SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
-------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
- ----------------------------- -----------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
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(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 July 15, 2000:
Class Number of Shares
--------------------------- ----------------
Common Stock $.01 par value 8,678,904
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION........................................ 1
Item 1. Financial Statements................................... 1
Condensed Consolidated Balance Sheets as of December
31, 1999 and June 30, 2000 (unaudited)............ 2
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 1999 and 2000
(unaudited)....................................... 3
Condensed Consolidated Statements of Operations for
the Six Months Ended June 30, 1999 and 2000
(unaudited)....................................... 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and 2000
(unaudited)....................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)....................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
Results of Operations................................. 9
Liquidity and Capital Resources....................... 12
Recent Pronouncements................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.................................................. 13
PART II. OTHER INFORMATION........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders... 14
Item 5. Other Information..................................... 14
Item 6. Exhibits and Reports on Form 8-K...................... 15
SIGNATURES........................................................... 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
-1-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 2000
December 31, June 30,
Assets 1999 2000
---- ----
(unaudited)
(dollars in thousands, except per share data)
Current assets:
Cash and cash equivalents..................... $ 7,981 $ 8,745
Short term investments........................ 6,386 2,081
Accounts receivable, net of allowance of $386
and $401 at December 31, 1999 and June 30,
2000, respectively........................... 2,150 2,699
Inventories................................... 695 385
Prepaid expenses and other current assets..... 615 781
--------- ---------
Total current assets...................... 17,827 14,691
Equipment and leasehold improvements, net....... 709 740
Other assets.................................... 27 27
--------- ---------
Total assets.............................. $ 18,563 $ 15,458
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of note payable............... $ 65 $ 65
Accounts payable.............................. 2,440 3,431
Accrued expenses.............................. 2,335 2,187
--------- ---------
Total current liabilities................. 4,840 5,683
--------- ---------
Note payable, less current portion.............. 116 82
--------- ---------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized; 200,000 shares of Series D
cumulative convertible preferred stock, $0.01
par value, issued and outstanding at December 31,
1999 and June 30, 2000 (liquidation value
of $20,000 at June 30, 2000)................. 2 2
Common stock, $0.01 par value, 25,000,000 shares
authorized; 8,622,091 and 8,678,904 shares
issued and outstanding at December 31, 1999 and
June 30, 2000, respectively.................. 86 87
Common Stock to be issued (39,188 shares at
December 31, 1999 and 92,572 shares at June 30,
2000)........................................ 858 849
Additional paid in capital.................... 66,348 67,602
Deferred compensation......................... (76) (43)
Accumulated deficit........................... (53,611) (58,804)
--------- ---------
Stockholders' equity...................... 13,607 9,693
--------- ---------
Total liabilities and stockholders'
equity.................................... $ 18,563 $ 15,458
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 1999 and 2000
(unaudited)
Three Months Ended June 30,
---------------------------
1999 2000
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(dollars in thousands, except per share data)
Revenues:
Product sales................................. $ 3,210 $ 5,723
Contract revenues............................. 128 878
License revenues.............................. 100 100
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Total revenues............................ 3,438 6,701
--------- ---------
Operating expenses:
Cost of product sales......................... 710 1,127
Research and development...................... 1,291 965
Selling, general and administrative........... 5,677 6,669
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Total operating expenses.................. 7,678 8,761
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Operating loss............................ (4,240) (2,060)
Other income (expense):
Interest income................................. 245 165
Interest expense................................ (145) (4)
Other expense................................... (2) (2)
--------- ---------
Net loss.................................. $ (4,142) $ (1,901)
========= =========
Preferred stock dividend........................ 235 426
--------- ---------
Net loss allocable to common stockholders....... (4,377) (2,327)
========= =========
Basic and diluted net loss per share allocable
to common stockholders........................ $ (0.51) $ (0.27)
========= =========
Shares used in computing basic and diluted net
loss per share allocable to common stockholders 8,589,704 8,678,073
