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Columbia Laboratories 10-Q 2008 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
For the
quarterly period ended September 30, 2008
OR
For the transition period from
______________ to ______________
Commission
File Number 1-10352
COLUMBIA
LABORATORIES, INC.
(Exact
name of Registrant as specified in its charter)
Registrant's
telephone number, including area code: (973) 994-3999
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
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
[ ]
Yes [X] No
Number of shares of Common Stock of
Columbia Laboratories, Inc. issued and outstanding as of October 31, 2008:
53,688,776
PART 1 - FINANCIAL
INFORMATION
Item 1. Financial
Statements
The following unaudited, condensed
consolidated financial statements of Columbia Laboratories, Inc. (“Columbia” or
the “Company”) have been prepared in accordance with the instructions to Form
10-Q and therefore omit or condense certain footnotes and other information
normally included in financial statements prepared in accordance with generally
accepted accounting principles (“GAAP”). In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial information for the interim
periods reported have been made. Results of operations for the nine
months ended September 30, 2008 are not necessarily indicative of the results
for the year ending December 31, 2008. It is suggested that these financial
statements be read in conjunction with the financial statements and related
disclosures for the year ended December 31, 2007 included in the Company’s
Annual Report on Form 10-K (the “2007 Annual Report”) filed with the Securities
and Exchange Commission (the “SEC”).
As disclosed in Notes 2 and 11 to the
financial statements in the 2007 Annual Report, the Company restated its
unaudited condensed consolidated financial statements for the first, second, and
third quarters of 2007. These restatements and revisions primarily
reflect adjustments to:
Correct
previously reported interest expense for financing agreements for overstatement
in each of such quarters of 2007 along with the respective decrease in the
accumulated deficit.
Correct
the classification of the contingently redeemable Series C Convertible Preferred
Stock (“Series C Preferred Stock”) from Stockholder’s Equity to temporary equity
for each of the quarters of 2007.
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
See notes
to condensed consolidated financial statements
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
See notes
to condensed consolidated financial statements
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
See notes
to condensed consolidated financial statements
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
See notes
to condensed consolidated financial statements
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
See notes
to condensed consolidated financial statements
COLUMBIA LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING
POLICIES:
The
significant accounting policies followed for quarterly financial reporting are
the same as those disclosed in Note (1) of the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007.
(2) SALES RETURN
RESERVES:
Revenues from the sale of products are
recorded at the time goods are shipped to customers. The Company believes that
it has not made any shipments in excess of its customers' ordinary course of
business inventory levels. The Company’s return policy allows product to be
returned for a period beginning three months prior to the product expiration
date and ending twelve months after the product expiration date. Provisions for
returns on sales to wholesalers, distributors and retail chain stores are
estimated based on a percentage of sales, using such factors as historical sales
information, distributor inventory levels and product prescription data, and are
recorded as a reduction to sales in the same period as the related sales are
recognized. The Company continually analyzes the reserve for future sales
returns and increases or decreases such reserve if deemed appropriate. The
Company purchases prescription data on all its products from IMS Health, a
leading provider of market information to the pharmaceutical and healthcare
industries. The Company also purchases certain information regarding inventory
levels from its larger wholesale customers. This information includes, for each
of the Company’s products, the quantity on hand, the number of days of inventory
on hand and a 28-day forecast of sales by units. Using this information and
historical information, the Company estimates potential returns by taking the
number of product units sold by the Company by expiration date and then
subtracting actual units and potential units that may be sold to end users
(consumers) based on prescription data up to five months prior to the product’s
expiration date. The Company assumes that our customers are using the first-in,
first-out method in filling orders so that the oldest saleable product is used
first. The Company also assumes that our customers will not ship product that
has expiration dating of less than six months to a retail pharmacy, but that
retail pharmacies will continue to dispense product they have on hand until two
months prior to the product’s expiration date. The Company’s products are used
by the consumer immediately so no additional shelf life is needed. Retail
pharmacies tend not to maintain a large supply of our products in their
inventory, so they order on an ‘as needed’ basis. The Company also subtracts
units that have already been returned or, based on notifications received from
customers, will be returned. The Company then records a provision for returns on
a quarterly basis using an estimated rate and adjusts the provision if the above
analysis indicates that the potential for product non-saleability
exists.
An analysis of the reserve for sales
returns is as follows:
*Sales
for 9 months subject to returns as of the end of the period
The Company believes that the greatest
potential for uncertainty in estimating sales returns is the estimation of
future prescriptions. They are wholly dependent on the Company’s ability to
market the products. If prescriptions are materially lower in future periods,
then the current reserve will likely be inadequate.
(3) STRATEGIC ALLIANCES
AGREEMENTS:
During
the three months ended September 30, 2008, the Company recorded a $0.6 million
reduction to revenues for estimated prior period sales price adjustments for
Crinone sold to Merck Serono.
Also,
during the three months ended September 30, 2008, the Company recognized in
revenues $2.9 million of deferred revenue from the cancellation of a license
agreement relating to the marketing of STRIANT in 18 European countries with
Ardana Biosciences, Ltd. (“Ardana”) due to Ardana’s bankruptcy.
(4)
INVENTORIES:
Inventories
consisted of the following:
During the three months ended September
30, 2008, the Company wrote down inventories of $0.7 million for short-dated
batches of progesterone gel products that were manufactured to qualify
alternative progesterone suppliers and for non-commercial
inventories.
