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 September 30, 1999
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.)
41 University Drive, Newtown, PA 18940
- --------------------------------------------------------------------------------
(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:
------- -------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of September 30, 1999:
Class Number of Shares
--------------------------- ----------------
Common Stock $.01 par value 8,596,829
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, 1998 and September 30, 1999 (unaudited).................... 2
Condensed Consolidated Statements of Operations for
the Three Months Ended September 30, 1998 and 1999
(unaudited).................................................... 3
Condensed Consolidated Statements of Operations for
the Nine Months Ended September 30, 1998 and 1999
(unaudited).................................................... 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1998 and 1999
(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.................................. 11
Year 2000 Issues................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II. OTHER INFORMATION................................................ 15
Item 2. Changes in Securities.......................................... 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES................................................................ 17
- i -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- 1 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1998 and September 30, 1999
December 31, September 30,
1998 1999
----------- -------------
(unaudited)
(dollars in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 3,286 $ 17,310
Short term investments ................................... 6,964 --
Accounts receivable, net of allowance of $293 and $393
in 1998 and 1999, respectively ......................... 3,045 1,359
Inventories .............................................. 342 696
Prepaid expenses and other current assets ................ 823 665
-------- --------
Total current assets ............................... 14,460 20,030
Equipment, net ............................................. 267 597
Other assets ............................................... 13 39
-------- --------
Total assets ....................................... $ 14,740 $ 20,666
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable .......................... $ -- $ 65
Accounts payable ......................................... 2,914 2,623
Accrued expenses ......................................... 2,545 2,464
-------- --------
Total current liabilities .......................... 5,459 5,152
-------- --------
Note payable, less current portion ......................... -- 133
-------- --------
Total stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; no shares and 200,000 shares of Series D
Cumulative Convertible Preferred Stock, $0.01 par
value, issued and outstanding in 1998 and 1999,
respectively (liquidation value of $20,663 at
September 30, 1999) .................................... -- 2
Common stock, $0.01 par value, 25,000,000 shares
authorized; 8,587,204 and 8,596,829 shares issued
and outstanding in 1998 and 1999, respectively ......... 86 86
Additional paid in capital ............................... 47,317 66,077
Deferred compensation .................................... (194) (106)
Accumulated deficit ...................................... (37,928) (50,678)
-------- --------
Stockholders' equity ............................... 9,281 15,381
-------- --------
Commitments
Total liabilities and stockholders' equity ......... $ 14,740 $ 20,666
======== ========
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 September 30, 1998 and 1999
(unaudited)
Three Months Ended
September 30,
------------------------
1998 1999
--------- ---------
(dollars in thousands, except share
and per share data)
Revenues:
Product sales................................. $ -- $ 4,219
Contract revenues............................. 1 126
License revenues.............................. 400 --
--------- ---------
Total revenues............................ 401 4,345
--------- ---------
Operating expenses:
Cost of product sales......................... -- 860
Research and development...................... 1,749 1,102
Selling, general and administrative........... 2,471 5,921
--------- ---------
Total operating expenses.................. 4,220 7,883
--------- ---------
Operating loss............................ (3,819) (3,538)
Other income (expense):
Interest income................................. 230 255
Interest expense................................ -- (3)
--------- ---------
Net loss.................................. (3,589) (3,286)
Preferred stock dividend........................ -- 429
--------- ---------
Net loss allocable to common stockholders....... $ (3,589) $ (3,715)
========= =========
Net loss per share allocable to common
stockholders:
Basic and Diluted............................. $ (0.42) $ (0.43)
========= ==========
Shares used in computing net loss per share
allocable to common stockholders:
Basic and Diluted............................. 8,586,735 8,591,992
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
- 3 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1998 and 1999
(unaudited)
Nine Months Ended
September 30,
------------------------
