007, assuming no unforeseen adverse events or delays and assuming that regulatory approvals are obtained. The C31G Phase 3 clinical trials are approximately 40% complete based on cost and patient enrollment.
Notes to Financial Statements (Continued)
The UC-781 and Cyanovirin-N development programs arewere at a much earlier stage than C31G. AdditionalSavvy. 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 willwere expected to be required to gain marketing acceptance.
The primary risk in completing the projects is the successful completion of the clinical testing and the regulatory review process. This process is time consuming and expensive, subject to significant challenges and risks before the products can be approved and commercialized. The Company must demonstrate product safety and efficacy to standards agreed to with regulatory authorities. Unsuccessful clinical results or delays in the approval process could have significant consequences, jeopardizing marketing launch of the product resulting in lower potential revenues and lowered economic returns.
Under the income approach, 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 C31G,Savvy, discount rates ranging from 34% - 37% were applied to cash flows with an additional approximateapproximately 52% probability applied to the cash flows representing, for purposes of this valuation, the estimated probability of the C31G Phase 3 trials beingsbeing successful and ultimately receiving FDA approval in the United States. These factors are commensurate with the overall risk and percent complete of the C31GSavvy program. Because of the earlier development stage of the UC-781 and Cyanovirin-N in-process programs, the primary valuation method used for these potential products was the current transaction approach. This uses management’s estimated value of the consideration paid for the acquisition.
Management has concluded that 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 statementconsolidated 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 the value of the purchased research and development was reduced by $2.0 million of the amount by which fair value of the net asset acquired exceeded the value of the acquisition consideration. The Company recorded a non-cashnon cash charge to operations in the fourth quarter of 2004 of $15.0 million for the purchased research and development.
Cellegy Pharmaceuticals, Inc.
(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 development stage company)
Notestool to Consolidated Financial Statements (Continued)
reduce the risk of HIV infection in people at high risk. The acquisitiondecision 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 completed on October 22,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 Biosyn’s results of operations subsequent to that date are includedcompleted planned enrollment with 2,152 women in the Company’s consolidated statements of operations. The Company has prepared unaudited pro forma financial information showing revenues and net loss for the combined entity for the years ended December 31, 2004 and 2003, respectively, as if the merger occurred as of the beginning of those periods. The following unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.
| | | Years Ended December 31, | |
| | | 2004 | | 2003 | |
| Revenues | | $ | 6,304,377 | | $ | 6,847,023 | |
| Net loss | | | (14,028,996 | ) | | (16,444,850 | ) |
| Basic and diluted net loss per common share | | $ | (0.64 | ) | $ | (0.73 | ) |
June 2006.
Cellegy
In December 2002, Cellegy entered into a license agreement, or the PDI Agreement, with PDI, Inc., or PDI, granting PDI the exclusive right to store, promote, sell and distribute Fortigel in North American markets. Cellegy received an upfront payment of $15.0 million on the effective date of December 31, 2002 with an additional $10.0 million payable no later than thirty days after the Company certifies to PDI that Fortigel has received all FDA approvals required to manufacture, sell and distribute the product in the United States. The Company recorded costs of $947,000 to selling, general and administrative expenses associated with an investment banking fee for the year ended December 31, 2002 related to the PDI Agreement. Under the PDI Agreement, the Company would also receive royalties each year until the expiration of the last patent right related to Fortigel of 20% - 30% of net sales and the Company would be reimbursed for 110% of burdened costs for any product supplied to PDI. In April 2005, pursuant to a settlement with PDI concerning litigation initiated in December of 2003, the companies terminated their agreement and all rights to Fortigel reverted back to Cellegy. See also Note 12.
In July 2004, Cellegy and ProStrakan entered into to an exclusive license agreement for the future commercialization of Tostrex® (testosterone gel) in Europe. Under the terms of the agreement, ProStrakan will bewas 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 couldwas 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.