(5) FINANCING
AGREEMENTS:
In an agreement dated July 31, 2002,
Quintiles Transnational Corp.’s (“Quintiles”) strategic investment group,
PharmaBio Development, Inc. (“PharmaBio”) agreed to pay the Company $4.5 million
in four equal quarterly installments commencing third quarter 2002 for the right
to receive a 5% royalty on the net sales of the Company’s women’s healthcare
products in the United States for five years beginning in the first quarter of
2003. The royalty payments were subject to minimum ($8 million) and
maximum ($12 million) amounts and because the minimum amount exceeded $4.5
million, the Company recorded the amounts received as liabilities. The excess of
the minimum ($8 million) to be paid by the Company over the $4.5 million
received by the Company was being recognized as interest expense over the
five-year term of the agreement, assuming an interest rate of
17%. The Company paid the final PharmaBio obligation under this
agreement of approximately $3.6 million on February 29, 2008. Therefore, there
was no interest expense recorded for the three and nine months ended September
30, 2008; $0.3 million was recorded as interest expense for the three months
ended September 30, 2007.
In an agreement dated March 5, 2003,
PharmaBio agreed to pay the Company $15 million in five quarterly installments
commencing with the signing of the agreement. In return, PharmaBio receives a 9%
royalty on net sales of STRIANT in the United States up to agreed annual sales
revenues, and a 4.5% royalty of net sales above those levels. The royalty term
is seven years. Royalty payments commenced for the quarter ended September 30,
2003 and are subject to minimum ($30 million) and maximum ($55 million) amounts.
Because the minimum amount of payments exceeds the $15 million received by the
Company, the Company has recorded the amounts received as liabilities. The
excess of the minimum ($30 million) to be paid by the Company over the $15
million received by the Company is being recognized as interest expense over the
seven-year term of the agreement, assuming an interest rate of 15%. $1.4 and
$1.2 million were recorded as interest expense for the nine months ended
September 30, 2008 and September 30, 2007, respectively. The Company has paid
PharmaBio $13.3 million under this agreement through September 30, 2008. For the
three months ended September 30, 2008 and September 30, 2007 the Company
recorded interest expenses of $0.5 million and $0.4 million
respectively.
Long term liabilities from financing
agreements consisted of the following:
(6) NOTES
PAYABLE:
On December 22, 2006, the Company
raised approximately $40 million in gross proceeds to the Company from the sale
of convertible subordinated notes to a group of institutional investors. The
notes bear interest at a rate of 8% per annum, are subordinated to the PharmaBio
financing agreement and mature on December 31, 2011. They are convertible into a
total of approximately 7.6 million shares of common stock of the Company, $0.01
par value per share (“Common Stock”) at a conversion price of $5.25. Investors
also received warrants to purchase 2,285,714 shares of Common Stock at an
exercise price of $5.50 per share. The warrants are exercisable and they expire
on December 22, 2011 unless earlier exercised or terminated. The Company used
the proceeds of this offering to acquire the U.S. marketing rights to CRINONE
from Ares Trading S.A. (“Merck Serono”) for $33 million and purchased Merck
Serono’s existing inventory of that product. The balance of the proceeds was
used to pay other costs related to the transaction and for general corporate
purposes.
We recorded original issue discounts of
$6.3 million to the notes based upon the fair value of warrants granted. In
addition, beneficial conversion features totaling $8.5 million have been
recorded as a discount to the notes and warrants. These discounts are being
amortized at an imputed rate over the five year term of the related notes. For
the three and nine month periods ended September 30, 2008, $0.7 million and $1.9
million, respectively, of amortization related to these discounts were
classified as interest expense in our consolidated statements of operations.
Unamortized discounts of $10.6 million and $12.5 million have been reflected as
a reduction to the face value of the convertible notes in our consolidated
balance sheet as of September 30, 2008 and December 31, 2007,
respectively.
(7) COMMON
STOCK:
In August of 2008, the Company issued
1,333,000 shares of Common Stock in an equity offering at $3.50 per share less
offering expenses of $0.6 million, resulting in net proceeds of $4.1 million.
During the nine months ended September 30, 2008, 310,199 options were exercised
for shares of Common Stock yielding proceeds to the Company of $0.6 million.
During the nine months ended September 30, 2008, the Company issued 151,720
shares of restricted Common Stock to key employees and directors of the Company.
Treasury shares purchased in 2008 totaled 45,644 shares at a cost of $0.1
million. During the nine months ended September 30, 2008, 4,547 shares of Series
E preferred stock were converted into 227,350 shares of Common
Stock.
(8) GEOGRAPHIC
INFORMATION:
The Company and its subsidiaries are
engaged in one line of business, the development and sale of pharmaceutical
products. In certain foreign countries these products may be
classified as medical devices or cosmetics by those countries’ regulatory
agencies. The following table shows selected unaudited information by geographic
area:
(9) INCOME (LOSS) PER COMMON
AND POTENTIAL COMMON SHARE:
The
calculation of basic and diluted loss per common and common equivalent share is
as follows:
Basic loss per share is computed by
dividing the net loss less preferred dividends by the weighted-average number of
shares of Common Stock outstanding during the period. Shares to be issued upon
the exercise of the outstanding options and warrants, the conversion of the
convertible notes and preferred stock are not included in the computation of
diluted loss per share as their effect is anti-dilutive. Shares to be issued
upon the exercise of the outstanding options and warrants or the conversion of
the convertible notes and preferred stock excluded from the calculation amounted
to 20,616,789 and 21,193,039 at September 30, 2008 and September 30, 2007,
respectively. Unvested restricted shares amounted to 217,282 and
182,096 at September 30, 2008 and September 30, 2007, respectively.
(10) LEGAL
PROCEEDINGS:
Claims and lawsuits have been filed
against the Company from time to time. Although the results of pending claims
are always uncertain, the Company does not believe the results of any such
actions, individually or in the aggregate, will have a material adverse effect
on the Company’s financial position or results of
operations. Additionally, the Company believes that it has reserves
or insurance coverage in respect of these claims, but no assurance can be given
as to the sufficiency of such reserves or insurance in the event of any
unfavorable outcome resulting from these actions.
