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, 1997.
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1758016
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 South State Street, Newtown, PA 18940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 579-7388
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
---- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of June 30, 1997:
Common Stock $0.01 par value 8,543,579
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,1996 and June 30,1997
12/31/96 6/30/97
-------- -------
(unaudited)
(in thousands except
share amounts)
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 9,848 $ 14,673
Short-term investments ............................. 8,367 12,603
Interest receivable ................................ 66 163
Prepaid expenses ................................... 88 112
-------- --------
Total current assets ........................ 18,369 27,551
Equipment, net ....................................... 57 84
Other assets ......................................... 11 11
-------- --------
Total assets ................................ $ 18,437 $ 27,646
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 46 $ 467
Accrued expenses .................................... 799 1,435
-------- --------
Total current liabilities .................... 845 1,902
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding ........... -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 7,535,533 and 8,543,579 shares issued
and outstanding in 1996 and 1997, respectively ... 75 85
Additional paid-in capital ......................... 35,552 47,152
Deferred compensation .............................. (296) (247)
Deficit accumulated during the development stage.... (17,739) (21,246)
-------- -------
Stockholders' equity ........................ 17,592 25,744
-------- --------
Commitments
Total liabilities and stockholders' equity .... $ 18,437 $ 27,646
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30,1996 and 1997
and for the period from January 10, 1992 (inception) to June 30,1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, For the Period from
-------------------------- -------------------------- 1/10/92 (inception)
1996 1997 1996 1997 to 6/30/97
---- ---- ---- ---- -------------------
(in thousands, except share amounts)
Revenues:
Licensing Fees ...................... $ -- $ 300 $ -- $ 300 $ 700
Operating expenses incurred in the
development stage:
Research and development ............ 1,301 1,379 2,277 2,072 15,116
Selling, general and administrative.. 535 1,385 953 2,353 8,167
----------- ----------- ----------- ----------- ---------
Total operating expenses ..... 1,836 2,764 3,230 4,425 23,283
Other income (expense)
Interest income ..................... 48 382 109 618 1,481
Other expense ....................... -- -- -- -- (144)
----------- ----------- ----------- ----------- ---------
Net loss .............................. $ (1,788) $ (2,082) $ (3,121) $ (3,507) $ (21,246)
=========== =========== =========== =========== =========
Accretion of undeclared dividends
attributable to mandatorily redeem-
able convertible preferred stock ...... $ 336 $ -- $ 720 $ -- $ 2,597
=========== =========== =========== =========== =========
Net loss allocable to common
stockholders ........................ $ (2,124) $ (2,082) $ (3,841) $ (3,507) $ (23,843)
=========== =========== =========== =========== =========
Proforma net loss per share ........... $ (0.31) $ (0.24) $ (0.56) $ (0.44)
=========== =========== =========== ===========
Shares used in computing
proforma net loss per share ......... 5,734,061 8,521,601 5,623,333 8,030,087
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
and for the period from January 10, 1992 (inception) to June 30,1997
(Unaudited)
Six Months Ended
June 30, For the Period
----------------- from 1/10/92
1996 1997 (inception) to 6/30/97
---- ---- ---------------------
(in thousands)
Cash flows from operating activities:
Net loss ....................................... $ (3,121) $ (3,507) $(21,246)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash research and development expense .... -- -- 514
Non-cash compensation expense ................ 101 49 221
Non-cash consulting expense .................. -- -- 15
Depreciation and amortization expense ........ 2 16 39
Change in assets and liabilities:
Increase in accounts and interest receivable.. -- (97) (163)
Increase in prepaid expenses ................. (13) (24) (112)
Increase in other assets ..................... (1) -- (11)
Increase in accounts payable ................. 290 421 467
Increase in accrued expenses ................. 275 636 1,435
-------- -------- --------
Net cash used in operating activities ............ (2,467) (2,506) (18,841)
-------- -------- --------