1998 1999
--------- ---------
(dollars in thousands, except share
and per share data)
Revenues:
Product sales................................. $ -- $ 9,839
Contract revenues............................. 8 262
License revenues.............................. 400 100
--------- ---------
Total revenues............................ 408 10,201
--------- ---------
Operating expenses:
Cost of product sales......................... -- 2,113
Research and development...................... 4,021 3,331
Selling, general and administrative........... 5,407 17,694
--------- ---------
Total operating expenses.................. 9,428 23,138
--------- ---------
Operating loss............................ (9,020) (12,937)
Other income (expense):
Interest income................................. 805 615
Interest expense................................ -- (192)
Other expense................................... -- (2)
--------- ----------
Net loss.................................. (8,215) (12,516)
Preferred stock dividend........................ -- 663
--------- ---------
Net loss allocable to common stockholders....... $ (8,215) $ (13,179)
========= ==========
Net loss per share allocable to common
stockholders:
Basic and Diluted............................. $ (0.96) $ (1.53)
========= ==========
Shares used in computing net loss per share
allocable to common stockholders:
Basic and Diluted............................. 8,576,337 8,590,224
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
- 4 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1999
(unaudited)
Nine Months Ended
September 30,
-----------------------------
1998 1999
------------ ------------
(dollars in thousands)
Cash flows from operating activities:
Net loss.................................................. $ (8,215) $ (12,516)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash compensation expense.......................... 91 151
Depreciation and amortization expense................. 27 137
Change in assets and liabilities:
Decrease in accounts receivable..................... -- 1,686
Increase in inventories............................. -- (354)
(Increase) decrease in prepaid expenses and other
assets............................................. (302) 132
Increase (decrease) in accounts payable............. 465 (291)
Increase (decrease) in accrued expenses............. 457 (81)
----------- -----------
Net cash used in operating activities........ (7,477) (11,136)
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (33) (467)
Proceeds from the sale of short term investments.......... 5,882 7,464
Purchase of short term investments........................ (3,474) (500)
----------- -----------
Net cash provided by investing activities.... 2,375 6,497
----------- -----------
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............. -- 18,456
Proceeds from the issuance of common stock................ 19 9
Proceeds from the issuance of note payable................ -- 219
Payments on note payable.................................. -- (21)
----------- ------------
Net cash provided by financing activities.... 19 18,663
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (5,083) 14,024
Cash and cash equivalents at beginning of period............ 16,379 3,286
----------- -----------
Cash and cash equivalents at end of period.................. $ 11,296 $ 17,310
=========== ===========
Supplemental schedule of non-cash financing activities:
Common stock dividend declared on Series D Cumulative
Convertible Preferred Stock............................. -- 234
See accompanying notes to unaudited condensed consolidated financial statements.
- 5 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
(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 1998 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 September 30, 1999, their results
of operations for the three and nine months ended September 30, 1998 and 1999,
and their cash flows for the nine months ended September 30, 1998 and 1999.
Interim results are not necessarily indicative of results anticipated for the
full fiscal year. Certain amounts in the 1998 unaudited condensed consolidated
financial statements have been reclassified to conform to the current year
presentation.
NOTE 2 -- EQUITY FINANCING AND SENIOR SECURED CONVERTIBLE NOTE:
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 "Preferred Stock"), which generated net proceeds to the
Company of $18.5 million. OCM Principal Opportunities Fund, L.P. ("OCM") led the
investor group, which also included certain current stockholders of the Company.
The issuance of the Preferred 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 Financing were used for the repayment
of a $10.0 million Senior Secured Convertible Note provided by OCM on March 19,
1999 in connection with the Financing. The remaining proceeds will be used for
general working capital purposes.
- 6 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
(Unaudited)
(Continued)
The Preferred 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 of the Preferred Stock is subject to adjustment in certain
circumstances including, but not limited to, the failure of the Company to
declare and pay dividends when due or the issuance of new equity securities or
convertible securities by the Company at a price per share or having a
conversion price per share lower than the then applicable conversion price of
the Preferred Stock.