In
connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which
assets consisted of the patents underlying the Company’s bioadhesive delivery
system (“BDS”), other patent applications, and related technology, the Company
agreed to pay Bio-Mimetics a royalty equal to two percent of the net sales of
products based on the assets up to an aggregate of $7.5 million or until the
last of the relevant patents expired. The Company determined that royalty
payments on STRIANT®, PROCHIEVE®, and CRINONE® terminated in September of 2006,
with the expiration of a certain Canadian patent, but continue on Replens® and
RepHresh®. On December 28, 2007, Bio-Mimetics filed a complaint in the United
States District Court for Massachusetts (Bio-Mimetics, Inc. v. Columbia
Laboratories, Inc.) alleging breach of contract, violation of the
covenant of good faith and fair dealing, and unjust enrichment for the Company’s
failure to continue royalty payments on STRIANT®, PROCHIEVE®, and CRINONE®. The
Company intends to defend this action vigorously.
(11) STOCK-BASED
COMPENSATION:
As a result of the adoption of SFAS No.
123R, the Company’s net loss for the three months ended September 30, 2008 and
September 30, 2007 included $0.3 million and $0.4 million, respectively, of
compensation expense and for the nine months ended September 30, 2008 and 2007,
the compensation expense was $1.1 million and $1.3 million,
respectively.
The Company granted options and
restricted stock to employees, consultants and directors. During the nine months
ended September 30, 2008 the Company granted options and restricted stock awards
of 1,082,300 and 151,720, respectively. During the nine months ended
September 30, 2008, 960,408 options expired unexercised (most of which were
previously issued in 1998) and 9,050 restricted shares were
forfeited.
(12) RECENT ACCOUNTING
PRONOUNCEMENTS:
In June
2008, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues
Task Force (“EITF”) Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”). The objective of EITF No.
08-4 is to provide transition guidance for conforming changes made to EITF No.
98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,” that result from EITF No. 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments,” and SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. The Company is currently
evaluating the impact of adoption of EITF No. 08-4 on the accounting for the
convertible notes and related warrants transactions.
In May
2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.” Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The Company is currently
evaluating the impact of the adoption of FSP APB 14-1 on the Company’s financial
condition and results of operations.
In March of 2008, the FASB issued SFAS
No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” – An Amendment of FASB’s
Statement No. 133, which expands the disclosure requirements in Statement 133
about an entity’s derivative instruments and hedging activities. It
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently
evaluating the impact that adopting SFAS No. 161 will have on its financial
position, cash flows, and statements of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which clarifies the definition of fair value, establishes
guidelines for measuring fair value, and expands disclosures regarding fair
value measurements. SFAS No. 157 does not require any new fair value
measurements and eliminates inconsistencies in guidance found in various prior
accounting pronouncements. On February 12, 2008, the FASB issued FSP 157-b (“FSP
157-b”) which delays the effective date of SFAS No. 157 for one year for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). SFAS No. 157 and FSP 157-b are generally effective
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The effective date of SFAS No. 157 for certain non-financial
assets and liabilities is fiscal years beginning after November 15, 2008 and for
interim periods within those years. The effectiveness of SFAS No. 157 on January
1, 2008 did not have a material impact on our financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar assets and liabilities. SFAS No.
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not
have a material impact on our financial statements.
In
December 2007, the FASB also issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) will change the accounting for business
combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141(R) will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141(R) will impact the Company in the event of
any future acquisition.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment to ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the Consolidated
Financial Statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160
clarifies that changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
non-controlling equity investment on the deconsolidation date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its non-controlling interest. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
Company is currently evaluating the impact that adoption of SFAS No. 160 will
have on its financial position, cash flows or results of
operations.
In June 2008, the FASB issued FSP “Determining Whether Instruments
Granted In Share-Based Payment Transactions are Participating Securities”
(“FSP 03-6-1”). FSP 03-6-1 clarifies that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are to be
included in the computation of earnings per share under the two-class method
described in SFAS No. 128, “Earnings Per Share.” FSP 03-6-1 is
effective for the Company on January 1, 2009 and requires all presented
prior-period earnings per share data to be adjusted retrospectively. The Company
is currently evaluating the impact that adopting FSP 03-6-1 will have on its
financial position, cash flows, and statements of operations.
In October 2008, the FASB issued FSP
No. 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not
Active” (“FSP 157-3”). FSP 157-3 clarifies the application of
SFAS 157 in a market that is not active and provides an example to illustrate
key considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 was
effective for the Company on September 26, 2008 for all financial assets and
liabilities recognized or disclosed at fair value in our Condensed Consolidated
Financial Statements on a recurring basis (at least annually). The
adoption of FSP 157-3 did not have a material impact on the Company’s financial
position, cash flows, and statements of operations. Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand the Company’s financial condition and
results of operations. The MD&A is provided as a supplement to, and should
be read in conjunction with, our financial statements and the accompanying notes
thereto.
We
receive revenues from our Progesterone Products that we either promote through
our own sales force to reproductive endocrinologists, obstetricians, and
gynecologists, and sell to wholesalers and specialty pharmacies, or sell to
licensees. We supplement our Progesterone Product revenue by selling other
products that use our BDS which we refer to as “Other Products.” Most of the
Other Product revenue is based on sales of products to licensees.
Products
for Fiscal 2008
All
of our products are manufactured in Europe by third parties on behalf of our
foreign subsidiaries who sell the products to our worldwide licensees, and to
the Company in the case of the products we commercialize ourselves in the United
States. Because our European revenues reflect these sales and are reduced only
by our product manufacturing costs, we have historically shown a profit from our
European operations.