Notes to receive milestones and royalties as set forth in the original agreement.Financial Statements (Continued)
In December 2004, Cellegy and ProStrakan entered into an exclusive license agreement for the commercialization of Cellegesic, branded Rectogesic outside of the United States, in Europe. Under the terms of the agreement, Cellegy received a non-refundablenonrefundable payment of $1.0 million and iswas entitled to receive an additional $4.6 million in milestone payments, along with additional payments based on sales of product to ProStrakan for distribution in Europe. ProStrakan will bewas responsible for additional regulatory filings, sales, marketing and distribution of Rectogesic throughout Europe. In all, the agreement covers 38covered thirty-eight (38) European territories, including all EU member states. Cellegy will bewas responsible for supplying finished product to ProStrakan through its contract manufacturer. In addition, ProStrakan has granted a right of first negotiation to Cellegy for its oral estradiol-glucoside product, which is currently in Phase 1 clinical development or an alternative product in the area of gastroenterology. The $1.0 million upfront fee received by the Company is beingwas recorded as deferred revenue to be amortized to income over 10ten (10) years, which representsrepresented the estimated life of the underlying patent.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
In November 2005, the Company amended its December 2004 agreement with ProStrakan concerning Rectogesic. Under the terms of the amended agreement, ProStrakan will assumeassumed 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 RectogesicTostrex directly from Cellegy’s contract manufacturer rather than purchasing the product from Cellegy under the terms of the original agreement. In return, Cellegy receivedwas 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 non-refundable paymentprepayment of $2.0 million and may receive futurethe milestone payments of up to $750,000due upon approval of the productRectogesic 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 $2.0Company recorded a gain on sale of technology of approximately $12,6 million payment is being amortized toas other income over the remaining estimated life of the underlying patent consideredwhich includes $9.0 million recognized in connection with the 2004 agreement.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 the entity that originally licensed the technology to Biosyn.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, Corporation(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 a warrant39,050 warrants to purchase Biosyn commonCellegy stock which converted into a Cellegy warrant in connection with the acquisition and isare 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.
Notes to Financial Statements (Continued)
In February 2003, Biosyn acquired exclusive worldwide rights from the National Institutes of Health or NIH,(“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 February 1,January 31, 2006, Cellegy announced that it had entered into a non-exclusive,nonexclusive, developing world licensing agreement with CONRADthe 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, clinical trials in the United StatesUC-781 and Africa; UC-781, currently in expanded Phase 1 trials in the United StatesCyanovirin-N. The agreement provided CONRAD with access to Biosyn’s current and Thailand; and Cyanovirin-N, currently in pre-clinical development.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. Under these other agreements, Biosyn is working in collaboration with various other parties. Should any discoveries be made under such arrangements, Biosyn may be required to negotiate the licensing of the technology for the development of the respective discoveries. There are no significant funding commitments under any of these other agreements.
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Common Stock Private Placements
In January 2004, the Company entered into a Structured Secondary Offering facility agreement with Kingsbridge Capital Limited (“Kingsbridge SSO”). Thethe Kingsbridge SSO, requireswhich 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 statementRegistration Statement with the SEC, which was subsequently amended and declared effective on June 1, 2004. The Kingsbridge SSO agreement doesdid not prohibit additional debt or equity financings, including Private Investment in Public Equity (“PIPEs”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 willwould not be able to conduct drawdowns on the Kingsbridge SSO. The timing and amount of any draw downs aredrawdowns 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 priceprices of the common stock will bewere at discounts ranging from 8% to 12% of the average market price of the common stock prior to each future draw down.drawdown. The lower discount appliesapplied to higher stock prices. In connection with the agreement, Cellegy issued warrants to Kingsbridge to purchase 260,000 common shares at an exercise price of $5.27 per share. Cellegy can,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 $0.8$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 approximately 3,621,819 shares of common stock. The Company also issued Class A Warrants to purchase approximately 714,362 shares of common stock at an exercise price of $2.25 per share. The Class A warrants can be called by the Company if the Company’s common stock trades for 20 consecutive days over $5.00. The Company also issued Class B Warrants to purchase approximately 714,362 shares of common stock at an exercise price of $2.50 per share. Class A and B Warrants can be called by the Company if the Company’s closing bid price of a share of Common Stockcommon 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 non-directornondirector investors was $1.65 per share. Pursuant to the transaction agreements, the Company has filed a registration statementRegistration Statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on July 8, 2005, covering the possible resale of the shares from time to time in the future.
