The calculation of basic and diluted loss per common and common equivalent share is as follows:
| | | Six Months Ended | | | Three Months Ended | |
| | | June 30, | | | June 30, | |
| | | | | | Restated | | | | | | Restated | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (8,574,967 | ) | | $ | (7,125,351 | ) | | $ | (4,326,171 | ) | | $ | (3,589,375 | ) |
| Less: Preferred stock dividends | | | (28,124 | ) | | | (48,770 | ) | | | (14,062 | ) | | | (14,707 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss applicable to | | | | | | | | | | | | | | | | |
| Common Stock | | $ | (8,603,091 | ) | | $ | (7,174,121 | ) | | $ | (4,340,233 | ) | | $ | (3,604,082 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted: | | | | | | | | | | | | | | | | |
| Weighted average number of | | | | | | | | | | | | | | | | |
| common shares outstanding | | | 52,083,106 | | | | 50,713,299 | | | | 52,127,332 | | | | 51,342,528 | |
| | | | | | | | | | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (0.17 | ) | | $ | (0.14 | ) | | $ | (0.08 | ) | | $ | (0.07 | ) |
| | | | | | | | | | | | | | | | | |
Basic loss per share is computed by dividing the net loss plus preferred dividends by the weighted-average number of shares of Common Stock outstanding during the period. Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the convertible notes and preferred stock are not included in the computation of diluted loss per share as their effect is anti-dilutive. Shares to be issued upon the exercise of the outstanding options and warrants or the conversion of the convertible notes and preferred stock excluded from the calculation amounted to 20,695,989 and 21,506,406 at June 30, 2008 and June 30, 2007, respectively.
(9) LEGAL PROCEEDINGS:
Claims and lawsuits have been filed against the Company from time to time. Although the results of pending claims are always uncertain, the Company does not believe the results of any such actions, individually or in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations. Additionally, the Company believes that it has reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance in the event of any unfavorable outcome resulting from these actions.
In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of the patents underlying the Company’s bioadhesive delivery system (“BDS”), other patent applications, and related technology, the Company agreed to pay Bio-Mimetics a royalty equal to two percent of the net sales of products based on the assets up to an aggregate of $7.5 million or until the last of the relevant patents expired. The Company determined that royalty payments on STRIANT®, PROCHIEVE®, and CRINONE® terminated in September of 2006, with the expiration of a certain Canadian patent, but continue on Replens® and RepHresh®. On December 28, 2007, Bio-Mimetics filed a complaint in the United States District Court for Massachusetts (Bio-Mimetics, Inc. v. Columbia Laboratories, Inc.) alleging breach of contract, violation of the covenant of good faith and fair dealing, and unjust enrichment for the Company’s failure to continue royalty payments on STRIANT®, PROCHIEVE®, and CRINONE®. The Company intends to defend this action vigorously.
(10) STOCK-BASED COMPENSATION:
As a result of the adoption of SFAS No. 123R, the Company’s net loss for the three months ended June 30, 2008 and June 30, 2007 include $0.4 million and $0.3 million, respectively, of compensation expense and for the six months ended June 30, 2008 and 2007; the compensation expense was $0.7 million and $1.0 million, respectively. The compensation expense related to all the Company’s stock-based compensation arrangements and is recorded as $0.0 million and $0.1 million in cost of revenues, $0.1 million and $0.2 million in selling and distribution, $0.5 million and $0.6 million in general and administrative, and $0.1 million and $0.1 million in research and development expenses for the six months ended June 30, 2008 and 2007, respectively. The Company granted options and restricted stock to employees, consultants and directors. During the six months ended June 30, 2008 the Company granted options and restricted stock awards of 1,061,900 and 151,720 respectively. During the six months ended June 30, 2008, 813,146 options expired unexercised (most of which were previously issued in 1998) or were forfeited.
(11) RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2008, the Financial Accounting Standards Board (“FASB”) issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 “(“EITF No. 08-4”)”. The objective of EITF No. 08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The Company is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.
In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement”). (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of FSP APB 14-1 on the Company’s financial condition and results of operations.
In March of 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” – An Amendment of FASB’s Statement No. 133, which expands the disclosure requirements in Statement 133 about an entity’s derivative instruments and hedging activities. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact that adopting SFAS No. 161 will have on its financial position, cash flows, and statements of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 and FSP 157-b are generally effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The effective date of SFAS No. 157 for certain non-financial assets and liabilities is fiscal years beginning after November 15, 2008 and for interim periods within those years. The adoption of SFAS No. 157 on January 1, 2008 did not have a material impact on our financial statement.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). 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. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not have a material impact on our financial statements.
