C O L L A G E N E X
p h a r m a c e u t i c a l s
May 15, 2001
Via EDGAR
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Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: CollaGenex Pharmaceuticals, Inc. (Commission File No. 0-28308)
Form 10-Q for the Quarter Ended March 31, 2001
Dear Sirs:
Pursuant to Rule 13a-13(a) under the Securities Exchange Act of 1934, as
amended, on behalf of CollaGenex Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), submitted herewith for filing is the Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
If you have any questions or comments concerning this filing, kindly
contact the undersigned at (215) 579-7388 ext. 3110.
/s/ Frank Ruffo
Frank Ruffo
Controller
CollaGenex Pharmaceuticals, Inc., 41 University Drive, Newtown, PA 18940 USA
215-579-7388 voice 215-579-8577 fax
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
(Registrant's Telephone Number,
Including Area Code)
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.
Yes: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of April 15, 2001:
Class Number of Shares
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Common Stock $.01 par value 10,550,638
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION.............................................. 1
Item 1. Financial Statements........................................ 1
Condensed Consolidated Balance Sheets as of December 31,
2000 and March 31, 2001 (unaudited)...................... 2
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 2001 (unaudited)......... 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 2001 (unaudited)......... 4
Notes to Condensed Consolidated Financial Statements
(unaudited).............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Results of Operations....................................... 9
Liquidity and Capital Resources............................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION................................................. 14
Item 2. Changes in Securities and Use of Proceeds................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES................................................................. 16
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 2000 and March 31, 2001
(dollars in thousands, except per share data)
December 31, March 31,
Assets 2000 2001
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(unaudited)
Current assets:
Cash and cash equivalents........................................... $ 3,709 $ 7,749
Short term investments.............................................. 1,739 --
Accounts receivable, net of allowance of $381 and $330 at December 31,
2000 and March 31, 2001, respectively............................. 3,038 3,476
Inventories......................................................... 277 504
Prepaid expenses and other current assets........................... 989 2,513
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Total current assets.......................................... 9,752 14,242
Equipment and leasehold improvements, net.............................. 652 596
Other assets........................................................... 27 26
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Total assets.................................................. $ 10,431 $ 14,864
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Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable..................................... $ 65 $ 65
Accounts payable.................................................... 1,865 2,486
Accrued expenses.................................................... 2,514 2,165
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Total current liabilities..................................... 4,444 4,716
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Note payable, less current portion..................................... 47 29
Deferred revenue....................................................... 676 661
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 200,000 shares
of Series D cumulative convertible preferred stock issued and outstanding
at December 31, 2000 and March 31, 2001 (liquidation
value of $20,000 at March 31, 2001)............................... 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized, 8,775,176 and
10,550,638 shares issued and outstanding at December 31, 2000
and March 31, 2001, respectively.................................. 88 106
Common stock to be issued (275,462 shares at December 31, 2000 and
none at March 31, 2001) .......................................... 872 --
Additional paid in capital.......................................... 68,461 76,193
Deferred compensation............................................... (29) (22)
Accumulated deficit................................................. (64,130) (66,821)
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Stockholders' equity.......................................... 5,264 9,458
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Total liabilities and stockholders' equity.................... $ 10,431 $ 14,864
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 2001
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
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2000 2001
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Restated
(See Note 3)
Revenues:
Product sales....................................................... $ 5,510 $ 6,113
Contract revenues................................................... 650 875
License revenues.................................................... 370 36
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Total revenues................................................. 6,530 7,024
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Operating expenses:
Cost of product sales............................................... 1,170 1,366
Research and development............................................ 847 944
Selling, general and administrative................................. 6,767 7,477
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Total operating expenses...................................... 8,784 9,787
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Operating loss................................................ 2,254 2,763
Other income (expense):
Interest income..................................................... 186 63
Interest expense.................................................... (5) (3)
Other Income (expense).............................................. -- 12
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Loss before cumulative effect of change in accounting
