SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark one)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2004
|_| 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 001-32325
CALLISTO PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3894575
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
420 Lexington Avenue, Suite 1609, New York, New York 10170
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(Address of Principal Executive Offices) (Zip Code)
(212) 297-0010
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.0001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Title of class
--------------
None
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.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). | | Yes |X| No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2004, based on the closing sale
price on such date, was $45,660,790.
As of March 24, 2005 the registrant had a total of 31,228,893 shares of Common
Stock outstanding.
EXPLANATORY NOTE
This Form 10-K/A to our Annual Report on Form 10-KSB for the year ended December
31, 2004 is being filed for the purposes of responding to comments received by
us from the Staff of the Securities and Exchange Commission. This Amendment
speaks as of the original filing date of our Annual Report on Form 10-KSB and
has not been updated to reflect events occurring subsequent to the original
filing date.
CALLISTO PHARMACEUTICALS, INC.
FORM 10-K
INDEX
PART I PAGE
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Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of 18
Security Holders
PART II
Item 5. Market for Common Equity and Related 18
Stockholder Matters
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 8. Financial Statements 25
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 25
Item 9A. Controls and Procedures 25
PART III
Item 10. Directors and Executive Officers of
the Registrant 26
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain
Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 34
Item 14. Principal Accountant Fees and Services 35
PART IV
Item 15. Exhibits 35
Signatures 38
2
PART I
This Form 10-K/A contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements are characterized by future or
conditional verbs and include, but are not limited to, statements regarding the
results of product development efforts, clinical trials and applications for
marketing approval of pharmaceutical products, and the scope and success of
future operations. Such statements are only predictions and our actual results
may differ materially from those anticipated in these forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed under "Risk Factors" and elsewhere in this Form 10-K/A for
the year ended December 31, 2004, as filed with the Securities and Exchange
Commission, including the uncertainties associated with product development, the
risk that products that appeared promising in early clinical trials do not
demonstrate efficacy in larger-scale clinical trials, the risk that we will not
obtain approval to market our products, the risks associated with dependence
upon key personnel and the need for additional financing. We do not assume any
obligation to update forward-looking statements as circumstances change.
ITEM 1. BUSINESS.
Callisto Pharmaceuticals, Inc. is referred to throughout this report as
"Callisto," "we" or "us."
We are a biopharmaceutical company focused on the development of drugs to treat
relapsed (failure of prior therapy) acute leukemia, multiple myeloma (an
incurable blood cancer that invades and proliferates in bone marrow), other
cancers and osteolytic bone disease (bone disease caused by white blood cells).
Our lead drug candidate, Annamycin, a drug from the anthracycline family
(chemotherapy drugs which are also antibiotics), earlier completed a Phase I/IIa
trial in leukemia patients with residual leukemic cells (refractory) in their
bodies. Annamycin, originally developed by scientists at The University of Texas
M.D. Anderson Cancer Center to address the clinical limitations associated with
anthracycline drugs such as Adriamycin (doxorubicin) to treat cancer, is planned
to begin a trial at The University of Texas M.D. Anderson Cancer Center in adult
relapsed acute lymphocytic leukemia (ALL) patients in mid-2005 which will
include an initial evaluation of a small number of patients (2 cohorts totaling
approximately 6 patients) in a Phase I/IIa trial that will be rolled into a
larger Phase IIb trial. We also expect to commence two additional trials of
Annamycin in 2005, a single agent trial in pediatric relapsed ALL patients and
in combination with Ara-C (cytosine arabinoside) in relapsed acute myeloid
leukemia (AML) patients.
Our second drug candidate, Atiprimod, is an orally available drug with
antiproliferative and antiangiogenic activity. Atiprimod commenced a Phase I/IIa
clinical trial in relapsed multiple myeloma patients on May 26, 2004. These are
patients that no longer respond to chemotherapy, and are in advanced stages of
the disease. The Phase I/IIa clinical trial is currently being enrolled at four
sites, The University of Texas M.D. Anderson Cancer Center (Houston, TX), the
Dana-Farber Cancer Institute (Boston, MA), the St. Vincent's Comprehensive
Cancer Center (New York, NY) and the Roswell Park Cancer Institute (Buffalo,
NY).
On January 6, 2004, we announced that the Office of Orphan Products Development
of the United States Food and Drug Administration (FDA) granted orphan drug
designation to Atiprimod for the treatment of multiple myeloma.
RECENT DEVELOPMENTS
On March 9, 2005 we sold and issued in a private placement an aggregate
1,985,791 shares of common stock at a per share price of $1.52, for aggregate
gross proceeds of approximately $3.02 million. Because this transaction was
completed with certain existing institutional shareholders and certain members
of our management we paid no fees to selling agents and have agreed to file a
registration statement covering resale of the shares within 30 days of the
closing.
On March 15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod
in advanced cancer patients. The new trial is entitled: "An Open Label Study of
the Safety and Efficacy of Atiprimod Treatment for Patients with Advanced
Cancer". An open label trial is a trial where the physicians and patients are
aware of the amount of drug each patient receives. The trial protocol received
institutional review board, or IRB, approval on February 22, 2005 at The
University of Texas M.D. Anderson Cancer Center. Site initiation was completed
on March 3, 2005, and patient screening and dosing is anticipated to begin in
April, 2005.
HISTORY
In March 2002, Callisto Pharmaceuticals, Inc. ("Old Callisto") purchased 99.7%
of the outstanding common shares of Webtronics, Inc., ("Webtronics") a public
company for $400,000. Webtronics was incorporated in Florida on February 2, 2001
and had limited operations at December 31, 2002.
On April 30, 2003, pursuant to an Agreement and Plan of Merger dated March 10,
2003, as amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned
subsidiary of Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy")
and Callisto Acquisition Corp., a wholly-owned subsidiary of Webtronics merged
into Old Callisto (collectively, the "Merger"). As a result of the Merger, Old
Callisto and Synergy became wholly-owned subsidiaries of Webtronics. In the
Merger Webtronics issued 17,318,994 shares of its common stock in exchange for
outstanding Old Callisto common stock and an additional 4,395,684 shares in
exchange for outstanding Synergy common stock. Old Callisto changed its name to
Callisto Research Labs, LLC ("Callisto Research") and Webtronics changed its
name to Callisto Pharmaceuticals, Inc. and changed its state of incorporation
from Florida to Delaware. Subsequently, 171,818 shares of common stock issued to
former Synergy shareholders were returned to us under the terms of certain
indemnification agreements.
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ANNAMYCIN TO TREAT RELAPSED LEUKEMIA
On August 12, 2004 we entered into a worldwide exclusive license agreement with
The University of Texas M.D. Anderson Cancer Center to develop and commercially
exploit the Annamycin patent rights. Annamycin, an anthracycline drug for
leukemia therapy, has a novel therapeutic profile, including activity against
drug resistant tumors and significantly reduced toxicity.
PRECLINICAL STUDIES
Nonclinical studies have shown that Annamycin encapsulated in a lipid
preparation (liposomal) is effective against several different in vivo tumor
models (animal experiments), including human tumors which are resistant to other
chemotherapy drugs, grafted into animals. Additionally, results from in vitro
studies (cell culture experiments) indicate that liposomal Annmycin and free
Annamycin were able to partially overcome tumor resistance to chemotherapy drugs
in several tumor cell lines, that were resistant to other drugs such as
doxorubicin. In nonclinical toxicity studies, myelosuppression or suppression of
the body's immune response, was noted in mice at a single intravenous dose of
15.7 mg/kg liposomal Annamycin. With weekly intravenous doses of 5.2 mg/kg
liposomal Annamycin for 6 weeks, or 3.1 and 4.2 mg/kg liposomal Annamycin for 10
weeks in mice, the cardiotoxicity (toxicity to heart tissue) of liposomal
Annamycin was substantially less than an equivalent dose of doxorubicin. In
dogs, a single 15-minute intravenous infusion of up to 1.42 mg/kg liposomal
Annamycin was well tolerated, with no clinically significant adverse effects,
hematological or chemical changes, or pathological changes.
COMPLETED CLINICAL STUDIES
Annamycin was evaluated previously by Aronex Pharmaceuticals, Inc. in 3 clinical
trials: 1) a Phase I clinical trial in 36 patients with relapsed solid tumors,
2) a Phase II clinical trial in 13 patients with doxorubicin-resistant breast
cancer, and 3) a Phase I/IIa trial in 20 patients with relapsed/refractory AML
and ALL. In the initial Phase I study, liposomal Annamycin was administered by a
single 1- to 2-h intravenous infusion at 3-week intervals. Thirty-six patients
with relapsed solid tumors were treated and 109 treatment courses were
administered at doses ranging from 3 to 240 mg/m2. No cardiotoxicity was seen on
biopsy of heart tissue of four patients studied. The maximum tolerated dose
(MTD) for liposomal Annamycin in solid tumor patients was found to be 190 mg/m2.
A second Phase II study of liposomal Annamycin was performed in 13 women with
doxorubicin-resistant breast cancer. The median number of prior chemotherapy
regimes was two, and six patients had two or more organ sites of involvement.
Liposomal Annamycin was administered at 190-250 mg/m2 as a single i.v. infusion
over 1-2 h every 3 weeks. Of the 13 patients, 12 had clear deterioration and new
tumor growth after one or two courses.
The potential of a less cardiotoxic drug that was active against multi-drug
resistant tumors led to a third trial in relapsed leukemia patients (both AML
and ALL). The trial involved 20 patients with relapsed/refractory AML (n=17) or
ALL (n=3). Annamycin was infused at a starting dose of 190 mg/m2/day x 3 days
with escalation to 230, 280, and 350 mg/m2/day x 3 days. Notably, this dosing
regime gave cumulative dosages that were 4 to 5-fold greater than was achieved
in solid tumor patients. Annamycin was generally well tolerated with no observed
cardiotoxicity. The MTD was determined at 280 mg/m2/day x 3 days with grade 3/4
hepatotoxicity, or liver toxicity, and mucositis, or inflammation and lesions of
the oral mucosa, observed at the highest dose levels. Of the 20 treated
patients, two achieved complete remission (1 AML at 280 mg/m2/day x 3 days who
had failed prior induction therapy, and 1 ALL at 350 mg/m2/day x 3 days).
Importantly, fifty percent of all patients cleared their immature white blood
cells, or blasts circulating in their blood stream and 43% cleared the blasts in
their bone marrow. The conclusions drawn from the trial were that liposomal
Annamycin was safe, well tolerated and showed clinical activity in patients with
acute leukemias, and that further evaluation of this novel anthracycline in
patients with hematopoietic, or blood borne, malignancies was clearly warranted.
DEVELOPMENT STRATEGY
We expect to commence a trial of liposomal Annamycin in adult relapsed ALL
patients at The University of Texas M.D. Anderson Cancer Center in mid-2005
which will include an initial evaluation of a small number of patients (2
cohorts totaling approximately 6 patients) in a Phase I/IIa trial that will be
rolled into a larger Phase IIb trial. The clinical trial protocol was submitted
to the institutional review board for approval in February 2005. We also expect
to commence two additional trials with liposomal Annamycin in 2005, a single
agent trial of liposomal Annamycin in pediatric relapsed ALL patients, and a
combination trial of liposomal Annamycin in combination with Ara-C in adult
relapsed AML patients.
MANUFACTURING
An improved manufacturing method for Annamycin has been developed at
Antibioticos S.p.A., our commercial supplier of GMP ("Good Manufacturing
Practice") drug substance. GMP material is currently being produced in
sufficient quantity for all three anticipated trials outlined in the development
strategy section. The analytical methods developed previously have been
successfully transferred, and are in the process of being validated by
Quantitative Technologies, Inc., our analytical contract research organization,
or CRO, for Annamycin development work. The final lyophilized GMP formulated
drug product is being manufactured by Pharmaceutical Services, Inc., who
previously produced final product for the earlier clinical trials. Currently,
Antibioticos S.p.A. is our sole supplier of Annamycin for our clinical trials.
Our agreement with Antibioticos provides that Antibioticos will provide 400
grams of GMP drug substance for our Annamycin clinical trials. Upon the
conclusion of our Phase IIb clinical trials, the agreement provides that the
parties will negotiate in good faith towards a commercial supply agreement for
Annamycin.
ATIPRIMOD TO TREAT MULTIPLE MYELOMA
On August 28, 2002, our wholly-owned subsidiary, Synergy, entered into a
worldwide license agreement with AnorMED Inc. ("AnorMED"), a Canadian
corporation, to research, develop, sell and commercially exploit the Atiprimod
(SKF 106615) patent rights.
Atiprimod is one of a class of compounds known as azaspiranes and was originally
developed as a potential treatment for rheumatoid arthritis based on encouraging
data from a number of animal models of arthritis and autoimmune indications. The
development of this drug originated with a
4
partnership between AnorMED and SmithKline Beecham ("SKB") that led to the
successful filing of an investigational new drug application, or IND, and
completion of three Phase I clinical trials involving a total of 63 patients.
The drug successfully completed both single and multiple dose Phase I clinical
trials in patients with rheumatoid arthritis. Both trials evaluated the safety
and pharmacokinetics (how the body takes up and eliminates drugs) of Atiprimod
and showed that the drug is well tolerated. In the third Phase I clinical trial,
the drug was found to be well tolerated in an open label extension study
performed with 43 patients from the first two studies, with patients on the drug
for as long as one year.
PRECLINICAL STUDIES
Atiprimod's specific ability to lower the level of key growth factors, known to
play an important role in the development of multiple myeloma, is the basis for
its potential use as a drug to treat this disease. Atiprimod was previously
shown to inhibit the production of the pro-inflammatory mediators IL-6 and
TNF(alpha) in a number of animal models of inflammation and autoimmune disease.
Atiprimod was also demonstrated using in vitro models of chemical cell signaling
to inhibit proliferation of a number of human multiple myeloma cell lines.
Characterization of the mechanism of Atiprimod's antiproliferative activity in a
series of experiments showed that the drug works by inducing apoptosis
(programmed cell death) in myeloma cells. In a second series of experiments
performed with Atiprimod on co-cultures composed of multiple myeloma cells plus
bone marrow stromal cells (used to simulate the human disease), the drug was
found to have a profound effect on secretion of the angiogenic (blood vessel
related) growth factor VEGF. A separate set of experiments also suggest an
additional explanation for the disease-modifying activity of Atiprimod
originally observed in chemically-induced arthritic-rat animal studies, and
provide a further rationale for the application of this drug to treat multiple
myeloma. Using a bone resorption assay (bone degradation experiment) to measure
the effect of drug on osteoclast-mediated bone resorption, Atiprimod
demonstrated a profound effect on osteoclast, or white blood cell, function. The
drug appears to be selectively toxic for activated osteoclasts, displaying a
negligible effect on bone marrow stromal cells.
COMPLETED CLINICAL STUDIES
Atiprimod successfully completed single and multiple dose Phase I clinical
trials in patients with rheumatoid arthritis (RA). In the initial Phase I study,
28 patients were given single escalating doses of drug (0.002 - 1.0 mg/kg), with
a 4-month follow-up. Atiprimod was well tolerated, displaying no clinically
relevant changes in any laboratory parameters. In particular, liver function
tests remained in the normal range. The second Phase I study involved a 28-day
multiple-dose-rising study in 35 RA patients. The study evaluated the effect of
food on bioavailability, or the concentration of drug in the body, as well as
the safety and pharmacokinetics of repeat dosing. Dosages included 0.1, 1.0,
5.0, and 10 mg/day plus a 14-day cohort at 30 mg/day, with 4-month follow-up.
All doses were well tolerated and clinical tests were unremarkable.
Significantly, reductions in tender and swollen joint counts were noted in a
number of subjects during the course of the dosing period. Individuals from the
two Phase I safety studies were also involved in a Phase I open-label extension
trial. Forty-three patients entered the study and remained on the drug as long
as 12 months. Clinical laboratory results for all patients were unremarkable, in
particular liver enzyme levels remained within the normal range in all patients
throughout the study period.
DEVELOPMENT STRATEGY
On May 26, 2004 we commenced a Phase I/IIa clinical trial of Atiprimod in
relapsed multiple myeloma patients at two sites, the Dana-Farber Cancer
Institute (Boston) and The University of Texas M.D. Anderson Cancer Center
(Houston). On January 31, 2005, we announced the opening of two additional sites
for the Phase I/IIa clinical trial of Atiprimod, the Roswell Park Cancer
Institute in Buffalo, New York, and the St. Vincent's Comprehensive Cancer
Center in New York, New York. The clinical trial is an open label study, with
the primary objective of assessing safety of drug and identifying the maximum
tolerated dose. The secondary objectives are to measure the pharmacokinetics,
evaluate the response in patients with refractory disease and to identify
possible surrogate responses to the drug to better determine the mechanism of
drug action. The duration of this clinical study depends on the enrollment rate,
how well the drug is tolerated, and on drug response, with final results not
anticipated until the end of 2005. If Atiprimod produces positive responses, we
intend to initiate a Phase IIb trial in relapsed multiple myeloma patients in
2006.
On March 15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod
in advanced cancer patients. The new trial is entitled: "An Open Label Study of
the Safety and Efficacy of Atiprimod Treatment for Patients with Advanced
Cancer." The primary objective is to assess the safety and determine the maximum
tolerated dose of Atiprimod in advanced cancer patients. The secondary
objectives are to measure the pharmacokinetics of Atiprimod and evaluate the
response in a variety of relapsed solid tumors and hematological malignancies.
The trial protocol received IRB approval on February 22, 2005 at The University
of Texas M.D. Anderson Cancer Center with Dr. Razelle Kurzrock as the Principal
Investigator. Site initiation was completed on March 3, 2005, and patient
screening and dosing is anticipated to begin in April, 2005. The duration of
this study is expected to depend on the enrollment rate, how well the drug is
tolerated and on drug response.
MANUFACTURING
A practical, efficient and cost effective method for producing Atiprimod on a
commercial scale was originally developed by SKB. In the course of this work, a
new dimaleate salt form was developed. A portion of the 7 kilos of Atiprimod
drug substance, available from SKB, was used as the source for generating the
Atiprimod dimaleate drug product presently being used in the Phase I/IIa
clinical study. Several lots of drug substance were re-qualified to meet current
FDA approved release specifications. The full package of fully validated
analytical methods developed by SKB was transferred to a contract research
organization used by us to perform all analytical tests. One large-scale GMP
production run of Atiprimod dimaleate led to the successful release of 10 Kg of
material available for future Phase II clinical studies. We plan to enter into a
supply contract for Atiprimod with a commercial supplier by the end of 2005.