PDI Senior Convertible Debenture
As more fully described in Note 8, “Notes Payable”, Cellegy issued a $3.5 million senoior convertible debenture to PDI in 2005 in connection with the settlement of its lawsuit with PDI. Cellegy may redeem the note at any time before the maturity date upon prior notice to PDI, at a redemption price equal to the principal amount. If Cellegy delivers such a redemption notice, PDI may convert the note into shares of Cellegy common stock at a price of $1.65 per share. In addition, after the 18th month anniversary of the debenture, PDI may convert the note into Cellegy common stock at a price of $1.65 per share. If Cellegy does not redeem the note within the first 18 months, then Cellegy has agreed to file a registration statement relating to the possible resale of any shares issued to PDI after 18 months. 2,121,212 shares would be issuable upon such conversion.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Delaware Reincorporation
In September 2004, the Company reincorporated in the stateState 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 NasdaqNASDAQ Listing Qualifications Panel transferring its stock listing to the NasdaqNASDAQ Small Cap Market. On December 29, 2005, Cellegy was delistedde-listed from the NasdaqNASDAQ Small Cap Market. The delisting resulted from the Company not satisfying the $35 million market capitalization requirement under NasdaqNASDAQ Marketplace Rule 4310(c)(2)(B)(ii). The Company also does not comply with alternative standards for continued listing on the Nasdaq Small Cap Market. The Company’s stock currently trades on the Over the CounterOver-the-Counter Bulletin Board.
Stock Option Plans
2005 Equity Incentive Plan
The Company’s Stockholdersstockholders 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 stockholderstockholders’ approval, except as required by applicable law. The 2005 Plan is not subject to the ERISA and is not qualified under Section 401(a) of the Code.
The 2005 Plan provides for the grantgranting of options and other awards to employees, directors and consultants. Options granted under the 2005 Plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted only to employees. The Compensation Committee determines who will receive options or other awards under the 2005 Plan and their terms, including the exercise price, number of shares subject to the option or award, and the vesting and exercisability thereof. Options granted under the 2005 Plan generally have a term of ten years from the grant date, and exercise price typically is equal to the closing price of the common stock on the grant date. Options typically vest over a three-year or four-year period. Options granted under the 2005 Plan typically expire if not exercised within 90 days from the date on which the optionee is no longer an employee, director or consultant. The vesting and exercisability of options may also be accelerated upon certain change of control events. As of December 31, 2005 there were outstanding2006, the future compensation expense to be recognized for unvested options to purchase 49,500 shares underis approximately $20,000 over the 2005 Plan and 950,500 shares were available for options or other awards under the 2005 Plan.remaining weighted average period of 1.75 years.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| | | Shares Under Option | | Weighted Average Exercise Price | |
| Beginning Balance | | - | | $ | - | | |
| Granted | | 49,500 | | | 1.34 | | |
| Canceled | | - | | | - | | |
| Exercised | | - | | | - | | |
| Balance at December 31, 2005 | | 49,500 | | | 1.34 | | |
| | | | | 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, 2005:2006:
| | | Options Outstanding | |
| Range of Exercise Prices | | Weighted Average Number of Options | | Weighted Average Remaining Contractual Life | | ExercisePrice | |
| $1.34 | | | 48,000 | | | 9.6 years | | $ | 1.34 | |
| $1.35 - $1.60 | | | 1,500 | | | 9.7 years | | | 1.39 | |
| Total | | | 49,500 | | | 9.7 years | | | 1.34 | |
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 no16,000 options vested and exercisable under the 2005 planPlan as of December 31, 2005.2006.