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 1999 and 2000
(unaudited)
Six Months Ended June 30,
1999 2000
(dollars in thousands, except per share data)
Revenues:
Product sales................................. $ 5,620 $ 11,233
Contract revenues............................. 136 1,528
License revenues.............................. 100 100
--------- ---------
Total revenues............................ 5,856 12,861
--------- ---------
Operating expenses:
Cost of product sales......................... 1,253 2,297
Research and development...................... 2,229 1,812
Selling, general and administrative........... 11,772 13,436
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Total operating expenses.................. 15,254 17,545
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Operating loss............................ (9,398) (4,684)
Other income (expense):
Interest income................................. 359 351
Interest expense................................ (189) (8)
Other expense................................... (2) (2)
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Net loss.................................. $ (9,230) $ (4,343)
========= =========
Preferred stock dividend........................ 235 849
--------- ---------
Net loss allocable to common stockholders....... (9,465) (5,192)
========= =========
Basic and diluted net loss per share allocable
to common stockholders........................ $ (1.10) $ (0.60)
========== ==========
Shares used in computing basic and diluted net
loss per share allocable to common stockholders 8,589,371 8,664,835
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 2000
(unaudited)
Six Months Ended June 30,
-------------------------
1999 2000
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(dollars in thousands)
Cash flows from operating activities:
Net loss........................................ $ (9,230) $ (4,343)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash compensation expense................. 58 358
Depreciation and amortization expense........ 66 113
Change in assets and liabilities:
Accounts receivable......................... 2,009 (549)
Inventories................................. (292) 310
Prepaid expenses and other assets........... 61 (166)
Accounts payable............................ (44) 991
Accrued expenses............................ 463 (148)
--------- ---------
Net cash used in operating
activities............................ (6,909) (3,434)
--------- ---------
Cash flows from investing activities:
Capital expenditures............................ (412) (144)
Proceeds from the sale of short term investments 7,464 5,638
Purchase of short term investments.............. (500) (1,333)
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Net cash provided by investing
activities............................ 6,552 4,161
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Cash flows from financing activities:
Proceeds from the issuance of convertible note
payable........................................ 10,000 -
Repayment of convertible note payable........... (10,000) -
Proceeds from the issuance of preferred stock... 18,500 -
Net proceeds from the issuance of common stock.. 3 71
Proceeds from the issuance of note payable...... 219 -
Payments on note payable........................ (11) (34)
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Net cash provided by financing
activities............................ 18,711 37
--------- ---------
Net increase in cash and cash equivalents......... 18,354 764
Cash and cash equivalents at beginning of period.. 3,286 7,981
--------- ---------
Cash and cash equivalents at end of period........ $ 21,640 $ 8,745
========= =========
Supplemental schedule of non-cash financing
activities:
Common stock dividend declared on preferred
stock........................................... $ 235 $ 849
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest....... $ 189 $ 8
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 2000
(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 1999 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 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 their financial position as of June 30, 2000, their results of
operations for the three and six months ended June 30, 1999 and 2000, and their
cash flows for the six months ended June 30, 1999 and 2000. Interim results are
not necessarily indicative of results anticipated for the full fiscal year.
Certain amounts in the December 31, 1999 Consolidated Balance Sheet have
been reclassified to conform with the June 30, 2000 presentation.
Note 2 -- Inventories:
Inventories at December 31, 1999 and June 30, 2000 consist of the
following:
1999 2000
---- ----
Raw materials $ 254 $ 168
Finished goods 441 217
----- ------
$ 695 $ 385
===== ======
-6-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 2000
(dollars in thousands)
(Unaudited)
(Continued)
Note 3 -- Recent Pronouncements:
In December 1999, the staff of the Securities and Exchange Commission
issued a Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements, including the recognition of non-refundable
fees received upon entering into arrangements. We are in the process of
evaluating this SAB and the effect it will have in our financial statements and
current revenue recognition policy. SAB 101, as amended, must be adopted no
later than the fourth quarter of 2000 with any impact reported as a cumulative
effect adjustment calculated as of January 1, 2000. Certain license fees
recognized as revenue during the three and six months ended June 30, 2000 may
need to be deferred once SAB 101 is adopted and amortized over a yet to be
estimated expected period of benefit.