principle..................................................... (2,073) (2,691)
Cumulative effect of change in accounting principle.................... 764 --
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Net loss...................................................... (2,837) (2,691)
Preferred stock dividend............................................... 423 420
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Net loss allocable to common stockholders.............................. $ (3,260) $ (3,111)
======== ========
Basic and diluted net loss per share allocable to common stockholders
before cumulative effect of change in accounting principle.......... $ (0.29) $ (0.33)
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Cumulative effect of change in accounting principle.................... (0.09) --
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Basic and diluted net loss per share allocable to
common stockholders................................................. $ (0.38) $ (0.33)
========= =========
Shares used in computing basic and diluted net loss per share..... 8,651,597 9,336,639
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 2001
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
2000 2001
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Restated
(See Note 3)
Cash flows from operating activities:
Net loss.......................................................... $ (2,837) $ (2,691)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash compensation expense.................................. 45 7
Depreciation and amortization expense......................... 56 64
Cumulative effect of change in accounting principle........... 764 --
Change in assets and liabilities:
Accounts receivable......................................... (131) (438)
Inventories................................................. 314 (227)
Prepaid expenses and other assets........................... (103) (1,523)
Accounts payable............................................ 505 621
Accrued expenses............................................ (487) (349)
Deferred revenue............................................ (370) (15)
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Net cash used in operating activities.............. (2,244) (4,551)
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Cash flows from investing activities:
Capital expenditures.............................................. (58) (8)
Proceeds from the sale of short term investments.................. 3,417 1,739
Purchase of short term investments................................ (849) --
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Net cash provided by investing activities......... 2,510 1,731
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Cash flows from financing activities:
Net proceeds from issuance of common stock........................ 70 6,878
Repayment of long-term debt....................................... (17) (18)
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Net cash provided by financing activities.......... 53 6,860
Net increase in cash and cash equivalents............................ 319 4,040
Cash and cash equivalents at beginning of period..................... 7,981 3,709
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Cash and cash equivalents at end of period........................... $ 8,300 $ 7,749
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Supplemental schedule of noncash financing activities:
Common stock dividends issued or issuable
on preferred stock.............................................. $ 423 $ 420
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Issuance of common stock to be issued........................... 858 872
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest........................ $ 5 $ 3
======== =======
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 2001
(dollars in thousands)
(Unaudited)
Note 1 -- Basis of Presentation:
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's 2000 audited consolidated financial
statements and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly the Company's consolidated financial position as of March 31,
2001, their results of operations for the three months ended March 31, 2000 and
2001, and their cash flows for the three months ended March 31, 2000 and 2001.
Interim results are not necessarily indicative of results anticipated for the
full fiscal year.
Note 2 -- Inventories:
Inventories at December 31, 2000 and March 31, 2001 consist of the
following:
2000 2001
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Raw materials $ 60 $ 276
Finished goods 217 228
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$ 277 $ 504
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Note 3 - Change in Accounting Principle:
In the fourth quarter of 2000, the Company adopted SAB 101, "Revenue
Recognition in Financial Statements", implementing a change in revenue
recognition policy for certain upfront payments received in international
licensing arrangements for Periostat. Effective January 1, 2000, upfront
payments received from licensees, where the Company has continuing involvement,
are now being deferred and recognized as license revenue over the estimated
performance period of the individual license agreements. In previous years,
prior to the
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Company's adoption of SAB 101, the Company recognized revenue when the upfront
payments were received, generally upon the execution of each agreement. During
the three months ended March 31, 2000, the Company recorded $370 in license
revenues which were deferred upon the implementation of SAB 101 as of January 1,
2000 and which were previously recognized as license revenues under the
historical revenue recognition policy prior to the adoption of SAB 101. During
the three months ended March 31, 2001, the Company recognized $15 in license
revenues which were deferred upon the implementation of SAB 101.
The consolidated statements of operations and cash flows for the three
months ended March 31, 2000 have been restated in the accompanying financial
statements based on this newly adopted revenue recognition policy. The change
increased revenue and decreased net loss by $370 during the three months ended
March 31, 2000, excluding the cumulative effect of the change. During the three
months ended March 31, 2000, the Company recorded a $764 charge as a result of
the cumulative effect of the change in accounting principle for revenue
recognized prior to January 1, 2000.