In December 2007, the FASB also issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141(R) will impact the Company in the event of any future acquisition.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – An Amendment to ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the Consolidated Financial Statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact that adoption of SFAS No. 160 will have on its financial position, cash flows or results of operations.
(12) SUBSEQUENT EVENTS:
Ardana Bioscience Ltd. (“Ardana”) announced on June 30, 2008 that it suspended trading in its shares, was no longer in a position to continue its operations, and had appointed administrators of the company. On July 24, 2008, the Company terminated the license and supply agreement dated October 16, 2002 (the “STRIANT Agreement”) with Ardana, pursuant to which Ardana was to market, distribute and sell STRIANT® (testosterone buccal system) in 18 European countries (excluding Italy) as necessary governmental product and pricing approvals were obtained. Prior to termination Ardana had marketed and sold STRIANT® in the United Kingdom itself, and sold STRIANT® in Ireland, Germany, Sweden, Finland, Norway, Denmark, and the Netherlands through other distributors. Company sales to Ardana and its distribution network during the past 18 months were less than $60,000. The Company is reaching out to Ardana’s distributors directly to maintain the supply of product, and is seeking a new distributor in the United Kingdom. The Company has deferred income of $2.9 million as of June 30, 2008 relating to the STRIANT Agreement. During the third quarter of 2008, the Company expects to reflect this amount into its income.
On July 24, 2008, the Company also terminated a development and license agreement dated December 26, 2002 (the “Terbutaline Agreement”) with Ardana to develop the Company’s terbutaline vaginal gel product candidate for the treatment of infertility, dysmenorrhea and endometriosis. In 2007, Ardana suspended development of the product candidate as a result of slow recruitment in a proof of concept clinical trial.
The Company terminated the STRIANT Agreement and the Terbutaline Agreement pursuant to its rights under each agreement to terminate them in the event of the insolvency of Ardana. No early termination penalties were incurred by the Company.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto.
We receive revenues from our Progesterone Products that we either promote through our own sales force to reproductive endocrinologists, obstetricians, and gynecologists, and sell to wholesalers and specialty pharmacies, or sell to licensees. We supplement our Progesterone Product revenue by selling other products that use our BDS which we refer to as “Other Products.” Most of the Other Product revenue is based on sales of products to licensees.
| | | Products for Fiscal 2008 |
| | | |
| Progesterone Products | | CRINONE ® 8% (progesterone gel) marketed by the Company in the U.S. CRINONE ® 8% sold to Merck Serono for foreign markets PROCHIEVE ® 8% (progesterone gel) marketed by the Company in the U.S. PROCHIEVE ® 4% sold to Ascend Therapeutics, Inc. for the U.S. market |
| | | |
| Other Products | | STRIANT® (testosterone buccal system) marketed by the Company in the U.S. STRIANT® sold to our partners for foreign markets Replens® Vaginal Moisturizer sold to Lil’ Drug Store Products, Inc (“Lil’ Drug Store”) for foreign markets RepHresh® Vaginal Gel sold to Lil’ Drug Store on a worldwide basis Royalty and licensing revenues |
All of our products are manufactured in Europe by third parties on behalf of our foreign subsidiaries who sell the products to our worldwide licensees, and to the Company in the case of the products we commercialize ourselves in the United States. Because our European revenues reflect these sales and are reduced only by our product manufacturing costs, we have historically shown a profit from our European operations.
Revenues from our United States operations principally relate to the Company’s products that we promote to physicians through our sales representatives, as well as royalty income from products that we have licensed. The Company charges our United States operations all Selling and Distribution expenses that support our marketing, sales and distribution efforts. Research and Development expenses are charged to our United States operations for product development which principally supports new products and new label indications for products to be sold in this country. In addition, the majority of our General and Administrative expenses represent the Company’s management activities as a public company and are charged to our United States operations. The amortization of the repurchase of the U.S. rights to CRINONE ® is also charged to our United States operations. As a result, we have historically shown a loss from our United States operations which has been significantly greater than, and offsets, the profits from our European operations.