During the first three years following issuance, holders of the Preferred
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.
The holders of the Preferred Stock are entitled to vote with the holders
of the Company's Common Stock on all matters to be voted on by the Company's
stockholders on an as-converted to Common Stock basis, subject to adjustment.
Without written approval of a majority of the holders of record of the
Preferred 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 Preferred 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 connection with the issuance of the Preferred Stock, the rights of the
holders of the Company's Common Stock may be limited in certain instances with
respect to dividend rights, rights on liquidation, winding up and dissolution of
the Company, and the right to vote in connection with certain matters submitted
to the Company's stockholders.
NOTE 3 -- NOTE PAYABLE:
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 note is
secured by a third party irrevocable standby letter of credit for an amount not
less than 90% of the financed property.
- 7 -
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
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, 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
130 sales representatives and managers. This sales force also co-promotes
Vioxx(R), a prescription non-sterodial anti-inflammatory drug developed by Merck
& Co., Inc., and Denavir(R), a prescription cold sore medication developed by
SmithKline Beecham, and the Company is actively pursuing other prescription
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 $50.7 million at September 30, 1999. The Company expects
to continue to incur losses in the near 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, risks relating to the Company's Year 2000 compliance and the Year
2000 compliance of the Company's vendors, suppliers, manufacturers,
distributors, marketing partners
- 8 -
and certain other parties 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. In addition,
there can be no assurance that any of the Company's product candidates (other
than the FDA's approval of Periostat in the United States, as set forth above)
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.
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 these
sales represented wholesale and retail stocking under introductory market launch
terms. During the three months ended March 31, 1999, June 30, 1999 and September
30, 1999, the Company achieved net product sales of $2.4 million, $3.2 million,
and $4.2 million, respectively, from the marketing of Periostat. The Company
realized a net loss during the first nine months of 1999, resulting primarily
from sales and marketing 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 payments to third parties, including
contract research organizations, universities and clinical investigators, for
services and materials for research, drug development 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 September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues. Total revenues increased to $4.3 million in the third quarter of
1999 from $401,000 in the third quarter of 1998. Revenues for the third quarter
of 1999 included $4.2 million in net sales of Periostat and $126,000 in contract
revenues. Revenues for the three months ended September 30, 1998 were derived
from license and contract revenues. There were no product sales revenues for the
three months ended September 30, 1998.
Cost of product sales. Cost of product sales were $860,000 for the three
months ended September 30, 1999, while there were no cost of product sales for
the three months ended September 30, 1998. Such increase resulted from the
Company's sales of Periostat, which did not commence until November 1998.
Research and development expenses. Research and development expenses
decreased 37% to $1.1 million in the third quarter of 1999 from $1.7 million in
the third quarter of 1998. This decrease resulted primarily from a shift in the
Company's research and development
- 9 -
expenditures from the FDA approval process relating to Periostat to
manufacturing and formulation development for Periostat.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 140% to $5.9 million in the third quarter of
1999 from $2.5 million in the third quarter of 1998. This increase was due
primarily to the Company's post-launch marketing activities related to Periostat
and the hiring of additional sales personnel.
Other income/expense. Interest income increased to $255,000 during the
three months ended September 30, 1999 from $230,000 during the three months
ended September 30, 1998. This increase was a function of the increased average
cash and short-term investments on hand during the quarter. Interest expense was
$3,000 for the three months ended September 30, 1999 due to interest on the
$219,000 note payable executed by the Company in April 1999. There was no
interest expense during the three months ended September 30, 1998, as there was
no debt then outstanding.
Preferred stock dividend. Preferred stock dividends increased to $429,000
during the three months ended September 30, 1999 as a result of the Company's
obligations in connection with the issuance of its Preferred Stock (as
hereinafter defined) in May 1999. No dividends were accrued or declared during
the three months ended September 30, 1998 as no shares of Preferred Stock were
outstanding during that period.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Revenues. Total revenues increased to $10.2 million for the nine months
ended September 30, 1999 from $408,000 in the first nine months of 1998.