Note 4 - Common Stock and Debt Financing:
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7,500,
which generated net proceeds to the Company of approximately $6,900. In
addition, the investors in this financing were also issued an aggregate of
400,000 warrants which are exercisable for up to three (3) years into 400,000
shares of the Company's Common Stock at an exercise price per share of $6.00.
The consideration received for such warrants is included in the aggregate
proceeds received in the financing. The Company also issued to its financial
advisor in this financing, warrants to purchase an aggregate of 150,000 shares
of the Company's Common Stock, exercisable for up to three (3) years, at an
exercise price of $5.70 per share. All such warrants may be deemed automatically
exercised in certain circumstances based on the Company's stock price. The
Company is obligated to maintain the effectiveness of a shelf registration
statement with respect to all such shares of Common Stock issued and shares
underlying all such warrants for a continuous twenty-four (24) month period.
Should the Company fail to maintain the effectiveness of such registration
statement the investors and the financial advisor shall receive an additional
27,500 shares of the Company's Common Stock, in the aggregate, for no additional
consideration. As a result of this financing, the conversion price paid on the
Preferred Stock has been reduced to $9.94 per share.
On March 19, 2001, the Company consummated a revolving credit facility (the
"Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow up to
the lesser of $3,000 or 80% of eligible accounts receivable, as defined. The
amount available is also reduced by outstanding letters of credit which may be
issued under this agreement in amounts totaling up to $1,500. As of March 31,
2001, the Company has a letter of credit in place in the amount of $1,313 which
bears interest, payable monthly, at the prime rate plus 1.5% per annum and may
be used only for working capital purposes. Without the consent of the Bank, the
Company, among other things, shall not (i) merge or consolidate with another
entity; (ii) acquire assets outside the ordinary course of business; or (iii)
pay or declare any cash
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dividends on the Company's Common Stock. The Company must also maintain a
certain tangible net worth and a minimum of $2,000 in cash, net of borrowings
under the Facility, at all times during the term of the Facility. In addition,
the Company has secured its obligations under the Facility through the granting
of a security interest in favor of the Bank with respect to all of the Company's
assets, including its intellectual property.
Note 5 - Subsequent Events:
At the Company's 2001 Annual Meeting of Stockholders held on May 10, 2001,
the stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number
of shares of Common Stock available for issuance under the 1996 Stock Option
Plan from 1,500,000 to 2,000,000 shares and to reserve an additional 500,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1996 Stock Option Plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. and subsidiaries (the "Company") is a
specialty pharmaceutical company focused on providing innovative medical
therapies to the dental market. The Company's first product, Periostat(R), is an
orally administered, prescription pharmaceutical product that was approved by
the United States Food and Drug Administration (the "FDA") in September 1998 and
is the first and only pharmaceutical to treat adult periodontitis by inhibiting
the enzymes that destroy periodontal support tissues. In December 2000 and
February 2001, the United Kingdom Medicines Control Agency and the FDA,
respectively, granted marketing approval for a new tablet formulation of
Periostat which is smaller, easier to swallow and offers manufacturing cost
advantages. This formulation will replace the currently marketed capsule
formulation during 2001. Periostat is indicated as an adjunct to scaling and
root planing, the most prevalent therapy for adult periodontitis, to promote the
attachment level gain and to reduce pocket depth in patients with adult
periodontitis. The Company is marketing Periostat to the dental community
through its own professional dental pharmaceutical sales force of approximately
120 sales representatives and managers. This sales force also co-promotes
Vioxx(R), a prescription non-steroidal anti-inflammatory drug developed by Merck
& Co., Inc. ("Merck") and until April 13, 2001, co-promoted Denavir(R), a
prescription cold sore medication owned by Novartis Pharmaceuticals Corporation
("Novartis"). Novartis terminated its co-promotion agreement with the Company
with respect to Denavir effective April 13, 2001. The Company is actively
pursuing other prescription and non-prescription products to market to the
professional dental community and directly to the consumer, and may enter
directly into manufacturing arrangements for additional complementary products,
such as dental neutraceuticals.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to contract
its research and development activities as well as manufacturing and
distribution functions.