-7-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
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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, is a
prescription pharmaceutical capsule that was approved by the United States Food
and Drug Administration (the "FDA") in September 1998 as an adjunct to scaling
and root planing, the most prevalent therapy for periodontitis, to promote
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
135 sales representatives and managers. This sales force also co-promotes
Vioxx(R), a prescription non-sterodial anti-inflammatory drug developed by Merck
& Co., Inc. ("Merck") and Denavir(R), a prescription cold sore medication
developed by SmithKline Beecham Consumer Healthcare, L.P. ("SmithKline
Beecham"), and the Company is actively seeking other products to market to the
dental community.
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.
The Company has incurred losses each year since inception and had an
accumulated deficit of $58.8 million at June 30, 2000. The Company expects to
continue to incur losses in the foreseeable future from expenditures on sales,
marketing, manufacturing, drug development, 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 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
-8-
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, 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 or Denavir will be successfully commercialized by the Company. 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 co-promotion agreements and $100,000 in license fees.
During the six months ended June 30, 2000, the Company achieved net product
sales of $11.2 million from the sales of Periostat. In addition, during the six
months ended June 30, 2000, the Company generated $1.5 million in contract
revenues from its co-promotion agreements and $100,000 in license revenues.
The Company realized a net loss during the second quarter of 2000,
resulting primarily from higher revenue offset by higher planned sales,
marketing and administrative expenses incurred during such period. 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 June 30, 2000 Compared to Three Months Ended June 30, 1999
- -----------------------------------------------------------------------------
REVENUES. The Company realized $6.7 million in net revenues during the
three months ended June 30, 2000 compared to $3.4 million during the three
months ended June 30, 1999. Revenues for the second quarter of 2000 included
$5.7 million in net sales of Periostat, $878,000 in contract revenues which were
derived from the Company's co-promotion of Vioxx for Merck and Denavir for
SmithKline Beecham, and $100,000 in Periostat license revenues. Revenues for the
three months ended June 30, 1999 included $3.2 million in net sales of
Periostat, $128,000 in contract revenues primarily for Denavir co-promotion and
$100,000 in Periostat license revenues. During the three month period ended June
30, 2000, net revenues included $1.2 million in stocking orders from one of the
Company's major customers, which may have significantly increased that
customer's weeks of sales in inventory at the end of such period. There were no
significant stocking orders received by the Company for the three months ended
June 30, 1999.
-9-
COST OF PRODUCT SALES. Cost of product sales for Periostat were $1.1
million, or 19.7% of net product sales, for the three months ended June 30,
2000, compared to $710,000, or 22.1% of net product sales, for the three months
ended June 30, 1999. This decrease resulted primarily from the absence of trade
allowances realized on product sales in the three months ended June 30, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 25.3% to $1.0 million in the second quarter of 2000 from $1.3 million
in the second quarter of 1999. This decrease resulted primarily from fewer
expenses related to Phase 3b clinical studies to support the future marketing
activities for Periostat, decreased manufacturing and formulation development
work for Periostat tablets and reduced research and development activities.
These decreases were partially offset by a $302,000 non-cash compensation charge
incurred during the quarter related to accelerating the vesting schedule on
stock options granted to certain non-employees in 1999. Expenditures made during
the three months ended June 30, 2000 included, among other expenditures,
regulatory and consulting fees associated with the Company's New Drug
Application for Periostat tablets submitted to the FDA in the first quarter of
2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 17.5% to $6.7 million in the second quarter of
2000 from $5.7 million in the second quarter of 1999. This increase was due
primarily to higher recruiting and continued training expenses associated with
new sales personnel hired earlier in 2000. The Company also incurred advertising
and promotional expenses for Vioxx during the second quarter of 2000 as a result
of its co-promotional agreement with Merck signed in September 1999.
OTHER INCOME/EXPENSE. Interest income decreased to $165,000 in the second
quarter of 2000 from $245,000 in the second quarter of 1999. This decrease was
due to lower average balances in cash and short-term investments. Interest
expense was $4,000 in the second quarter of 2000. This expense was primarily due
to interest on the outstanding balances on the note payable executed by the
Company in April 1999. Interest expense was $145,000 in the second quarter of
1999 due primarily to interest on the $10.0 million short term convertible note
executed by the Company in March 1999 which was repaid in connection with the
Company's Financing (as defined below) in May 1999.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends were $426,000 in the
second quarter of 2000 as a result of the Company's obligations in connection
with the issuance of its Series D Stock (as defined below) in May 1999.
