**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C** **.
20549**
  **FORM
10-Q**
  x
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
quarterly period ended March 31, 2005
 
 OR
 
 o
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from ______________ to ______________
 
 **Commission
File Number 1-10352**
 
 **COLUMBIA
LABORATORIES, INC.**
 (Exact
name of Registrant as specified in its charter)
 
 **Delaware**
    **59-2758596**(State
      or other jurisdiction of
    (I.R.S.
      Employerincorporation
      or organization)
    Identification
      No.)
 
 **354
      Eisenhower Parkway****Livingston,
      New Jersey**
    **07039**(Address
      of principal executive offices)
    (Zip
      Code)
 
 Company'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 o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) Yes xNo o
 
 Number of
shares of the Common Stock of Columbia Laboratories, Inc. issued and outstanding
as of May 1, 2005: 41,751,934
  
 ****
 **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.
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 three months ended March 31, 2005 are not necessarily
indicative of the results for the year ending December 31, 2005.
 
 Page 2 of
20
 
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March
      31,
    
    December
      31,2005
    
    2004(Unaudited)ASSETSCurrent assets-Cash
      and cash equivalents
    
    $
    4,303,046
    
    $
    19,781,591Accounts
      receivable, net
    
    
    2,922,775
    
    
    4,260,379Inventories
    
    
    2,808,363
    
    
    2,742,544Prepaid
      expenses and other current assets
    
    
    859,047
    
    
    1,155,673Total
      current assets
    
    
    10,893,231
    
    
    27,940,187Property
      and equipment, net
    
    
    1,120,334
    
    
    1,207,041Other
      assets
    
    
    120,748
    
    
    121,140TOTAL
      ASSETS
    
    $
    12,134,313
    
    $
    29,268,368LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      liabilities-Note
      payable
    
    $
    -
    
    $
    10,000,000Current
      portion of financing agreements
    
    
    805,639
    
    
    2,753,486Accounts
      payable
    
    
    2,581,740
    
    
    2,772,107Accrued
      expenses
    
    
    1,792,179
    
    
    3,111,198Total
      current liabilities
    
    
    5,179,558
    
    
    18,636,791Deferred
      revenue
    
    
    4,497,127
    
    
    4,239,060Long-term
      portion of financing agreements
    
    
    19,268,794
    
    
    18,923,440TOTAL
      LIABILITIES
    
    
    28,945,479
    
    
    41,799,291Stockholders'
      equity (deficiency)-Preferred
      stock, $.01 par value; 1,000,000 shares authorized:Series
      B Convertible Preferred Stock, 130 shares issued andoutstanding
      in 2005 and 2004
    
    
    1
    
    
    1Series
      C Convertible Preferred Stock, 3,250 shares issuedand
      outstanding in 2005 and 2004
    
    
    32
    
    
    32Common
      stock, $.01 par value; 100,000,000 authorized41,751,934
      shares issued and outstanding in 2005 and2004
    
    
    417,519
    
    
    417,519Capital
      in excess of par value
    
    
    168,546,911
    
    
    168,587,536Accumulated
      deficit
    
    
    (185,992,545
    )
    
    (181,777,838
    )Accumulated
      other comprehensive income
    
    
    216,916
    
    
    241,827TOTAL
      STOCKHOLDERS' EQUITY (DEFICIENCY)
    
    
    (16,811,166
    )
    
    (12,530,923
    )TOTAL
      LIABILITIES AND STOCKHOLDERS'EQUITY
      (DEFICIENCY)
    
    $
    12,134,313
    
    $
    29,268,368
 See notes
to condensed consolidated financial statements
 Page 3 of
20
 
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three
      Months EndedMarch
      31,2005
    
    2004NET
      REVENUES
    
    $
    4,280,577
    
    $
    4,539,679COST
      OF REVENUES
    
    
    1,817,005
    
    
    1,685,196Gross
      profit
    
    
    2,463,572
    
    
    2,854,483OPERATING
      EXPENSES:Selling
      and distribution
    
    
    2,898,603
    
    
    4,872,906General
      and administrative
    
    
    1,825,758
    
    
    1,927,746Research
      and development
    
    
    1,292,225
    
    
    1,616,711Total
      operating expenses
    
    
    6,016,586
    
    
    8,417,363Loss
      from operations
    
    
    (3,553,014
    )
    