ORPHAN DRUG STATUS
On January 6, 2004, we announced that the Office of Orphan Products Development
of the FDA granted orphan drug designation to Atiprimod for the treatment of
multiple myeloma. The FDA grants orphan drug status for drug candidates that are
intended to treat rare life-threatening diseases
5
that, at the time of application, affect no more than 200,000 patients in the
United States. The drug must have the ability to provide significant patient
benefit over currently available treatment or fill an unmet medical need. Orphan
drug designation entitles us to seven years of market exclusivity in the United
States of America, and ten years of market exclusivity in Europe, upon FDA
marketing approval, provided that we continue to meet certain conditions
established by the FDA. Once the FDA grants marketing approval of a new drug,
the FDA will not accept or approve other applications to market the same
medicinal product for the same therapeutic indication. Other incentives provided
by orphan status include certain tax benefits, eligibility for research grants
and protocol assistance. Protocol assistance includes regulatory assistance and
possible exemptions or reductions of certain regulatory fees.
SITE DIRECTED INTERCALATION TECHNOLOGY
On February 24, 2004, we entered into an agreement with Houston Pharmaceuticals,
Inc. ("HPI") to sublicense the rights to a key patent covering a technology
platform for site-directed DNA intercalation and we acquired the rights to a
patent covering new anthracycline analogs.
The lead inventor on both patents, Dr. Waldemar Priebe, a Professor of Medicinal
Chemistry at The University of Texas M.D. Anderson Cancer Center, is an expert
in the synthesis of novel anti-cancer compounds. The first patent covers a
technology platform for site-directed DNA intercalation, or a compound's ability
to insert between the base pairs in DNA. This approach to target intercalator
drug candidates to new sites on DNA can potentially provide a new way to attack
cancer targets not achievable with older technologies. The second patent covers
new anthacycline analogs with increased potency and reduced toxicity. The
site-directed intercalation technology is exemplified by the identification of a
lead drug candidate, WP760, for melanoma that shows remarkable selectivity for
human melanoma cancer cell lines. WP760 is presently being pre-clinically
evaluated as a potential drug to treat melanoma.
GUANYLYL CYCLASE RECEPTOR AGONIST TECHNOLOGY
Our guanylyl cyclase receptor agonist (GCRA) program is focused on the control
of cyclic GMP, an important second messenger involved in key cellular functions
that are tied to inflammation, anti-tumorigenic responses and/or cellular death
(apoptosis). Uroguanylin, a hormone produced by and secreted by specialized
cells in the human gastrointestinal tract, activates synthesis of cyclic GMP,
leading to apoptosis, an important event in the turnover of cells lining the
gastrointestinal (GI) tract. Production of uroguanylin is dramatically
suppressed in colon cancer patients, and there is increasing evidence that
uroguanylin may have GI antiinflammatory properties.
Our GCRA program has resulted in the development of SP304, a biologically
functional analog of uroguanylin that has demonstrated superior activity,
enhanced temperature and protease stability and superior pH characteristics
relative to human uroguanylin. SP304 is currently undergoing pre-clinical
evaluation as a treatment for GI inflammation in a collaborative study involving
clinical gastroenterologist Dr. Scott Plevy of the University of Pittsburgh.
SUPERANTIGEN-BASED BIOTERORRISM DEFENSE
On July 25, 2001, we entered into a license agreement to research, develop, sell
and commercially exploit certain Rockefeller University ("Rockefeller") licensed
patents covering peptides and antibodies useful in treating toxic shock syndrome
and septic shock.
We have designed both a monoclonal antibody and a peptide that prevent the
unregulated activation of T-cells (human white blood cells) by a wide range of
bacterial toxins (superantigens). This form of T-cell activation leads to a
lethal condition called toxic shock syndrome, and is typically generated by
bacteria from the class of staphylococcus aureus and streptococcus pyogenes.
These bacteria provide a potential opportunity for bioterrorists, and, in
particular, the toxin from staphylococcus aureus-b is listed as a Category B
bioagent by the national bioterrorism defense program. We are exploring the
development of the monoclonal antibody as a therapeutic agent to prevent, treat
and control superantigen-mediated bioweapons. Our goal is to demonstrate
therapeutic utility of this agent in an animal model in which toxic shock is
induced by an aerosolized superantigen toxin. The research work involves a
collaboration with Dr. Sina Bavari, U.S. Army Medical Research Institute of
Infectious Diseases, Fort Detrick, MD. We are also exploring strategic
alternatives regarding further development of the superantigen program,
including spin-off or strategic partnership.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States of America and other
countries will be a significant factor in the production and marketing of any
products that may be developed by us. The nature and the extent to which such
regulation may apply will vary depending on the nature of any such products.
Virtually all of our potential products will require regulatory approval by
governmental agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous pre-clinical and clinical testing
and other approval procedures by the FDA and similar health authorities in
foreign countries. Various federal statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations requires the expenditure of substantial resources. In order to test
in clinical trials, produce and market products for diagnostic or therapeutic
use, a company must comply with mandatory procedures and safety standards
established by the FDA and comparable agencies in foreign countries. Before
beginning human clinical testing of a potential new drug, a company must file an
IND and receive clearance from the FDA. This application is a summary of the
pre-clinical studies that were conducted to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies that are being proposed.
The pre-marketing program required for approval of a new drug typically involves
a time-consuming and costly three-phase process. In Phase I, trials are
conducted with a small number of patients to determine the early safety profile,
the pattern of drug distribution and metabolism. In Phase II, trials are
conducted with small groups of patients afflicted with a target disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large scale, multi-center comparative trials are conducted
with patients afflicted with a target disease in order to provide enough data
for statistical proof of efficacy and safety required by the FDA and others.
6
The FDA closely monitors the progress of each of the three phases of clinical
testing and may, in its discretion, reevaluate, alter, suspend or terminate the
testing based on the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient. Estimates of the total time
required for carrying out such clinical testing vary between two and ten years.
Upon completion of such clinical testing, a company typically submits a New Drug
Application (NDA) or Product License Application (PLA) to the FDA that
summarizes the results and observations of the drug during the clinical testing.
Based on its review of the NDA or PLA, the FDA will decide whether or not to
approve the drug. This review process can be quite lengthy, and approval for the
production and marketing of a new pharmaceutical or medical diagnostic product
can require a number of years and substantial funding, and there can be no
assurance that any approvals will be granted on a timely basis, if at all.
If the product is approved for sale, FDA regulations govern the production
process and marketing activities, and a post-marketing testing and surveillance
program may be required to monitor continuously a product's usage and effects.
Product approvals may be withdrawn if compliance with regulatory standards are
not maintained, and other countries, in which any products developed by us are
marketed, may impose a similar regulatory process.
COMPETITION
The biopharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Our competitors include major pharmaceutical and
biotechnology companies, most of which have financial, technical and marketing
resources significantly greater than our resources. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting research activities and seeking patent protection and may
commercialize products on their own or through joint venture. We are aware of
certain development projects for products to prevent or treat certain diseases
targeted by us. The existence of these potential products or other products or
treatments of which we are not aware, or products or treatments that may be
developed in the future, may adversely affect our ability to market the products
we develop.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs, laboratory supplies, license fees
and patent legal costs. Research and development expenses were $2,817,387 for
the year ended December 31, 2004, compared to $1,369,985 for the year ended
December 31, 2003 and $491,430 for the year ended December 31, 2002. We expect
our research and development expenses to increase in 2005 as our products move
into more expensive later stages of development.
On October 7, 2003 we were awarded a $265,697 Small Business Technology Transfer
Research grant from the National Institutes of Health for studies on Atiprimod.
The Principal and Co-Principal Investigators of the grant entitled "Atiprimod to
Treat Multiple Myeloma and Bone Resorption" are Dr. Gary S. Jacob, our Chief
Executive Officer, and Dr. Kenneth C. Anderson, Director of the Jerome Lipper
Multiple Myeloma Center of the Dana-Farber Cancer Institute, respectively. The
studies, which began in early 2004 and were completed in November 2004, utilized
unique in vitro and in vivo methods and animal models at the Dana-Farber Cancer
Institute and at our in-house laboratory facilities to explore Atiprimod's
pharmacological activity and mechanism of action. Funding for the total amount
of this grant was received during 2004 as expenses were incurred and $265,697
has been reported on our Consolidated Statements of Operations as a separate
line item entitled "Government Grant".
PROPRIETARY RIGHTS
We are able to protect our technology from unauthorized use by third parties
only to the extent that it is covered by valid and enforceable patents or is
effectively maintained as a trade secret. Accordingly, patents or other
proprietary rights are an essential element of our business. We are the assignee
or exclusive licensee of three pending patent applications and 12 issued patents
in the United States, and in most cases corresponding patents/applications in
foreign countries that we have deemed desirable. We seek patent protection of
inventions originating from our ongoing research and development activities that
are commercially important to our business. Our composition of matter patents
for liposomal Annamycin and Atiprimod expire in 2008 and 2009, respectively. Our
formulation patents for liposomal Annamycin and Atiprimod expire in 2019 and
2018, respectively.
We have obtained licenses from various parties that give us rights to
technologies that we deem to be necessary or desirable for our research and
development. These licenses (both exclusive and non-exclusive) may require us to
pay royalties to the parties in addition to upfront or milestone payments, and
to expend certain minimum resources to develop these technologies.
Patents extend for varying periods according to the date of patent filing or
grant and the legal term of patents in the various countries where patent
protection is obtained. The actual protection afforded by a patent, which can
vary from country to country, depends on the type of patent, the scope of its
coverage and the availability of legal remedies in the country.
While trade secret protection is an essential element of our business and we
have taken security measures to protect our proprietary information and trade
secrets, we cannot give assurance that our unpatented proprietary technology
will afford us significant commercial protection. We seek to protect our trade
secrets by entering into confidentiality agreements with third parties,
employees and consultants. Our employees and consultants also sign agreements
requiring that they assign to us their interests in intellectual property
arising from their work for us. All employees sign an agreement not to engage in
any conflicting employment or activity during their employment with us and not
to disclose or misuse our confidential information. However, it is possible that
these agreements may be breached or invalidated, and if so, there may not be an
adequate corrective remedy available. Accordingly, we cannot ensure that
employees, consultants or third parties will not breach the confidentiality
provisions in our contracts, infringe or misappropriate our trade secrets and
other proprietary rights or that measures we are taking to protect our
proprietary rights will be adequate.
In the future, third parties may file claims asserting that our technologies or
products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our
7
business. If we are forced to defend ourselves against such claims, whether they
are with or without merit and whether they are resolved in favor of, or against,
our licensors or us, we may face costly litigation and the diversion of
management's attention and resources. As a result of such disputes, we may have
to develop costly non-infringing technology or enter into licensing agreements.
These agreements, if necessary, may be unavailable on terms acceptable to us, or
at all.
LICENSE AGREEMENTS
On August 12, 2004, we entered into a world-wide license agreement with The
University of Texas M. D. Anderson Cancer Center to research, develop, sell and
commercially exploit the patent rights for Annamycin. Consideration paid for
this license amounted to $31,497 for reimbursement of out-of-pocket costs for
filing, enforcing and maintaining the Annamycin patent rights and a $100,000
initial license fee. We also agreed to pay The University of Texas M. D.
Anderson Cancer Center royalties based on net sales from any licensed products,
plus aggregate milestone payments of up to $750,000 based upon achieving certain
regulatory submissions and approvals. The term of the agreement is from August
12, 2004 until November 2, 2019. Under the terms of the license agreement, we
are required to make certain good faith expenditures towards the clinical
development of at least one licensed product within the two year period after
March 2005. In addition, at any time after 5 years from August 12, 2004, The
University of Texas M.D. Anderson Cancer Center has the right to terminate the
license if we fail to provide evidence within 90 days of written notice that we
have commercialized or we are actively and effectively attempting to
commercialize Annamycin.
On August 28, 2002, Synergy entered into a worldwide license agreement with
AnorMED to research, develop, sell and commercially exploit the Atiprimod patent
rights. The license agreement provides for aggregate milestone payments of up to
$14 million based upon achieving certain regulatory submissions and approvals
for an initial indication, and additional payments of up to $16 million for each
additional indication based on achieving certain regulatory submissions and
approvals. In addition the agreement requires Synergy to pay AnorMED royalties
on net sales. Commencing on January 1, 2004 and on January 1 of each subsequent
year Synergy is obligated to pay AnorMED a maintenance fee of $200,000 until the
first commercial sale of the product. The first of these annual maintenance fee
payments under this agreement was made on January 22, 2004. Pursuant to the
license agreement, failure to pay the maintenance fee is a material breach of
the license agreement. The license agreement will terminate in 2018.
On February 24, 2004, we entered into an agreement with HPI to sublicense the
rights to a key patent covering a technology platform for site-directed DNA
intercalation and we acquired the rights to a patent covering new anthracycline
analogs. We issued to HPI 25,000 shares of common stock at a fair value of
$56,250 and reimbursed HPI approximately $103,500 for various costs and
expenses. In addition, we granted to HPI 1,170,000 performance based stock
options, exercisable at $3.50 per share, which vest upon the achievement of
certain milestones. We also agreed to pay HPI royalties of 2% on net sales from
any products resulting from commercializing the site-directed DNA intercalation.
Pursuant to the sublicense agreement, in the event our Board of Directors
determines to abandon its development and commercialization of the site-directed
DNA intercalation, HPI shall have the right to terminate the sublicense
agreement.
On July 25, 2001, we entered into a license agreement to research, develop, sell
and commercially exploit certain Rockefeller University licensed patents
covering peptides and antibodies useful in treating toxic shock syndrome and
septic shock. We will pay Rockefeller a $7,500 annual maintenance fee until the
first commercial sale of the product, plus royalties of 2% and 0.75% of net
sales of product depending on whether the product is covered by a claim under
the licensed patents or derived from a claim under the licensed patents and will
pay Rockefeller 15% of any sublicense fee paid by sublicensees. The agreement
will terminate on July 25, 2021. Rockefeller may terminate the license agreement
if we are more than 30 days late in paying Rockefeller any amounts due under the
license agreement or if we breach the license agreement.
EMPLOYEES
As of March 24, 2005, we had 4 full-time and 2 part-time employees. We believe
our employee relations are satisfactory.
AVAILABLE INFORMATION
We operate two wholly owned subsidiary companies Callisto Research Labs, LLC.
and Synergy Pharmaceuticals Inc. ("Synergy"); and we own two inactive
subsidiaries, IgX, Ltd (Ireland) and Callisto Pharma, GmbH (Germany), We were
incorporated in Delaware in May 2003 and our principal offices are at 420
Lexington Avenue, Suite 1609, New York, NY 10170.
We maintain a site on the world wide web at http://www.callistopharma.com;
however, information found on our website is not incorporated by reference into
this report. We make available free of charge through our website our Securities
and Exchange Commission, or SEC, filings, including our annual report on Form
10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
8
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION INCLUDED HEREIN AS WELL AS THE INFORMATION INCLUDED IN OTHER REPORTS
AND FILINGS MADE WITH THE SEC BEFORE INVESTING IN OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD BE HARMED. THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AS A COMPANY, CURRENTLY HAVE NO SOURCE
OF REVENUE AND MAY NEVER BECOME PROFITABLE.
We are a development stage biopharmaceutical company. Currently, we have no
products approved for commercial sale and, to date, we have not generated any
revenue. Our ability to generate revenue depends heavily on:
o demonstration in Phase I/IIa and Phase IIb clinical trials that
our two product candidates, Atiprimod for the treatment of
relapsed multiple myeloma and Annamycin for the treatment of
relapsed acute leukemia, respectively, are safe and effective;
o the successful development of our other product candidates;
o our ability to seek and obtain regulatory approvals, including
with respect to the indications we are seeking;
o the successful commercialization of our product candidates; and
o market acceptance of our products.
All of our existing product candidates will require extensive additional
clinical evaluation, regulatory review, significant marketing efforts and
substantial investment before they could provide us with any revenue. For
example, Atiprimod for the treatment of multiple myeloma entered Phase I/IIa
clinical trials in May 2004 and Annamycin for the treatment of acute leukemia is
expected to enter clinical trials in mid-2005. Our other product candidates are
in preclinical development. As a result, if we do not successfully develop and
commercialize Atiprimod or Annamycin, we will be unable to generate any revenue
for many years, if at all. We do not anticipate that we will generate revenue
for several years, at the earliest, or that we will achieve profitability for at
least several years after generating material revenue, if at all. If we are
unable to generate revenue, we will not become profitable, and we may be unable
to continue our operations.
WE HAVE INCURRED SIGNIFICANT LOSSES SINCE INCEPTION AND ANTICIPATE THAT WE WILL
INCUR CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
As of December 31, 2004, we had an accumulated deficit of $33,361,197. We have
incurred losses in each year since our inception in 1996. We incurred a net loss
of $7,543,467, $13,106,247 and $1,684,965 for the years ended December 31, 2004,
2003 and 2002, respectively. These losses, among other things, have had and will
continue to have an adverse effect on our stockholders' equity and working
capital. We expect to incur significant and increasing operating losses for the
next several years as we expand our research and development, continue our
clinical trials of Atiprimod for the treatment of multiple myeloma, initiate our
clinical trials of Annamycin for the treatment of acute leukemias, acquire or
license technologies, advance our other product candidates into clinical
development, seek regulatory approval and, if we receive FDA approval,
commercialize our products. Because of the numerous risks and uncertainties
associated with our product development efforts, we are unable to predict the
extent of any future losses or when we will become profitable, if at all. If we
are unable to achieve and then maintain profitability, the market value of our
common stock will likely decline.
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND
OUR FAILURE TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR
ELIMINATE OUR PRODUCT DEVELOPMENT PROGRAMS OR COLLABORATION EFFORTS.
Our operations have consumed substantial amounts of cash since inception. We
expect to continue to spend substantial amounts to:
o complete the clinical development of our two lead product
candidates, Atiprimod for the treatment of multiple myeloma and
Annamycin for the treatment of acute leukemias;
o continue the development of our other product candidates;
o finance our general and administrative expenses;
o prepare regulatory approval applications and seek approvals for
Atiprimod and Annamycin and our other product candidates;
o license or acquire additional technologies;
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o launch and commercialize our product candidates, if any such
product candidates receive regulatory approval; and
o develop and implement sales, marketing and distribution
capabilities.