Prior Plan
The total number of shares reserved and available for issuance pursuant to the exercise of Awardsawards under the Prior Plan is 4,850,000 shares. The Prior Plan will continue to govern the stock options previously granted under the Prior Plan. However,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.
| | | Shares Under Option | | Weighted Average Exercise Price | |
| Balance at December 31, 2002 | | 3,962,492 | | | $4.83 | | |
| Granted | | 363,500 | | | 3.05 | | |
| Canceled | | (1,123,080 | ) | | 5.11 | | |
| Exercised | | (273,196 | ) | | 1.97 | | |
| Balance at December 31, 2003 | | 2,929,716 | | | 4.77 | | |
| Granted | | 35,000 | | | 4.47 | | |
| Canceled | | (29,900 | ) | | 3.73 | | |
| Exercised | | (133,174 | ) | | 2.10 | | |
| Balance at December 31, 2004 | | 2,801,642 | | | 4.90 | | |
| Granted | | 287,150 | | | 1.89 | | |
| Exercised | | (14,920 | ) | | 2.35 | | |
| Cancelled | | (835,135 | ) | | 4.54 | | |
| Balance at December 31, 2005 | | 2,238,737 | | | 4.67 | | |
| | | | | 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, 2005:2006:
F-31Options Outstanding | | Options Exercisable | |
| | Weighted | | | | | | | | Weighted | | | | | |
Weighted | | Average | | Weighted | | | | | | Average | | Weighted | | | |
Average | | Remaining | | Average | | Aggregate | | | | Remaining | | Average | | Aggregate | |
| | 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 | | $ | - | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | | | Weighted
Average
Number of
Options | | Weighted Average Remaining Contractual Life | | Exercise Price | | Number of Options | | Weighted Average Exercise Price | |
| $1.35 - $2.30 | | 618,952 | | | 5.4 years | | | $1.85 | | 361,802 | | | $1.80 | | |
| $2.89 - $4.00 | | 563,951 | | | 2.5 years | | | 3.50 | | 520,119 | | | 3.55 | | |
| $4.38 - $6.50 | | 506,000 | | | 1.7 years | | | 5.10 | | 489,125 | | | 5.12 | | |
| $7.00 - $8.93 | | 496,834 | | | 2.0 years | | | 7.97 | | 496,834 | | | 7.97 | | |
| $15.00 | | 53,000 | | | 2.2 years | | | 15.00 | | 53,000 | | | 15.00 | | |
| Total | | 2,238,737 | | | 3.0 years | | | 4.67 | | 1,920,880 | | | 5.08 | | |
At December 31, 2004 and 2003, options to purchase 2,801,642 shares of common stock with an average price of $4.90 and 2,173,078 shares of common stock with an average price of $4.77were vested and exercisable, respectively. No future options may be grantedoffered under the Prior Plan.
Directors’1995 Directors’ Stock Option Plan
In 1995, Cellegy adopted the 1995 Directors’ Stock Option Plan (the “Directors’ Plan”) to provide for the issuance of non-qualifiednonqualified 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.