    (5,562,880
    )OTHER
      INCOME (EXPENSE):Interest
      income
    
    
    45,838
    
    
    59,969Interest
      expense
    
    
    (740,613
    )
    
    (684,181
    )Other,
      net
    
    
    33,082
    
    
    (67,737
    )(661,693
    )
    
    (691,949
    )Net
      loss
    
    $
    (4,214,707
    )
    $
    (6,254,829
    )NET
      LOSS PER COMMON SHARE:Basic
      and diluted
    
    $
    (0.10
    )
    $
    (0.16
    )WEIGHTED
      AVERAGE NUMBER OFCOMMON
      SHARES OUTSTANDING:Basic
      and diluted
    
    
    41,751,934
    
    
    39,751,934
 See notes
to condensed consolidated financial statements
 
 Page 4 of
20
 
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
 (Unaudited)
 Three
      Months EndedMarch
      31,2005
    
    2004NET
      LOSS
    
    $
    (4,214,707
    )
    $
    (6,254,829
    )Other
      comprehensive income (loss):Foreign
      currency translation, net of tax
    
    
    (24,911
    )
    
    (10,529
    )Comprehensive
      loss
    
    $
    (4,239,618
    )
    $
    (6,265,358
    )
 See notes
to condensed consolidated financial statements
 
 Page 5 of
20
 
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three
      Months Ended March 31,2005
    
    2004CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
    
    $
    (4,214,707
    )
    $
    (6,254,829
    )Adjustments
      to reconcile net loss to netcash
      used in operating activities-Depreciation
      and amortization
    
    
    90,006
    
    
    107,936Provision
      for doubtful accounts
    
    
    45,000
    
    
    -Provision
      for returns and allowances
    
    
    546,429
    
    
    25,575Writedown
      of inventories
    
    
    210,000
    
    
    100,000Interest
      expense on financing agreements
    
    
    585,033
    
    
    495,340Changes
      in assets and liabilities-(Increase)
      decrease in:Accounts
      receivable
    
    
    1,292,604
    
    
    98,393Inventories
    
    
    (275,819
    )
    
    (1,000,127
    )Prepaid
      expenses
    
    
    296,626
    
    
    820,307Other
      assets
    
    
    392
    
    
    827Increase
      (decrease) in:Accounts
      payable
    
    
    (190,367
    )
    
    282,106Accrued
      expenses
    
    
    (1,865,448
    )
    
    (1,707,420
    )Deferred
      revenue
    
    
    258,067
    
    
    783,119Net
      cash used in operating activities
    
    
    (3,222,184
    )
    
    (6,248,773
    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
    
    
    (3,343
    )
    
    (25,892
    )Net
      cash used in investing activities
    
    
    (3,343
    )
    
    (25,892
    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of note payable
    
    
    (10,000,000
    )
    
    -Proceeds
      from exercise of warrants
    
    
    -
    
    
    229,688Proceeds
      from financing agreements
    
    
    -
    
    
    3,000,000Payments
      pursuant to financing agreements
    
    
    (2,187,526
    )
    
    (92,065
    )Dividends
      paid
    
    
    (40,625
    )
    
    (40,625
    )Net
      cash provided by (used in) financing activities
    
    
    (12,228,151
    )
    
    3,096,998(continued)
  Page 6 of
20
 
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Continued)
 Three
      Months Ended March 31,2005
    
    2004EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
    
    
    (24,867
    )
    
    (10,424
    )NET
      DECREASE IN CASHAND
      CASH EQUIVALENTS
    
    
    (15,478,545
    )
    
    (3,188,091
    )CASH
      AND CASH EQUIVALENTS,Beginning
      of period
    
    
    19,781,591
    
    
    30,965,517CASH
      AND CASH EQUIVALENTS,End
      of period
    
    $
    4,303,046
    
    $
    27,777,426
 See notes
to condensed consolidated financial statements
 
 Page 7 of
20
  
 COLUMBIA
LABORATORIES, INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  (1)
SIGNIFICANT ACCOUNTING POLICIES :
 
 The
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, 2004.
 