The Company has incurred losses each year since inception and had an
accumulated deficit of $66.8 million at March 31, 2001. The Company expects to
continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of
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those terms. This Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The Company's business of selling, marketing and
developing pharmaceutical products is subject to a number of significant risks,
including risks relating to the implementation of the Company's sales and
marketing plans for Periostat, risks inherent in research and development
activities, risks associated with conducting business in a highly regulated
environment and uncertainty relating to clinical trials of products under
development. The success of the Company depends to a large degree upon the
market acceptance of Periostat by periodontists, dental practitioners, other
health care providers, patients and insurance companies. Other than Periostat,
which has been FDA approved for marketing in the United States and approved by
the Medicines Control Agency for marketing in the United Kingdom, there can be
no assurance that any of the Company's other product candidates will be approved
by any regulatory authority for marketing in any jurisdiction or, if approved,
that any such products or that Vioxx will be successfully commercialized by the
Company. As a result of these risks, and others expressed from time to time in
Collagenex's filings with the Securities and Exchange Commission, the Company's
actual results may differ materially from the results discussed in the
forward-looking statements contained herein.
RESULTS OF OPERATIONS
From its founding through the quarter ended September 30, 1998, the Company
had no revenues from sales of its own products. During the fourth quarter of
1998, the Company achieved net product sales of $3.1 million following the
commercial launch of Periostat in November 1998. Most of the 1998 sales
represented initial wholesale and retail stocking. During the year ended
December 31, 1999, the Company achieved net product sales of $15.2 million from
sales of Periostat. In addition, in 1999 the Company generated $770,000 in
contract revenues from its two (2) co-promotion agreements (one (1) of which was
terminated effective April 13, 2001) and $100,000 in license fees relating to
the signing of a distribution agreement for Periostat in Canada. During the year
ended December 31, 2000, the Company achieved net product sales of $20.5 million
from sales of Periostat. In addition, in 2000 the Company generated $3.2 million
in contract revenues from its two (2) co-promotion agreements (one (1) of which
was terminated effective April 13, 2001) and $530,000 in license and milestone
fees from various foreign distribution and marketing agreements for Periostat.
This amount included $397,000 of license revenues that were deferred upon the
implementation of Staff Accounting Bulletin ("SAB") 101, effective January 1,
2000. These amounts were previously recognized as license revenues in prior
years under the historical revenue recognition policy prior to the adoption of
SAB 101.
During the three months ended March 31, 2001, the Company achieved net
product sales of $6.1 million from the sales of Periostat. In addition, during
the three months ended March 31, 2001, the Company generated $875,000 in
contract revenues from its two (2) co-promotion agreements (one (1) of which was
terminated effective April 13, 2001) and $36,000 in license revenues.
To broaden and increase Periostat usage, the Company initiated a
direct-to-consumer ("DTC") advertising test program in the fall of 2000. DTC is
a relatively new but highly effective marketing tool used by pharmaceutical
companies to build patient awareness of prescription drugs and to drive
prescription and revenue growth. In October 2000, the Company launched a test
DTC campaign in Tampa and St. Louis to evaluate the potential effectiveness of
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this tool for increasing Periostat prescription growth. During the fourth
quarter of 2000, new Periostat prescriptions in the test cities were 48% higher
than the third quarter of 2000 compared to a 1.4% increase in new Periostat
prescriptions in the rest of the United States. Based on these results, in
January 2001 the Company expanded its DTC campaign to include Philadelphia,
Washington, Houston and Chicago and in April 2001 launched such a campaign in
New York City, Denver, Detroit and Boston. During the first quarter of 2001, new
Periostat prescriptions in Philadelphia, Washington, Houston and Chicago were
55% higher than in the first quarter of 2000 compared to a 10% increase in new
Periostat prescriptions in the rest of the United States.