In 2004, our cash used in operations increased significantly over 2003 and we
expect that our cash used in operations will increase significantly for the next
several years. Over the past 12 months, we have spent approximately $4.7 million
or approximately $400,000 per month. We expect that our existing capital
resources will be sufficient to fund our operations for at least the next 12
months. We will be required to raise additional capital to complete the
development and commercialization of our current product candidates. Our future
funding requirements will depend on many factors, including, but not limited to:
o the rate of progress and cost of our clinical trials and other
development activities;
o any future decisions we may make about the scope and
prioritization of the programs we pursue;
o the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
o the costs and timing of regulatory approval;
o the costs of establishing sales, marketing and distribution
capabilities;
o the effect of competing technological and market developments;
o the terms and timing of any collaborative, licensing and other
arrangements that we may establish; and
o general market conditions for offerings from biopharmaceutical
companies.
To date, our sources of cash have been primarily limited to the sale of our
equity securities. 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 development and/or
commercialization of one or more of our product candidates. We also may be
required to:
o seek collaborators for our product candidates at an earlier stage
than otherwise would be desirable and on terms that are less
favorable than might otherwise be available; and
o relinquish, license or otherwise dispose of rights to
technologies, product candidates or products that we would
otherwise seek to develop or commercialize ourselves on
unfavorable terms.
IF OUR AGREEMENTS WITH ANORMED INC. OR THE UNIVERSITY OF TEXAS M.D. ANDERSON
CANCER CENTER TERMINATE, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Our business is dependent on rights we have licensed from AnorMED Inc. and The
University of Texas M.D. Anderson Cancer Center. Under the terms of the AnorMED
license agreement, we are obligated to make a maintenance fee payment of
$200,000 on January 1 of each year for the term of the license agreement.
Pursuant to the license agreement, failure to pay the maintenance fee is a
material breach of the agreement. We do not anticipate failing to pay the
maintenance fee, however in the event we cannot pay the maintenance fee, AnorMED
may terminate the license agreement and we would not be able to further develop
and commercialize Atiprimod which would have an adverse effect on our business.
Under the terms of the The University of Texas M.D. Anderson Cancer Center
license agreement, we are required to make certain good faith expenditures
towards the clinical development of at least one licensed product within the two
year period after March 2005. In addition, at any time after 5 years from August
12, 2004, The University of Texas M.D. Anderson Cancer Center has the right to
terminate the license if we fail to provide evidence within 90 days of written
notice that we have commercialized or we are actively and effectively attempting
to commercialize Annamycin. If we fail to fulfill these obligations or other
material obligations, The University of Texas M.D. Anderson Cancer Center
license agreement may be terminated and our business would be adversely
affected.
CLINICAL TRIALS INVOLVE A LENGTHY AND EXPENSIVE PROCESS WITH AN UNCERTAIN
OUTCOME, AND RESULTS OF EARLIER STUDIES AND TRIALS MAY NOT BE PREDICTIVE OF
FUTURE TRIAL RESULTS.
In order to receive regulatory approval for the commercialization of our product
candidates, we must conduct, at our own expense, extensive clinical trials to
demonstrate safety and efficacy of these product candidates. Clinical testing is
expensive, can take many years to complete and its outcome is uncertain. Failure
can occur at any time during the clinical trial process.
The results of preclinical studies and early clinical trials of our product
candidates do not necessarily predict the results of later-stage clinical
trials. Product candidates in later stages of clinical trials may fail to show
the desired safety and efficacy traits despite having progressed through initial
clinical testing. The data collected from clinical trials of our product
candidates may not be sufficient to support the submission of a new drug
application or to obtain regulatory approval in the United States or elsewhere.
Because of the uncertainties associated with drug development and regulatory
approval, we cannot determine if or when we will have an approved product for
commercialization or achieve sales or profits.
10
DELAYS IN CLINICAL TESTING COULD RESULT IN INCREASED COSTS TO US AND DELAY OUR
ABILITY TO GENERATE REVENUE.
While to date there have no delays in our clinical trials, enrollment in our
Atiprimod Phase I/IIa trial in multiple myeloma was slower than anticipated due
to limited availability of relapsed multiple myeloma patients. In the future, we
may experience delays in clinical testing of our product candidates. We do not
know whether planned clinical trials will begin on time, will need to be
redesigned or will be completed on schedule, if at all. Clinical trials can be
delayed for a variety of reasons, including delays in obtaining regulatory
approval to commence a trial, in reaching agreement on acceptable clinical trial
terms with prospective sites, in obtaining institutional review board approval
to conduct a trial at a prospective site, in recruiting patients to participate
in a trial or in obtaining sufficient supplies of clinical trial materials. Many
factors affect patient enrollment, including the size of the patient population,
the proximity of patients to clinical sites, the eligibility criteria for the
trial, competing clinical trials and new drugs approved for the conditions we
are investigating. Prescribing physicians will also have to decide to use our
product candidates over existing drugs that have established safety and efficacy
profiles. Any delays in completing our clinical trials will increase our costs,
slow down our product development and approval process and delay our ability to
generate revenue.
WE MAY BE REQUIRED TO SUSPEND OR DISCONTINUE CLINICAL TRIALS DUE TO UNEXPECTED
SIDE EFFECTS OR OTHER SAFETY RISKS THAT COULD PRECLUDE APPROVAL OF OUR PRODUCT
CANDIDATES.
Our clinical trials may be suspended at any time for a number of reasons. For
example, we may voluntarily suspend or terminate our clinical trials if at any
time we believe that they present an unacceptable risk to the clinical trial
patients. In addition, regulatory agencies may order the temporary or permanent
discontinuation of our clinical trials at any time if they believe that the
clinical trials are not being conducted in accordance with applicable regulatory
requirements or that they present an unacceptable safety risk to the clinical
trial patients.
Administering any product candidates to humans may produce undesirable side
effects. These side effects could interrupt, delay or halt clinical trials of
our product candidates and could result in the FDA or other regulatory
authorities denying further development or approval of our product candidates
for any or all targeted indications. Ultimately, some or all of our product
candidates may prove to be unsafe for human use. Moreover, we could be subject
to significant liability if any volunteer or patient suffers, or appears to
suffer, adverse health effects as a result of participating in our clinical
trials.
IF WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS, WE MAY NOT BE ABLE TO
COMMERCIALIZE OUR PRODUCT CANDIDATES.
We need FDA approval prior to marketing our product candidates in the United
States of America. We commenced in May 2004 a Phase I/IIa trial of Atiprimod for
the treatment of multiple myeloma. We expect to commence a Phase IIb clinical
trial of Annamycin for the treatment of acute leukemias in the first half of
2005. If we fail to obtain FDA approval to market our product candidates, we
will be unable to sell our product candidates in the United States of America
and we will not generate any revenue.
This regulatory review and approval process, which includes evaluation of
preclinical studies and clinical trials of a product candidate as well as the
evaluation of our manufacturing process and our contract manufacturers'
facilities, is lengthy, expensive and uncertain. To receive approval, we must,
among other things, demonstrate with substantial evidence from well-controlled
clinical trials that the product candidate is both safe and effective for each
indication where approval is sought. Satisfaction of these requirements
typically takes several years and the time needed to satisfy them may vary
substantially, based on the type, complexity and novelty of the pharmaceutical
product. We cannot predict if or when we might submit for regulatory review any
of our product candidates currently under development. Any approvals we may
obtain may not cover all of the clinical indications for which we are seeking
approval. Also, an approval might contain significant limitations in the form of
narrow indications, warnings, precautions, or contra-indications with respect to
conditions of use.
The FDA has substantial discretion in the approval process and may either refuse
to file our application for substantive review or may form the opinion after
review of our data that our application is insufficient to allow approval of our
product candidates. If the FDA does not file or approve our application, it may
require that we conduct additional clinical, preclinical or manufacturing
validation studies and submit that data before it will reconsider our
application. Depending on the extent of these or any other studies, approval of
any applications that we submit may be delayed by several years, or may require
us to expend more resources than we have available. It is also possible that
additional studies, if performed and completed, may not be considered sufficient
by the FDA to make our applications approvable. If any of these outcomes occur,
we may be forced to abandon our applications for approval, which might cause us
to cease operations.
We will also be subject to a wide variety of foreign regulations governing the
development, manufacture and marketing of our products. Whether or not FDA
approval has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must still be obtained prior to manufacturing
or marketing the product in those countries. The approval process varies from
country to country and the time needed to secure approval may be longer or
shorter than that required for FDA approval. We cannot assure you that clinical
trials conducted in one country will be accepted by other countries or that
approval in one country will result in approval in any other country.
IF OUR PRODUCT CANDIDATES ARE UNABLE TO COMPETE EFFECTIVELY WITH MARKETED CANCER
DRUGS TARGETING SIMILAR INDICATIONS AS OUR PRODUCT CANDIDATES, OUR COMMERCIAL
OPPORTUNITY WILL BE REDUCED OR ELIMINATED.
We face competition from established pharmaceutical and biotechnology companies,
as well as from academic institutions, government agencies and private and
public research institutions. Many of our competitors have significantly greater
financial resources and expertise in research and development, manufacturing,
preclinical testing, conducting clinical trials, obtaining regulatory approvals
and marketing approved products than we do. Smaller or early-stage companies may
also prove to be significant competitors, particularly through collaborative
arrangements with large,
11
established companies. Our commercial opportunity will be reduced or eliminated
if our competitors develop and commercialize cancer drugs that are safer, more
effective, have fewer side effects or are less expensive than our product
candidates. These third parties compete with us in recruiting and retaining
qualified scientific and management personnel, establishing clinical trial sites
and patient registration for clinical trials, as well as in acquiring
technologies and technology licenses complementary to our programs or
advantageous to our business.
We expect that our ability to compete effectively will depend upon our ability
to:
o successfully and rapidly complete clinical trials and submit for
and obtain all requisite regulatory approvals in a cost-effective
manner;
o maintain a proprietary position for our products and manufacturing
processes and other related product technology;
o attract and retain key personnel;
o develop relationships with physicians prescribing these products;
and
o build an adequate sales and marketing infrastructure for our
product candidates.
Because we will be competing against significantly larger companies with
established track records, we will have to demonstrate to physicians that, based
on experience, clinical data, side-effect profiles and other factors, our
products are preferable to existing cancer drugs. If we are unable to compete
effectively in the cancer drug market and differentiate our products from
currently marketed cancer drugs, we may never generate meaningful revenue.
Numerous pharmaceutical and biotechnology companies have developed anthracycline
drugs used to treat acute leukemias similar to our compound, Annamycin. These
compounds include Adriamycin(R) and Ellence(R) which are marketed by Pfizer and
Cerubidine(R) which is marketed by Boehringer Ingelheim. These drugs have been
approved by the FDA and are currently being marketed as opposed to Annamycin
which is in clinical development. Atiprimod, our drug candidate for relapsed
multiple myeloma, works through a different mechanism of action than Velcade
which is currently marketed by Millenium Pharmaceuticals and other drugs in
development, such as Celgene Corporation's Revlimid.
WE CURRENTLY HAVE NO SALES AND MARKETING ORGANIZATION. IF WE ARE UNABLE TO
ESTABLISH A DIRECT SALES FORCE IN THE UNITED STATES TO PROMOTE OUR PRODUCTS, THE
COMMERCIAL OPPORTUNITY FOR OUR PRODUCTS MAY BE DIMINISHED.
We currently have no sales and marketing organization. If any of our product
candidates are approved by the FDA, we intend to market that product directly to
hospitals in the United States of America through our own sales force. We will
incur significant additional expenses and commit significant additional
management resources to establish this sales force. We may not be able to
establish these capabilities despite these additional expenditures. We will also
have to compete with other pharmaceutical and biotechnology companies to
recruit, hire and train sales and marketing personnel. If we elect to rely on
third parties to sell our product candidates in the United States, we may
receive less revenue than if we sold our products directly. In addition, we may
have little or no control over the sales efforts of those third parties. In the
event we are unable to develop our own sales force or collaborate with a third
party to sell our product candidates, we may not be able to commercialize our
product candidates which would negatively impact our ability to generate
revenue.
WE MAY NEED OTHERS TO MARKET AND COMMERCIALIZE OUR PRODUCT CANDIDATES IN
INTERNATIONAL MARKETS.
In the future, if appropriate regulatory approvals are obtained, we intend to
commercialize our product candidates in international markets. However, we have
not decided how to commercialize our product candidates in those markets. We may
decide to build our own sales force or sell our products through third parties.
Currently, we do not have any plans to enter international markets. If we decide
to sell our product candidates in international markets through a third party,
we may not be able to enter into any marketing arrangements on favorable terms
or at all. In addition, these arrangements could result in lower levels of
income to us than if we marketed our product candidates entirely on our own. If
we are unable to enter into a marketing arrangement for our product candidates
in international markets, we may not be able to develop an effective
international sales force to successfully commercialize those products in
international markets. If we fail to enter into marketing arrangements for our
products and are unable to develop an effective international sales force, our
ability to generate revenue would be limited.
IF OUR RELATIONSHIPS WITH OUR CONTRACT MANUFACTURER FOR ANNAMYCIN TERMINATES, OR
THEIR FACILITIES ARE DAMAGED OR DESTROYED, WE MAY BE UNABLE TO DEVELOP OR
COMMERCIALIZE ANNAMYCIN.
Currently, Antibioticos S.p.A. is our sole supplier of Annamycin for our
clinical trials. If our relationship with this contract manufacturer, or any
other contract manufacturer we might use, terminates or if any of their
facilities are damaged for any reason, including fire, flood, earthquake or
other similar event, we may be unable to obtain supply of Annamycin. If any of
these events were to occur, we may need to find alternative manufacturers or
manufacturing facilities. The number of contract manufacturers with the
expertise, required regulatory approvals and facilities to manufacture Annamycin
on a commercial scale is extremely limited, and it would take a significant
amount of time to arrange for alternative manufacturers. If we need to change to
other commercial manufacturers, the FDA and comparable foreign regulators must
approve these manufacturers' facilities and processes prior to our use, which
would require new testing and compliance inspections. In addition, we may not
have the intellectual property rights, or may have to share intellectual
property rights, to any improvements in the current manufacturing processes or
any new manufacturing processes for Annamycin. Any of these factors could cause
us to delay or suspend clinical trials, regulatory submissions, required
approvals or
12
commercialization of Annamycin, entail higher costs, and could result in our
being unable to commercialize Annamycin successfully. Furthermore, if our
contract manufacturers fail to deliver the required commercial quantities of
bulk drug substance or finished product on a timely basis and at commercially
reasonable prices, and we were unable to find one or more replacement
manufacturers capable of production at a substantially equivalent cost, in
substantially equivalent volumes and quality, and on a timely basis, we would
likely be unable to meet demand for Annamycin and we would lose potential
revenue.
IF THE FDA DOES NOT APPROVE OUR CONTRACT MANUFACTURERS' FACILITIES, WE MAY BE
UNABLE TO DEVELOP OR COMMERCIALIZE OUR PRODUCT CANDIDATES.
We rely on third-party contract manufacturers to manufacture our product
candidates, and currently have no plans to develop our own manufacturing
facility. The facilities used by our contract manufacturers to manufacture our
product candidates must be approved by the FDA. If the FDA does not approve
these facilities for the manufacture of our product, we may need to fund
additional modifications to our manufacturing process, conduct additional
validation studies, or find alternative manufacturing facilities, any of which
would result in significant cost to us as well as a delay of up to several years
in obtaining approval for and manufacturing of our product candidates. In
addition, our contract manufacturers will be subject to ongoing periodic
unannounced inspection by the FDA and corresponding state agencies for
compliance with good manufacturing practices regulations, or cGMPs, and similar
foreign standards. These regulations cover all aspects of the manufacturing,
testing, quality control and record keeping relating to our product candidates.
We do not have control over our contract manufacturers' compliance with these
regulations and standards. Failure by our contract manufacturers to comply with
applicable regulations could result in sanctions being imposed on us, including
fines, injunctions, civil penalties, failure of the government to grant market
approval of drugs, delays, suspension or withdrawals of approvals, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business. In addition, we have no control over our contract
manufacturers' ability to maintain adequate quality control, quality assurance
and qualified personnel. Failure by our contract manufacturers to comply with or
maintain any of these standards could adversely affect the development of our
product candidates and our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
PRODUCT CANDIDATES.
We face an inherent risk of product liability lawsuits related to the testing of
our product candidates, and will face an even greater risk if we sell our
product candidates commercially. Currently, we are not aware of any anticipated
product liability claims with respect to our product candidates. In the future,
an individual may bring a liability claim against us if one of our product
candidates causes, or merely appears to have caused, an injury. If we cannot
successfully defend ourselves against the product liability claim, we may incur
substantial liabilities. Regardless of merit or eventual outcome, liability
claims may result in:
o decreased demand for our product candidates;
o injury to our reputation;
o withdrawal of clinical trial participants;
o costs of related litigation;
o substantial monetary awards to patients;
o product recalls;
o loss of revenue; and
o the inability to commercialize our product candidates.
We have "clinical trial" liability insurance with a $2,000,000 annual aggregate
limit for up to 40 patients participating in our Atiprimod and prospective
Annamycin clinical trials. We intend to expand our insurance coverage to include
the sale of commercial products if marketing approval is obtained for our
product candidates. Our current insurance coverage may prove insufficient to
cover any liability claims brought against us. In addition, because of the
increasing costs of insurance coverage, we may not be able to maintain insurance
coverage at a reasonable cost or obtain insurance coverage that will be adequate
to satisfy any liability that may arise.
EVEN IF WE RECEIVE REGULATORY APPROVAL FOR OUR PRODUCT CANDIDATES, WE WILL BE
SUBJECT TO ONGOING SIGNIFICANT REGULATORY OBLIGATIONS AND OVERSIGHT.
If we receive regulatory approval to sell our product candidates, the FDA and
foreign regulatory authorities may, nevertheless, impose significant
restrictions on the indicated uses or marketing of such products, or impose
ongoing requirements for post-approval studies. Following any regulatory
approval of our product candidates, we will be subject to continuing regulatory
obligations, such as safety reporting requirements, and additional
post-marketing obligations, including regulatory oversight of the promotion and
marketing of our products. If we become aware of previously unknown problems
with any of our product candidates here or overseas or our contract
manufacturers' facilities, a regulatory agency may impose restrictions on our
products, our contract manufacturers or on us, including requiring us to
reformulate our products, conduct additional clinical trials, make changes in
the labeling of our products, implement changes to or obtain re-approvals of our
contract manufacturers' facilities or withdraw the product from the market. In
addition, we may experience a significant drop in the sales of the affected
products, our reputation in the marketplace may suffer and we may become the
target of lawsuits, including class action suits. Moreover, if we fail to comply
with applicable regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure of products,
operating
13
restrictions and criminal prosecution. Any of these events could harm or prevent
sales of the affected products or could substantially increase the costs and
expenses of commercializing and marketing these products.