Cash flows from investing activities:
Organizational costs ........................... -- -- (5)
Capital expenditures ........................... (28) (43) (118)
Purchase of short-term investments (available
for sale) ................................... -- (15,587) (27,877)
Proceeds from the sale of short-term
investments (available for sale) ............. -- 11,351 15,274
-------- -------- --------
Net cash used in investing activities ............ (28) (4,279) (12,726)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock ...... -- -- 13,508
Proceeds from issuance of common stock ......... 18,053 11,610 29,707
Proceeds from issuance of promissory notes ..... -- -- 3,150
Repayment of promissory note ..................... -- -- (125)
-------- -------- --------
Net cash provided by financing activities ........ 18,053 11,610 46,240
-------- -------- --------
Net increase in cash and cash equivalents ........ 15,558 4,825 14,673
Cash and cash equivalents at beginning of period . 5,807 9,848 0
-------- -------- --------
Cash and cash equivalents at end of period ....... $ 21,365 $ 14,673 $ 14,673
======== ======== ========
4
(Continued from preceding page)
Six Months Ended
June 30, For the Period
----------------- from 1/10/92
1996 1997 (inception) to 6/30/97
---- ---- ---------------------
(in thousands)
Supplemental disclosure of cash flows information:
Cash paid for interest ......................... $ -- $ -- $ 23
======= ======== ========
Supplemental schedule of non-cash financing
activities:
Conversion of mandatorily redeemable
convertible preferred stock to common stock ... $19,628 $ -- $ 19,628
======= ======== ========
Accretion of undeclared dividends attributable
to mandatorily redeemable convertible
preferred stock ............................... $ -- $ -- $ 2,597
======= ======== ========
Conversion of promissory notes plus accrued
interest to preferred stock ................... $ -- $ -- $ 2,903
======= ======== ========
Deferred compensation .......................... $ 381 $ -- $ 469
======= ======== ========
Preferred stock issued in connection with
technology license agreements ................. $ -- $ -- $ 498
======= ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1997
(Unaudited)
(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 financial statements should be read in conjunction
with the Company's 1996 audited financial statements and footnotes.
The accompanying unaudited consolidated financial statements include the
results of the Company and its wholly-owned subsidiary (CollaGenex
International, Ltd.). All intercompany accounts and transactions have been
eliminated.
In the opinion of the Company's management, the accompanying unaudited
condensed financial statements have been prepared on a basis substantially
consistent with the audited financial statements and contain adjustments, all of
which are of a normal recurring nature, necessary to present fairly its
financial position as of June 30, 1997, its results of operations for the three
and six months ended June 30, 1996 and 1997 and for the period January 10, 1992
(inception) to June 30, 1997, and its cash flows for the six months ended June
30, 1996 and 1997 and for the period January 10, 1992 (inception) to June 30,
1997. Interim reports are not necessarily indicative of results anticipated for
the full fiscal year.
(2) Completion of Follow-on Offering of Common Stock
On April 8, 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock at a price of $12.50 per share. The net proceeds from
the offering after underwriting fees and other expenses were $11.6 million.
(3) Line of Credit
On June 26, 1997, the Company entered into a credit arrangement consisting
of a $5,000,000 line of credit (the "LOC") to support the future working capital
needs of the Company. The LOC will be unsecured as long as the Company's cash
and investment balances maintained with the lender or an affiliate of the lender
equals or exceeds $10,000,000. At the Company's option, the LOC will bear
interest at either the prime rate charged by the lender or LIBOR plus 2.15%. The
LOC is terminable by the lender at any time.
No balance was outstanding under the LOC at June 30, 1997.
6
(4) Licensing Fee
During 1996, the Company executed a licensing agreement with Boehringer
Mannheim Italia ("BMI") pursuant to which BMI will distribute and manufacture
Periostat(R) in Italy. The agreement provided for BMI to pay the Company a
license fee upon signing, additional fees upon the achievement of future
milestones and royalties upon future sales of Periostat in Italy, San Marino and
The Vatican City. During the second quarter of 1997, the Company received a
nonrefundable $300,000 licensing fee related to the achievement of the first
milestone under the agreement.