Revenues
from our United States operations principally relate to the Company’s products
that we promote to physicians through our sales representatives, as well as
royalty income from products that we have licensed. The Company charges our
United States operations all selling and distribution expenses that support our
marketing, sales and distribution efforts. Research and development expenses are
charged to our United States operations for product development which
principally supports new products and new label indications for products to be
sold in this country. In addition, the majority of our general and
administrative expenses represents the Company’s management activities as a
public company and are charged to our United States operations. The amortization
of the repurchase of the U.S. rights to CRINONE ® is also
charged to our United States operations. As a result, we have historically shown
a loss from our United States operations that has been significantly greater
than, and offsets, the profits from our European operations.
Our net
loss for 2007 was $14.3 million, or $0.28 per basic and diluted common
share. We expect to continue to incur operating losses in the near
future because of the significant non-cash items related to the CRINONE®
acquisition, continuing research and development activities, selling and
distribution costs, and debt service. Our sales and distribution
expenses will be higher in 2008 to fund market research critical to our growth
strategy. In 2008, we expect that our research and development expenses will be
higher than those in 2007 as we focus on medical education programs, the
clinical development of vaginal lidocaine for dysmenorrhea and a clinical trial
for PROCHIEVE 8% to reduce the risk of preterm birth in women with a short
cervix as measured by transvaginal ultra sound at mid-pregnancy. This study
is referred to as the PREGNANT (PRochieve Extending GestatioN A New Therapy)
Study.
Results
of Operations - Nine Months Ended September 30, 2008 versus Nine Months Ended
September 30, 2007 (Restated)
Net revenues increased 38% in the nine
months ended September 30, 2008 to $29.3 million as compared to $21.3 million in
the nine months ended September 30, 2007.
Revenues from Progesterone Products
increased 35% in the nine months ended September 30, 2008, to $18.9 million as
compared to $14.0 million in the nine months ended September 30, 2007, primarily
as a result of increased sales of CRINONE in the U.S. and foreign markets. In
September 2008, the Company recorded a $0.4 million reduction to revenues
recorded in prior periods for its CRINONE sold in foreign markets for estimated
sales price adjustments. The growth in CRINONE is primarily from increases in
unit volume and to a lesser extent price increases. Revenues from Other Products
increased 77% to $10.3 million in the nine months ended September 30, 2008, as
compared to $7.3 million in the nine months ended September 30, 2007. The
Company recognized $2.9 million in the third quarter of 2008 for deferred
revenue from the cancellation of the Ardana contract for STRIANT due to Ardana’s
bankruptcy. Increases in orders of Replens and sales of STRIANT also contributed
to the increase in this category.
Gross profit as a percentage of
revenues was 70% in the nine months ended September 30, 2008 and 69% in the nine
months ended September 30, 2007. The one point increase in gross profit
percentage from 2007 to 2008 was the result of the recognition of the deferred
revenue from Ardana offset by the $0.4 million reduction to revenues recorded in
prior periods for its CRINONE sold in foreign markets for estimated sales price
adjustments and inventory write-offs of $0.7 million for short-dated batches of
progesterone gel products that were manufactured to qualify alternative
progesterone suppliers and for non-commercial inventories.
Selling and distribution expenses
include payroll, employee benefits, equity compensation and other
personnel-related costs associated with sales and marketing personnel,
advertising, market research, market data capture, promotions, tradeshows,
seminars, other marketing-related programs and distribution costs. Selling and
distribution expenses increased 43% to $9.9 million in the nine months ended
September 30, 2008, as compared to $6.9 million in the nine months ended
September 30, 2007. For the nine months ended September 30, 2008, sales force
and other personnel costs increased to $5.3 million compared with $3.5 million
for the same period in 2007, primarily due to an increase in the sales force to
32 persons in September 2008 from 20 persons in September 2007. Market research
costs in the nine months of 2008 increased to $4.0 million compared with $2.7
million for the same period in 2007 primarily due to market research and
marketing expenses to aid the Company in promoting CRINONE and primary market
research on the use of PROCHIEVE.
General and administrative expenses
include payroll, employee benefits, equity compensation and other
personnel-related costs associated with the finance, legal, regulatory affairs,
information technology, facilities, certain human resources and other
administrative personnel, as well as legal costs and other administrative fees.
General and administrative expenses increased 14% to $6.6 million in the nine
months ended September 30, 2008 as compared to $5.8 million in the nine months
ended September 30, 2007. The increase in the nine months of 2008 expenses is a
combination of an increase in professional fees of $0.4 million and general
expenses of $0.4 million over the prior year period.
Research and development
expenses include payroll, employee benefits, equity compensation and other
personnel-related costs associated with product development, as well as the cost
of conducting and administering clinical studies and the cost of regulatory
filings for our products. Research and development expenses increased
33% to $5.1 million in the nine months ended September 30, 2008, as compared to
$3.8 million in the nine months ended September 30, 2007. Enrollment costs for
the Company’s Phase III PREGNANT Study were $1.8 million in the nine months
ended September 30, 2008. Expenses for the Company’s prior preterm birth study
and PREGNANT trial start-up costs for the nine months ended September 30, 2007,
were $1.6 million. The Company also contracted with medical science liaisons to
consult with thought leaders and doctors about the use of progesterone. These
services and other consultants increased by $0.4 million.
The Company purchased the marketing
rights for U.S. sales of CRINONE ® 8% from
Merck Serono in December 2006 for $33 million. In the second quarter of 2007,
the Company recognized a $1 million adjustment to the purchase price to reflect
contingent liabilities for Merck Serono sales returns. The $33 million charge is
being amortized over 6.75 years, and the $1 million charge is being amortized
over 6.5 years. Amortization of the acquisition cost for the CRINONE U.S.
marketing rights for the nine months ended September 30, 2008 and September 30,
2007 was $3.8 million.