Our net loss for 2007 was $14.3 million, or $0.28 per basic and diluted common share. We expect to continue to incur operating losses in the near future because of the significant non-cash items related to the CRINONE® acquisition, continuing research and development activities, selling and distribution costs, and debt service. Our sales and distribution expenses will be higher in 2008 to fund market research critical to our growth strategy. In 2008, we expect that our research and development expenses will be higher than those in 2007 as we focus on medical education programs, the clinical development of vaginal lidocaine for dysmenorrhea and complete the clinical trial for PROCHIEVE 8% to reduce the risk of preterm birth in women with a short cervix as measured by transvaginal ultra sound at mid-pregnancy. This study is referred as the PREGNANT (PRochieve Extending GestatioN A New Therapy) Study.
Net revenues increased 31% in the six months ended June 30, 2008 to $18.3 million as compared to $14.0 million in the six months ended June 30, 2007.
Revenues from Progesterone Products increased 41% in the six months ended June 30, 2008, to $12.7 million as compared to $9.0 million in the six months ended June 30, 2007, primarily as a result of increased sales of PROCHIEVE in the U.S. and CRINONE sales in foreign markets. This growth is primarily from increases in unit volume. Revenues from Other Products increased 13% to $5.6 million in the six months ended June 30, 2008, as compared to $5.0 million in the six months ended June 30, 2007, primarily as a result of increases in orders of Replens and sales of STRIANT.
Gross profit as a percentage of revenues was 68% in the six months ended June 30, 2008 and 65% in the six months ended June 30, 2007. The three percentage point increase in gross profit percentage from 2007 to 2008 was the result of a change in sales mix toward the CRINONE higher margin products. Other Products have a significantly lower gross margin than the Progesterone Products.
Selling and distribution expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, market research, market data capture, promotions, tradeshows, seminars, other marketing-related programs and distribution costs. Selling and distribution expenses increased 62% to $6.6 million in the six months ended June 30, 2008, as compared to $4.1 million in the six months ended June 30, 2007. For the six months ended June 30, 2008, sales force and management costs increased to $3.8 million compared with $2.3 million for the same period in 2007 primarily due to an increase in the sales force to 32 persons in June 2008 from 20 persons in June 2007. Market research costs in the six months of 2008 increased to $2.2 million compared with $1.6 million for the same period in 2007 primarily due to market research and marketing expenses to aid the Company in promoting CRINONE.
General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. General and administrative expenses increased 17% to $4.5 million in the six months ended June 30, 2008 as compared to $3.9 million in the six months ended June 30, 2007. The increase in first half 2008 expenses is a combination of an increase in professional fees of $0.4 million and personnel related costs of $0.1 million over the prior year period.
Research and development expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with product development, as well as the cost of conducting and administering clinical studies and the cost of regulatory filings for our products. Research and development expenses increased 50% to $3.5 million in the six months ended June 30, 2008, as compared to $2.4 million in the six months ended June 30, 2007. The increase is primarily related to the enrolling of patients in the lidocaine study in 2008 of $0.4 million. In addition in 2008 there were start-up costs for the Company’s Phase III PREGNANT Study of $0.3 million in the six months ended June 30, 2008. The Company has contracted with medical science liaisons to consult with thought leaders and doctors about the use of progesterone. These services and other consultants increased by $0.3 million.
The Company purchased the marketing rights for U.S. sales of CRINONE ® 8% from Merck Serono in December 2006 for $33 million. In the second quarter of 2007, the Company recognized a $1 million adjustment to the purchase price to reflect contingent liabilities for Merck Serono sales returns. The $33 million charge is being amortized over 6.75 years, and the $1 million charge is being amortized over 6.5 years. Amortization of the acquisition cost for the CRINONE U.S. marketing rights for the six months ended June 30, 2008 and June 30, 2007 was $2.5 million.
Other income/(expense) for the six months ended June 30, 2008 consisted primarily of interest expense of $3.9 million associated with the $40 million convertible notes and the financing agreements with PharmaBio. Interest expense for the six months ended June 30, 2007 was $3.9 million (restated).
As a result, the net loss for the six months ended June 30, 2008 was $8.6 million or $0.17 per share as compared to the net loss for the six months ended June 30, 2007 of $7.1 million or $0.14 per share (restated).
Results of Operations - Three Months Ended June 30, 2008 versus Three Months Ended June 30, 2007 (Restated)
Net revenues increased 27% in the three months ended June 30, 2008, to $9.3 million, as compared to $7.3 million in the three months ended June 30, 2007.