The Company realized a net loss during the first quarter of 2001, resulting
primarily from increased sales and marketing expenses associated with the
Company's investment in DTC advertising for Periostat. Total operating expenses
consist of the cost of product sales, research and development expenses and
selling, general and administrative expenses. Cost of product sales consists
primarily of direct manufacturing expenses and royalties. Research and
development expenses consist primarily of funds paid to contract research
organizations for the provision of services and materials for drug development,
ongoing manufacturing and formulation enhancements and clinical trials. Selling,
general and administrative expenses consist primarily of personnel salaries and
benefits, direct marketing costs, professional and consulting fees, insurance
and general office expenses.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. The Company realized $7.0 million in net revenues during the
three months ended March 31, 2001 compared to $6.5 million during the three
months ended March 31, 2000. Revenues for the first quarter of 2001 included
$6.1 million in net sales of Periostat, $875,000 in contract revenues which were
derived from the Company's co-promotion of Vioxx and Denavir, and $36,000 in
foreign license and milestone revenues for Periostat. Revenues from Denavir
accounted for approximately $175,000 of such contract revenues. Revenues for the
three months ended March 31, 2000 included $5.5 million in net sales of
Periostat, $650,000 in contract revenues, which were derived from the Company's
co-promotion of Vioxx and Denavir and $370,000 in foreign license and milestone
revenues for Periostat. Revenues from Denavir accounted for approximately
$175,000 of such contract revenues. Novartis, the owner of Denavir, terminated
its co-promotion agreement with the Company with respect to Denavir effective
April 13, 2001. In accordance with SAB 101, which was adopted on January 1,
2000, the license revenues recorded during the three months ended March 31, 2000
and 2001 were attributable, in part, to the recognition of up-front license fees
received for various agreements which are being recognized over the expected
term of these agreements. License revenues during the quarters ended March 31,
2001 and 2000 include $15,000 and $370,000 that were recorded in periods prior
to the adoption of SAB 101 which were deferred as a results the cumulative
effect of a change in accounting principle as of January 1, 2000.
Cost of Product Sales. Cost of product sales for Periostat were $1.3
million, or 22.3% of net product sales, for the three months ended March 31,
2001, compared to $1.2 million, or 21.2% of net product sales, for the three
months ended March 31, 2000. This increase in cost of product sales for
Periostat as a percentage of net product sales for Periostat resulted primarily
from increases in contracted product production cost.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the three months ended March 31, 2001 were $944,000 compared to $847,000 for the
three months ended March 31, 2000. This increase resulted primarily from
clinical development expenses for Metastat, the Company's lead compound for the
treatment of metastatic cancer, and formulation development expenses relating to
new product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $7.5 million for the three months ended
March 31, 2001 from $6.8 million for the three months ended March 31, 2000. This
increase was due primarily to increased sales and marketing expenses associated
with the Company's investment in DTC advertising for Periostat.
OTHER INCOME/EXPENSES. Interest income decreased to $63,000 during the
three months ended March 31, 2001 from $186,000 during the three months ended
March 31, 2000. This decrease was due to lower average balances in cash and
short-term investments. Interest expense for the three months ended March 31,
2001 was $3,000 compared to $5,000 for the three months ended March 31, 2000.
These expenses were primarily due to interest on the $219,000 note payable
executed by the Company in April 1999. Other income of $12,000 was recognized
during the three months ended March 31, 2001 as a result of foreign currency
transactions.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends of $420,000 were
recorded during the three months ended March 31, 2001 as a result of the
Company's obligations in connection with the issuance of its Series D Stock (as
defined below) in May 1999. Similarly, preferred stock dividends of $423,000
were recorded during the three months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On May 12, 1999, the
Company consummated a $20.0 million financing (the "1999 Financing") through the
issuance of its Series D Cumulative Convertible Preferred Stock (the "Series D
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Series D Stock was approved by a majority of the Company's
stockholders at the Company's Annual Meeting of Stockholders on May 11, 1999. A
portion of the proceeds of the 1999 Financing were used to repay a $10.0 million
Senior Secured Convertible Note provided by one of the investors on March 19,
1999 in connection with the 1999 Financing. The remaining proceeds have been and
will be used for general working capital purposes.