Other income/(expense) for the nine
months ended September 30, 2008 consisted primarily of interest expense of $5.9
million associated with the $40 million convertible notes and the financing
agreement with PharmaBio. Interest expense for the nine months ended September
30, 2007 was $5.9 million (restated).
As a result, the net loss for the nine
months ended September 30, 2008 was $10.6 million or $0.20 per share as compared
to the net loss for the nine months ended September 30, 2007 of $10.9 million or
$0.21 per share (restated).
Results
of Operations - Three Months Ended September 30, 2008 versus Three Months Ended
September 30, 2007 (Restated)
Net revenues increased 52% in the three
months ended September 30, 2008, to $11.1 million, as compared to $7.3 million
in the three months ended September 30, 2007.
Revenues from Progesterone Products
increased 51% in the three months ended September 30, 2008, to $6.5 million as
compared to $4.3 million in the three months ended September 30, 2007, primarily
as a result of increased sales of CRINONE in the U.S. and foreign markets. In
September 2008, the Company recorded a $0.6 million reduction to revenues
recorded in prior periods for its CRINONE sold in foreign markets for estimated
sales price adjustments. The growth in CRINONE is primarily from increases in
unit volume and to a lesser extent price increases. Revenues from Other Products
increased 54% to $4.7 million in the three months ended September 30, 2008, as
compared to $3.0 million in the three months ended September 30, 2007. The
Company recognized $2.9 million of deferred revenue in the third quarter from
the cancellation of the Ardana contract for the marketing of STRIANT in Europe,
due to Ardana’s bankruptcy. In addition, sales of Replens® and
RepHresh® were
below third quarter 2007 levels by $1 million due to the timing of
orders.
Gross profit as a percentage of
revenues was 74% in the three months ended September 30, 2008, and 76% in the
three months ended September 30, 2007. The two percentage point decrease in
gross profit percentage from 2007 to 2008 was primarily the result of the
recognition of the deferred revenue from Ardana, offset by the reduction to
revenues recorded in prior periods for estimated sales price adjustments for
CRINONE sold in foreign markets of $0.6 million and inventory write-offs of $0.7
million for short-dated batches of progesterone gel products that were
manufactured to qualify alternative progesterone suppliers and for
non-commercial inventories.
Selling and distribution expenses
include payroll, employee benefits, equity compensation and other
personnel-related costs associated with sales and marketing personnel, and
advertising, market research, market data capture, promotions, tradeshows,
seminars, other marketing-related programs and distribution information service
fees. Selling and distribution expenses increased 23% to $3.5 million in the
three months ended September 30, 2008, as compared to $2.8 million in the three
months ended September 30, 2007. In the three months ended September 30, 2008,
sales force and management costs were $1.7 million compared to $1.3 million in
the three months ended September 30, 2007. Market research costs for the three
months ended September 30, 2008 and 2007 were $1.6 million and $1.1 million,
respectively. Other sales and marketing costs were approximately $0.3 million in
2008 and $0.5 million in 2007. The primary reasons for the increase were
expansion of the sales force from 20 to 32 representatives and market research
expenses to aid the Company in promoting CRINONE 8%. New marketing programs were
also added to support CRINONE sales.
General and administrative expenses
include payroll, employee benefits, equity compensation and other
personnel-related costs associated with the finance, legal, regulatory affairs,
information technology, facilities, certain human resources and other
administrative personnel, as well as legal costs and other administrative
fees. General and administrative expenses increased 9% to $2.1
million in the three months ended September 30, 2008, as compared to $1.9
million in the three months ended September 30, 2007. The key expense increases
were in professional fees of $0.1 million and other expenses of $0.2
million.
Research and development
expenses include payroll, employee benefits, equity compensation and other
personnel-related costs associated with product development, as well as the cost
of conducting and administering clinical studies and the cost of regulatory
filings for our products. Research and development expenses increased
5% to $1.5 million in the three months ended September 30, 2008, as compared to
$1.4 million in the three months ended September 30, 2007. The increase is
primarily related to the addition of medical science liaison professional’s
expense of $0.4 million and PREGNANT study expenses of $0.1 million over 2007
levels, less a reduction of $0.5 million in Lidocaine trial expenses in the
quarter.
The Company purchased the marketing
rights for U.S. sales of CRINONE from Merck Serono in December 2006 for $33
million. In the second quarter of 2007, the Company recognized a $1 million
adjustment to the purchase price to reflect contingent liabilities for Merck
Serono sales returns. The $33 million charge is being amortized over 6.75 years,
and the $1 million charge is being amortized over 6.5 years. Amortization
expense of the acquisition cost for the CRINONE U.S. marketing rights was $1.3
million for each of the three months ended September 30, 2008 and September 30,
2007.
Other income/(expense) for the quarters
ended September 30, 2008 and September 30, 2007 consisted primarily of interest
expense of $2.0 million in each period associated with the $40 million
convertible notes financing completed in December 2006 and the financing
agreements with PharmaBio. Interest income in the quarter ended September 30,
2008 was lower than the prior year due to lower cash balances.
As a result, the net loss for the three
months ended September 30, 2008, was $2.1 million, or $0.04 per share as
compared to the net loss for the three months ended September 30, 2007 of $3.7
million, or $0.07 per share of Common Stock (restated).
Liquidity
and Capital Resources
Cash and cash equivalents were $12.8
and $19.2 million at September 30, 2008 and September 30, 2007,
respectively. The Company believes the approximately $13 million of
cash on hand at September 30, 2008 is sufficient to sustain its
operations.