 (2)
LIQUIDITY:
 
 As shown
in the financial statements, the Company has had recurring losses from
operations and has a stockholders' deficiency. The Company has been able to
raise additional funds from equity offerings and finance arrangements and
management believes it can continue to do so in the future. Management
believes that certain
cost reduction measures taken in 2005, together with increased projected revenue
in 2005 and potential equity offerings, such as the one consummated on May 10,
2005 (see Note 12), and/or financing arrangements, will enable the Company to
sustain its operations. However, there can be no assurance given that this will
occur.
 
 (3)
INVENTORIES:
 
 Inventories
consisted of the following:
 March
      31,
    
    December
      31,2005
    
    2004Finished
      goods
    
    $
    1,672,309
    
    $
    1,993,190Raw
      materials
    
    
    1,136,054
    
    
    749,354$
    2,808,363
    
    $
    2,742,544
 (4 ) NOTE
PAYABLE:
 
 On March
16, 1998, the Company issued to an institutional investor a $10 million
convertible subordinated note due March 15, 2005. The note was paid in full on
March 15, 2005.
 
 (5)
FINANCING AGREEMENTS:
 
 In an
agreement dated July 31, 2002, Quintiles’ strategic investment group, PharmaBio
Development, agreed to pay the Company $4.5 million, to be paid 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 are subject to minimum ($8 million) and maximum ($12 million) amounts
and because the minimum amount exceeds $4.5 million, the Company has 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 is being
recognized as interest expense over the five-year term of the agreement,
assuming an interest rate of 12.51%. $166,378 and $147,877 were recorded as
interest expense for the quarters ended March 31, 2005 and March 31, 2004,
respectively. The Company has paid PharmaBio $2,750,000 under this agreement
through March 31, 2005.
 
 In an
agreement dated March 5, 2003, Quintiles’ strategic investment group, PharmaBio
Development, agreed to pay the Company $15
million, to be paid in five quarterly installments commencing with the signing
of this agreement. In return, Quintiles will receive 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 2003 third quarter and are subject to minimum
($30 million) and maximum ($55 million) amounts. Because
the minimum amount 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 10.67%. $437,156 and $347,463 were
recorded as interest expense for the quarters ended March 31, 2005 and March 31,
2004, respectively.  The
agreement calls for a true-up payment to PharmaBio in an amount equal to the
difference between royalties paid through September 30, 2006 and $13,000,000.
The Company has paid PharmaBio $581,450 under this agreement through March 31,
2005.
 
 Page 8 of
20
 
 Long term
l iabilities
from financing agreements consisted of the following:
 March
      31,
    
    December
      31,2005
    
    2004July
      31, 2002 financing agreement
    
    $
    3,021,541
    
    $
    4,932,548March
      5, 2003 financing agreement
    
    
    17,052,892
    
    
    16,744,37820,074,433
    
    
    21,676,926Less:
      current portion
    
    
    805,639
    
    
    2,753,486$
    19,268,794
    
    $
    18,923,440
  Page 9 of
20
 
 (6)
SEGMENT INFORMATION:
 
 The
Company and its subsidiaries are engaged in one line of business, the
development and sale of pharmaceutical products medical devices, and cosmetics.
The following table shows selected unaudited information by geographic
area:
  Net
    
    Loss
      from
    
    IdentifiableRevenues
    
    Operations
    
    AssetsAs
      of and for the three monthsended
      March 31, 2005-United
      States
    
    $
    1,729,367
    
    $
    (4,481,617
    )
    $
    4,861,667Europe
    
    
    2,551,210
    
    
    928,603
    
    
    7,272,646$
    4,280,577
    
    $
    (3,553,014
    )
    $
    12,134,313As
      of and for the three monthsended
      March 31, 2004-United
      States
    
    $
    2,332,664
    
    $
    (5,909,748
    )
    $
    26,457,792Europe
    
    
    2,207,015
    
    
    346,868
    
    
    13,007,217$
    4,539,679
    
    $
    (5,562,880
    )
    $
    39,465,009
 (7)
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
 
 The
calculation of basic and diluted loss per common and common equivalent share is
as follows:
  Three
      Months EndedMarch
      31,2005
    
    2004Net
      loss
    
    $
    (4,214,707
    )
    $
    (6,254,829
    )Less:
      Preferred stock dividends
    
    
    (40,625
    )
    
    (40,625
    )Net
      loss applicable tocommon
      stock
    
    $
    (4,255,332
    )
    $
    (6,295,454
    )Basic
      and diluted:Weighted
      average number ofcommon
      shares outstanding
    
    
    41,751,934
    
    
    39,751,934Basic
      and diluted net loss per common share
    
    $
    (0.10
    )
    $
    (0.16
    )
 Page 10 of
20
 
 ( 8)
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 any unfavorable outcome resulting
from these actions.
 