Revenues for the first nine months of 1999 included $9.8 million in net sales of
Periostat, $262,000 in contract revenues and $100,000 in license revenues.
Revenues for the nine months ended September 30, 1998 were derived from license
and contract revenues. There were no product sales for the nine months ended
September 30, 1998.
Cost of product sales. Cost of product sales were $2.1 million for the
nine months ended September 30, 1999, while there were no cost of product sales
for the nine months ended September 30, 1998. Such increase resulted from the
Company's sales of Periostat, which did not commence until November 1998.
Research and development expenses. Research and development expenses
decreased 17% to $3.3 million for the nine months ended September 30, 1999 from
$4.0 million in the first nine months of 1998. This decrease resulted primarily
from a shift in the Company's research and development expenditures from the FDA
approval process relating to Periostat to manufacturing and formulation
development for Periostat.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 227% to $17.7 million for the nine months
ended September 30, 1999 from $5.4 million in the first nine months of 1998.
This increase was due primarily to the Company's post-launch marketing
activities related to Periostat and the hiring of additional sales personnel.
- 10 -
Other income/expense. Interest income decreased to $615,000 during the
nine months ended September 30, 1999 from $805,000 during the nine months ended
September 30, 1998. This decrease was a function of the decreased average cash
and short-term investments on hand during the quarter. Interest expense was
$192,000 for the nine months ended September 30, 1999 primarily due to the
interest on the $10.0 million short term convertible note executed by the
Company in March 1999. There was no interest expense during the nine months
ended September 30, 1998, as there was no debt then outstanding.
Preferred stock dividend. Preferred Stock dividends increased to $663,000
during the nine months ended September 30, 1999 as a result of the Company's
obligations in connection with the issuance of its Preferred Stock (as
hereinafter defined) in May 1999. No dividends were accrued or declared during
the nine months ended September 30, 1998 as no shares of Preferred Stock were
outstanding during that period.
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 follow-on 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 "Preferred
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Preferred 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 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 remaining proceeds will be used for
general working capital purposes. The Preferred 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 Preferred Stock. During the first three years
following issuance, holders of the Preferred 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. Without written approval of a majority of the holders of record of the
Preferred 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 Preferred 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
- 11 -
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. At September 30, 1999,
the Company had cash, cash equivalents and short-term investments of
approximately $17.3 million, an increase of $7.0 million from the $10.3 million
balance at December 31, 1998.
In accordance with investment guidelines approved by the Company's Board
of Directors, cash balances in excess of those required to fund operations are
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
September 30, 1999 was $14.9 million, an increase of $5.9 million from December
31, 1998. This increase was primarily attributable to the Financing, offset in
part by cash loss from operations incurred during the first nine months of 1999.
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 note is
secured by a third party irrevocable standby letter of credit for an amount not
less than 90% of the financed property.
The Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through December 31, 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.
Year 2000 Issues
- ----------------
Assessment
The Company believes its exposure to Year 2000 problems lies primarily in
two areas: (i) its own internal operating systems; and (ii) Year 2000 compliance
by third parties with whom the Company has a material relationship. The Company
has completed an assessment of its principal internal systems and its Year 2000
exposure with respect to third parties. While the costs of these assessment
efforts to date have not been material to the Company's financial condition or
any year's results of operations, there can be no assurance that this will be
the case with any future inquiries.
Internal Operating Systems
The Company believes that its principal internal systems are Year 2000
compliant. The Company recently installed upgraded versions of its internal
accounting, management and financial reporting applications which the vendor has
represented are Year 2000 compliant. Some of the Company's non-critical
applications, however, may not be Year 2000 compliant. The
- 12 -
Company is conducting a program to identify and resolve any such exposure.