Cash provided by (used in) operating,
investing and financing activities is summarized as follows:
Operating
Activities:
Net cash used in operating activities
for the nine month period ended September 30, 2008 was $4.9 million. The net
loss of $10.6 million in the nine months ending September 30, 2008 included
non-cash items for depreciation, amortization, stock-based compensation,
provision for sales returns, non-cash interest expense and deferred revenue
related to Ardana which totals $7.3 million in aggregate, leaving a net cash
loss, net of non-cash items, of $3.3 million for the 2008 period. Accounts
receivable increased by $1.4 million as a result of increased sales. Inventories
increased by $0.2 million during the period. Accounts payable increased by $0.5
million and accrued expenses increased by $0.4 million. The increase
in accounts payable is due primarily to higher inventory levels and increased
expenses for clinical trials. The increase in accrued expenses of $0.4 million
relates to price adjustments on international CRINONE sales.
Net cash used in operating activities
for the nine months ended September 30, 2007 resulted primarily from increases
in working capital. The net loss of $10.8 million included non-cash items for
depreciation, amortization, stock-based compensation, provision for sales
returns and non-cash interest expense, which totals $8.8 million in aggregate,
leaving a net cash loss, net of non-cash items, of $2.1 million for the nine
months ended September 30, 2007. Accounts receivable increased by $1.6 million
as a result of the increased sales during the 2007 nine month period.
Inventories also grew by $0.1 million during the period to cover CRINONE and
STRIANT demands. Accounts payable and accrued expenses decreased by $0.7 million
and $1.5 million, respectively.
Investing
activities:
Net cash used in investing activities
of $0.4 million in the nine months ended September 30, 2008 was primarily
attributable to the purchase of production equipment and office equipment. There
were no significant expenses in the nine months ended September 30,
2007.
Financing
Activities:
Net cash provided by financing
activities in the nine months ended September 30, 2008 was $1.0 million. The
Company raised $4.1 million, net of expenses, through the sale of 1,333,000
shares of Common Stock at $3.50. Earlier in 2008, the Company made the $3.5
million final payment to PharmaBio under the financing agreement relating to the
Company’s women’s healthcare products. The balance of the financing activities
is proceeds from the exercise of stock options in the amount of $0.6 million,
purchase of treasury stock for $0.1 million and dividends on the Company’s
Series C Preferred Stock.
Net cash used in financing activities
in the nine months ended September 30, 2007 of $0.0 million was attributable to
dividends on the Company’s Series C Preferred Stock offset by the exercise of
stock options.
The Company has an effective
registration statement that we filed with the SEC using a shelf registration
process that expires December 1, 2008. Under the shelf registration process we
may offer from time to time shares of our Common Stock up to an aggregate amount
of $75 million. To date, the Company has sold approximately $61.1 million in
Common Stock under the registration statement. On November 6, 2008 the Company
announced its intention to file a new registration statement for up to $50
million for any combination of Common Stock, preferred stock, debt securities,
and warrants. We may continue to offer and sell shares of Common Stock under the
effective registration statement until the earlier of the effectiveness of the
new registration statement and 180 days after the expiration date of the
currently effective registration statement. We cannot be certain that additional
funding will be available on acceptable terms, or at all. To the extent that we
raise additional funds by issuing equity or equity-linked securities, such as
convertible preferred stock, warrants or convertible debt, our stockholders may
experience significant dilution. Any debt financing, if available, may involve
restrictive covenants that impact our ability to conduct our business. If we are
unable to raise additional capital when required or on acceptable terms, we may
have to significantly delay, scale back or discontinue the marketing of one or
more of our products and/or the development and/or commercialization of one or
more product candidates.
In connection with the 1989 purchase of
the assets of Bio-Mimetics, Inc., which assets consisted of certain patents
underlying the Company’s BDS, other patent applications and related technology,
the Company pays Bio-Mimetics, Inc. a royalty equal to two percent (2%) of the
net sales of products based on the assets purchased from Bio-Mimetics, Inc., up
to an aggregate of $7.5 million or until the last of the relevant patents
expire. The Company is required to prepay 25% of the remaining maximum royalty
obligation in cash or stock, at the option of the Company, within 30 days of
March 2 of any year in which the closing price on that date of the Company’s
Common Stock on any national securities exchange is $20 or more. Through
September 30, 2008, the Company has paid approximately $3.7 million in royalty
payments to Bio-Mimetics. Due to the expiration in September 2006 of certain
patents purchased from Bio-Mimetics, Inc., royalties to Bio-Mimetics, Inc. are
no longer due on CRINONE®, PROCHIEVE®, or STRIANT®.
As of September 30, 2008, the Company
had outstanding exercisable options and warrants that, if exercised, would
result in approximately $44.4 million of additional capital and would cause the
number of shares of Common Stock outstanding to increase. Options and warrants
outstanding at September 30, 2008 were 4,747,998 and 4,867,755, respectively,
with average exercise prices of $3.54 and $5.67
respectively. However, there can be no assurance that any such
options or warrants will be exercised.
The Company anticipates that
significant expenditures in the near future will be concentrated on research and
development related to new products and new indications for currently approved
products.
The
current stock market and credit market conditions are extremely
volatile. It is difficult to predict whether these conditions will
continue or worsen and, if so, whether the conditions would impact the Company
and whether the impact would be material. In particular, constriction
and volatility in the equity and debt markets may restrict our future ability to
access these markets to meet our future capital or liquidity needs.
A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because a significant portion of our operations has been and will
continue to be financed through the sale of equity securities and equity linked
securities (warrants and convertible debt), a decline in the price of our common
stock could be especially detrimental to our liquidity and our
operations
Contractual
Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
The Company’s contractual obligations,
commercial commitments and off-balance sheet arrangement disclosures in its
Annual Report on Form 10-K for the year ended December 31, 2007, have not
materially changed since that report was filed.