 (9)
STOCK-BASED COMPENSATION:
 
 The
Company has elected to apply APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock options and
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at the grant date as prescribed by SFAS No. 123, the
Company's net loss and net loss per common share for the three month periods
ended March 31, 2005 and 2004 would have been as follows:
 Three
      Months EndedMarch
      31,2005
    
    2004Net
      loss, as reported
    
    $
    (4,214,707
    )
    $
    (6,254,829
    )Deduct:
      Total stock-basedcompensation
      expensedetermined
      under fair value basedmethod
      for all awards
    
    
    (516,293
    )
    
    (452,294
    )Pro
      forma net loss
    
    $
    (4,731,000
    )
    $
    (6,707,123
    )Loss
      per share - basic and dilutedAs
      reported
    
    $
    (0.10
    )
    $
    (0.16
    )Pro
      forma
    
    $
    (0.11
    )
    $
    (0.17
    )
 (10)
RECENT ACCOUNTING PRONOUNCEMENTS:
  In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on alternative fair value models. The share-based
compensation cost will be measured based on the fair value of the equity or
liability instruments issued. The Company currently discloses pro forma
compensation expense quarterly and annually by calculating the stock option
grants' fair value using the Black-Scholes model and disclosing the impact on
net loss and net loss per share in a Note to the Consolidated Financial
Statements. Upon adoption, pro forma disclosure will no longer be an
alternative. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company has not completed its evaluation of
SFAS No. 123R and therefore has not determined the impact that adopting SFAS No.
123R will have on its results of operations. The Company will begin to apply
SFAS No. 123R using the most appropriate fair value model as of the interim
reporting period
ending March 31, 2006.
  Page 11 of
20
 
 The
Company does not believe that any other recently issued, but not yet effective,
accounting standards would have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
 
 (11)
RECLASSIFICATION OF PRIOR-YEAR AMOUNTS:
 
 Prior-year
financial statements have been reclassified to conform to the 200 5
presentation.
 
 (12)
SUBSEQUENT EVENT - SALE OF PREFERRED STOCK
 
 On May
10, 2005 , the
Company raised $6.9 million from the issuance and sale of 69,000 shares of
Series E Convertible Preferred Stock ("Preferred Stock"). The Preferred Stock,
sold to three accredited investors, has a stated value of $100 per share. Each
share of Preferred Stock is convertible into 50 shares of common stock. The
Preferred Stock pays no dividend and contains voting rights equal to the number
of common shares into which each share of Preferred Stock is convertible.
 
 **Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations**
 
 **Overview**
  We
are in the
business of developing, manufacturing and selling pharmaceutical products that
treat various medical conditions. Most of our products and developmental product
candidates address women’s healthcare issues. We have also developed Striant, a
buccal system for the treatment of hypogonadism in men, and a desmopressin
buccal product for the treatment of nocturnal enuresis in children.
  All of
our products and product candidates utilize our patented, proprietary
Bioadhesive Delivery System (“BDS”), which consists principally of a polymer
(polycarbophil) and an active ingredient. The BDS is based upon the principle of
bioadhesion, a process by which the polymer adheres to epithelial surfaces or
mucosa. The polymer remains attached to epithelial surfaces or mucosa and is
discharged upon normal cell turnover, a physiological process that, depending
upon the area of the body, occurs every 12 to 72 hours, or longer. This extended
period of attachment permits the BDS to be utilized in products when extended
duration of effectiveness is desirable or required.
  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. MD&A is provided as
a supplement to, and should be read in conjunction with, our financial
statements and the accompanying notes (“Notes”).
  Over the
last few years we have laid a foundation for the Company’s long-term growth by
establishing marketing partnerships and forging alliances with strategic
partners to create a base business of products that these partners market and
that provide us with good margins and growth potential. In addition, in
September 2002, we developed our own commercial organization to commercialize
our women’s healthcare products in the United States. We more than doubled the
size of that sales organization in the summer of 2003 upon FDA approval of
Striant. Subsequently, in both January 2004 and February 2005, we restructured
our sales and marketing organizations and downsized them to reduce costs. We
have advanced several clinical research initiatives designed to realize
additional potential from currently marketed Prochieve products by developing
new indications, while also bringing new products through the clinic. Our focus
in fiscal 2005 is building on this foundation and executing well in key areas,
including the successful implementation of our selling strategy of targeting our
sales force on current prescribers of our products.
  Page 12 of
20
 