Notes to Financial Statements (Continued)
The Directors’ Plan provides for the grant of initial and annual non-qualifiednonqualified 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:
| | | Shares Under Option | | Weighted Average Exercise Price | | | | | Weighted | |
| Balance at December 31, 2002 | | 292,500 | | | $4.61 | | | |
| | | Shares | | Average | |
| | | Under | | Exercise | |
| | | Option | | Price | |
| Balance at December 31, 2005 | | | | 307,500 | | $ | 4.74 | |
| Granted | | 60,000 | | | 5.00 | | | | | - | | | - | |
| Canceled | | (84,000 | ) | | 4.41 | | | | | (214,500 | ) | | (5.86 | ) |
| Balance at December 31, 2003 | | 268,500 | | | 4.75 | | | |
| Granted | | 48,000 | | | 4.30 | | | |
| Exercised | | (9,000 | ) | | 2.64 | | | | | - | | | - | |
| Balance at December 31, 2004 | | 307,500 | | | 4.74 | | | |
| Granted | | — | | | — | | | |
| Exercised | | — | | | — | | | |
| Balance at December 31, 2005 | | 307,500 | | | 4.74 | | | |
| Balance at December 31, 2006 | | | | 93,000 | | | 4.44 | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
The following table summarizes those stock options outstanding and exercisable related to the Directors’ Plan at December 31, 2005:2006:
Options Outstanding | | Options Exercisable | |
| | Weighted | | | | | | | | Weighted | | | | | |
Weighted | | Average | | Weighted | | | | | | Average | | Weighted | | | |
Average | | Remaining | | Average | | Aggregate | | Number | | Remaining | | Average | | Aggregate | |
| | 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 | | $ | - | |
| | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | | | | Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | |
| $1.34 - $3.25 | | 35,000 | | | 6.3 years | | | | $2.62 | | | 35,000 | | | $2.62 | | |
| $4.30 - $5.50 | | 254,500 | | | 3.7 years | | | | 4.90 | | | 218,500 | | | 4.98 | | |
| $6.50 - $8.50 | | 18,000 | | | 2.6 years | | | | 6.72 | | | 18,000 | | | 6.72 | | |
| Total | | 307,500 | | | 3.6 years | | | | 4.74 | | | 271,500 | | | 4.79 | | |
AtAs of December 31, 20042006 and 2003, options to purchase 307,500 shares of common stock with a weighted average exercise price of $4.74 and 251,167 shares of common stock with a weighted average exercise price of $4.79 were vested and exercisable, respectively. At December 31, 2005, there were no options available for future grants under the Directors’ Plan.
Non-PlanNonPlan Options
In November 2003, the Company granted an initial stock option to Mr. Richard Williams, on his appointment to become Chairman of the Board, to purchase 1,000,000 shares of common stock. 400,000 of the options have an exercise price equal toof $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, 2005,2006, 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. During 2005, 74,446Aggregate intrinsic value of options were exercised and 99,162 were cancelled. in 2006 was $1,804.
Notes to Financial Statements (Continued)
| | | | 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, 2005:
| | | Options Outstanding and Exercisable | |
Range of Exercise Prices | | | | Number of Options | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | |
| $0.06 | | 11,872 | | | 1.8 years | | | | $0.06 | | |
| $0.29 | | 20,233 | | | 7.6 years | | | | 0.29 | | |
| $1.46 - $6.83 | | 8,564 | | | 8.5 years | | | | 1.46 | | |
| $8.76 | | 3,855 | | | 6.1 years | | | | 8.76 | | |
| $14.60 - $21.02 | | 18,503 | | | 3.1 years | | | | 18.68 | | |
| Total | | 63,027 | | | 5.2 years | | | | 6.30 | | |
Cellegy Pharmaceuticals, Inc.