Recent
Accounting Pronouncements
In June
2008, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues
Task Force (“EITF”) Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.
08-4 is to provide transition guidance for conforming changes made to EITF No.
98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,” that result from EITF No. 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments,” and SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. The Company is currently
evaluating the impact of adoption of EITF No. 08-4 on the accounting for the
convertible notes and related warrants transactions.
In May
2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”). FSP APB 14-1 clarifies that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants”. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is not permitted. The Company is currently
evaluating the impact of the adoption of FSP APB 14-1 on the Company’s financial
condition and results of operations.
In March of 2008, FASB issued SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities” – An Amendment of FASB
Statement No. 133, which expands the disclosure requirements in Statement 133
about an entity’s derivative instruments and hedging activities. It
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently
evaluating the impact that adopting SFAS No. 161 will have on its financial
position, cash flows, and statements of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which clarifies the definition of fair value,
establishes guidelines for measuring fair value, and expands disclosures
regarding fair value measurements. SFAS No. 157 does not require any new fair
value measurements and eliminates inconsistencies in guidance found in various
prior accounting pronouncements. On February 12, 2008, the FASB issued FSP 157-b
(“FSP 157-b”) which delays the effective date of SFAS No. 157 for one year for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). SFAS No. 157 and FSP 157-b are effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. As proposed the effective date of SFAS No. 157 would be deferred to
Fiscal years beginning after November 15, 2008 and for interim periods within
those years for certain non-financial assets and liabilities. The Company is
currently evaluating the impact that adopting SFAS No. 157 will have on its
financial position, cash flows, or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar assets and liabilities. SFAS No.
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not
have a material impact on our financial statements.
In
December 2007, the FASB also issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) will change the accounting for business
combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141(R) will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141(R) will impact the Company in
the event of any future acquisition.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment to ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the Consolidated
Financial Statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160
clarifies that changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
non-controlling equity investment on the deconsolidation date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its non-controlling interest. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
Company is currently evaluating the impact that adoption of SFAS No. 160 will
have on its financial position, cash flows or results of
operations.
In June 2008, the FASB issued FSP
03-6-1 “Determining Whether
Instruments Granted In Share-Based Payment Transactions are Participating
Securities” (“FSP 03-6-1’). FSP 03-6-1 clarifies that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
are to be included in the computation of earnings per share under the two-class
method described in SFAS No. 128, “Earnings Per Share.” FSP 03-6-1 is
effective for the Company on January 1, 2009 and requires all presented
prior-period earnings per share data to be adjusted retrospectively. The Company
is currently evaluating the impact that adopting FSP 03-6-1 will have on its
financial position, cash flows, and statements of operations.
In October 2008, the FASB issued FSP
No. 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active”
(“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157
in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157- 3 was
effective for the Company on September 26, 2008 for all financial assets and
liabilities recognized or disclosed at fair value in our Condensed Consolidated
Financial Statements on a recurring basis (at least annually). The
adoption of FSP 157-3 did not have a material impact on the Company’s financial
position, cash flows, and statements of operations.
Critical
Accounting Policies and Estimates
The Company has identified
the policies below as critical to its business operations and the understanding
of its results of
operations. For a detailed discussion on the application of these and other
accounting policies, see Note 1 of the consolidated financial
statements included in Item 15 of the Annual Report on Form 10-K for the year
ended December 31, 2007, beginning on page F-12. Note that the preparation of
this Quarterly Report on Form 10-Q requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
Revenue Recognition. The
Company’s revenue recognition is significant because revenue is a key component
of our results of operations. In addition, revenue recognition determines the
timing of certain expenses, such as commissions and
royalties. Revenue results are difficult to predict, and any
shortfall in revenue or delay in recognizing revenue could cause operating
results to vary significantly from quarter to quarter. Revenues from the sale of
products are recorded at the time goods are shipped to customers. Provisions for
returns, rebates and other allowances are estimated based on a percentage of
sales, using such factors as historical trends, distributor inventory levels and
product prescription data, and are recorded in the same period the related sales
are recognized. The Company regularly evaluates its product return reserves
based on the actual experience and adjusts its reserve to reflect the market
circumstances which have changed. Royalties and additional monies owed to the
Company based on the strategic alliance partners’ sales are recorded as revenue
as those sales are made by the strategic alliance
partners.
License fees are recognized in net sales over the term of the
license.
Accounting for PharmaBio
Agreements. In July 2002 and March 2003, the Company entered into
agreements with PharmaBio under which the Company received upfront money paid in
quarterly installments in exchange for royalty payments on certain of the
Company’s products to be paid to PharmaBio for a fixed period of time. The
royalty payments are subject to minimum and maximum amounts. Because the minimum
amounts are in excess of the amount to be received by the Company, the Company
has recorded the money received as liabilities. The excess of the minimum to be
paid by the Company over the amount received by the Company is being recorded as
interest expense over the terms of the agreements. The Company has corrected
previously reported interest expense for these financing arrangements for
overstatement in each of the quarters of 2007. See Notes 2 and 11 to
the Company’s financial statements included in Item 15 of the 2007 Annual
Report. The July 2002 agreement terminated at December 31, 2007 pursuant to its
terms.
Stock-Based Compensation – Employee
Stock-Based Awards. Commencing January 1, 2006 the Company adopted
Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS
123R”), which requires all share based payments, including grants of stock
options, to be recognized in the income statement as an operating expense, based
on their fair values. In March 2005, the SEC issued Staff Accounting Bulletin
No. 110 (“SAB 110”) providing supplemental implementation guidance for SFAS
123(R). The Company has applied the provisions of SAB 110 in its adoption of
SFAS 123(R).