Revenues from Progesterone Products increased 59%, to $6.8 million, in the three months ended June 30, 2008, as compared to $4.3 million in the three months ended June 30, 2007, primarily as a result of the increase in Crinone sales to foreign and domestic markets, and Prochieve 4% (marketed by Ascend Therapeutics). Revenues from Other Products decreased 18% to $2.5 million in the three months ended June 30, 2008, as compared to $3.0 million in the three months ended June 30, 2007, due to the timing of RepHresh orders by Lil’ Drug Stores.
Gross profit as a percentage of revenues was 68% in the three months ended June 30, 2008, and 62% in the three months ended June 30, 2007. The six percentage point increase in gross profit percentage from 2007 to 2008 was the result of a change in product mix to the higher margin foreign and US CRINONE sales.
Selling and distribution expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with sales and marketing personnel, and advertising, market research, market data capture, promotions, tradeshows, seminars, other marketing-related programs and distribution information service fees. Selling and distribution expenses increased 54% to $3.3 million in the three months ended June 30, 2008, as compared to $2.2 million in the three months ended June 30, 2007. In the three months ended June 30, 2008, sales force and management costs were $2.0 million compared to $1.2 million in the three months ended June 30, 2007. Market research costs for the three months ended June 30, 2008 and 2007 were $1.0 million and $0.9 million, respectively. Other sales and marketing costs were approximately $0.3 million in 2008 and $0.1 million in 2007. The primary reasons for the increase were
expansion of the sales force from 20 to 32 representatives and market research expenses to aid the Company in promoting CRINONE 8%. Additional expenses included an increase in distributor services fees.
General and administrative expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with the finance, legal, regulatory affairs, information technology, facilities, certain human resources and other administrative personnel, as well as legal costs and other administrative fees. General and administrative expenses increased 27% to $2.4 million in the three months ended June 30, 2008, as compared to $1.9 million in the three months ended June 30, 2007. The key expense increases were in professional fees of $0.3 million and personnel related costs of $0.1 million.
Research and development expenses include payroll, employee benefits, equity compensation and other personnel-related costs associated with product development, as well as the cost of conducting and administering clinical studies and the cost of regulatory filings for our products. Research and development expenses increased 68%, to $1.7 million, in the three months ended June 30, 2008, as compared to $1.0 million in the three months ended June 30, 2007. The increase is primarily related to the PREGNANT study start-up expense of $0.3 million and the addition of medical science liaison professionals expense of $0.3 million.
The Company purchased the marketing rights for U.S. sales of CRINONE ® 8% from Merck Serono in December 2006 for $33 million. In the second quarter of 2007, the Company recognized a $1 million adjustment to the purchase price to reflect contingent liabilities for Merck Serono sales returns. The $33 million charge is being amortized over 6.75 years, and the $1 million charge is being amortized over 6.5 years. Amortization expense of the acquisition cost for the CRINONE U.S. marketing rights for the three months ended June 30, 2008 was $1.3 million compared to $1.3 million for the comparable period in 2007.
Other income/expense for the quarter ended June 30, 2008, consisted primarily of interest expense of $2.0 million associated with the $40 million convertible notes financing completed in December 2006 and the financing agreements with PharmaBio. Interest expense for the quarter ended June 30, 2007 was $2.0 million (restated).
As a result, the net loss for the three months ended June 30, 2008, was $4.3 million, or $0.08 per share as compared to the net loss for the three months ended June 30, 2007 of $3.6 million, or $0.07 per share of common stock (restated).
Liquidity and Capital Resources
Cash and cash equivalents were $10.6 and $17.2 million at June 30, 2008 and June 30, 2007, respectively. The Company believes the approximately $11 million of cash on hand at June 30, 2008 is sufficient to sustain operations.