The Series D Stock is convertible at any time into shares of common stock
of the Company at a current conversion price of $9.94 per common share, which
conversion price reflects a decrease from the initial conversion price of $11.00
per share as a result of the 2001 Financing (as defined below). The conversion
price is not subject to reset except in the event that the Company should fail
to declare and pay dividends when due or the Company should issue new equity
securities or convertible securities at a price per share or having a conversion
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price per share lower than the then applicable conversion price of the Series D
Stock. During the first three years following issuance, holders of the Series D
Stock will be entitled to receive dividends payable in shares of fully
registered common stock at a rate of 8.4% per annum. Thereafter, dividends will
be payable in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Stock shall, at the option of
the Company (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale price, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices on the Nasdaq is at least 200% of the conversion price then in effect (as
of March 31, 2001, $9.94 per share) for forty consecutive trading days; and (ii)
a shelf registration is in effect for the shares of common stock to be issued
upon conversion of the Series D Stock. Without written approval of a majority of
the holders of record of the Series D Stock, the Company, among other things,
shall not: (i) declare or pay any dividend or distribution on any shares of
capital stock of the Company other than dividends on the Series D Stock; (ii)
make any loans, incur any indebtedness or guarantee any indebtedness, advance
capital contributions to, or investments in any person, issue or sell any
securities or warrants or other rights to acquire debt securities of the
Company, except that the Company may incur such indebtedness in any amount not
to exceed $10.0 million in the aggregate outstanding at any time for working
capital requirements in the ordinary course of business; or (iii) make research
and development expenditures in excess of $7.0 million in any continuous twelve
month period, unless the Company has reported positive net income for four
consecutive quarters immediately prior to such twelve month period.
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's corporate offices in
Newtown, Pennsylvania. The term of the note is three years at 9.54% per annum,
with monthly minimum payments of principal and interest.
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7.5
million, which generated net proceeds to the Company of approximately $6.9
million (the "2001 Financing"). Such proceeds will be used primarily for the
Company's DTC advertising campaign and for general working capital purposes. In
addition, the investors in such financing were also issued an aggregate of
400,000 warrants which are exercisable for up to three (3) years into 400,000
shares of the
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the Company's Common Stock at an exercise price per share of $6.00. The
consideration received for such warrants is included in the aggregate proceeds
received in the 2001 Financing. The Company also issued to its financial advisor
in such financing warrants to purchase an aggregate of 150,000 shares of the
Company's Common Stock exercisable for up to three (3) years at an exercise
price of $5.70 per share, as partial consideration for services rendered in
connection with the 2001 Financing. These warrants may be deemed automatically
exercised in certain circumstances based upon the Company's stock price. In
connection with the 2001 Financing, the Company is obligated to maintain the
effectiveness of a shelf registration statement with respect to all such shares
of Common Stock issued and shares underlying all such warrants for a continuous
twenty-four (24) month period, or the Company will be required to issue to the
investors and the financial advisor an additional 27,500 shares of the Company's
Common Stock, in the aggregate, for no additional consideration.
On March 19, 2001, the Company consummated a revolving credit facility (the
"Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow up to
the lesser of $3,000,000 or 80% of eligible accounts receivable, as defined
under the Facility. The amount available is also reduced by outstanding letters
of credit which may be issued under the Facility in amounts totaling up to
$1,500,000. The Company is not obligated to draw amounts under the Facility and
any such draws will bear interest, payable monthly, at the then prevailing prime
rate plus 1.5% per annum and may be used only for working capital purposes. The
Company intends to secure its purchase order commitments for Periostat from
Pharmaceutical Manufacturing Research Services, Inc., a contract manufacturing
company, with a letter of credit under the Facility. Without the consent of the
Bank, the Company, among other things, shall not (i) merge or consolidate with
another entity; (ii) acquire assets outside the ordinary course of business; or
(iii) pay or declare any cash dividends on the Company's Common Stock. The
Company must also maintain a certain tangible net worth and a minimum of $2.0
million in cash, net of borrowings under the Facility, at all times during the
term of the Facility. In addition, the Company has secured its obligations under
the Facility through the granting of a security interest in favor of the Bank
with respect to all of the Company's assets, including its intellectual
property.