WE RELY ON THIRD PARTIES TO CONDUCT OUR CLINICAL TRIALS. IF THESE THIRD PARTIES
DO NOT SUCCESSFULLY CARRY OUT THEIR CONTRACTUAL DUTIES OR MEET EXPECTED
DEADLINES, WE MAY NOT BE ABLE TO SEEK OR OBTAIN REGULATORY APPROVAL FOR OR
COMMERCIALIZE OUR PRODUCT CANDIDATES.
We have agreements with third-party contract research organizations, or CROs, to
provide monitors and to manage data for our clinical programs. We and our CROs
are required to comply with current Good Clinical Practices, or GCPs,
regulations and guidelines enforced by the FDA for all of our products in
clinical development. The FDA enforces GCPs through periodic inspections of
trial sponsors, principal investigators and trial sites. In the future, if we or
our CROs fail to comply with applicable GCPs, the clinical data generated in our
clinical trials may be deemed unreliable and the FDA may require us to perform
additional clinical trials before approving our marketing applications. We
cannot assure you that, upon inspection, the FDA will determine that any of our
clinical trials for products in clinical development comply with GCPs. In
addition, our clinical trials must be conducted with product produced under cGMP
regulations, and will require a large number of test subjects. Our failure to
comply with these regulations may require us to repeat clinical trials, which
would delay the regulatory approval process.
If any of our relationships with these third-party CROs terminate, we may not be
able to enter into arrangements with alternative CROs. If CROs do not
successfully carry out their contractual duties or obligations or meet expected
deadlines, if they need to be replaced, or if the quality or accuracy of the
clinical data they obtain is compromised due to the failure to adhere to our
clinical protocols, regulatory requirements or for other reasons, our clinical
trials may be extended, delayed or terminated, and we may not be able to obtain
regulatory approval for or successfully commercialize our product candidates. As
a result, our financial results and the commercial prospects for our product
candidates would be harmed, our costs could increase, and our ability to
generate revenue could be delayed.
IF WE FAIL TO ATTRACT AND KEEP SENIOR MANAGEMENT AND KEY SCIENTIFIC PERSONNEL,
WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES, CONDUCT OUR
CLINICAL TRIALS AND COMMERCIALIZE OUR PRODUCT CANDIDATES.
Our success depends in part on our continued ability to attract, retain and
motivate highly qualified management, clinical and scientific personnel and on
our ability to develop and maintain important relationships with leading
academic institutions, clinicians and scientists. We are highly dependent upon
our senior management and scientific staff, particularly Gary S. Jacob, our
Chief Executive Officer, and Donald Picker, our Executive Vice President, R&D.
The loss of services of Dr. Jacob, Dr. Picker or one or more of our other
members of senior management could delay or prevent the successful completion of
our planned clinical trials or the commercialization of our product candidates.
The competition for qualified personnel in the biotechnology and pharmaceuticals
field is intense. We will need to hire additional personnel as we expand our
clinical development and commercial activities. We may not be able to attract
and retain quality personnel on acceptable terms given the competition for such
personnel among biotechnology, pharmaceutical and other companies. We do not
carry "key person" insurance covering any members of our senior management.
IF WE FAIL TO ACQUIRE AND DEVELOP OTHER PRODUCTS OR PRODUCT CANDIDATES, WE MAY
BE UNABLE TO GROW OUR BUSINESS.
To date, we have in-licensed or acquired the rights to each of our product
candidates. As part of our growth strategy, in addition to developing our
current product candidates, we intend to license or acquire additional products
and product candidates for development and commercialization. Because we have
limited internal research capabilities, we are dependent upon pharmaceutical and
biotechnology companies and other researchers to sell or license products to us.
The success of this strategy depends upon our ability to identify, select and
acquire the right pharmaceutical product candidates and products. We currently
do not have any intentions to acquire another company.
Any product candidate we license or acquire may require additional development
efforts prior to commercial sale, including extensive clinical testing and
approval by the FDA and applicable foreign regulatory authorities. All product
candidates are prone to the risks of failure inherent in pharmaceutical product
development, including the possibility that the product candidate will not be
shown to be sufficiently safe and effective for approval by regulatory
authorities. In addition, we cannot assure you that any products that we license
or acquire that are approved will be manufactured or produced economically,
successfully commercialized or widely accepted in the marketplace.
Proposing, negotiating and implementing an economically viable product
acquisition or license is a lengthy and complex process. Other companies,
including those with substantially greater financial, marketing and sales
resources, may compete with us for the acquisition or license of product
candidates and approved products. We may not be able to acquire or license the
rights to additional product candidates and approved products on terms that we
find acceptable, or at all.
WE MAY UNDERTAKE ACQUISITIONS IN THE FUTURE, AND ANY DIFFICULTIES FROM
INTEGRATING THESE ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN
PROFITABILITY.
14
We may acquire additional businesses, products or product candidates that
complement or augment our existing business. Integrating any newly acquired
business or product could be expensive and time-consuming. We may not be able to
integrate any acquired business or product successfully or operate any acquired
business profitably. Moreover, we many need to raise additional funds through
public or private debt or equity financing to make acquisitions, which may
result in dilution to stockholders and the incurrence of indebtedness that may
include restrictive covenants.
WE WILL NEED TO INCREASE THE SIZE OF OUR ORGANIZATION, AND WE MAY EXPERIENCE
DIFFICULTIES IN MANAGING GROWTH.
We are a small company with 4 full-time and 2 part-time employees as of March
24, 2005. To continue our clinical trials and commercialize our product
candidates, we will need to expand our employee base for managerial,
operational, financial and other resources. Future growth will impose
significant added responsibilities on members of management, including the need
to identify, recruit, maintain and integrate additional employees. Over the next
12 months depending on the progress of our planned clinical trials, we plan to
add approximately four employees who we expect to assist us with our clinical
programs. Our future financial performance and our ability to commercialize our
product candidates and to compete effectively will depend, in part, on our
ability to manage any future growth effectively. To that end, we must be able
to:
o manage our development efforts effectively;
o manage our clinical trials effectively;
o integrate additional management, administrative, manufacturing and
sales and marketing personnel;
o maintain sufficient administrative, accounting and management
information systems and controls; and
o hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any
of them could harm our financial results.
REIMBURSEMENT MAY NOT BE AVAILABLE FOR OUR PRODUCT CANDIDATES, WHICH COULD
DIMINISH OUR SALES.
Market acceptance and sales of our product candidates may depend on
reimbursement policies and health care reform measures. The levels at which
government authorities and third-party payors, such as private health insurers
and health maintenance organizations, reimburse patients for the price they pay
for our products could affect whether we are able to commercialize these
products. We cannot be sure that reimbursement will be available for any of
these products. Also, we cannot be sure that reimbursement amounts will not
reduce the demand for, or the price of, our products. We have not commenced
efforts to have our product candidates reimbursed by government or third party
payors. If reimbursement is not available or is available only to limited
levels, we may not be able to commercialize our products.
In recent years, officials have made numerous proposals to change the health
care system in the United States. These proposals include measures that would
limit or prohibit payments for certain medical treatments or subject the pricing
of drugs to government control. In addition, in many foreign countries,
particularly the countries of the European Union, the pricing of prescription
drugs is subject to government control. If our products are or become subject to
government regulation that limits or prohibits payment for our products, or that
subject the price of our products to governmental control, we may not be able to
generate revenue, attain profitability or commercialize our products.
As a result of legislative proposals and the trend towards managed health care
in the United States, third-party payers are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement of
new drugs. They may also refuse to provide any coverage of uses of approved
products for medical indications other than those for which the FDA has granted
market approvals. As a result, significant uncertainty exists as to whether and
how much third-party payers will reimburse patients for their use of
newly-approved drugs, which in turn will put pressure on the pricing of drugs.
LEGISLATIVE OR REGULATORY REFORM OF THE HEALTHCARE SYSTEM MAY AFFECT OUR ABILITY
TO SELL OUR PRODUCTS PROFITABLY.
In both the United States and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system
in ways that could impact upon our ability to sell our products profitably. In
recent years, new legislation has been proposed in the United States at the
federal and state levels that would effect major changes in the healthcare
system, either nationally or at the state level.
These proposals have included prescription drug benefit proposals for Medicare
beneficiaries introduced in Congress. Legislation creating a prescription drug
benefit and making certain changes in Medicaid reimbursement has recently been
enacted by Congress and signed by the President. Given this legislation's recent
enactment, it is still too early to determine its impact on the pharmaceutical
industry and our business. Further federal and state proposals are likely. The
potential for adoption of these proposals affects or will affect our ability to
raise capital, obtain additional collaborators and market our products. We
expect to experience pricing pressures in connection with the sale of our
products due to the trend toward managed health care, the increasing influence
of health maintenance organizations and additional legislative proposals. Our
results of operations could be adversely affected by future healthcare reforms.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
IT IS DIFFICULT AND COSTLY TO PROTECT OUR PROPRIETARY RIGHTS, AND WE MAY NOT BE
ABLE TO ENSURE THEIR PROTECTION.
15
Our commercial success will depend in part on obtaining and maintaining patent
protection and trade secret protection of our product candidates, and the
methods used to manufacture them, as well as successfully defending these
patents against third-party challenges. We will only be able to protect our
product candidates from unauthorized making, using, selling, offering to sell or
importation by third parties to the extent that we have rights under valid and
enforceable patents or trade secrets that cover these activities.
As of March 24, 2005, we own 4 issued United States patents and have licensed
rights to 8 issued United States patents and 78 issued foreign patents, and to 3
pending United States patent applications and 39 pending foreign patent
applications. We do not and have not had any control over the filing or
prosecution of these patents or patent applications. We may file additional
patent applications and extensions. The issued United States patents we own and
license primarily are composition of matter and formulation patents related to
Atiprimod and liposomal Annamycin. Our composition of matter patents for
liposomal Annamycin and Atiprimod expire in 2008 and 2009, respectively. Our
formulation patents for liposomal Annamycin and Atiprimod expire in 2019 and
2018, respectively.
The patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions for which important
legal principles remain unresolved. No consistent policy regarding the breadth
of claims allowed in biotechnology patents has emerged to date in the United
States. The biotechnology patent situation outside the United States is even
more uncertain. Changes in either the patent laws or in interpretations of
patent laws in the United States and other countries may diminish the value of
our intellectual property. Accordingly, we cannot predict the breadth of claims
that may be allowed or enforced in our licensed patents or in third-party
patents.
The degree of future protection for our proprietary rights is uncertain because
legal means afford only limited protection and may not adequately protect our
rights or permit us to gain or keep our competitive advantage. For example:
o others may be able to make compounds that are competitive with our
product candidates but that are not covered by the claims of our
licensed patents, or for which we are not licensed under our
license agreements;
o we or our licensors might not have been the first to make the
inventions covered by our pending patent application or the
pending patent applications and issued patents of our licensors;
o we or our licensors might not have been the first to file patent
applications for these inventions;
o others may independently develop similar or alternative
technologies or duplicate any of our technologies;
o it is possible that our pending patent application or one or more
of the pending patent applications of our licensors will not
result in issued patents;
o the issued patents of our licensors may not provide us with any
competitive advantages, or may be held invalid or unenforceable as
a result of legal challenges by third parties;
o we may not develop additional proprietary technologies that are
patentable; or
o the patents of others may have an adverse effect on our business.
We also may rely on trade secrets to protect our technology, especially where we
do not believe patent protection is appropriate or obtainable. However, trade
secrets are difficult to protect. While we use reasonable efforts to protect our
trade secrets, our employees, consultants, contractors, outside scientific
collaborators and other advisors may unintentionally or willfully disclose our
information to competitors. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE UNABLE
TO PROTECT OUR RIGHTS TO, OR USE, OUR TECHNOLOGY.
If we choose to go to court to stop someone else from using the inventions
claimed in our licensed patents, that individual or company has the right to ask
the court to rule that these patents are invalid and/or should not be enforced
against that third party. These lawsuits are expensive and would consume time
and other resources even if we were successful in stopping the infringement of
these patents. In addition, there is a risk that the court will decide that
these patents are not valid and that we do not have the right to stop the other
party from using the inventions. There is also the risk that, even if the
validity of these patents is upheld, the court will refuse to stop the other
party on the ground that such other party's activities do not infringe our
rights to these patents.
Furthermore, a third party may claim that we are using inventions covered by the
third party's patent rights and may go to court to stop us from engaging in our
normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to
16
demonstrate that our products or methods of use either do not infringe the
patent claims of the relevant patent and/or that the patent claims are invalid,
and we may not be able to do this. Proving invalidity, in particular, is
difficult since it requires a showing of clear and convincing evidence to
overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States of America may be
maintained in secrecy until the patents are issued, because patent applications
in the United States of America and many foreign jurisdictions are typically not
published until eighteen months after filing, and because publications in the
scientific literature often lag behind actual discoveries, we cannot be certain
that others have not filed patent applications for technology covered by our
licensors' issued patents or our pending applications or our licensors' pending
applications or that we or our licensors were the first to invent the
technology. Our competitors may have filed, and may in the future file, patent
applications covering technology similar to ours. Any such patent application
may have priority over our or our licensors' patent applications and could
further require us to obtain rights to issued patents covering such
technologies. If another party has filed a United States patent application on
inventions similar to ours, we may have to participate in an interference
proceeding declared by the United States Patent and Trademark Office to
determine priority of invention in the United States. The costs of these
proceedings could be substantial, and it is possible that such efforts would be
unsuccessful, resulting in a loss of our United States patent position with
respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
RISKS RELATED TO OUR COMMON STOCK
MARKET VOLATILITY MAY AFFECT OUR STOCK PRICE AND THE VALUE OF YOUR INVESTMENT.
The market prices for securities of biopharmaceutical companies in general have
been highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may have a significant impact on the market price of our common stock:
o announcements of technological innovations or new products by us
or our competitors;
o announcement of FDA approval or non-approval of our product
candidates or delays in the FDA review process;
o actions taken by regulatory agencies with respect to our product
candidates, clinical trials, manufacturing process or sales and
marketing activities;
o regulatory developments in the United States of America and
foreign countries;
o the success of our development efforts and clinical trials;
o the success of our efforts to acquire or in-license additional
products or product candidates;
o any intellectual property infringement action, or any other
litigation, involving us;
o announcements concerning our competitors, or the biotechnology or
biopharmaceutical industries in general;
o actual or anticipated fluctuations in our operating results;
o changes in financial estimates or recommendations by securities
analysts;
o sales of large blocks of our common stock;
o sales of our common stock by our executive officers, directors and
significant stockholders; and
o the loss of any of our key scientific or management personnel.
The occurrence of one or more of these factors may cause our stock price to
decline, and you may not be able to resell your shares at or above the price you
paid for your shares. In addition, the stock markets in general, and the markets
for biotechnology and biopharmaceutical stocks in particular, have experienced
extreme volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
trading price of our common stock.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION.
In the past, securities class action litigation has often been brought against a
company following a decline in the market price of its securities. This risk is
especially relevant for us because biotechnology and biopharmaceutical companies
have experienced significant stock price volatility in recent years. If we faced
such litigation, it could result in substantial costs and a diversion of
management's attention and resources, which could harm our business.
17
WE HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH
DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF
OUR STOCK.
We have never paid cash dividends on our stock and do not anticipate paying cash
dividends on our stock in the foreseeable future. The payment of cash dividends
on our stock will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of directors may
consider relevant. If we do not pay cash dividends, our stock may be less
valuable because a return on your investment will only occur if our stock price
appreciates.
ITEM 2. PROPERTIES.
We currently lease 3,886 square feet of office space located at 420 Lexington
Avenue, Suite 1609, New York, New York through June 30, 2011. This facility
contains our executive and administrative headquarters.
Additionally, we currently lease 2,120 square feet of laboratory space located
at 7 Deer Park Drive, Suite N, Monmouth Junction, New Jersey through November
2005.
We believe our existing facilities are well maintained, in good operating
condition, and that our existing and planned facilities will be adequate to
support our operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the three
months ended December 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock has been quoted on the American Stock Exchange under the symbol
"KAL" since October 25, 2004. From May 21, 2003 to October 22, 2004, our common
stock was quoted on the OTC Bulletin Board under the symbol "CLSP.OB." Prior to
May 21, 2003, our common stock was quoted on the OTC Bulletin Board under the
symbol "WEBR.OB" but never traded. The following table shows the reported high
and low closing prices per share for our common stock as reported on the
American Stock Exchange and the OTC Bulletin Board. With respect to the OTC
Bulletin Board quotes, these quotations reflect inter-dealer prices, without
markup, markdown or commissions and may not necessarily represent actual
transactions or a liquid trading market.
2004 HIGH LOW
---- ---
Fourth Quarter $2.08 $1.50
Third Quarter 2.01 1.15
Second Quarter 3.70 1.95
First Quarter 4.25 3.25
2003 HIGH LOW
---- ---
Fourth Quarter $4.05 $3.95
Third Quarter 5.30 3.00
Second Quarter 5.80 4.50
(beginning May 21, 2003)
NUMBER OF STOCKHOLDERS
As of March 24, 2005, there were 195 holders of record of our common stock.
DIVIDEND POLICY
Historically, we have not paid any dividends to the holders of our common stock
and we do not expect to pay any such dividends in the foreseeable future as we
expect to retain our future earnings for use in the operation and expansion of
our business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K/A. The
statements of operations data for the years ended December 31, 2004, 2003 and
2002 and the balance sheet data at December 31, 2004 and 2003 are derived from
our audited financial statements which are included elsewhere in this Form
10-K/A. The statement of operations data for the year ended December 31, 2001
and the balance sheet data at December 31, 2002 and 2001 are derived from our
audited financial statements which are not included in this Form 10-K/A. The
statement of operations data for the year ended December 31, 2000 and the
balance sheet data at December 31, 2000 are derived from our unaudited financial
statements not included in this Form 10-K/A. The historical results are not
necessarily indicative of results to be expected for future periods. The
following information is presented in thousands, except per share data.