 **Results
of Operations - Three Months Ended March 31, 2005 versus Three Months Ended
March 31, 2004**
 
 Net
revenues decreased 6% in the three months ended March 31, 2005 to $4.3 million
as compared to $4.5 million in the three months ended March 31, 2004. We receive
revenues both from selling our products to licensees, which we refer to as our
“Partnered Products”, and selling our products that we promote through our own
sales force to wholesalers and other distributors, which we refer to as our
“Promoted Products.”
  Partnered
Products are:
 ·
    Crinone®
      sold to Serono (Ares Trading S.A.) on a worldwide
basis;
 ·
    Striant®
      sold to our ex-U.S. marketing partners;
 ·
    Replens®
      Vaginal Moisturizer sold to Lil’ Drug Store Products, Ind. (“Lil’ Drug
      Store”) ex-U.S.;
 ·
    RepHresh®
      Vaginal Gel and Advantage-S® Bioadhesive Contraceptive Gel sold to Lil’
      Drug Store on a worldwide basis; and,
 ·
    Royalty
      and licensing revenues.
 
 Promoted
Products are:
 ·
    Prochieve®
      8%, Prochieve 4% and Striant in the U.S.;
 ·
    Crinone®
      prescriptions in the U.S. from our OB/GYN audience, for which Serono pays
      us a 40% supplemental royalty; and
 ·
    Replens®
      Vaginal Moisturizer, RepHresh® Vaginal Gel, and Advantage-S® Bioadhesive
      Contraceptive Gel, which Lil’ Drug Store pays us promotion fees to present
      to OB/GYNs.
 
 Revenues
from promoted products increased 63% to $1.4 million in the three months ended
March 31, 2005 as compared to $900,000 in the three months ended March 31, 2004,
primarily as a result of an increase in sales of the Prochieve line of products.
 
 Revenues
from partnered products decreased 22% to $2.9 million in the three months ended
March 31, 2005 as compared to $3.7 million in the three months ended March 31,
2004, primarily as a result of the Company’s Replens licensee, Lil’ Drug Store,
electing to move manufacture of product for the U.S. market from the Company to
a third party after the first quarter of 2004. Sales of that product in the
first quarter of 2004 were $878,000.
 
 Gross
profit as a percentage of revenues was 58% in the three months ended March 31,
2005 and 63% in the three months ended March 31, 2004. The
decrease in gross profit percentage from 2005 from 2004 was the result of the
change in product mix. Cost of goods sold for Prochieve includes a 30% royalty
on net sales paid to Serono.
 
 Selling
and distribution expenses decreased 41% to $2.9 million in the three months
ended March 31, 2005, as compared to $4.9 million in the
three months ended March 31, 2004. Selling and distribution expenses include
payroll, employee benefits, equity compensation and other personnel-related
costs associated with sales and marketing personnel, and advertising,
promotions, tradeshows, seminars, and other marketing-related programs. The
Company restructured its sales force in February 2005, reducing the number of
salespeople, which is reflected in the 2005 reduction in expense. Included in
the 2005 expenses were sales force costs of approximately $1.7 million, product
marketing expenses of approximately $483,000 and salary costs of approximately
$272,000. Expenses in 2004 included approximately $2.8 million in sales force
costs, approximately $884,000 in product marketing expenses and approximately
$439,000 in salary costs.
 
 Page 13 of
20
 
 General
and administrative expenses decreased 5% to $1.8 million in the three months
ended March 31, 2005 as compared to $1.9 million in the three months ended March
31, 2004. The reduction in 2005 expenses is primarily the result in a decrease
in insurance premiums ($251,000), offset by an increase in salary expense
($199,000).
 
 Research
and development expenses decreased 20% to $1.3 million in the three months ended
March 31, 2005 as compared to $1.6 million in the three months ended March 31,
2004. The decrease is primarily related to a reduction in the costs associated
with the Company’s on-going Phase III trial for Prochieve® 8% in preventing
pre-term delivery in pregnant women who are at high risk.
 