Although the costs related to these efforts are not expected to be material to
the Company's business, financial condition or results of operations, no
assurance can be made that this will be the case.
Third-Party Relationships
The Company has conducted a program to identify and resolve Year 2000
exposure from third parties. The Company has made inquiries of its outside
vendors, suppliers, manufacturers, distributors and marketing partners to assess
their Year 2000 readiness. Such third parties have represented to the Company
that their principal internal systems are currently Year 2000 compliant or will
be Year 2000 compliant. Any failure of third parties with whom the Company has a
material relationship to resolve Year 2000 problems in a timely manner could
materially adversely affect the Company's business, financial condition or
results of operations.
Risks of the Company's Year 2000 Issues
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect the Company's business, financial condition or
results of operations. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting it have
been identified or will be corrected. Further, the Company cannot accurately
predict how many failures related to the Year 2000 problem will occur or the
severity, duration or financial consequences of such failures. As a result, the
Company expects that it could possibly suffer the following consequences:
o A significant number of operational inconveniences and
inefficiencies for the Company and the Company's customers that may
divert the Company's time and attention and financial and human
resources from the Company's ordinary business activities; and
o A lesser number of serious system failures (whether the Company's
systems or those of its vendors, suppliers, manufacturers,
distributors and marketing partners) that may require significant
efforts by the Company, its customers or third parties to prevent or
alleviate material business disruptions.
Costs
Other than time spent by the Company's own personnel, to date the Company
has not incurred any significant costs in identifying and remediating Year 2000
problems.
The Company's Contingency Plans
The Company believes its plans for addressing the Year 2000 problem are
adequate. The Company does not believe it will incur a material financial impact
from system failures, or from the costs associated with assessing and addressing
the risks of failure, arising from the Year 2000 problem. Consequently, the
Company does not intend to create a detailed contingency plan. In the event that
the Company does not adequately identify and resolve its Year 2000 issues, the
- 13 -
absence of a detailed contingency plan may materially adversely affect its
business, financial condition and results of operations.
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.
- 14 -
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The following information relates to all securities of the Company within
the third quarter of 1999 which were not registered under the securities laws at
the time of grant, issuance and/or sale:
1. During the third quarter of 1999, the Company granted stock options
pursuant to its 1996 Non-Employee Director Stock Option Plan which
were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). All of such option grants were granted at
the then current fair market value of the Common Stock. The
following table sets forth certain information regarding such grants
during the quarter:
Number Exercise
of Shares Price
--------- --------
50,000 $12.25
The Company did not employ an underwriter in connection with the issuance
of the securities described above. The Company believes that the issuance of all
of the foregoing securities was exempt from registration under: (i) Section 4(2)
of the Securities Act as transactions not involving any public offering and such
securities having been acquired for investment and not with a view to
distribution; 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.
ITEM 5. OTHER INFORMATION.
Co-Promotion Agreement
- ----------------------
The Company executed a Co-Promotion Agreement with Merck & Co., Inc.
("Merck") in September 1999 pursuant to which the Company will promote Merck's
Vioxx(R) product, an FDA approved prescription pharmaceutical for the treatment
of arthritis and acute pain in adults, including dental pain. The agreement
provides for certain payments by Merck to the Company upon future sales of
Vioxx.
Appointment of Directors
- ------------------------
On September 10, 1999, Robert C. Black and Stephen A. Kaplan were
appointed to the Company's Board of Directors. On May 12, 1999, the Company
consummated a $20.0 million financing through the issuance of its Series D
Cumulative Convertible Preferred Stock which generated net proceeds to the
Company of $18.5 million. OCM Principal Opportunities Fund, L.P. ("OCM") led the
investor group, which also included certain current stockholders of the Company.
Mr. Kaplan was appointed to the Board of Directors as the designee of OCM.
- 15 -
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
report on Form 10-Q relates.
- 16 -
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: November 12, 1999 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Nancy C. Broadbent
-------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
- 17 -