FOR THE YEAR ENDING DECEMBER 31,
2004 2003 2002 2001 2000
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ -0- $ -0- $ -0- $ -0- $ -0-
Operating expenses:
Research and development 2,817 1,370 491 653 897
Government grant (266) -- -- -- --
Purchased in process research and development 210 6,735 -- -- --
Stock-based compensation - research and development 1,508 434 -- -- --
General and administrative 2,363 1,398 1,228 939 857
Stock-based compensation - general and administrative 1,224 3,400 -- 22 1,054
Loss from operations (7,857) (13,337) (1,719) (1,614) (2,809)
Other income 229 222 -- -- --
Interest income 84 9 34 182 192
Net loss $ (7,544) $ (13,106) $ (1,685) $ (1,432) $ (2,616)
Net loss per common share -- basic and diluted $ (0.26) $ (0.61) $ (0.10) $ (0.08) $ (0.15)
Weighted average number of common shares
outstanding -- basic and diluted 28,485 21,358 17,319 17,319 17,319
AS OF DECEMBER 31,
2004 2003 2002 2001 2000
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 5,323 $ 3,956 $ 2,223 $ 3,627 $ 4,948
Total assets 5,470 4,119 2,272 3,651 4,955
Total current liabilities 1,220 1,264 440 138 31
Accumulated deficit during development stage (33,361) (25,818) (12,711) (11,027) (9,594)
Total stockholders' equity $ 4,249 $ 2,855 $ 1,829 $ 3,513 $ 4,923
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and other financial information appearing elsewhere in this Annual
Report. In addition to historical information, the following discussion and
other parts of this Annual Report contain forward-looking information that
involves risks and uncertainties.
OVERVIEW
We are a development stage biopharmaceutical company, whose primary focus is on
biopharmaceutical product development. Since inception in June 1996 our efforts
have been principally devoted to research and development, securing patent
protection, obtaining corporate relationships and raising capital. Since
inception through December 31, 2004, we have sustained cumulative net losses of
$33,361,197. Our losses have resulted primarily from expenditures incurred in
connection with clinical development of licensed products, the purchase of
in-process research and development, stock based compensation expense, patent
filing and maintenance, outside accounting and legal services and regulatory
consulting fees.
From inception through December 31, 2004 we have not generated any revenue from
operations. We expect to incur substantial and increasing losses for the next
several years as we develop our product candidates, expand our clinical
development team and prepare for the commercial launch of our product
candidates. We do not currently have any commercial biopharmaceutical products,
and do not expect to have such for several years, if at all.
19
To date, our sources of cash have been primarily limited to the sale of our
equity securities. On March 9, 2005, we completed a private placement of an
aggregate 1,985,791 shares of our common stock at a per share price of $1.52,
for net proceeds of $2,993,402. The financing was led by certain current
institutional shareholders and included certain members of our management. We
have devoted substantially all of our capital resources to the in-licensing and
development of our product candidates.
Our research and development expenses consist primarily of costs associated with
an in-house research and development laboratory, salaries and staff, application
and filing for regulatory approval of our proposed products, purchase of
in-process research and development, regulatory and scientific consulting fees,
contract research and royalty payments to outside suppliers, facilities and
universities as well as legal and professional fees associated with filing and
maintaining our patent and license rights to our proposed products. We expense
all research and development costs as they are incurred. We expect our research
and development expenses to increase significantly in the future as we develop
our product candidates.
Our general and administrative expenses primarily include personnel and related
costs, rent and professional service fees. We expect our general and
administrative expenses to increase significantly over the next few years as we
continue to build our operations to support our product candidates and as we
incur costs associated with being a publicly traded company.
HISTORY
In March 2002, Callisto Pharmaceuticals, Inc. ("Old Callisto") purchased 99.7%
of the outstanding common shares of Webtronics, Inc., a public company
("Webtronics"), for $400,000. Webtronics was incorporated in Florida on February
2, 2001 and had limited operations during the year ended December 31, 2002. On
April 30, 2003, pursuant to an Agreement and Plan of Merger dated March 10,
2003, as amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned
subsidiary of Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy")
and Callisto Acquisition Corp., a wholly-owned subsidiary of Webtronics merged
into Old Callisto (collectively, the "Merger"). As a result of the Merger, Old
Callisto and Synergy became wholly-owned subsidiaries of Webtronics. Old
Callisto changed its name to Callisto Research Labs, LLC and Webtronics changed
its name to Callisto Pharmaceuticals, Inc. and changed its state of
incorporation from Florida to Delaware
PLAN OF OPERATIONS
Our plan of operations for the next twelve months is to focus primarily on the
development of two drugs to treat leukemia and multiple myeloma (an incurable
blood cancer that invades and proliferates in bone marrow). Our lead drug in
development for leukemia, Annamycin, earlier completed a Phase I/IIa trial in
refractory leukemia patients. We plan to initiate clinical trials in relapsed
(failure of prior therapy) leukemia patients in 2005. Our second drug candidate,
Atiprimod, is presently in a Phase I/IIa clinical trial in multiple myeloma
patients, and is an orally available drug with antiproliferative and
antiangiogenic activity. We also have three drugs in preclinical development,
WP760, for melanoma, SP304 for gastrointestinal inflammation, and a monoclonal
antibody that is being explored as a biodefensive agent against staphylococcal
and streptococcal bioweapons.
ANNAMYCIN
On August 12, 2004, we entered into a world-wide license agreement with The
University of Texas M.D. Anderson Cancer Center to research, develop, sell and
commercially exploit the patent rights for Annamycin, an anthacycline cancer
drug for leukemia therapy. Consideration paid for this license amounted to
$31,497 for reimbursement of out-of-pocket costs for filing, enforcing and
maintaining the Annamycin patent rights and a $100,000 initial license fee. We
also agreed to pay The University of Texas M.D. Anderson Cancer Center royalties
based on net sales from any licensed products, plus aggregate milestone payments
of up to $750,000 based upon achieving certain regulatory submissions and
approvals. The term of the agreement is from August 12, 2004 until November 2,
2019. Under the terms of the license agreement, we are required to make certain
good faith expenditures towards the clinical development of at least one
licensed product within the two year period after March 2005. In addition, at
any time after 5 years from August 12, 2004, The University of Texas M.D.
Anderson Cancer Center has the right to terminate the license if we fail to
provide evidence within 90 days of written notice that we have commercialized or
we are actively and effectively attempting to commercialize Annamycin.
Annamycin was discovered by scientists at The University of Texas M.D. Anderson
Cancer Center and initially evaluated in a Phase I clinical trial in 36 patients
with relapsed solid tumors, a Phase II clinical trial in 13 patients with
doxorubicin-resistant breast cancer, and a Phase I/IIa trial in 20 patients with
relapsed/refractory acute myeloid leukemia, or AML and acute lymphocytic
leukemia, or ALL. We expect to commence a trial of Annamycin in adult relapsed
ALL patients at The University of Texas M.D. Anderson Cancer Center in mid-2005
which will include an initial evaluation of a small number of patients (2
cohorts totaling approximately 6 patients) in a Phase I/IIa trial that will be
rolled into a larger Phase IIb trial. The clinical trial protocol was submitted
to the institutional review board for approval in February 2005. We also expect
to commence two additional trials with Annamycin in 2005, a single agent trial
of Annamycin in pediatric relapsed ALL patients, and a combination trial of
Annamycin in combination with Ara-C in adult relapsed AML patients.
ATIPRIMOD
On August 28, 2002, Synergy entered into a worldwide license agreement with
AnorMED to research, develop, sell and commercially exploit the Atiprimod patent
rights. The license agreement provides for aggregate milestone payments of up to
$14 million based upon achieving certain regulatory submissions and approvals
for an initial indication, and additional payments of up to $16 million for each
additional indication based on achieving certain regulatory submissions and
approvals. In addition the agreement requires Synergy to pay AnorMED royalties
on net sales. Commencing on January 1, 2004 and on January 1 of each subsequent
year, Synergy is obligated to pay AnorMED a maintenance fee of $200,000 until
the first commercial sale of the product. The first of these annual maintenance
fee payments under this agreement was made on January 22,
20
2004. Pursuant to the license agreement, failure to pay the maintenance fee is a
material breach of the license agreement. The license agreement will terminate
in 2018.
On May 26, 2004, we commenced a Phase I/IIa clinical trial of Atiprimod in
relapsed multiple myeloma patients at two sites, the Dana-Farber Cancer
Institute (Boston) and The University of Texas M.D. Anderson Cancer Center
(Houston). On January 31, 2005, we announced the opening of two additional sites
for the Phase I/IIa clinical trial of Atiprimod, the Roswell Park Cancer
Institute in Buffalo, New York, and the St. Vincent's Comprehensive Cancer
Center in New York, NY. The clinical trial is an open label study, with the
primary objective of assessing the safety of the drug and identifying the
maximum tolerated dose. The secondary objectives are to measure the
pharmacokinetics, evaluate the response in patients with refractory disease and
to identify possible surrogate responses to drug to better determine the
mechanism of drug action. The duration of this clinical study depends on the
enrollment rate, how well the drug is tolerated, and on drug response, with
final results not anticipated until the end of 2005. If Atiprimod produces
positive responses, we intend to initiate a Phase IIb trial in relapsed multiple
myeloma patients in 2006.
On March 15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod
in advanced cancer patients. The new trial is entitled: "An Open Label Study of
the Safety and Efficacy of Atiprimod Treatment for Patients with Advanced
Cancer". The primary objective is to assess the safety and determine the maximum
tolerated dose (MTD) of Atiprimod in advanced cancer patients. The secondary
objectives are to measure the pharmacokinetics of Atiprimod and evaluate the
response in a variety of relapsed solid tumors and hematologic malignancies. The
trial protocol received institutional review board (IRB) approval on February
22, 2005 at The University of Texas M.D. Anderson Cancer Center with Dr. Razelle
Kurzrock as the Principal Investigator. Site initiation was completed on March
3, 2005, and patient screening and dosing began in April, 2005. The duration of
this study will depend on the enrollment rate, how well the drug is tolerated
and on drug response.
SITE DIRECTED INTERCALATION TECHNOLOGY
On February 24, 2004, we entered into an agreement with HPI to sublicense the
rights to a key patent covering a technology platform for site-directed DNA
intercalation and we acquired the rights to a patent covering new anthracycline
analogs. We issued to HPI 25,000 shares of common stock at a fair value of
$56,250 and reimbursed HPI approximately $103,500 for various costs and
expenses. The total consideration of $159,750 was allocated in full to the HPI
patent rights, which have not yet reached technological feasibility, and having
no alternative use, was accounted for as purchased in-process research and
development expense during the quarter ended March 31, 2004. The fair value of
the common stock issued to HPI was $2.25, based on the price per share paid in
the April 2004 private placement, which closed on April 19, 2004.
In addition, we granted to HPI 1,170,000 performance based stock options,
exercisable at $3.50 per share, which vest upon the achievement of certain
milestones. If the milestones are achieved, we will record additional purchased
in-process research and development expense based upon the fair value of the
options at that time. We also agreed to pay HPI royalties of 2% on net sales
from any products resulting from commercializing the site-directed DNA
intercalation. Pursuant to the sublicense agreement, in the event our Board of
Directors determines to abandon its development and commercialization of the
site-directed DNA intercalation, HPI shall have the right to terminate the
sublicense agreement. The technology platform for site-directed DNA
intercalation is exemplified by the identification of a lead drug candidate,
WP760, for melanoma that shows remarkable selectivity for human melanoma cancer
cell lines. We are presently evaluating this drug pre-clinically in animal
models of human melanoma, and based on these results plan to make a decision in
2005 on further development of WP760.
GUANYLYL CYCLASE RECEPTOR AGONIST TECHNOLOGY
Our GCRA program has resulted in the development of SP304, a biologically
functional analog that has demonstrated superior biological activity, enhanced
temperature and protease stability and superior pH characteristics relative to
human uroguanylin. SP304 is currently undergoing pre-clinical evaluation as a
treatment for GI inflammation in a collaborative study involving clinical
gastroenterologist Dr. Scott Plevy of the University of Pittsburgh. Based on
these animal studies, we plan in 2005 to make a decision on moving this drug
forward into the clinic.
SUPERANTIGEN-BASED BIOTERORRISM DEFENSE
On July 25, 2001, we entered into a license agreement to research, develop, sell
and commercially exploit certain Rockefeller University licensed patents
covering peptides and antibodies useful in treating toxic shock syndrome and
septic shock. We will pay Rockefeller a $7,500 annual maintenance fee until the
first commercial sale of the product, plus royalties of 2% and 0.75% of net
sales of product depending on whether the product is covered by a claim under
the licensed patents or derived from a claim under the licensed patents and will
pay Rockefeller 15% of any sublicense fee paid by sublicensees. The agreement
will terminate on July 25, 2021. Rockefeller may terminate the license agreement
if we are more than 30 days late in paying Rockefeller any amounts due under the
license agreement or if we breach the license agreement.
We are exploring the development of a monoclonal antibody as a therapeutic agent
to prevent, treat and control superantigen-mediated bioweapons. Our goal is to
demonstrate therapeutic utility of this agent in an animal model in which toxic
shock is induced by an aerosolized superantigen toxin. The research work
involves a collaboration with Dr. Sina Bavari, U.S. Army Medical Research
Institute of Infectious Diseases, Fort Detrick, MD. We are also exploring
strategic alternatives regarding further development of the superantigen
program, including spin-off or strategic partnership.
MANUFACTURING
An improved manufacturing method for Annamycin has been developed at
Antibioticos S.p.A., our commercial supplier of Good Manufacturing Practice, or
GMP, drug substance. GMP material is currently being produced in sufficient
quantity for all three anticipated Phase II trials. Currently, Antibioticos
S.p.A. is our sole supplier of Annamycin for our clinical trials. Our agreement
with Antibioticos provides that Antibioticos S.p.A. will provide 400 grams of
GMP drug substance for our Annamycin clinical trials. Upon the conclusion of our
Phase IIb clinical trials, the agreement
21
provides that the parties will negotiate in good faith towards a commercial
supply agreement for Annamycin. If our relationship with this contract
manufacturer, or any other contract manufacturer we might use, terminates or if
any of their facilities are damaged for any reason, including fire, flood,
earthquake or other similar event, we may be unable to obtain supply of
Annamycin. If any of these events were to occur, we may need to find alternative
manufacturers or manufacturing facilities. The number of contract manufacturers
with the expertise, required regulatory approvals and facilities to manufacture
Annamycin on a commercial scale is extremely limited, and it would take a
significant amount of time to arrange for alternative manufacturers. If we need
to change to other commercial manufacturers, the FDA and comparable foreign
regulators must approve these manufacturers' facilities and processes prior to
our use, which would require new testing and compliance inspections. In
addition, we may not have the intellectual property rights, or may have to share
intellectual property rights, to any improvements in the current manufacturing
processes or any new manufacturing processes for Annamycin. Any of these factors
could cause us to delay or suspend clinical trials, regulatory submissions,
required approvals or commercialization of Annamycin, entail higher costs, and
could result in our being unable to commercialize Annamycin successfully.
One large-scale GMP production run of Atiprimod dimaleate led to the successful
release of 10 Kg of material available for future Phase II clinical studies. We
plan to enter into a supply contract for Atiprimod with a commercial supplier by
the end of 2005.
EMPLOYEES
Our plan is to use contract research organizations (CROs) for most of our
development efforts, including monitoring of clinical trial results, thus
minimizing the need to hire full time employees. As of March, 24, 2005, we had 4
full-time and 2 part-time employees.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of December 31, 2004.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our accounting policies are described in Note 3 of the
notes to our consolidated financial statements included in this Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2004. The financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.
Accounting for stock based compensation: We have adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). As provided for by SFAS 123, we have also elected to account for our
stock-based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25")." Accordingly, compensation expense has been recognized based on the
intrinsic value of stock issued or options granted to employees and directors
for services rendered. Other stock based compensation associated with grants to
non-employees, as well as Directors who perform services outside of their Board
duties, is measured using the fair value method. We rely heavily on incentive
compensation in the form of stock options to recruit, retain and motivate
directors, executive officers, employees and consultants. Incentive compensation
in the form of stock options is designed to provide long-term incentives,
develop and maintain an ownership stake and conserve cash during our development
stage. Since inception through December 31, 2004 stock based compensation
expense totaled $11,351,272, or approximately one third of our accumulated
deficit.
We account for stock options and warrants granted to non-employees based on the
fair value of the stock option or warrant using the Black-Scholes option-pricing
model based on assumptions for expected stock price volatility, expected term of
the option, risk-free interest rate and expected dividend yield at the grant
date.
The single most significant factor impacting our operating results is the price
of our stock which is used in the computation of stock-based compensation
expense, particularly for variable options. Our stock price fluctuated from
$3.95 per share as of December 31, 2003 to $1.98 per share as of December 31,
2004. As of December 31, 2004, 428,500 of our non-employee options required
variable accounting treatment in accordance with FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25" ("FIN 44"). Our stock-based compensation
expense associated with these non-employee variable options during the twelve
months ended December 31, 2003 was $1,108,817, whereas we reversed $816,865 of
this expense during the twelve months ended December 31, 2004 due entirely to
the fluctuation in our stock price.
Research and Development: We do not currently have any commercial
biopharmaceutical products, and do not expect to have such for several years, if
at all and therefore our research and development costs are expensed as
incurred. These include expenditures in connection with an in-house research and
development laboratory, salaries and staff costs, application and filing for
regulatory approval of our proposed products, purchase of in-process research
and development, regulatory and scientific consulting fees, contract research
and royalty payments to outside suppliers, facilities and universities as well
as legal and professional fees associated with filing and maintaining our patent
and license rights to our proposed products. While certain of our research and
development costs may have future benefits, our policy of expensing all research
and development expenditures is predicated on the fact that we have no history
of successful commercialization of biopharmaceutical products to base any
estimate of the number of future periods that would be benefited.
22
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003.
The results of operations of Synergy are included in the consolidated statements
of operations since the Merger on April 30, 2003.
We had no revenues during the twelve months ended December 31, 2004 and 2003
because we do not have any commercial biopharmaceutical products and we do not
expect to have such products for several years, if at all.