Cash provided by (used in) operating, investing and financing activities is summarized as follows:
| | | Six Months Ended | |
| | | June 30, | |
| | | | | | Restated | |
| | | 2008 | | | 2007 | |
| Cash flows: | | | | | | |
| Operating activities | | $ | (3,302,521 | ) | | $ | (5,227,192 | ) |
| Investing activities | | | (147,809 | ) | | | (1,497 | ) |
| Financing activities | | | (3,210,655 | ) | | | (50,670 | ) |
Operating Activities:
Net cash used in operating activities for the six month period ended June 30, 2008 resulted primarily from $2.1 million net operating losses after applying non-cash charges and an increase in working capital of $1.2 million. The net loss of $8.6 million in 2008 included non-cash items for depreciation, amortization, stock-based compensation, provision for sales returns and non-cash interest expense, which total $6.5 million in aggregate, leaving a net cash loss, net of non-cash items, of $2.1 million for the 2008 period. Accounts receivable increased by $0.5 million as a result of increased sales. Inventories increased by $0.7 million during the period to cover anticipated summer shut downs of key suppliers. Accounts payable increased by $1.0 million and accrued expenses decreased by $1.2 million. The increase in accounts payable is due primarily to higher inventory levels, and increased expenses for the clinical trials. The reduction in accrued expenses of $1.2 million related to the combination of bonuses and distributor service fees paid during the period and realized sales returns.
Net cash used in operating activities for the six months ended June 30, 2007 resulted primarily from increases in working capital. The net loss of $7.1 million included non-cash items for depreciation, amortization, stock-based compensation, provision for sales returns and non-cash interest expense, which totals $6.0 million in aggregate, leaving a net cash loss, net of non-cash items, of $1.1 million for the six months ended June 30, 2007. Accounts receivable increased by $1.9 million as a result of the increased sales during the 2007 six month period. Inventories also grew by $0.1 million during the period to cover CRINONE and STRIANT demands. Accounts payable and accrued expenses decreased by $0.5 million and $1.7 million, respectively. The reduction in accrued expenses related to additional royalty payments of $0.5 million, bonuses in the amount of $0.3 million, sales returns of $0.3 million, and miscellaneous expenses and interest.
Investing activities:
Net cash used in investing activities of $0.1 million in the six months ended June 30, 2008 was primarily attributable to the purchase of production equipment. There were no significant expenses in the six months ended June 30, 2007.
Financing Activities:
Net cash used in financing activities in the six months ended June 30, 2008 was $3.2 million, of which $3.5 million represented the final payment to PharmaBio and dividends on the Company’s contingently redeemable Series C Preferred Stock and the purchase of treasury stock partially offset by proceeds from the exercise of options. The principal and interest payment for PharmaBio represented $3.5 million of the $6.6 million use of cash for the period.
Net cash used in financing activities in the six months ended June 30, 2007 of $0.1 million was attributable to dividends on the Company’s Series C Preferred Stock and the exercise of stock options.
The Company has an effective registration statement that we filed with the SEC using a shelf registration process. Under the shelf registration process, we may offer from time to time shares of our Common Stock up to an aggregate amount of $75 million. To date, the Company has sold approximately $56.4 million in Common Stock under the registration statement. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the marketing of one or more of our products and/or the development and/or commercialization of one or more product candidates.
In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of certain patents underlying the Company’s BDS, other patent applications and related technology, the Company pays Bio-Mimetics, Inc. a royalty equal to two percent (2%) of the net sales of products based on the assets purchased from Bio-Mimetics, Inc., up to an aggregate of $7.5 million or until the last of the relevant patents expire. The Company is required to prepay 25% of the remaining maximum royalty obligation, in cash or stock at the option of the Company, within 30 days of March 2 of any year in which the closing price on that date of the Company’s Common Stock on any national securities exchange is $20 or more. Through June 30, 2008, the Company has paid approximately $3.7 million in royalty payments to Bio-Mimetics. Due to expiration in September 2006 of certain patents purchased from Bio-Mimetics, Inc., royalties to Bio-Mimetics, Inc. are no longer due on CRINONE®, PROCHIEVE®, or STRIANT®.
As of June 30, 2008, the Company had outstanding exercisable options and warrants that, if exercised, would result in approximately $43.6 million of additional capital and would cause the number of shares of Common Stock outstanding to increase. Options and warrants outstanding at June 30, 2008 are 4,915,604 and 4,867,755, respectively, with average exercise prices of $3.25 and $5.67, respectively. However, there can be no assurance that any such options or warrants will be exercised.
The Company anticipates that significant expenditures in the near future will be concentrated on research and development related to new products and new indications for currently approved products.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements
Except for the termination of the STRIANT Agreement and Terbutaline Agreement with Ardana (see note 12 to the unaudited condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q), the Company’s contractual obligations, commercial commitments and off-balance sheet arrangement disclosures in its Annual Report on Form 10-K for the year ended December 31, 2007, have not materially changed since that report was filed.
Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (“FASB”) issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No. 08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. The Company is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.
In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of FSP APB 14-1 on the Company’s financial condition and results of operations.
In March of 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” – An Amendment of FASB Statement No. 133, which expands the disclosure requirements in Statement 133 about an entity’s derivative instruments and hedging activities. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact that adopting SFAS No. 161 will have on its financial position, cash flows, and statements of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 and FSP 157-b are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As proposed the effective date of SFAS No. 157 would be deferred to Fiscal years beginning after November 15, 2008 and for interim periods within those years for certain non-financial assets and liabilities. The Company is currently evaluating the impact that adopting SFAS No. 157 will have on its financial position, cash flows, or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). 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. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not have a material impact on our financial statements.
In December 2007, the FASB also issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141(R) will impact the Company in the event of any future acquisition.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – An Amendment to ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the Consolidated Financial Statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the impact that adoption of SFAS No. 160 will have on its financial position, cash flows or results of operations.
Critical Accounting Policies and Estimates
The Company has identified the policies below as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 1 of the consolidated financial statements included in Item 15 of the Annual Report on Form 10-K for the year ended December 31, 2007, beginning on page F-12. Note that the preparation of this Quarterly Report on Form 10-Q requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Revenue Recognition. The Company’s revenue recognition is significant because revenue is a key component of our results of operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter. Revenues from the sale of products are recorded at the time goods are shipped to customers. Provisions for returns, rebates and other allowances are estimated based on a percentage of sales, using such factors as historical trends, distributor inventory levels and product prescription data, and are recorded in the same period the related sales are recognized. The Company regularly evaluates its product return reserves based on the actual experience and adjusts its reserve to reflect the market circumstances which have changed. Royalties and additional monies owed to the Company based on the strategic alliance partners’ sales are recorded as revenue as those sales are made by the strategic alliance partners. License fees are recognized in net sales over the term of the license.
Accounting for PharmaBio Agreements. In July 2002 and March 2003, the Company entered into agreements with PharmaBio under which the Company received upfront money paid in quarterly installments in exchange for royalty payments on certain of the Company’s products to be paid to PharmaBio for a fixed period of time. The royalty payments are subject to minimum and maximum amounts. Because the minimum amounts are in excess of the amount to be received by the Company, the Company has recorded the money received as liabilities. The excess of the minimum to be paid by the Company over the amount received by the Company is being recorded as interest expense over the terms of the agreements. The Company has corrected previously reported interest expense for these financing arrangements for overstatement in each of the quarters of 2007. See Notes 2 and 11 to the Company’s financial statements included in Item 15 of the 2007 Annual Report on Form 10-K for the year ended December 31, 2007. The July 2002 agreement terminated at December 31, 2007 pursuant to its terms.
Stock-Based Compensation – Employee Stock-Based Awards. Commencing January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”), which requires all share based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”) providing supplemental implementation guidance for SFAS 123(R). The Company has applied the provisions of SAB 110 in its adoption of SFAS 123(R).
| | 6 months ended June 30, 2008 | 6 months ended June 30, 2007 |
| Risk free interest rate | 2.50% | 4.55% |
| Expected term | 4.75 years | 4.51 years |
| Dividend yield | 0.0 | 0.0 |
| Expected volatility | 84.29% | 85.68% |
Forward-Looking Information
The Company and its representatives from time to time make written or verbal forward-looking statements, including statements contained in this and other filings with the SEC and in the Company’s reports to stockholders, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, the Company’s expectations regarding clinical research programs, sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions and general views about future operations or operating results. Some of these statements can be identified by the use of forward-looking terminology such as "prospects," "outlook," "believes," "estimates," "intends," "may," "will," "should," "anticipates," "expects" or "plans," or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties.
Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that might cause future results to differ include, but are not limited to, the following: the successful marketing of CRINONE® 8%, PROCHIEVE® 8%, and STRIANT® in the U.S.; the timing and size of orders for out-licensed products from our marketing partners; the timely and successful development of new products and new indications for current products PROCHIEVE 8% to reduce the risk of preterm birth in women with a short cervix at mid-pregnancy and vaginal lidocaine product candidate for dysmenorrhea; success in obtaining acceptance and approval of new products and new indications for current products by the FDA and international regulatory agencies; the impact of competitive products and pricing; competitive economic and regulatory factors in the pharmaceutical and health care industry; general economic conditions; and other risks and uncertainties that may be detailed, from time to time, in the Company’s reports filed with the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Statements in this Quarterly Report on Form 10-Q. Readers are advised to consult any further disclosures the Company may make on related subjects in subsequent Form 10-Q, 8-K, and 10-K reports to the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that it has material exposure to market rate risk. The Company may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose the Company to material market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation for the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Claims and lawsuits have been filed against the Company from time to time. Although the results of pending claims are always uncertain, the Company does not believe the results of any such actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operation. Additionally, the Company believes that it has reserves or insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such reserves or insurance in the event of for any unfavorable outcome resulting from these actions.
In connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which assets consisted of the patents underlying the Company’s BDS, other patent applications, and related technology, the Company agreed to pay Bio-Mimetics a royalty equal to two percent of the net sales of products based on the assets up to an aggregate of $7.5 million or until the last of the relevant patents expired. The Company determined that royalty payments on STRIANT®, PROCHIEVE®, and CRINONE® terminated in September of 2006, with the expiration of a certain Canadian patent, but continue on Replens® and RepHresh®. On December 28, 2007, Bio-Mimetics filed a complaint in the United States District Court for Massachusetts (Bio-Mimetics, Inc. v. Columbia Laboratories, Inc.) alleging breach of contract, violation of the covenant of good faith and fair dealing, and unjust enrichment for the Company’s failure to continue royalty payments on STRIANT®, PROCHIEVE®, and CRINONE®. The Company intends to defend this action vigorously.
Item 1A. Risk Factors ..
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of shareholders was held on May 13, 2008. At the meeting:
1. Seven nominees for director were elected for one-year terms by a vote of shares as follows:
Valerie L. Andrews received 49,172,285 votes for her election (98.2% of shares voted; 89.4% of shares eligible to vote) and 917,406 votes were withheld (1.8% of shares voted; 1.7% of shares eligible to vote).
Edward A. Blechschmidt received 49,179,733 votes for his election (98.2% of shares voted; 89.4% of shares eligible to vote) and 909,958 votes were withheld (1.8% of shares voted; 1.7% of shares eligible to vote).
James S. Crofton received 49,290,584 votes for his election (98.4% of shares voted; 89.6% of shares eligible to vote) and 799,107 votes were withheld (1.6% of shares voted; 1.5% of shares eligible to vote).
Stephen Kasnet received 49,366,250 votes for his election (98.6% of shares voted; 89.8% of shares eligible to vote) and 723,441 votes were withheld (1.4% of shares voted; 1.3% of shares eligible to vote).
Robert S. Mills, Jr. received 49,355,250 votes for his election (98.5% of shares voted; 89.8% of shares eligible to vote) and 734,441 votes were withheld (1.5% of shares voted; 1.3% of shares eligible to vote).
Denis M. O’Donnell received 43,139,489 votes for his election (86.1% of shares voted; 78.5% of shares eligible to vote) and 6,950,202 votes were withheld (13.9% of shares voted; 12.6% of shares eligible to vote).
Selwyn P. Oskowitz received 49,362,940 votes for his election (98.5% of shares voted; 89.8% of shares eligible to vote) and 726,751 votes were withheld (1.5% of shares voted; 1.3% of shares eligible to vote).
2. The 2008 Long-Term Incentive Plan was adopted.
The 2008 Long-Term Incentive Plan received 25,458,845 votes for adoption (50.8% of shares voted), 1,319,978 votes against adoption (2.6% of shares voted), 57,950 shares abstained (0.1% of shares voted), and 23,252,918 broker non-votes (46.4% of shares voted).
Item 5. Other Information.
None.
Item 6. Exhibits.
10.1 Columbia Laboratories, Inc. 2008 Long-Term Incentive Plan. (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company. (*)
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company. (*)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002. (*)
| (1) | Incorporated by reference to the registrant’s definitive proxy statement relating to the registrant’s 2007 annual meeting of stockholders filed with the Securities and Exchange Commission on April 8, 2007. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COLUMBIA LABORATORIES, INC. | |
| /s/ JAMES A. MEER | |
| JAMES A. MEER, Senior Vice President- | |
| Chief Financial Officer and Treasurer | |
DATE: August 8, 2008