 As a
result, the net loss for the three months ended March 31, 2005 was
$4 .2
million or $(.10) per common share as compared to the net loss for the three
months ended March 31, 2004 of $6.3 million or $(.16) per common
share.
 
 **Liquidity
and Capital Resources**
 
 Cash and
cash equivalents decreased from $19,781,591 at December 31, 2004 to $4,303,046
at March 31, 2005. During the quarter ended March 31, 2005 the Company used
$3,222,184 for operations, paid off its $10,000,000 convertible subordinated
note, paid $2,187,526, which included a $1,891,944 true-up payment, to
PharmaBio, spent $3,343 on property and equipment and $40,625 for dividends to
holders of its Series C preferred stock. The effect of exchange rate changes
decreased cash by $24,867.
 
 On May
10, 2005 , the
Company raised $6.9 million from the issuance and sale of 69,000 shares of
Series E Convertible Preferred Stock ("Preferred Stock")(see Note 12). The
Preferred Stock, sold to three accredited investors, has a stated value of $100
per share. Each share of Preferred Stock is convertible into 50 shares of common
stock. The Preferred Stock pays no dividend and contains voting rights equal to
the number of common shares into which each share of Preferred Stock is
convertible. The Company believes that certain cost reduction measures taken in
2005, together with increased projected revenue in 2005 and potential equity
offerings, such as the one consummated on May 10, 2005, and/or financing
arrangements, will enable the Company to sustain its operations. However, there
can be no assurance given that this will occur.
 
 T he
Company has an effective registration statement that we filed with the
Securities and Exchange Commission (the “SEC”) using a shelf registration
process. Under the shelf registration process, we may offer from time to time
shares of our common stock up to an aggregate amount of $75,000,000. To date the
Company has sold approximately $56,400,000 in common stock under the
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 securities, 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 the development and/or commercialization
of one or more of our product candidates.
 
 Page 14 of
20
 
 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, other patent applications and related technology, the Company pays
Bio-Mimetics, Inc. a royalty equal to two percent of the net sales of products
based on the Bioadhesive Delivery System, 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 March 31, 2005, the Company has paid approximately $3.0
million in royalty payments.
 
 
 As of March 31,
2005, the Company has outstanding exercisable options and warrants that, if
exercised, would result in approximately $48.5 million of additional capital.
However, there can be no assurance that any such options or warrants will be
exercised.
 
 Significant
expenditures anticipated by the Company in the near future are concentrated on
research and development related to new products. In addition, the Company
anticipates it will spend approximately $500,000 on property and equipment in
2005.
 
 As of
March 31, 2005, the Company had available net operating loss carryforwards of
approximately $117 million to offset its future U.S. taxable income. There can
be no assurance that the Company will have sufficient income to utilize the net
operating loss carryforwards or that the net operating loss carryforwards will
be available at that time.
 
 In
accordance with Statement of Financial Accounting Standards No. 109, as of March
31, 2005 and December 31, 2004, other assets in the accompanying consolidated
balance sheets include deferred tax assets of approximately $42 and $41 million,
respectively (comprised primarily of a net operating loss carryforward), for
which a full valuation allowance has been recorded since the realizability of
the deferred tax assets are not determinable.
 
 **Recent
Accounting Pronouncements**
  In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on alternative fair value models. The share-based
compensation cost will be measured based on the fair value of the equity or
liability instruments issued. The Company currently discloses pro forma
compensation expense quarterly and annually by calculating the stock option
grants' fair value using the Black-Scholes model and disclosing the impact on
net loss and net loss per share in a Note to the Consolidated Financial
Statements. Upon adoption, pro forma disclosure will no longer be an
alternative. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company has not completed its evaluation of
SFAS No. 123R and therefore has not determined the impact that adopting SFAS No.
123R will have on its results of operations. The Company will begin to apply
SFAS No. 123R using the most appropriate fair value model as of the interim
reporting period
ending March 31, 2006.
  The
Company does not believe that any other recently issued, but not yet effective,
accounting standards would have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
 