Research and development expenses increased approximately $1,447,402, or 106%,
to $2,817,387 for the twelve months ended December 31, 2004 from $1,369,985 for
the twelve months ended December 31, 2003. The single most significant factor
contributing to this increase in research and development expense was
approximately $500,000 in higher costs associated with the commencement of our
Phase I/IIa clinical trials of Atiprimod in May of 2004. These clinical trial
expenses included patient costs, drug formulation and tableting, data
collection, monitoring, insurance, and FDA consultants. During the twelve month
period ended December 31, 2003 our Atiprimod project expenses were pre-clinical
in nature, associated with preparing our IND application. Also contributing to
this increase in research and development expense in the twelve months ended
December 31, 2004 were our payments of the first annual $200,000 maintenance fee
to AnorMED, Inc. for the Atiprimod license In addition personnel costs increased
approximately $300,000 as we retained two Synergy executive staff scientists,
Drs. Picker and Shailubhai, subsequent to the Merger and we incurred $137,000 of
costs to develop a new GMP certified commercial production capacity for future
trials of Atiprimod. The remainder of the increase was primarily attributable to
$160,000 of higher expenses paid to outside collaborating institutions under our
government research grant for Atiprimod.
Our Annamycin project, which started in the latter part of 2004, incurred
expenses primarily limited to a $100,000 initial license fee and $31,000 in
patent related legal fees paid to The University of Texas MD Anderson Cancer
Center. Until the latter part of 2004 our lead drug candidate was Atiprimod and
almost all of our resources were devoted to that project. Concurrently with the
license of Annamycin we began implementing a project cost management system
which became effective January 1, 2005. This system captures all of our outside
variable project cost (e.g. patient costs, drug formulation and tableting, data
collection, monitoring, insurance, and FDA consultants) associated with the
clinical development of each of our drug candidates. With regard to our
relatively fixed and smaller research and development overhead expenses,
principally salaries and facilities, we are not able to accurately and
meaningfully determine project allocations at this time. We do believe however
that these internal fixed resources are expended on projects approximately in
proportion to our outside variable costs.
Stock-based compensation -- research and development recorded during the twelve
months ended December 31, 2004, totaled $1,508,588 as compared to $434,187
recorded during the twelve months ended December 31, 2003. This increase was
primarily attributable to restructuring of Dr. Kunwar M. Shalubhai's employment
agreement, which resulted in deferred compensation cost associated with 225,000
cancelled options of $706,813 as of the date of cancellation being charged to
stock-based compensation expense during the year ended December 31, 2004 (see
Footnote 8 to our Consolidated Financial Statements). In addition our
stock-based compensation - research and development recorded during the twelve
months ended December 31, 2004 reflects a full year of expense attributable to
options granted to our scientific staff at mid-year 2003 subsequent to the
Merger with Synergy in April 2003.
Government grant funding for the twelve months ended December 31, 2004 was
$265,697 as compared to $0 for the twelve months ended December 31, 2003. We
request grant funding to reimburse research and development expenses as
incurred.
General and administrative expenses for the twelve months ended December 31,
2004 were $2,362,773, an increase of $964,683 or 69%, from $1,398,090 for the
twelve months ended December 31, 2003. The increase was due primarily to
approximately (i) $300,000 of increased personnel costs principally as a result
of the Merger and recruitment costs related to hiring personnel, (ii) $220,000
in higher facilities and office overhead related to the move into our new
corporate headquarters in New York City during the quarter ended December 31,
2003, (iii) $340,000 in higher outside services associated with being a public
company including outside directors, transfer agent fees and investor relations
and (iv) $80,000 in higher business travel principally attending investor,
professional and medical conferences in the United States, England, Italy and
Germany.
Stock-based compensation -- general and administrative recorded during the
twelve months ended December 31, 2004, totaled $1,224,182 as compared to
$3,399,759 recorded during the twelve months ended December 31, 2003. This
decrease was primarily attributable to a decrease in our stock price from $3.95
as of December 31, 2003 to $1.98 per share as of December 31, 2004. This share
price decrease resulted in the recapture during 2004 of stock based compensation
recorded on certain variable options granted to non-employees during 2003. The
stock-based compensation expense associated with these variable options during
the twelve months ended December 31, 2003 was $1,108,817, whereas we reversed
$816,865 of this expense during the twelve months ended December 31, 2004.
Purchased in-process research and development was $209,735 for the twelve months
ended December 31, 2004, primarily in connection with the acquisition of rights
to two key patents covering a novel cancer platform technology from Houston
Pharmaceuticals, Inc. During the twelve months ended December 31, 2003 we
recorded $6,734,818 of purchased in-process research and development expense in
connection with the Merger.
During December 2004 and 2003, Synergy sold certain New Jersey State tax loss
carry forwards under a state economic development program for cash of
approximately $233,000 and $222,000 respectively , the proceeds of which were
used to support research and development activities in New Jersey. This state
tax benefit was recorded as Other Income during the fourth quarters ended
December 31, 2004 and 2003.
Net loss for the twelve months ended December 31, 2004 was $7,543,467 compared
to a net loss of $13,106,247 incurred for the twelve months ended December 31,
2003. The decreased net loss is primarily the result of the lower purchased
in-process research and development expenses, partially offset by higher
research, development, general and administrative expenses discussed above. In
addition we recorded lower stock based compensation expense of $2,732,770 during
the twelve months ended December 31, 2004, as compared to $3,833,946 recorded
during the same period ended December 31, 2003.
YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002.
We had no revenues during the twelve months ended December 31, 2003 and December
31, 2002 because we did not have any commercial biopharmaceutical products.
Research and development expenses increased $878,555 or 179% to $1,369,985 for
the twelve months ended December 31, 2003 from $491,430 for the same period in
2002. The results of operations of Synergy for the period May 1, 2003 through
December 31, 2003 are included in the consolidated statement of operations for
the year ended December 31, 2003, and are not included in the results of 2002.
Of this increase in research and development expense, approximately 63% or
$556,000 was attributable to costs associated with preparing and filing our IND
application for
23
Atiprimod in September of 2003. These IND application related costs included
quantitative analysis and synthesis, as well as pre-clinical management
consulting fees paid to contract research organizations to develop and advise on
IND application requirements, proposed clinical trial protocols, site selection
and principal investigator contracting. Also contributing to this increase in
research and development expense were higher salaries and wages, which increased
approximately $200,000 as we retained two key executive staff scientists from
Synergy. The remainder of this increase in research and development was
primarily due to the acquisition of the Synergy research laboratory facility in
conjunction with the Merger. No such expenses were incurred in 2002. Our
research and development expenses were primarily incurred negotiating and doing
due diligence in anticipation of the Merger and maintaining our existing
superantigen-based bioterrorism defense patents licensed from Rockefeller
University.
During the twelve months ended December 31, 2003 we also incurred $6,734,818 of
net purchased in-process research and development expense related to the Merger.
There was no such expense during the twelve months ended December 31, 2002.
General and administrative expenses for the twelve months ended December 31,
2003 of $1,398,090 increased $170,391 or 14% from the $1,227,699 we incurred for
the twelve months ended December 31, 2002. During 2002, we recorded a charge of
$400,000 associated with the purchase of Webtronics. Excluding this $400,000
charge in 2002, the increase in general and administrative expenses was $570,391
or 69% from 2002 to 2003 primarily from higher legal, accounting and
professional fees incurred in connection with the Merger, regulatory filings,
insurance and travel associated with fund raising activities during 2003.
Stock-based compensation expense recorded during the twelve months ended
December 31, 2003, totaled $3,833,946 as compared to $332 recorded during the
twelve months ended December 31, 2002. This increase was primarily attributable
to options issued in connection with the Merger, to retain several key Synergy
scientists, at approximately the same time our shares of common stock commenced
trading on the OTC Bulletin Board on June 17, 2003. The remaining balance of
unamortized deferred stock based compensation expense, presented in the
stockholder's equity section of our December 31, 2003 Balance Sheet, totaled
$5,480,007.
During December 2003 Synergy sold certain New Jersey State tax loss carry
forwards under a state economic development program for cash of approximately
$222,000, the proceeds of which have been and will be used to support research
and development activities in New Jersey. This state tax benefit was recorded as
Other Income during the fourth quarter ended December 31, 2003 and there was no
such benefit in 2002.
Net loss for the twelve months ended December 31, 2003 was $13,106,247 compared
to a net loss of $1,684,965 incurred for the twelve months ended December 31,
2002.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004 we had $5,323,384 in cash and cash equivalents, compared
to $3,956,486 as of December 31, 2003. This increase in cash of $1,366,898
during the twelve months ended December 31, 2004 was principally the result of
completing two private placements of common stock yielding net proceeds of
$6,099,012. This was partially offset by cash used in operating activities of
$4,732,114 during the twelve months ended December 31, 2004. Cash used in
operating activities was primarily for research and development and general and
administrative expenses discussed above totaling $5,180,160, less $265,697 in
government grant funding and $233,382 in cash received from the sale of certain
New Jersey State tax loss carry forwards under a state economic development
program.
On March 9, 2005 we sold and issued in a private placement an aggregate
1,985,791 shares of common stock at a per share price of $1.52, for aggregate
gross proceeds of approximately $3.02 million. Because this transaction was
completed with certain existing institutional shareholders and certain members
of our management we paid no fees to selling agents and have agreed to file a
registration statement covering resale of the shares within 30 days of closing.
On April 19, 2004, we sold and issued in a private placement to accredited
investors an aggregate 2,151,109 shares of common stock at an issue price of
$2.25 per share for aggregate gross proceeds of $4,839,995. We incurred fees and
expenses aggregating $294,241 to various selling agents. In addition, we issued
an aggregate 124,711 warrants to purchase common stock to such selling agents.
The warrants are immediately exercisable at $2.48 per share and will expire five
years after issuance.
In January 2004, we completed a private placement begun in late 2003 and issued
1,128,766 shares of common stock at an issue price of $1.50 for aggregate
proceeds of $1,693,149, less $139,891 in fees to various selling agents. In
addition, we incurred and issued 31,467 shares of common stock and an aggregate
370,543 warrants to purchase common stock to such selling agents. The warrants
are immediately exercisable at $1.90 per share and will expire five years after
issuance.
On October 7, 2003 we were awarded a $265,697 Small Business Technology Transfer
Research grant from the National Institutes of Health for studies on Atiprimod.
The studies began in early 2004 and were completed in November 2004. Funding for
the total amount of this grant was received during 2004 and has been reported on
our Consolidated Statements of Operations as a separate line item entitled
"Government Grant".
Our capital resources will be focused primarily on the clinical development and
regulatory approval of Annamycin for acute leukemia and Atiprimod for multiple
myeloma and bone resorption disease, a major complication associated with
multiple myeloma disease. Our product development efforts are thus in their
early stages and we cannot make estimates of the costs or the time it will take
to complete. The risk of completion of any program is high because of the long
duration of clinical testing, extended regulatory approval and review cycles and
uncertainty of the costs. Net cash inflows from any products developed may take
several years to achieve. We will need additional funding to complete these
activities. We could however receive grants, contracts or technology licenses in
the short-term. The amount and timing of these inflows, if any, is not known.
To date, our sources of cash have been primarily limited to the sale of our
equity securities. We cannot be certain that additional funding will be
available on acceptable terms, or at all. Any debt financing, if available, may
involve restrictive covenants that impact our ability to conduct our
24
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 development and/or commercialization of one or more of our product
candidates.
We expect that our existing capital resources will be sufficient to fund our
operations for at least the next 12 months.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following is a summary of our significant contractual cash obligations for
the periods indicated that existed as of December 31, 2004, and is based on
information appearing in the Notes to Consolidated Financial Statements.
Less than 1-2 3-5 More than
Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ---------
Operating leases - facilities $1,048,092 $ 193,552 $ 300,077 $ 312,200 $242,263
Minimum spending obligations(1) 5,045,000 1,009,000 2,018,000 2,018,000 (3)
License royalty payments (2) 1,037,500 207,500 415,000 415,000 (3)
---------- ---------- ---------- ---------- --------
Total obligations $7,130,592 $1,410,052 $2,733,077 $2,745,200 $242,263
========== ========== ========== ========== ========
(1) We have licensed patents from other companies and institutions under certain
license agreements. This line item represents our minimum obligations to spend
monies for product development and commercialization as set forth in each
license.
(2) This line item represents our minimum annual royalty payments of $200,000 to
AnorMED, Inc. for our Atiprimod license and $7,500 to Rockefeller University for
our superantigen-based bioterrorism defense patents. Our patent license
agreements also include milestone royalty payments to be paid in cash upon the
achievement of certain regulatory approval and product commercialization goals.
These milestone payments have not been estimated because of the uncertainty
surrounding the duration of on-going early stage clinical trials and the extent
of regulatory approval and review cycles. Since inception we have never achieved
regulatory approval of any of our proposed products and we do not currently have
any commercial biopharmaceutical products, and do not expect to have such for
several years.
(3) For purposes of this schedule we have assumed that all patents not
commercialized within 5 years will be abandoned, license agreements will be
terminated and associated minimum royalty payments will cease
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (Revised 2004),
"Share-Based Payment." SFAS No 123R is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation" and supersedes Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. While we cannot precisely determine the impact on net loss as
a result of the adoption of SFAS No 123R, estimated compensation expense related
to prior periods can be found in footnote 3 to our audited consolidated
financial statements.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets",
which is effective for fiscal years beginning after June 15, 2005. SFAS 153
amends APB 29, "Accounting for Nonmonetary Transactions", which is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in APB 29 included certain
exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of this statement is not expected to have a
material effect on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 2004 and 2003, a substantial portion of our cash and cash
equivalents consists of short term, highly liquid investments in a money market
fund managed by a large money center bank (JPMorganChase). Maturities of fund
investments are all less than three months.
ITEM 8. FINANCIAL STATEMENTS.
The full text of our audited consolidated financial statements as of December
31, 2004 and 2003 and for the fiscal years ended December 31, 2004, 2003 and
2002 begins on page F-1 of this Annual Report on Form 10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
25
ITEM 9A. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Principal Financial Officer, based on evaluation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) required by
paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31, 2004, have
concluded that our disclosure controls and procedures were effective to ensure
the timely collection, evaluation and disclosure of information relating to our
company that would potentially be subject to disclosure under the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
there under.
There were no significant change in our internal controls over financial
reporting that could significantly affect internal controls over financial
reporting during the quarter ended December 31, 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors and
executive officers of Callisto Pharmaceuticals, Inc. as of March 24, 2005:
Name AGE POSITIONS
--- ---------
Gabriele M. Cerrone 33 Chairman of the Board
Gary S. Jacob 58 Chief Executive Officer, Chief Scientific
Officer and Director; Chairman of Synergy
Pharmaceuticals Inc.
Donald H. Picker 59 Executive Vice President, R&D
Bernard F. Denoyer 57 Vice President, Finance
Kunwar Shailubhai 47 Senior Vice President, Drug Discovery of
Synergy Pharmaceuticals Inc.
Christoph Bruening 37 Director
Iain G. Ross 51 Director
Edwin Snape 65 Director
John P. Brancaccio 57 Director
Stephen K. Carter 66 Director
Randall Johnson 58 Director
Gabriele M. Cerrone has served as our Chairman of the Board of Directors since
May 2003 and as a consultant since January 2005. From March 1999 to January 2005
Mr. Cerrone served as a Senior Vice President of Investments of Oppenheimer &
Co. Inc., a financial services firm. Prior to such affiliation, Mr. Cerrone held
the position of Managing Director of Investments at Barrington Capital, L.P., a
merchant bank, between March 1998 and March 1999. Between May 2001 and May 2003,
Mr. Cerrone served on the board of directors of SIGA Technologies, Inc.
Gary S. Jacob, Ph.D. has served as our Chief Executive Officer as well as Chief
Scientific Officer since May 2003 and a Director since October, 2004. Dr. Jacob
has also served as Chairman of Synergy Pharmaceuticals Inc. since October 2003.
Dr. Jacob served as Chief Scientific Officer of Synergy Pharmaceuticals Inc.
from 1999 to 2003. From 1990 to 1998, Dr. Jacob served as a Monsanto Science
Fellow, specializing in the field of Glycobiology. From 1997 to 1998, Dr. Jacob
was Director of Functional Genomics, Corporate Science & Technology, Monsanto,
where he played a pivotal role in the rapid development of Monsanto's plant
genomics strategy and the buildup of the in-house advanced genomics program.
From 1990 to 1997, Dr. Jacob was Director of Glycobiology, G.D. Searle
Pharmaceuticals Inc. From 1986 to 1990, Dr. Jacob was Manager of the G.D. Searle
Glycobiology Group located at Oxford University, England.
Donald H. Picker, Ph.D. has served as our Executive Vice President, R&D since
April 2004. From May 2003 until March 2004, Dr. Picker served as Senior Vice
President, Drug Development. Dr. Picker was Chief Executive Officer and
President of Synergy Pharmaceuticals Inc. and a member of its board of directors
from September 1999 to April 2003. From February 1997 to September 1999, Dr.
Picker was President and Chief Operating Officer of LXR Biotechnology Inc., an
apoptosis drug development company. From 1991 to 1997, he was Senior Vice
President of Research and Development at Genta Inc., an antisense drug
development company. Dr. Picker is also a director of Xenomics, Inc., a public
medical diagnostics company.
Bernard F. Denoyer, CPA has served as our Vice President, Finance since January
2004. From July 2003 to December 2003, Mr. Denoyer served as an independent
consultant to our company providing interim CFO services. In addition to our
company, Mr. Denoyer provided interim CFO and other services to emerging
technology companies, principally portfolio companies of Marsh & McLennan
Capital, LLC, from October 2000 to December 2003. From October 1994 until
September 2000, Mr. Denoyer served as Chief Financial Officer and Senior Vice
President. at META Group, Inc., a public information technology research
company. From 1990 to 1993 he was Vice President Finance of Environetics, Inc.,
a pharmaceutical water diagnostic business. Mr. Denoyer is also Vice President,
Controller of Xenomics, Inc., a public medical diagnostics company.
Kunwar Shailubhai, Ph.D., has served as Senior Vice President, Drug Discovery of
Synergy Pharmaceuticals Inc. since April 2004. From May 2003 until March 2004,
Dr. Shailubhai served as our Executive Vice President. From 2001 to April 2003,
Dr. Shailubhai held the position of Vice
26
President, Drug Discovery at Synergy Pharmaceuticals Inc. Between 1993 and 2000,
he was affiliated with Monsanto Company as Group Leader of the cancer
chemoprevention group during which time he was involved in several cancer
research projects.
Christoph Bruening has served as a Director of our company since May 2003. Mr.
Bruening organized Value Relations GmbH, a full service investor relations firm
operating in Frankfurt, Germany in 1999 and currently serves as its Managing
Partner. From 1998 to 1999, Mr. Bruening served as a funds manager and Director
of Asset Management for Value Management and Research AG, a private investment
fund and funds manager in Germany. From 1997 to 1998, Mr. Bruening was a
financial analyst and Head of Research for Value Research GmbH. Mr. Bruening is
currently a member of the advisory board of Clarity AG and is a director of
Xenomics, Inc., a public medical diagnostics company.