Preferred stock dividends in the second quarter of 1999 were $235,000, and were
accrued during the portion of that quarter that the Series D Stock was
outstanding.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
- -------------------------------------------------------------------------
REVENUES. The Company realized $12.9 million in net revenues during the six
months ended June 30, 2000 compared to $5.9 million during the six months ended
June 30, 1999. Revenues for the six months ended June 30, 2000 included $11.2
million in net sales of Periostat, $1.5 million in contract revenues which were
derived from the Company's co-promotion of Vioxx for Merck and Denavir for
SmithKline Beecham, and $100,000 in Periostat license
-10-
revenues. Revenues for the six months ended June 30, 1999 included $5.6 million
in net sales of Periostat, $136,000 in contract revenues primarily for Denavir
co-promotion and $100,000 in Periostat license revenues. During the six month
period ended June 30, 2000, net revenues included $2.3 million in stocking
orders from one of the Company's major customers, which may have significantly
increased that customer's weeks of sales in inventory at the end of such period.
During the six month period ended June 30, 1999, this customer placed orders
totalling $839,000, which also may have increased its weeks of sales in
inventory at June 30, 1999.
COST OF PRODUCT SALES. Cost of product sales for Periostat were $2.3
million, or 20.4% of net product sales, for the six months ended June 30, 2000,
compared to $1.3 million, or 22.3% of net product sales, for the six months
ended June 30, 1999. This decrease resulted primarily from the absence of trade
allowances realized on product sales in the six months ended June 30, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 18.7% to $1.8 million for the six months ended June 30, 2000 from $2.2
million for the six months ended June 30, 1999. This decrease resulted primarily
from fewer expenses related to Phase 3b clinical studies to support the future
marketing activities for Periostat, decreased manufacturing and formulation
development work for Periostat tablets and reduced research and development
activities. These decreases were partially offset by a $324,000 non-cash
compensation charge incurred during the period related to accelerating the
vesting schedule on stock options granted to certain non-employees in 1999.
Expenditures made during the six months ended June 30, 2000 included, among
other expenditures, regulatory and consulting fees associated with the Company's
New Drug Application for Periostat tablets submitted to the FDA during the
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 14.1% to $13.4 million for the six months
ended June 30, 2000 from $11.8 million for the six months ended June 30, 1999.
This increase was due primarily to higher recruiting and continued training
expenses associated with new sales personnel hired in 2000. The Company also
incurred advertising and promotional expenses for Vioxx during the six months
ended June 30, 2000 as a result of its co-promotional agreement with Merck
signed in September 1999.
OTHER INCOME/EXPENSE. Interest income decreased to $351,000 in the six
months ended June 30, 2000 from $359,000 in the six months ended June 30, 1999.
This decrease was due to slightly lower average balances in cash and short-term
investments during 2000. Interest expense was $8,000 in the six months ended
June 30, 2000. This expense was primarily due to interest on the outstanding
balance on the note payable executed by the Company in April 1999. Interest
expense was $189,000 for the six months ended June 30, 1999 due primarily to
interest on the $10.0 million short term convertible note executed by the
Company in March 1999 which was repaid in connection with the Company's
Financing in May 1999.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends were $849,000 in the
six months ended June 30, 2000 as a result of the Company's obligations in
connection with the issuance of its Series D Stock in May 1999. Preferred stock
dividends for the six months ended June 30,
-11-
1999 were $235,000, and were accrued during the portion of that period that the
Series D Stock was outstanding.
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 "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. A portion
of the proceeds of such 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 Financing.
The Series D Stock is convertible at any time into shares of common stock
of the Company at an initial conversion price of $11.00 per common share. 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 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 have been and will continue to 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 June 30, 2000, $11.00 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.