At March 31, 2001, the Company had cash, cash equivalents and short-term
investments of approximately $7.7 million, an increase of $2.3 million from the
$5.4 million balance at December 31, 2000. This increase was primarily
attributable to the net proceeds of $6.9 million from the 2001 Financing (as
defined below) less cash used to fund operations during the quarter and vendor
deposits necessary to fund the Company's DTC advertising during 2001. In
accordance with investment guidelines approved by the Company's Board of
Directors, cash balances in excess of those required to fund operations have
been invested in short-term United States Treasury securities and commercial
paper with a credit rating no lower than A1/P1. The Company's working capital at
March 31, 2001 was $9.5 million, an increase of $4.2 million from $5.3 million
at December 31, 2000. This increase was primarily attributable to the net
proceeds of $6.9 million from the 2001 Financing (as defined below) less cash
used to fund operations during the quarter.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least the middle of 2002.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including the size and scope of the Company's
marketing effort and sales of Periostat, the terms of agreements entered into
with corporate partners, if any, and the results of research and development and
pre-clinical and clinical studies for other applications of the Company's core
technology. Over the long-term, the Company's liquidity is dependent on market
acceptance of its products and technology.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Changes in Securities
The following information relates to all securities of the Company sold by
the Company within the first quarter of 2001 which were not registered under the
securities laws at the time of sale and/or issuance:
1. On March 12, 2001, the Company issued and sold shares of the Company's
Common Stock in connection with the 2001 Financing, which were not
registered under the Securities Act of 1933, as amended (the
"Securities Act"). The following table sets forth certain information
regarding such sales during the quarter:
NUMBER AGGREGATE
OF SHARES PURCHASE PRICE
--------- --------------
1,500,000 $7,500,000
2. On March 12, 2001, the Company issued warrants to purchase shares of
the Company' s Common Stock in connection with the 2001 Financing,
which were not registered under the Securities Act. The following
table sets forth certain information regarding such issuances during
the quarter:
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ---------
400,000 $6.00
150,000 $5.70
On March 12, 2001, the Company consummated the 2001 Financing pursuant to
which the Company sold 1,500,000 shares of Common Stock for an aggregate
purchase price of $7.5 million, which generated net proceeds to the Company of
approximately $6.9 million. In addition, the Investors in such financing were
issued warrants to purchase an aggregate of 400,000 shares of the Company's
Common Stock which are exercisable for up to three (3) years at an exercise
price per share of $6.00. In such financing, Common Stock was sold to, and
warrants to purchase shares of Common Stock were issued to, each of Perseus
Soros BioPharmaceutical Fund, L.P.; Anvil Investment Associates, LP; Ashford
Capital Partners, LP; John Patience; and Jack Schuler. Tucker Anthony Sutro
Capital Markets acted as the Company's placement agent in connection with the
2001 Financing and, in consideration for such services, received cash
compensation of $450,000 and warrants to purchase an aggregate of 150,000 shares
of the Company's Common Stock which are exercisable for up to three (3) years at
an exercise price of $5.70 per share. The Company believes that the issuance of
the foregoing securities was exempt from registration under Section 4(2) of the
Securities Act as transactions
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not involving any public offering. All recipients had adequate access to
information about the Company.
On April 9, 2001, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission with respect to the foregoing
securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
* 10.1 - Services and Supply Agreement dated as of September 26, 2000 as
amended by letter agreement dated as of December 1, 2000, by and
between the Company and Pharmaceutical Manufacturing Research
Services, Inc.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2001, the Company filed on March
16, 2001, a current report on Form 8-K with the Securities and
Exchange Commission relating to the issuance by the Company of
1,500,000 shares of Common Stock for an aggregate purchase price of
$7.5 million and warrants to purchase shares of the Company's Common
Stock. The Company amended such Form 8-K by filing a Form 8-K/A on
April 3, 2001.
* Confidential Treatment has been sought for a portion of this Exhibit
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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.
CollaGenex Pharmaceuticals, Inc.
Date: May 15, 2001 By: /s/ Brian M. Gallagher, Ph.D.
------------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2001 By: /s/ Nancy C. Broadbent
------------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
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EXHIBIT 10.1
SERVICES AND SUPPLY AGREEMENT BY AND BETWEEN COLLAGENEX
PHARMACEUTICALS, INC. AND PHARMACEUTICAL MANUFACTURING
RESEARCH SERVICES, INC., AS AMENDED