(5) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128 Earnings Per Share ("Statement 128").
Statement 128 replaces the presentation of primary earnings per share ("EPS")
and fully diluted EPS with basic EPS and diluted EPS, respectively. Statement
128 is effective for both interim and annual periods ending after December 15,
1997 and once implemented will require restatement of all prior EPS data to
conform with Statement 128. The Company believes that this restatement will not
be material.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company began operations in January 1992 and is engaged in the
development and commercialization of innovative, proprietary medical therapies
for the treatment of periodontal disease and other dental pathologies. Since
inception, the Company has had no revenues from product sales and has funded its
operations primarily from the proceeds of public and private offerings of equity
securities. Substantially all of the Company's expenditures to date have been
for pharmaceutical development, prelaunch sales and marketing activities and
general and administrative expenses.
Since inception, the Company has operated with a minimal number of
employees. Substantially all pharmaceutical development activities, including
clinical trials, have been contracted to independent contract research and other
organizations. The Company anticipates that it will significantly increase the
number of its employees over the next several years, primarily to build a
commercial infrastructure in anticipation of regulatory approval and market
commercialization of Periostat(R).
The Company has incurred losses each year since inception and had an
accumulated deficit of $21.2 million at June 30, 1997. The Company expects to
continue to incur losses in the foreseeable future from expenditures on
marketing, drug development, manufacturing and administrative activities.
The Company does not expect to generate any material revenues from sales of
its own products in 1997. No assurance can be given that such product sales will
be achieved in the future. Successful future operations will depend on the
Company's ability to develop, obtain regulatory approval for and commercialize
its products.
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 developing
pharmaceutical products is subject to a number of significant risks, including
risks inherent in research and development activities and in conducting business
in a highly regulated environment. The success of the Company depends to a large
degree upon obtaining FDA and foreign regulatory approval to market products
currently under development. There can be no assurance that any of the Company s
product candidates will be approved by any regulatory authority for marketing in
any jurisdiction or, if approved, that any such products 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.
8
Results of Operations
From inception through June 30, 1997, the Company had no revenues from
product sales. Operating expenses consist of research and development expenses,
prelaunch sales and marketing and general and administrative expenses. Research
and development expenses consist primarily of funds paid to contract research
organizations for the provision of services and materials for drug development
and clinical trials. General and administrative expenses consist primarily of
personnel salaries and benefits, contract selling expenses, professional and
consulting fees, facilities and general office expenses. The Company anticipates
that selling, general and administrative expenses will increase during the next
several years due to the expansion of its commercial infrastructure, primarily
in sales, marketing and finance.
During 1996, the Company executed a licensing agreement with Boehringer
Mannheim Italia ("BMI") pursuant to which BMI will distribute and manufacture
Periostat(R) in Italy. The Company earned $300,000 in licensing fee revenue
during the three month period ending June 30, 1997. This revenue represented a
milestone payment pursuant to the agreement. (See Note 4 of Notes to Condensed
Consolidated Financial Statements.)
Research and development expenses decreased $205,000, or 9%, but increased
$78,000, or 6%, respectively, for the six months and three months ended June 30,
1997, over the comparable year earlier periods. The decrease in the six month
period was due to lower contract costs associated with the New Drug Application
("NDA") for Periostat(R), which was submitted to the FDA in August 1996. The
increase in the three month period resulted from costs associated with
validating manufacturing processes for Periostat(R). Selling, general and
administrative expenses increased $1,400,000, or 147%, and $850,000, or 159%,
respectively, during these six and three month periods due to the hiring of
additional staff in finance, commercial development and sales and marketing, the
initiation of certain prelaunch sales and marketing activities, and higher
insurance and professional fees associated with becoming a public company.