(a development stage company)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 | | $ | - | |
Notes to Consolidated Financial Statements (Continued)
Shares Reserved
As of December 31, 2005,2006, the Company has reserved shares of common stock for future issuance as follows:
| Biosyn options | | 63,027 | |
Director's Plan | | 307,500 | |
Warrants | | 2,374,593 | |
Non-plan options | | 1,000,000 | |
Neptune agreement | | 1,080,08239,229 | |
| Kingsbridge SSO | | | 3,493,601 | |
| Director's Plan | | | 93,000 | |
| Warrants | | | 2,374,593 | |
| Nonplan options | | | 1,000,000 | |
| 1995 Equity Incentive Plan | | 2,238,737 | 221,208 | |
| 2005 Equity Incentive Plan | | 950,500 | 952,000 | |
| Total | | 11,508,040 | 8,173,631 | |
Warrants
The Company has the following warrants outstanding to purchase common stock as of December 31, 2005:2006:
| | | | 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 | | | | | | | | | | |
| | | Warrant Shares | | Exercise Price Per Share | | Date Issued | | Expiration Date | |
| June 2004 PIPE Financing | | | 604,000 | | $ | 4.62 | | | July 27, 2004 | | | July 27, 2009 | |
| Biosyn warrants | | | 81,869 | | | 5.84 - 17.52 | | | Oct. 22, 2004 | | | 2006 - 2014 | |
| Kingsbridge SSO | | | 260,000 | | | 5.27 | | | Jan. 16, 2004 | | | Jan. 16, 2009 | |
| May 2005 PIPE Financing | | | | | | | | | | | | | |
| Series A | | | 714,362 | | | 2.25 | | | May 13, 2005 | | | May 13, 2010 | |
| Series B | | | 714,362 | | | 2.50 | | | May 13, 2005 | | | May 13, 2010 | |
| Total | | | 2,374,593 | | | | | | | | | | |
Non-CashNon Cash Compensation Expense Related to Stock Options
For the year ended December 31, 2005, 2004 and 2003, The2006, the Company recorded $651,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 $579,000,$39,000 were charged to SG&A and R&D expenses, respectively.
Notes to Financial Statements (Continued)
At December 31, 20052006, the Company had net operating loss carryforwards of approximately $87.9$89.3 million and $44.2$45.7 million for federal and state purposes, respectively. The federal net operating loss carryforwards expire between the years 20062007 and 2025.2026. The state net operating loss carryforwards expire between the years 20062007 and 2015.2016. At December 31, 2005,2006, the Company also had research and development credit carryforwards of approximately $2.9$2.8 million and $1.5$1.4 million for federal and state purposes, respectively. The federal credits expire between the years 20062007 and 20252026 and the state credits do not expire. The Tax Reform Act of 1986 (the Act)“Act”) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s ability to utilize these carryforwards. The Company may havemost 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 Federalfederal 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 20052006 and 20042005, not available to be recorded as a benefit due to the exercise of non-qualifiednonqualified employee stock options is approximately $643,000 and $599,000, respectively.$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 appliedapplied: (a) first to reduce to zero any goodwill related to the acquisition, (b) second to reduce to zero other noncurrentnon-current intangible assets related to the acquisition, and (c) third to reduce income tax expense. The future tax benefit of the Bisosyn pre-acquisisitonBiosyn pre-acquisition net operating losses, tax credits, and other deductible temporary differences, when they are ultiimately recgonized,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 | | $ | - | | $ | - | |
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
| | | December 31, | |
| | | 2005 | | 2004 | |
| Deferred tax assets: | | | | | |
| Net operating loss carryforwards | | $ | 31,400 | | $ | 35,700 | |
| Deferred revenue | | | 3,000 | | | 6,000 | |
| Credit carryforwards | | | 3,800 | | | 3,600 | |
| Capitalized research and development | | | 10,100 | | | 2,100 | |
| Depreciation and amortization | | | 1,400 | | | 2,000 | |
| Intangible assets | | | (100 | ) | | (300 | ) |
| Other, net | | | 400 | | | 1,100 | |
| Total deferred tax assets | | | 50,000 | | | 50,200 | |
| Valuation allowance | | | (50,000 | ) | | (50,200 | ) |
| Net deferred tax assets | | $ | — | | $ | — | |
Reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate (dollars in thousands):
| | | 2005 | | 2004 | |
| | | | | | | | | | |
| Net loss | | $ | (5,008 | ) | | | | $ | (28,154 | ) | | | |
| Tax at Federal statutory rate | | | (1,703 | ) | | 34.0 | % | | (9,572 | ) | | 34.0 | % |
| Meals and entertainment | | | 8 | | | -0.1 | % | | 9 | | | -0.1 | % |
| Stock compensation expense | | | 38 | | | -0.8 | % | | (240 | ) | | 0.1 | % |
| Purchased research and development | | | — | | | | % | | 5,349 | | | -19.0 | % |
| Research credits | | | (15 | ) | | 0.3 | % | | (121 | ) | | 0.4 | % |
| Deferred taxes not benefited | | | 1,672 | | | -33.4 | % | | 4,575 | | | -16.2 | % |
| Provision for taxes | | $ | — | | | | % | $ | — | | | | % |
| | | 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, and increased in 2004 by approximately $14.0 million.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 the Summary of Significant Accounting Policies (Footnote(Note 1).