 Page 15 of
20
 ****
 **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, 2004, beginning on page F-11. 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. 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 Development Agreements* . In July
2002 and March 2003, the Company entered into agreements with PharmaBio
Development, Inc. 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 and 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.
  **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 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 that 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 Striant ® ,
Prochieve ® 8% and
Prochieve ® 4% in
the U.S.; the timing and size of orders for out-licensed products from our
marketing partners; the timely receipt of national marketing authorizations and
individual licenses for Striant in European countries; the timely payment of
milestone payments by our marketing and product development partners; the timely
and successful development of products; the timely and successful completion of
clinical studies, including the PROTERMTM study and the lidocaine vaginal gel
study; success in obtaining acceptance and approval of new products and
indications for current products by the FDA and international regulatory
agencies, including acceptance and approval of an indication for preventing
preterm delivery for Prochieve 8% from the FDA; 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. 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.
 
  Page 16 of
20
 ****
 **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. Disclosure Controls And Procedures**
 
 The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's filings with the SEC
is recorded, processed, summarized and reported within the periods specified in
the rules and forms of the SEC. Such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company's management, including the Chief Executive Officer and
the Chief Financial Officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
 
 As of
March 31, 2005, the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective due to the material weakness noted below .
 
 Management
of the Company conducted an evaluation of the effectiveness, as of December 31,
2004, of the Company’s internal control over financial reporting based on the
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, management
identified a material weakness in the Company’s internal controls relating to
the financial statement close process. A material weakness is a control
deficiency, or combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
 The
Company is reliant on its chief financial officer, who is solely responsible for
the drafting and completing of all financial reporting. The Company’s senior
management reviews all financial reporting, but they do not possess sufficient
technical accounting and reporting credentials to provide adequate oversight. In
addition, there is a lack of segregation of duties in the accounting department.
This material weakness results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
 
 Page 17 of
20
 ****
 **Changes
in Internal Control Over Financial Reporting**
 
 During
the quarter ended March 31, 2005, the Company implemented changes in business
processes relating to the recording of international sales and to estimating
returns. The Company expects these changes to materially improve, or are
reasonably likely to materially improve, the Company’s internal control over
financial reporting. Except
for those changes there were no significant changes in the Company’s internal
controls over financial reporting that occurred during the quarter ended March
31, 2005, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
 
 **Remediation
Plan**
 
 The
material weakness, noted above, in the Company’s internal control over financial
reporting is being remediated in 2005. The Company is planning to acquire
additional technical accounting expertise through additional training, the
hiring of another competent employee, or through the engagement of a qualified
consultant.
 Page 18 of
20
 ****
 **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.
 
 **Item
2.** **Unregistered
Sales of Equity Securities and Use of Proceeds**
 
 None.
 
 **Item
3.** **Defaults
upon Senior Securities**
 
 None.
 
 **Item
4.** **Submission
of Matters to a Vote of Security Holders**
 
 None.
 
 **Item
5.**  **Other
Information**
 
 None.
 
 **Item
6.**  **Exhibits**
 
 (a)
    Exhibits
 10.52
    Letter
      Agreement and General Release of Claims, effective as of December 31,
      2004, between Columbia Laboratories, Inc. and James J.
      Apostolakis.1/
 10.53
    Employment Agreement dated as of February 25,
      2005 between the Company and Robert S. Mills.2/
 10.54
    Columbia Laboratories Inc. Incentive Plan,
      2004.2/
 10.55
    Description
      of Columbia Laboratories, Inc., Compensation and Reimbursement Practices
      for Non-Employee Directors.3/
 31.1
    Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
      Company.4/
 31.2
    Rule 13a-14(a)/15d-14(a) Certification of
      Chief Financial Officer of the Company.4/
 32.1
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.4/
 32.2
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.4/
 
 1/  Incorporated
by reference to the Registrant’s Current Report on Form 8-K, dated January 3,
2005.
 2/  Incorporated
by reference to the Registrant’s Current Report on Form 8-K, dated March 1,
2005.
 3/  Incorporated
by reference to the Registrant’s Current Report on Form 8-K, dated April 11,
2005.
 4/   Filed
herewith.
 
 Page 19 of
20
 
 ****
 **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.**By:
    /S/ DAVID L. WEINBERGDAVID
      L. WEINBERG, Vice President-
      Finance
      and Chief Financial Officer
 ****
  DATE: May
10, 2005
  Page 20 of
20