Interest income for the six month period ended June 30, 1997 increased
$509,000 from the comparable period in 1996 due to higher interest income from
the invested net proceeds of the Company's initial public offering in June 1996
and its follow-on common stock offering in April 1997.
Liquidity and Capital Resources
On June 20, 1996, the Company completed an initial public offering of
2,000,000 shares of common stock at a price of $10.00 per share, which generated
net proceeds to the Company of approximately $18.0 million after underwriting
fees and related expenses. An additional $11.6 million, net of underwriting fees
and expenses, was raised as a result of the Company's follow-on offering of
1,000,000 shares of common stock completed on April 8, 1997 at a price of $12.50
per share (See Note 2 of Notes to Condensed Consolidated Financial Statements).
At June 30, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $27.3 million. This was an increase of $9.1 million
9
from the $18.2 million balance at December 31, 1996. 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 U.S. Treasury securities and commercial paper with a credit rating no
lower than A1/P1. The Company's working capital of $25.6 million at June 30,
1997 reflected an increase of $8.1 million from December 31, 1996 due primarily
to the proceeds received from the follow-on offering, less normal operating
expenses incurred during the six months ended June 30,1997.
The Company had no debt outstanding (other than accounts payable and
accrued expenses) at June 30, 1997. The Company had no capital leases
outstanding at June 30, 1997. On June 26, 1997, the Company entered into a
credit arrangement consisting of a $5,000,000 line of credit (the "LOC") to
support the future working capital needs of the Company. The LOC will be
unsecured as long as the Company's cash and investment balances maintained with
the lender or an affiliate of the lender equals or exceeds $10,000,000. At the
Company's option, the LOC will bear interest at either the prime rate charged by
the lender or LIBOR plus 2.15%. The LOC is terminable by the lender at any time.
No balance was outstanding under the LOC at June 30, 1997.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least 1998. The Company's
future capital requirements and the adequacy of its available funds will depend
on many factors, including the timing of FDA approval, if any, of the Company's
NDA for Periostat(R), such NDA having been submitted to the FDA in August 1996,
the size and scope of the Company's sales and marketing effort, 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
The following information relates to all securities of the Company sold by
the Company within the past quarter which were not registered under the
securities laws at the time of grant, issuance and/or sale:
1. The Company has, during the quarter, granted stock options pursuant to
its 1996 Stock Plan which, at the time of grant, had not yet been
registered under the securities laws. The following table sets forth
certain information regarding such grants during the quarter:
Number
of shares Exercise price
--------- --------------
25,000 $12.25
10
No underwriter was employed by the Company in connection with the issuance
of the securities described above. The Company believes that the issuance of all
of the foregoing securities were exempt from registration under either (i)
Section 4(2) of the Securities Act of 1933, as amended (the "Act") as
transactions not involving any public offering, or (ii) Rule 701 under the Act
as transactions made pursuant to a written compensatory benefit plan or pursuant
to a written contract relating to compensation. All recipients had adequate
access to information about the Company.
On July 14, 1997, the Company filed a Registration Statement on Form S-8
with respect to the Company's 1992 Stock Option Plan, as amended, 1996 Stock
Plan and 1996 Non-Employee Director Stock Option Plan, as amended.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual meeting of Shareholders of the Company (the "Meeting") was held
on May 8, 1997.
There were present at the Meeting in person or by proxy shareholders
holding an aggregate of 6,432,790 shares of Common Stock. The results of the
vote taken at such Meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
- --------------------- --- --------
Helmer P.K. Agersborg, Ph.D. 6,429,740 Shares 3,050 Shares
Brian M. Gallagher, Ph.D. 6,429,740 Shares 3,050 Shares
Peter R. Barnett, D.M.D. 6,429,740 Shares 3,050 Shares
Robert J. Easton 6,429,740 Shares 3,050 Shares
James E. Daverman 6,429,740 Shares 3,050 Shares
Stephen W. Ritterbush, Ph.D. 6,429,740 Shares 3,050 Shares
Pieter J. Schiller 6,429,740 Shares 3,050 Shares
Terence E. Winters, Ph.D. 6,429,740 Shares 3,050 Shares
In addition, a vote of the shareholders was taken at the Meeting on the
proposal to ratify the appointment of KPMG Peat Marwick LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1997. Of the
shares present at the meeting in person or by proxy, 6,428,790 shares of Common
Stock were voted in favor of such proposal, 2,500 shares of Common Stock were
voted against such proposal and 1,500 shares of Common Stock abstained from
voting.