Iain G. Ross has served as a Director of our company since June 2003. Mr. Ross
has been Chairman of Biomer Technology Ltd., SR Pharma plc and Ozone Industries
Ltd since January 2003, July 2004 and March 2005, respectively, and serves as a
director of a number of healthcare technology companies including Angle plc,
Eden Biopharm Group, Swedish DIA (Sweden) AB and Procognia Ltd. Mr. Ross is an
advisor to Apax Partners and PPM Ventures in London. From 2001 to 2002, Mr. Ross
was Chairman and Chief Executive Officer of Allergy Therapeutics Ltd. and from
1995 to 2000, Mr. Ross was Chief Executive Officer of Quadrant Healthcare plc,
which was sold to Elan Corporation in 2000.
Edwin Snape, Ph.D. has served as a Director of our company since May 2003. Dr.
Snape has been a principal at New England Partners, a private equity firm since
1999. Previously, he was Managing General Partner of the Vista Group, an
international private equity firm. Dr. Snape is Chairman of Memry Corporation
and a director of Deltex Medical Holdings, Inc. and Diomed, Inc.
John P. Brancaccio, a retired CPA, has served as a Director of our company since
April 2004. Since April 2004, Mr. Brancaccio has been the Chief Financial
Officer of Accelerated Technologies, Inc., an incubator for medical device
companies. From May 2002 until March 2004, Mr. Brancaccio was the Chief
Financial Officer of Memory Pharmaceuticals Corp., a biotechnology company. From
2000 to 2002, Mr. Brancaccio was the Chief Financial Officer/Chief Operating
Officer of Eline Group, an entertainment and media company. Mr. Brancaccio is
currently a director of Alfacell Corporation.
Stephen K. Carter, M.D. has served as a Director of our company since August
2004. Since 2000, Dr. Carter has been employed as an independent consultant.
From 1998 to 2000, Dr. Carter was senior vice president, clinical and regulatory
affairs of SUGEN, Inc. (subsequently acquired by Pharmacia & Upjohn, Inc.). From
1995 to 1996, Dr. Carter was senior vice president, research and development
with Boehringer Ingelheim Pharmaceuticals, Inc. and from 1982 to 1995 held
various positions with Bristol-Myers Squibb Company, including senior vice
president, worldwide clinical research and development. Dr. Carter is a director
of Vion Pharmaceuticals, Inc., Cytogen Corp., Emisphere Technologies Inc.,
Alfacell Corp. and Tapestry Pharmaceuticals Inc. (each a biotechnology company).
Randall Johnson, Ph.D. has served as a Director of our company since February
2005. Since February 2002, Dr. Johnson has been serving as a consultant to
various venture capital, biotechnology and pharmaceutical companies focusing on
oncology. From October 1982 to February 2002, Dr. Johnson served in a number of
capacities at GlaxoSmithKline PLC/SmithKline Beecham Pharmaceuticals, most
recently as a Group Director in the Department of Oncology Research.
COMPENSATION OF DIRECTORS
Each of our directors is entitled to receive a cash payment of $5,750 per
calendar quarter. Messrs. Cerrone, Snape and Jacob have waived their right to
such payments. Upon their appointment to the Board of Directors, each of our
directors received a grant of 75,000 stock options to purchase common stock
which vest over a period of three years from the date of grant.
AUDIT COMMITTEE
The Audit Committee currently consists of John Brancaccio, chairman of the Audit
Committee, and Christoph Bruening. Our board of directors has determined that
each of Mr. Bruening and Mr. Brancaccio is "independent" as that term is defined
under applicable SEC rules and under the current listing standards of the
American Stock Exchange. Mr. Brancaccio is our audit committee financial expert.
The Audit Committee met four times in 2004. The Board of Directors has adopted a
written charter setting forth the authority and responsibilities of the Audit
Committee. A copy of this charter is available at the Company's web site
www.callistopharma.com
The Audit Committee's responsibilities include: (i) reviewing the independence,
qualifications, services, fees, and performance of the independent auditors,
(ii) appointing, replacing and discharging the independent auditors, (iii)
pre-approving the professional services provided by the independent auditors,
(iv) reviewing the scope of the annual audit and reports and recommendations
submitted by the independent auditors, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management and
the independent auditors. The Audit Committee also prepares the Audit Committee
report that is required pursuant to the rules of the SEC.
COMPENSATION COMMITTEE
We have a Compensation Committee currently consisting of Iain Ross, John
Brancaccio and Christoph Bruening. The Board of Directors has determined that
all of the members are "independent" under the current listing standards of the
American Stock Exchange. The Compensation Committee met three times in 2004. The
Board of Directors has adopted a written charter setting forth the authority and
responsibilities of the Compensation Committee. A copy of this charter is
available at the Company's web site www.callistopharma.com.
The Compensation Committee has responsibility for assisting the Board of
Directors in, among other things, evaluating and making recommendations
regarding the compensation of the executive officers and directors of the
Company; assuring that the executive officers are compensated effectively in a
manner consistent with the stated compensation strategy of the Company;
producing an annual report on executive compensation in accordance with the
rules and regulations promulgated by the SEC; periodically evaluating the terms
and administration of the Company's incentive plans and benefit programs and
monitoring of compliance with the legal prohibition on loans to directors and
executive officers of the Company.
27
CORPORATE GOVERNANCE/NOMINATING COMMITTEE
We have a Corporate Governance/Nominating Committee currently consisting of
Stephen Carter, John Brancaccio and Christoph Bruening. The Board of Directors
has determined that all of the members are "independent" under the current
listing standards of the American Stock Exchange. The Corporate Governance/
Nominating Committee was designated by the Board of Directors in January 2005
and did not meet in 2004. The Board of Directors has adopted a written charter
setting forth the authority and responsibilities of the Corporate
Governance/Nominating Committee. A copy of this charter is available at the
Company's web site www.callistopharma.com.
As set forth in the Corporate Governance/Nominating Committee charter, the
Corporate Governance/Nominating Committee has responsibility for assisting the
Board in, among other things, effecting Board organization, membership and
function including identifying qualified Board nominees; effecting the
organization, membership and function of Board committees including composition
and recommendation of qualified candidates; establishment of and subsequent
periodic evaluation of successor planning for the chief executive officer and
other executive officers; development and evaluation of criteria for Board
membership such as overall qualifications, term limits, age limits and
independence; and oversight of compliance with the Corporate Governance
Guidelines. The Corporate Governance/Nominating Committee shall identify and
evaluate the qualifications of all candidates for nomination for election as
directors.
SCIENTIFIC ADVISORY BOARD
Our scientific advisory board assists us in identifying research and development
opportunities, in reviewing with management the progress of our projects and in
recruiting and evaluating scientific staff. Although we expect to receive
guidance from the members of our scientific advisory board, all of its members
are employed on a full-time basis by others and, accordingly, are able to devote
only a small portion of their time to us. Management expects to meet with its
scientific advisory board members individually from time to time on an informal
basis. We have entered into a consulting agreement with each member of the
scientific advisory board. The scientific advisory board consists of the
following scientists:
Robert A. Kyle, M.D. Dr. Kyle is the Chairman of our scientific advisory board
and is Professor of Medicine and Laboratory Medicine at Mayo Medical School. He
served as the William H. Donner Professor of Medicine at Mayo Medical School. He
was previously Section Head of the Division of Hematology and subsequently,
Chairman of the Division of Hematology at Mayo Clinic, and served as
Secretary-General of the International Society of Hematology. He is currently on
the Board of Directors and is Chairman of the Scientific Advisory Board of the
International Myeloma Foundation. Dr. Kyle's research interests include the
biology and management of multiple myeloma, amyloidosis and monoclonal
gammopathy of undetermined significance. Dr. Kyle has received a number of
awards including the Waldenstrom Award for Myeloma Research, Henry S. Plummer
Distinguished Internist Award and the Distinguished Clinician Award from Mayo
Clinic.
Kenneth C. Anderson, M.D. Dr. Anderson is the Kraft Family Professor of Medicine
at Harvard Medical School; and serves as Chief of the Division of Hematologic
Neoplasia, Director of the Jerome Lipper Multiple Myeloma Center and Vice Chair
of the Joint Program in Transfusion Medicine at Dana-Farber Cancer Institute.
His translational research focuses on development of novel therapeutics
targeting the myeloma cell in its microenvironment. He hosted the VI
International Myeloma Workshop on Multiple Myeloma, serves on the Board of
Directors and as Chairman of the Scientific Advisors of the Multiple Myeloma
Research Foundation, and is a Doris Duke Distinguished Clinical Research
Scientist.
Moshe Talpaz, M.D. Dr. Talpaz currently holds the titles of Professor of
Medicine, David Burton, Jr. Endowed Chair at the M.D. Anderson Cancer Center,
Houston, Texas. Dr. Talpaz was formerly Chairman of the Department of
Bioimmunotherapy of the M.D. Anderson Cancer Center. Dr. Talpaz has been and
continues to be involved in the clinical development of numerous cancer drugs
and has been a pioneer in developing currently accepted treatment protocols
especially in the leukemia area. Dr. Talpaz is a member of many committees such
as the National Comprehensive Cancer Network Guidelines Panel and sits on
several editorial and advisory boards, such as Hematology Digest, Bone Marrow
Transplantation and Clinical Cancer Research. In 2003, Dr. Talpaz received the
prestigious "Leukemia and Lymphoma Society Service to Mankind Award" for his
pioneering work in this cancer field. Dr. Talpaz discovered the use of
interferon-a for treating chronic myeloid leukemia (CML) and he was the
principal investigator until FDA approval. In addition, Dr. Talpaz has acted as
a consultant to Hoffman LaRoche with regards to the FDA approval process for
interferon.
Roman Perez-Soler, M.D. Dr. Perez-Soler is currently Gutman Professor of
Oncology and Chairman of the Department of Oncology at Montefiore Medical Center
as well as Associate Director of Clinical Research at the Albert Einstein Cancer
Center and Chief of the Division of Medical Oncology at the Albert Einstein
College of Medicine. Dr. Perez-Soler was formerly Professor of Medicine and
Deputy Chairman of the Department of Thoracic/Head and Neck Medical Oncology at
The University of Texas M.D. Anderson Cancer Center and Associate Director for
Clinical and Translational Research at the Kaplan Cancer Center at New York
University. Dr. Perez-Soler is a nationally and internationally renowned
clinical translational researcher in the areas of new anticancer drug
development, with a strong emphasis in liposome delivery and thoracic
malignancies.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission and American Stock Exchange.
Officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based on a review of the copies of such forms received, we believe that during
2004, all filing requirements applicable to our officers, directors and greater
than ten percent beneficial owners were complied with.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a formal Code of Business Conduct and Ethics applicable to all
Board members, executive officers and employees. A copy of this Code of Business
Conduct and Ethics is filed as an exhibit to this report and is posted on our
website at www.callistopharma.com.
28
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our two most
highly paid executive officers (the "Named Executive Officers") for services
rendered in all capacities as of December 31, 2004.
Long Term
Annual Compensation Compensation
------------------- -----------------
Name and Principal Year Salary Bonus Securities Under-
Position ($) ($) lying Options (#)
Gary S. Jacob 2004 $225,000 $33,750 275,000
Chief Executive Officer and 2003 $144,792 $0 500,000
Chief Scientific Officer
Donald H. Picker 2004 $191,875 $37,500 400,000
Executive Vice President, R&D 2003 $126,661 $10,000 325,000
Kunwar Shailubhai 2004 $155,333 $0 100,000(1)
Senior Vice President, 2003 $110,833 $0 350,000(2)
Drug Discovery of Synergy
Pharmaceuticals, Inc.
(1) On April 6, 2004, Dr. Shailubhai entered int o an employment agreement with
Synergy Pharmaceuticals Inc. and was granted 100,000 stock options exercisable
at $1.50 per share, 50,000 of such stock options vest in June 2004 and the
remainder vest in December 2004.
(2) All of such stock options were granted on June 13, 2003 pursuant to an
employment agreement entered into with us at that time. On April 6, 2004, the
employment agreement was terminated and 325,000 unvested stock options were
canceled.
OPTION GRANTS IN FISCAL YEAR 2004
The following table sets forth certain information concerning grants of stock
options to the Named Executive Officers during the fiscal year ended December
31, 2004.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Number of Shares Percent of Total For Option Term
Underlying Options Granted to Exercise Price Expiration -----------------------
Name Options Granted Employees in 2004 Per Share Date 5%($) 10%($)
--------------- ----------------- -------------- ---------- ---------- ----------
Gary S. Jacob 275,000 (1) 29.4% $3.00 6/29/2014 $70,882 $601,558
Chief Executive Officer and
Chief Scientific Officer
Donald H. Picker 400,000 (2) 42.8% $3.00 6/29/2014 $103,116 $874,244
Executive Vice President, R&D
Kunwar Shailubhai 100,000 (3) 10.7% $1.50 4/6/2014 $405,824 $731,871
Senior Vice President,
Drug Discovery of Synergy
Pharmaceuticals, Inc.
(1) 25,000 options vest on 6/1/2005; 25,000 options vest on 6/1/2006 and 50,000
options vest on 6/1/2007. The remaining 175,000 options vest based on the
achievement of certain performance milestones.
(2) 50,000 options vest on 6/1/2005; 50,000 options vest on 6/1/2006 and 75,000
options vest on 6/1/2007. The remaining 225,000 options vest based on the
achievement of certain performance milestones.
(3) 50,000 of such stock options vested in June 2004 and the remainder vested in
December 2004.
On April 26, 2004, we granted 100,000 stock options to Gabriele M. Cerrone,
Chairman of the Board, in recognition of his efforts during the past year on
behalf of the company. The stock options are immediately exercisable at $3.20
per share.
29
AGGREGATED OPTION EXERCISES IN 2004 AND YEAR END OPTION VALUES
The following table provides certain information with respect to the Named
Executive Officers concerning the exercise of stock options during the fiscal
year ended December 31, 2004 and the value of unexercised stock options held as
of such date.
Number of Shares Value of Unexercised
Underlying Options at In the Money Options at
December 31, 2004 December 31, 2004(1)
----------- ------------- ----------- -------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Gary S. Jacob 150,000 625,000 $72,000 $168,000
Chief Executive Officer and
Chief Scientific Officer
Donald H. Picker 83,333 641,667 $40,000 $116,000
Executive Vice President, R&D
Kunwar Shailubhai 125,000 0 $60,000 --
Senior Vice President,
Drug Discovery of Synergy
Pharmaceuticals, Inc.
During the fiscal year ended December 31, 2004, no options were exercised.
(1) Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying common stock using the closing sale price on the
American Stock Exchange of $1.98 per share on December 31, 2004.
MANAGEMENT AGREEMENTS
On June 13, 2003, we entered into an employment agreement with Gary S. Jacob,
Ph.D., to serve as our Chief Executive Officer and Chief Scientific Officer. Dr.
Jacob's employment agreement is for a term of 18 months beginning June 13, 2003
and is automatically renewable for successive one year periods at the end of the
term. Dr. Jacob's salary is $225,000 per year and he is eligible to receive a
cash bonus of up to 15% of his salary per year. In connection with his
employment agreement, Dr. Jacob received a grant of 500,000 stock options which
vest over a three year period and are exercisable at $1.50 per share.
On September 23, 2003, we entered into an employment agreement with Donald H.
Picker, Ph.D., to serve as Vice President, Drug Development. The employment
agreement is for a term of 18 months beginning September 23, 2003 and is
automatically renewable for successive one year periods at the end of the term.
Dr. Picker's salary is $175,000 per year and he is eligible to receive a cash
bonus of up to $45,000 per year upon the achievement of certain performance
milestones. In connection with his employment agreement, Dr. Picker received a
grant of 325,000 stock options which vest over a three year period and are
exercisable at $1.50 per share. On April 6, 2004, Dr. Picker's employment
agreement was amended to change his title to Executive Vice President, R&D and
his salary was increased to $200,000 per year and certain milestones were added
upon which cash bonuses of up to $92,500 over a 12 month period may be paid.
During the twelve months ended December 31, 2004, Dr. Picker was paid a bonus
$37,500 based on certain milestones he achieved during 2004. The balance of the
annual bonus Dr. Picked is eligible to receive will be paid only if and when
certain other milestones are reached.
On January 15, 2004, we entered into an employment agreement with Bernard
Denoyer, our Vice President, Finance. Mr. Denoyer's employment agreement is for
a term of 12 months beginning January 15, 2004 and is automatically renewable
for successive one year periods at the end of the term. Mr. Denoyer's salary is
$90,000 per year and he is eligible to receive a cash bonus of up to 10% of his
salary per year. Mr. Denoyer received a grant of 100,000 stock options which
vest over a three year period and are exercisable at $3.60 per share.
On April 6, 2004, Kunwar Shailubhai, Ph.D. entered into an employment agreement
with Synergy in which he agreed to serve as Senior Vice President, Drug
Discovery. Dr. Shailubhai's employment agreement is for a term of 12 months
beginning April 6, 2004 and is automatically renewable for successive one year
periods at the end of the term. Dr. Shailubhai's salary is $150,000 per year and
he is eligible to receive a cash bonus of up to 15% of his salary per year. Dr.
Shailubhai received a grant of 100,000 stock options which are exercisable at
$1.50 per share. 50,000 of such stock options vest in June 2004 and the
remainder vest in December 2004. We previously had an employment agreement dated
June 13, 2003 with Kunwar Shailubhai, Ph.D. to serve as Executive Vice President
and Head of Research and Development for a term of 18 months beginning June 13,
2003. Dr. Shailubhai's salary was $170,000 per year and he was eligible to
receive a cash bonus of up to 15% of his salary per year. In connection with his
employment agreement, Dr. Shailubhai received a grant of 25,000 stock options
which were fully vested and have an exercise price of $1.50 per share. Dr.
Shailubhai also received a grant of 325,000 stock options which were to have
vested over a three year period and were exercisable at $1.50 per share. This
employment agreement was terminated on April 6, 2004 and unvested options were
forfeited. The new grant of 100,000 options will be subject to variable
accounting because it was deemed that his agreement was a continuation of
employment with a wholly owned subsidiary of Callisto.
On December 27, 2004, we entered into a consulting agreement with Gabriele M.
Cerrone, our Chairman of the Board and a principal stockholder. The duties of
Mr. Cerrone pursuant to the agreement will consist of business development,
strategic planning, capital markets and corporate financing consulting advice.