Forward-Looking
Information
The Company and its representatives
from time to time make written or verbal forward-looking statements, including
statements contained in this and other filings with the SEC and in the Company’s
reports to stockholders, which are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements
include, without limitation, the Company’s expectations regarding clinical
research programs, sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions and general
views about future operations or operating results. Some of these statements can
be identified by the use of forward-looking terminology such as "prospects,"
"outlook," "believes," "estimates," "intends," "may," "will," "should,"
"anticipates," "expects" or "plans," or the negative or other variation of these
or similar words, or by discussion of trends and conditions, strategy or risks
and uncertainties.
Although the Company believes its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that might
cause future results to differ include, but are not limited to, the following:
the successful marketing of CRINONE® 8%,
PROCHIEVE® 8%, and
STRIANT in the U.S.; the timing and size of orders for out-licensed products
from our marketing partners; the timely and successful development of new
products and new indications for current products including PROCHIEVE 8% to
reduce the risk of preterm birth in women with a short cervix at mid-pregnancy
and vaginal lidocaine product candidate for dysmenorrhea; success in obtaining
acceptance and approval of new products and new indications for current products
by the FDA and international regulatory agencies; the impact of competitive
products and pricing; competitive economic and regulatory factors in the
pharmaceutical and health care industry; general economic conditions; and other
risks and uncertainties that may be detailed, from time to time, in the
Company’s reports filed with the SEC. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements in this Quarterly Report on Form 10-Q. Readers
are advised to consult any further disclosures the Company may make on related
subjects in subsequent Form 10-Q, 8-K, and 10-K reports to the SEC.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
The Company does not believe that it
has material exposure to market rate risk. The Company may, however, require
additional financing to fund future obligations and no assurance can be given
that the terms of future sources of financing will not expose the Company to
material market risk.
Item 4. Controls
and Procedures.
Evaluation
of Disclosure Controls and Procedures.
We maintain “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation for the
period covered by this quarterly report on Form 10-Q, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.
Changes
in Internal Control over Financial Reporting
There was no change in our internal
control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART II - OTHER
INFORMATION
Item
1. Legal
Proceedings.
Claims and lawsuits have been filed
against the Company from time to time. Although the results of pending claims
are always uncertain, the Company does not believe the results of any such
actions, individually or in the aggregate, will have a material adverse effect
on our financial position or results of operation. Additionally, the
Company believes that it has reserves or insurance coverage in respect of these
claims, but no assurance can be given as to the sufficiency of such reserves or
insurance in the event of for any unfavorable outcome resulting from these
actions.
In
connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which
assets consisted of the patents underlying the Company’s BDS, other patent
applications, and related technology, the Company agreed to pay Bio-Mimetics a
royalty equal to two percent of the net sales of products based on the assets up
to an aggregate of $7.5 million or until the last of the relevant patents
expired. The Company determined that royalty payments on STRIANT®,
PROCHIEVE®, and
CRINONE®
terminated in September of 2006, with the expiration of a certain Canadian
patent, but continue on Replens® and
RepHresh®. On
December 28, 2007, Bio-Mimetics filed a complaint in the United States District
Court for Massachusetts (Bio-Mimetics, Inc. v. Columbia
Laboratories, Inc.) alleging breach of contract, violation of the
covenant of good faith and fair dealing, and unjust enrichment for the Company’s
failure to continue royalty payments on STRIANT®,
PROCHIEVE®, and
CRINONE®. The
Company intends to defend this action vigorously.
Item 1A. Risk
Factors.
In addition to the other information
set forth in this report, you should carefully consider the factors discussed in
Part I, “Item 1A. Risk Factors” of the 2007 Annual Report, which could
materially affect our business, financial condition or future
results. The risks described in the 2007 Annual Report are not the
only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently do not consider material also may
materially adversely affect our business, financial condition and/or operating
results. There have been no material changes from the risk factors
disclosed in the 2007 Annual Report except for the following:
The
current stock market and credit market conditions are extremely volatile and may
restrict our ability to raise additional funds to meet our capital
needs.
The
current stock market and credit market conditions are extremely
volatile. It is difficult to predict whether these conditions will
continue or worsen and, if so, whether the conditions would impact the Company
and whether the impact would be material. In particular, constriction
and volatility in the equity and debt markets may restrict our future ability to
access these markets to meet our future capital or liquidity needs.
A
decline in the price of our common stock could affect our ability to raise
further working capital and adversely impact our ability to continue
operations.
A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because a significant portion of our operations has been and will
continue to be financed through the sale of equity securities and equity linked
securities (warrants and convertible debt), a decline in the price of our common
stock could be especially detrimental to our liquidity and our operations. Such
reductions may force us to reallocate funds from other planned uses and may have
a significant negative effect on our business plans and operations, including
our ability to develop our product candidates and continue our current
operations. If we are unable to raise sufficient capital in the
future, and we are unable to generate funds from operations sufficient to meet
our obligations, we will not be able to have the resources to continue our
normal operations.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds.
None.
Item
3. Defaults upon Senior
Securities.
Item
4. Submission of Matters to a
Vote of Security Holders.
None.
Item
5. Other
Information.
None.
Item
6. Exhibits.
31.1 Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company.
(*)
31.2 Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the Company.
(*)
32.1 Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (*)
32.2 Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
theSarbanes-Oxley Act of 2002. (*)
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
COLUMBIA LABORATORIES,
INC.
/s/ JAMES A.
MEER JAMES
A. MEER, Senior Vice President-
Chief Financial Officer and
Treasurer
DATE: November 6,
2008
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