-12-
At June 30, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $10.8 million, a decrease of $3.6 million from the
$14.4 million balance at December 31, 1999, due primarily to the loss from
operations during the six months ended June 30, 2000.
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
June 30, 2000 was $9.0 million, a decrease of $4.0 million from the $13.0
million balance at December 31, 1999. This decrease was primarily attributable
to the Company's cash used for normal operations during the six months ended
June 30, 2000.
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 newly leased 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.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least 2000. 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.
Recent Pronouncements
- ---------------------
In December 1999, the staff of the Securities and Exchange Commission
issued a Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements, including the recognition of non-refundable
fees received upon entering into arrangements. We are in the process of
evaluating this SAB and the effect it will have in our financial statements and
current revenue recognition policy. SAB 101, as amended, must be adopted no
later than the fourth quarter of 2000 with any impact reported as a cumulative
effect adjustment calculated as of January 1, 2000. Certain license fees
recognized as revenue during the three and six months ended June 30, 2000 may
need to be deferred once SAB 101 is adopted and amortized over a yet to be
estimated expected period of benefit.
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.
-13-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on May 8, 2000.
There were present at the Annual Meeting in person or by proxy stockholders
holding an aggregate of 6,542,240 shares of Common Stock and 189,000 shares of
Series D Stock, which shares of Series D Stock account for an additional
1,718,182 shares of Common Stock on an as converted to Common Stock basis. The
results of the vote taken at such Annual Meeting with respect to the election of
the nominees to be the Common Stock directors were as follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Brian M. Gallagher, Ph.D. 6,446,190 Shares 96,050 Shares
Helmer P.K. Agersborg, Ph.D. 6,535,260 Shares 6,980 Shares
Peter R. Barnett, D.M.D. 6,446,190 Shares 96,050 Shares
Robert C. Black 6,535,260 Shares 6,980 Shares
James E. Daverman 6,535,260 Shares 6,980 Shares
Robert J. Easton 6,535,260 Shares 6,980 Shares
Terence E. Winters, Ph.D. 6,535,260 Shares 6,980 Shares
The results of the vote taken at such Annual Meeting with respect to the
election of the nominee to be the Series D Director, Stephen A. Kaplan, were as
follows: 1,718,182 shares of Series D Stock (on an as converted to Common Stock
basis) were voted FOR the Series D Stock nominee, with no shares voting against
or abstaining.
In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the independent auditors
of the Company for the fiscal year ending December 31, 2000. For the purpose of
such vote, the holders of shares of Common Stock and the holders of Series D
Stock (on an as converted to Common stock basis) voted together as a single
class. Of such shares, 8,256,045 shares of Common Stock and Series D Stock voted
in favor of such proposal, 2,500 shares were voted against such proposal and
1,877 shares abstained from voting.
Item 5. Other Information.
On May 2, 2000, the Company announced that it had filed an application for
a Marketing Authorization for Periostat tablets with the United Kingdom
Medicines Control Agency (MCA). The MCA granted a marketing authorization for
Periostat capsules in February 2000. The Company intends to use the United
Kingdom as its Reference Member State to apply for registrations for Periostat
tablets in all of the countries of the European Union and Norway.
-14-
On May 2, 2000, the Company also announced that it had executed an
exclusive marketing and distribution agreement with ISDIN S.A., a Spanish
company, with respect to the marketing and distribution of Periostat tablets in
Spain and Portugal.
On June 9, 2000, the Company announced that it had executed marketing and
distribution agreements with Willvonseder & Marchesani Ges.m.b.H. & Co. KG., a
Vienna based company, and Karr Dental Ltd., a Zurich based company, with respect
to the marketing and distribution of Periostat tablets in Austria and
Switzerland, respectively.
On August 9, 2000, the Company announced that it had executed an exclusive
marketing and supply agreement with Showa Yakuhin Kako Co. Ltd., a Japanese
company, with respect to the marketing and supply of Periostat tablets in Japan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter to which this Form
10-Q relates.
-15-
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: August 14, 2000 By: /s/ Brian M. Gallagher, Ph.D.
---------------------------------
Brian M. Gallagher, Ph.D.
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /s/ Nancy C. Broadbent
---------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)