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Revenues from external sources by major geographic area are as follows:
| | | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
Revenues | | Years ended December 31, | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| North America | | | | | | | | | | | | | | | | | |
| Pharmaceuticals | | $ | 11,758,235 | | $ | 1,840,840 | | $ | 919,513 | | | $ | 1,925,779 | | $ | 11,758,236 | | $ | 1,840,840 | |
| Skin care | | | — | | | 181,386 | | | 316,000 | | | | - | | | - | | | 181,386 | |
| Europe | | | | | | | | | | | | | | | | | | | | |
| Pharmaceuticals | | | 440,477 | | | 10,704 | | | — | | | | 734,279 | | | 440,477 | | | 10,704 | |
| Skin care | | | — | | | — | | | — | | |
| Australia & Pacific Rim | | | | | | | | | | | |
| Pharmaceuticals | | | 636,632 | | | 563,447 | | | 384,985 | | |
| Skin care | | | — | | | — | | | — | | |
| | | $ | 12,835,345 | | $ | 2,596,377 | | $ | 1,620,498 | | | | | | | | | | | |
| 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% and 20% of total revenue fromin 2005 and 2004, and 2003 respectively.
OperatingNet operating income (loss) from continuing operations by geographic region is as follows:
| | | | Years Ended December 31 | |
| | | 2006 | | 2005 | | 2004 | |
Operating Income (Loss) | | Years ended December 31, | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | |
| North America | | | | | | | | | | | | | | | | | |
| Pharmaceuticals | | $ | (4,912,541 | ) | $ | (25,689,094 | ) | $ | (10,125,038 | ) | | $ | 9,119,113 | | $ | (4,912,541 | ) | $ | (25,689,095 | ) |
| Skin care | | | — | | | (2,531,258 | ) | | (3,479,572 | ) | | | - | | | - | | | (2,531,258 | ) |
| Europe | | | | | | | | | | | | | | | | | | | | |
| Pharmaceuticals | | | (184,803 | ) | | (149,375 | ) | | — | | | | 227,082 | | | (184,803 | ) | | (149,375 | ) |
| Skin care | | | — | | | — | | | — | | |
| Australia & Pacific Rim | | | | | | | | | | | |
| Pharmaceuticals | | | 89,705 | | | 215,666 | | | 72,462 | | |
| Skin care | | | — | | | — | | | — | | |
| | | $ | (5,007,639 | ) | $ | (28,154,061 | ) | $ | (13,532,148 | ) | | | | | | | | | | |
| Net income (loss) from continuing operations | | | $ | 9,346,195 | | $ | (5,097,344 | ) | $ | (28,369,728 | ) |
(a development stage company)
Notes to Consolidated Financial Statements (Continued)
Assets by major geographic region are as follows:
| | | | December 31, | |
Assets | | Years ended December 31, | | | 2006 | | 2005 | | 2004 | |
| North America | | | $ | 4,145,177 | | $ | 5,217,480 | | $ | 12,532,030 | |
| Pacific Rim | | | | - | | | 1,232,503 | | | 1,331,295 | |
| | | 2005 | | 2004 | | 2003 | | | | | | | | | | | |
| North America | | $ | 4,957,406 | | $ | 12,532,030 | | $ | 15,151,186 | | |
| Australia & Pacific Rim | | | 1,232,502 | | | 1,331,295 | | | 179,621 | | |
| | | $ | 6,189,908 | | $ | 13,863,325 | | $ | 15,330,807 | | |
| Total assets | | | $ | 4,145,177 | | $ | 6,449,983 | | $ | 13,863,325 | |
19.Related Party Transactions
The Company pays fees to theirits board members for their 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 2003 were $75,500, $180,703, and $103,000, respectively. In mid 2005, at the request of the directors, the Company deferred the payment of board fees.