In addition, a vote of the shareholders was taken at the Meeting on the
proposal to approve certain amendments to the Company's 1996 Non-Employee
Director Stock Option Plan. Of the shares present at the meeting in person or by
proxy, 5,573,269 shares of Common Stock were voted in favor of such proposal,
563,075 shares of Common Stock were voted against such proposal and 85,898
shares of Common Stock abstained from voting.
11
Item 5. Other Information.
Follow-on Offering of Common Stock
- ----------------------------------
On April 8, 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock at a price of $12.50 per share. The net proceeds from
the offering after underwriting fees and other expenses were $11.6 million.
Line of Credit
- --------------
On June 26, 1997, the Company entered into a credit arrangement consisting
of a $5,000,000 line of credit (the "LOC") to support the future working capital
needs of the Company. The LOC will be unsecured as long as the Company's cash
and investment balances maintained with the lender or an affiliate of the lender
equals or exceeds $10,000,000. At the Company's option, the LOC will bear
interest at either the prime rate charged by the lender or LIBOR plus 2.15%. The
LOC is terminable by the lender at any time. No balance was outstanding under
the LOC at June 30, 1997.
Product Launches
- ----------------
On May 12, 1997, the Company announced that it signed an exclusive
marketing agreement with the Parke-Davis Division of the Warner Lambert Company
to promote Ponstel(R)(Mefenamic Acid) to the professional dental community.
Ponstel(R) is a nonsteriodal anti-inflammatory drug indicated for the relief of
moderate pain. As of June 30, 1997, the Company had not recognized any revenue
from its marketing of Ponstel(R).
On June 17, 1997, the Company announced that it signed a marketing
agreement with Advanced Clincal Technologies, Inc. pursuant to which the Company
will promote Periocheck(R) to the professional dental community. Periocheck(R)
is an FDA-approved test for monitoring the periodontal disease process in the
dentist's office. As of June 30, 1997, the Company had not recognized any
revenue from its marketing of Periocheck(R).
Executive Officers
- ------------------
On June 9, 1997, the Company hired David F. Pfeiffer as Vice President,
Marketing, and on June 16, 1997, the Company hired Douglas C. Gehrig as Vice
President, Sales.
Extension of Collaboration Agreement with National Cancer Institute
- -------------------------------------------------------------------
On June 30, 1997, the Company and the National Cancer Institute ("NCI")
formally extended its collaboration with the Company. As a result, NCI and the
Company will collaborate in the clinical development of one of the Company's
compounds, Metastat(TM), for the prevention of cancer metastases. The Company
expects that Metastat(TM) will be the first of a new class of matrix
metalloproteinase (MMP) inhibitors to reach clinical development. Metastat(TM)
is a chemically modified tetracycline that has shown promise in pre-clinical
studies in a variety of human tumor types as an inhibitor of tumor growth and
metastases.
12
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Letter Agreement dated June 24, 1997 relating to CoreStates Bank
N.A. line of credit, together with Master Commercial Promissory Note.
10.2 - Consulting and Contract Service Agreement dated February 1, 1997 by
and between the Company and Innovative Customer Solutions, Ltd.
27 - Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report
on Form 10-Q is filed.
13
SIGNATURES
Pursuant to the requirements of the Securities and 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: July 31, 1997 By: /s/ Brian M. Gallagher, Ph.D
----------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 31, 1997 By: /s/ Nancy C. Broadbent
----------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
14