There were no consulting fees paid in cash to any board members in 2005, 2004 and 2003. The Company recognized $131,000 in non-cash compensation expense during 2003 associated with the valuation of vested stock options previously issued under a consulting agreement to a former board member.
Three directors, Messrs. Adams, Rothermel and Williams purchased a total of 50,000 shares in connection with the May 2005, PIPE financing at the closing market price of the common stock on the date of the transaction.
On March 24,April 11, 2006, the Company announced that its European marketing partner, ProStrakan had successfully completed the European Union Mutual Recognition Procedure for Rectogesic. Following the successful conclusionEpsilon purchased all of the MRP process, national licenses will be issued in due course inshares of Cellegy Australia. The subsidiary was part of the 19 additional countries (in additionPharmaceutical Segment for the Australian and Pacific Rim geographic areas. The purchase price for the shares was $1.0 million plus amounts equal to the United Kingdom, where approvals have previously been obtained)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 MRP submission application. 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 entitledreflected in other income. There was no income tax effect to receive $250,000this 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 each marketing regulatory approval obtainedthe disposal group through the date of disposition and recognize the subsidiary's foreign currency translation balance as income in the firstcurrent period pursuant to SFAS No. 52, Foreign Currency Translation. Below is a summary of any three countries out of France, Italy, Germany or Spain up to a maximum total amount payable of $750,000. Under Cellegy’s previous agreements with PDI, Inc., PDI is entitled to receive one-half of these payments.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 | |
Notes to Financial Statements (Continued)
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 | |
| | | 2005 | | | First | | Second | | Third | | Fourth | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | | Quarter | | Quarter | | Quarter | | Quarter | |
| Revenues | | $ | 1,606 | | $ | 7,749 | | $ | 1,952 | | $ | 1,528 | | | $ | 1,236 | | $ | 1,227 | | $ | 172 | | $ | 25 | |
| Operating income (loss) | | | (5,210 | ) | | 4,947 | | | (2,676 | ) | | (2,340 | ) | |
| Net Income (loss) | | | (5,086 | ) | | 4,835 | | | (2,793 | ) | | (1,964 | ) | |
| 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 | | | (0.19 | ) | | 0.17 | | | (0.09 | ) | | (0.08 | ) | | | (0.08 | ) | | (0.04 | ) | | (0.05 | ) | | 0.50 | |
| Diluted net income (loss) per common share | | | (0.19 | ) | | 0.16 | | | (0.09 | ) | | (0.08 | ) | | | (0.08 | ) | | (0.04 | ) | | (0.05 | ) | | 0.50 | |
| | | 2004 | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| Revenues | | $ | 338 | | $ | 430 | | $ | 483 | | $ | 1,345 | |
Operating loss1 | | | (3,245 | ) | | (2,837 | ) | | (3,194 | ) | | (19,498 | ) |
Net loss1 | | | (3,058 | ) | | (2,708 | ) | | (3,143 | ) | | (19,245 | ) |
| Basic and diluted net loss per common share | | | (0.15 | ) | | (0.13 | ) | | (0.14 | ) | | (0.76 | ) |
| | 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 | ) |
1Includes a charge of $14,982,000 for acquired in-process technology relating to the Biosyn acquisition in October 2004.