The term of the agreement commenced on January 10, 2005 and continues until
December 31, 2006 with automatic renewal for successive one year periods unless
either party gives notice to the other not to renew the agreement.
30
We will pay Mr. Cerrone an annual fee of $205,000 on a monthly basis. In
addition, Mr. Cerrone received a grant of 375,000 ten year non-qualified stock
options pursuant to our Stock Option Plan at an exercise price of $1.70 per
share. One half of such options will vest on each of the first two anniversaries
of the date of the agreement
In the event the agreement is terminated without cause or for good reason, Mr.
Cerrone will receive a cash payment equal to the aggregate amount of his annual
fee for the then remaining term of the Agreement and all unvested stock options
will immediately vest and the exercise period of such options will be extended
to the later of the longest period permitted by our stock option plans or ten
years following termination. In the event a change of control of the Company
occurs, Mr. Cerrone shall be entitled to such compensation upon the subsequent
termination of the agreement within two years of the change in control unless
such termination is the result of Mr. Cerrone's death, disability or retirement
or his termination for cause
On December 22, 2004 our Board of Directors, acting upon advice of the
Compensation Committee, awarded Mr. Cerrone a cash bonus of $200,000 in
recognition of his contributions to the company including negotiation and
acquisition of certain intellectual property licenses during 2004.
STOCK OPTION PLAN
We rely on incentive compensation in the form of stock options to retain and
motivate directors, executive officers, employees and consultants. Incentive
compensation in the form of stock options is designed to provide long-term
incentives to directors, executive officers, employees and consultants, to
encourage them to remain with us and to enable them to develop and maintain an
ownership position in our common stock.
The stock option plan authorizes the grant of stock options to directors,
eligible employees, including executive officers and consultants. The value
realizable from exercisable options is dependent upon the extent to which our
performance is reflected in the value of our common stock at any particular
point in time. Equity compensation in the form of stock options is designed to
provide long-term incentives to directors, executive officers and other
employees. We approve the granting of options in order to motivate these
employees to maximize stockholder value. Generally, vesting for options granted
under the stock option plan is determined at the time of grant, and options
expire after a 10-year period. Options are generally granted at an exercise
price not less than the fair market value at the date of grant. As a result of
this policy, directors, executives, employees and consultants are rewarded
economically only to the extent that the stockholders also benefit through
appreciation in the market. Options granted to employees are based on such
factors as individual initiative, achievement and performance. In administering
grants to executives, the compensation committee of the Board of Directors
evaluates each executive's total equity compensation package. The compensation
committee generally reviews the option holdings of each of the executive
officers, including vesting and exercise price and the then current value of
such unvested options. We consider equity compensation to be an integral part of
a competitive executive compensation package and an important mechanism to align
the interests of management with those of our stockholders.
As of December 31, 2004, options for 3,177,222 shares were outstanding under our
stock option plan, and options for 6,822,778 shares remain available for future
grants. The options we grant under the Plan may be either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-statutory stock options at the discretion of the
Board of Directors and as reflected in the terms of the written option
agreement. The stock option plan is not a qualified deferred compensation plan
under Section 401(a) of the Code, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA). In
addition, as of December 31, 2004, we have granted 4,144,838 stock options not
subject to the stock option plan.
The following table summarizes information about our equity compensation plans
as of December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of Shares of Common Weighted-Average Exercise Number of Options
------------- Stock to be Issued upon Price of Outstanding Remaining Available for
Exercise of Outstanding Options Future Issuance Under
Options Equity Compensation Plans
(excluding securities
reflected in column (a))
(a) (b) (c)
Equity Compensation Plans 3,177,222 $2.27 6,822,778
Approved by Stockholders
Equity Compensation Plans 4,144,838 $2,14 n/a
Not Approved by
Stockholders
Total 7,322,060 $2.19 6,822,778
===== ========= ===== =========
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of shares of our common stock as of March 24, 2005 by (i) each person
know to beneficially own more than 5% of the outstanding common stock, (ii) each
of our directors, (iii) the Named Executive Officers and (iv) all directors and
executive officers as a group. Except as otherwise indicated, the persons named
in the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws, where applicable. Unless
otherwise indicated, the address of each beneficial owner listed below is c/o
Callisto Pharmaceuticals, Inc., 420 Lexington Avenue, Suite 1609, New York, N.Y.
10170.
Shares of Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1)
----------------------
NUMBER OF SHARES PERCENTAGE OF CLASS
Gabriele M. Cerrone 2,976,237(2) 9.3%
Chairman of the Board
Gary S. Jacob 274,745(3) *
Chief Executive Officer, Chief
Scientific Officer and Director
Donald H. Picker 172,037(4) *
Executive Vice President, R&D
Kunwar Shailubhai 125,000(5) *
Senior Vice President, Drug Discovery
of Synergy Pharmaceuticals Inc.
Iain G. Ross 25,000(6) *
Director
Edwin Snape 939,402(7) 3.0%
Director
Stephen Carter 0
Director
Christoph Bruening 460,699(8) 1.5%
Director
John Brancaccio
Director 25,000(9) *
Randall K. Johnson 10,000(10) *
Director
All Directors and Executive Officers 5,038,120(11) 15.5%
as a group (11 persons)
Donald G. Drapkin 1,766,059(12) 5.6%
Panetta Partners Ltd. 2,101,237 6.7%
* less than 1%
32
(1) Applicable percentage ownership as of March 24, 2005 is based upon
31,228,893 shares of common stock outstanding. Beneficial ownership is
determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. Under Rule 13d-3, shares issuable within 60 days upon exercise of
outstanding options, warrants, rights or conversion privileges ("Purchase
Rights") are deemed outstanding for the purpose of calculating the number and
percentage owned by the holder of such Purchase Rights, but not deemed
outstanding for the purpose of calculating the percentage owned by any other
person. "Beneficial ownership" under Rule 13d-3 includes all shares over which a
person has sole or shared dispositive or voting power.
(2) Consists of 875,000 shares of common stock issuable upon exercise of stock
options held by Mr. Cerrone and 2,101,237 shares held by Panetta Partners, Ltd.
Mr. Cerrone is the sole general partner of Panetta and in such capacity only
exercises voting and dispositive control over securities owned by Panetta. As
such, Mr. Cerrone may be deemed, solely for purposes of Section 13(d) of the
Securities Exchange Act of 1934 as amended, to "beneficially" own securities in
which he has no pecuniary interest and he therefore disclaims such beneficial
interest.
(3) Includes 150,000 shares of common stock issuable upon exercise of stock
options.
(4) Includes 83,333 shares of common stock issuable upon exercise of stock
options.
(5) Consists of 125,000 shares of common stock issuable upon exercise of stock
options.
(6) Consists of 25,000 shares of common stock issuable upon exercise of stock
options.
(7) Includes 25,000 shares of common stock issuable upon exercise of stock
options. 914,402 of such shares are held by NEGF II, L.P. and New England
Partners Capital, L.P.. Mr. Snape is a principal of NEGF II, L.P. and New
England Partners Capital, L.P.
(8) Includes 25,000 shares of common stock issuable upon exercise of stock
options.
(9) Consists of 25,000 shares of common stock issuable upon exercise of stock
options.
(10) Consists of 10,000 shares of common stock issuable upon exercise of stock
options.
(11) Includes 1,373,333 shares of common stock issuable upon exercise of stock
options.
(12) Includes 250,000 shares of common stock issuable upon exercise of stock
options held by Mr. Drapkin and 916,059 shares of common stock held by the
Drapkin Family Charitable Foundation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 27, 2004 we entered into a consulting agreement with Gabriele M.
Cerrone, our Chairman of the Board and a principal shareholder. The agreement
and its terms were approved by our Compensation Committee, which consists solely
of independent members of the Board. Additional information concerning the terms
of the consulting agreement are set forth in Item 9 of this report.
On March 9, 2005 certain members of management, in addition to certain current
institutional investors, purchased an aggregate 1,985,791 shares of our common
stock in a private placement. The shares were sold at a price of $1.52 per share
for aggregate proceeds of approximately $3.02 million. Panetta Partners, Ltd., a
principal shareholder and limited partnership, of which Mr. Cerrone is the sole
managing partner, purchased 25,000 shares in the private placement. In such
capacity Mr. Cerrone exercises voting and dispositive control over shares owned
by Panetta in which he has no pecuniary interest. In addition, Gary S. Jacob,
our Chief Executive Officer purchased 16,448 shares in the private placenment
and Christoph Bruening, a director, purchased 20,000 shares in the private
placement. Each did so at the specific request of the institutional investors.
In connection with the sale of our common stock to certain members of management
in the private placement, our Audit Committee determined that participation by
such members of management in the private placement (i) did not constitute a
conflict of interest under our Code of Business Conduct and Ethics and (ii) was
on term no less favorable to the company than terms offered to third parties.
CONFLICTS OF INTEREST
Gabriele Cerrone and his affiliates are subject to certain potential conflicts
of interests. His consulting agreement expressly recognizes that he may provide
consulting services to others. In addition, from time to time, he or his
affiliates may be presented with business opportunities which could be suitable
for our business and Mr. Cerrone is not subject to any restrictions with respect
to other business activities, except to the extent such activities are in
violation of our Code of Conduct and Ethics or violate general confidentiality
provisions of his consulting agreement. In instances where there is potential
conflict of interest or business opportunity, with respect to any officer or
director, including Mr. Cerrone, our Audit Committee has both the authority and
responsibility to review such matters and take appropriate actions.
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES.
The aggregate fees billed and unbilled for the fiscal year ended December 31,
2004 for professional services rendered by our principal accountants for the
audits of our annual financial statements and the review of our financial
statements included in our quarterly reports on Form 10-QSB were $95,000. The
aggregate fees billed and unbilled for the fiscal year ended December 31, 2003
for professional services rendered by our principal accountants for the audit of
our annual financial statements, the reaudit of the 2002 and 2001 financial
statements, and the review of our financial statements included in our quarterly
reports on Form 10-QSB were $153,000.
AUDIT-RELATED FEES.
The aggregate fees billed for the fiscal year ended December 31, 2004 and 2003
for assurance and related services rendered by our principal accountants related
to the performance of the audit or review of our financial statements,
specifically accounting research, were $2,500 in each period.
TAX AND OTHER FEES.
There were no aggregate fees billed for the fiscal years ended December 31, 2004
and 2003 as there were no tax related or other services rendered by our
principal accountants in connection with the preparation of our federal and
state tax returns.
Consistent with SEC policies and guidelines regarding audit independence, the
Audit Committee is responsible for the pre-approval of all audit and permissible
non-audit services provided by our principal accountants on a case-by-case
basis. Our Audit Committee has established a policy regarding approval of all
audit and permissible non-audit services provided by our principal accountants.
Our Audit Committee pre-approves these services by category and service. Our
Audit Committee has pre-approved all of the services provided by our principal
accountants.
ITEM 15. EXHIBITS.
(a) Exhibits
Exhibit
Number Description
2.1 Agreement and Plan of Merger by and among Callisto
Pharmaceuticals, Inc., Webtronics, Inc., Callisto
Acquisition Corp., Synergy Pharmaceuticals Inc. and
Synergy Acquisition Corp. dated as of March 10, 2003 (1)
2.2 Amendment to Agreement and Plan of Merger dated as of
April 4, 2003 (2)
3.1 Certificate of Incorporation (3)
3.2 Bylaws (4)
4.1 1996 Incentive and Non-Qualified Stock Option Plan (5)
4.2 Form of Warrant to purchase shares of common stock issued
in connection with the sale of common stock (6)
10.1 Employment Agreement dated June 13, 2003 by and between
Callisto Pharmaceuticals, Inc. and Gary S. Jacob (7)*
10.2 Employment Agreement dated April 6, 2004 by and between
Synergy Pharmaceuticals Inc. and Kunwar Shailubhai (8)*
10.3 Employment Agreement dated June 13, 2003 by and between
Callisto Pharmaceuticals, Inc. and Donald H. Picker (9)*
10.4 Amendment to Employment Agreement dated April 6, 2004 by
and between Callisto Pharmaceuticals, Inc. and Donald H.
Picker (10)*
10.5 License Agreement dated as of August 28, 2002 by and
between Synergy Pharmaceuticals Inc. and AnorMED
Inc.(11)**
10.6 Employment Agreement dated January 15, 2004 by and
between Callisto Pharmaceuticals, Inc and Bernard Denoyer
(12)*
10.7 Form of Registration Rights Agreement dated as of January
21, 2004 by and among the Registrant and the Purchasers
set forth on the signature page thereto (13)
10.8 Common Stock Purchase Agreement dated as of April 19,
2004, by and between Callisto Pharmaceuticals, Inc. and
the Purchasers set forth on Exhibit A thereto. (14)
34
Exhibit
Number Description
10.9 Patent and Technology License Agreement dated August 12,
2004 by and between The Board of Regents of the
University of Texas System, on behalf of The University
of Texas M. D. Anderson Cancer Center and Callisto
Pharmaceuticals, Inc. (15)**
10.10 Consulting Agreement dated as of December 27, 2004
between the Registrant and Gabriele M. Cerrone. *+
10.11 Common Stock Purchase Agreement dated as of March 8, 2005
by and between Callisto Pharmaceuticals, Inc. and the
Purchasers set forth on Exhibit A thereto. (16)
10.12 License Agreement between Callisto Pharmaceuticals, Inc.
and The Rockefeller University effective as of July 25,
2001.
10.13 Asset Purchase Agreement dated as of February 24, 2004
between Callisto Pharmaceuticals, Inc. and Houston
Pharmaceuticals, Inc.
10.14 Sublicense Agreement dated as of February 24, 2004
between Callisto Pharmaceuticals, Inc. and Houston
Pharmaceuticals, Inc.
10.15 Agreement among Davos Chemical Corporation, Callisto
Pharmaceuticals, Inc. and Antibioticos S.p.A. dated July
28, 2004.
14 Code of Business Conduct and Ethics (17)
21 List of Subsidiaries+
23 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive Officer required under
Rule 13a-14(a)/15d-14(a) under the Exchange Act
31.2 Certification of Principal Financial Officer required
under Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to
18 U.S.C Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to this form pursuant to Item 601 of
Regulation S-K.
** Confidential treatment has been requested with respect to deleted
portions of this agreement.
+ Previously filed.
(1) Incorporated by reference to Exhibit 2.1 filed with the Company's Current
Report on Form 8-K filed on March 19, 2003.
(2) Incorporated by reference to Exhibit 2.2 filed with the Company's Current
Report on Form 8-K filed on April 30, 2003.
(3) Incorporated by reference to Exhibit 99.1 filed with the Company's Current
Report on Form 8-K filed on May 28, 2003.
(4) Incorporated by reference to Exhibit 99.2 filed with the Company's Current
Report on Form 8-K filed on May 28, 2003.
(5) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on May 15, 2003.
(6) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on January 28, 2004.
(7) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 10-QSB filed on August 20, 2003.
(8) Incorporated by reference to Exhibit 10.2 filed with the Company's Annual
Report on Form 10-KSB on April 14, 2004.
(9) Incorporated by reference to Exhibit 10.3 filed with the Company's Current
Report on Form 10-QSB filed on November 14, 2003.
(10) Incorporated by reference to Exhibit 10.6 filed with the Company's Annual
Report on Form 10-KSB filed on April 14, 2004.
(11) Incorporated by reference to Exhibit 10.4 filed with the Company's Current
Report on Form 10-QSB filed on November 14, 2003.
(12) Incorporated by reference to Exhibit 10.6 filed with the Company's Annual
Report on Form 10-KSB on April 14, 2004.
35
(13) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on January 28, 2004.
(14) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on April 19, 2004.
(15) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on September 7, 2004.
(16) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on March 5, 2005.
(17) Incorporated by reference to Exhibit 14 filed with the Company's Annual
Report on Form 10-KSB filed on April 14, 2004.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15D 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.
Date: June 6, 2005 Callisto Pharmaceuticals, Inc.
By: /s/ Gary S. Jacob
-------------------------
Gary S. Jacob,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gary S. Jacob Chief Executive Officer and Director June 6, 2005
---------------------- (Principal Executive Officer)
Gary S. Jacob
/s/ Bernard F. Denoyer Vice President, Finance June 6, 2005
---------------------- (Principal Accounting Officer)
Bernard F. Denoyer
/s/ Gabriele M. Cerrone Chairman of the Board June 6, 2005
----------------------
Gabriele M. Cerrone
/s/ Edwin Snape Director June 6, 2005
----------------------
Edwin Snape
/s/ John P. Brancaccio Director June 6, 2005
----------------------
John P. Brancaccio
/s/ Stephen K. Carter Director June 6, 2005
----------------------
Stephen K. Carter
/s/ Christoph Bruening Director June 6, 2005
----------------------
Christoph Bruening
/s/ Randall K. Johnson Director June 6, 2005
----------------------
Randall K. Johnson
37
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
Index to Consolidated Financial Statements
PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the three years
in the period ended December 31, 2004 and for the period
from June 5, 1996 (inception) to December 31, 2004 F-4
Consolidated Statement of Changes in Stockholders' Equity
for the period from June 5, 1996 (inception) to December 31, 2004 F-5
Consolidated Statements of Cash Flows for the three years
in the period ended December 31, 2004 and for the period from
June 5, 1996 (inception) to December 31, 2004 F-6
Notes to Consolidated Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders Callisto Pharmaceuticals, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Callisto
Pharmaceuticals, Inc. and Subsidiaries (a development stage company) (the
"Company") as of December 31, 2004 and 2003, the related consolidated statements
of operations and cash flows for each of the three years in the period ended
December 31, 2004 and for the period from June 5, 1996 (inception) to December
31, 2004 and the related consolidated statement of stockholders' equity for the
period from June 5, 1996 (inception) to December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Callisto
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 and for the period from June 5, 1996
(inception) to December 31, 2004, in conformity with accounting principles
generally accepted in the United States.
/s/ BDO Seidman, LLP
New York, New York
March 14, 2005
F-2
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
AS OF DECEMBER 31,
2004 2003
Current Assets:
Cash and cash equivalents $ 5,323,384 $ 3,956,486
Prepaid expenses 45,231 52,644
----------- -----------
5,368,615 4,009,130
Property and equipment, net 18,856 46,488
Security deposits 82,196 62,980
----------- -----------
$ 5,469,667 $ 4,118,598
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 984,486 $ 842,520
Accrued expenses 235,803 79,625
Selling agent fees payable related to
private placement -- 341,625
----------- -----------
1,220,289 1,263,770
Stockholders' equity:
Common stock, $.0001 par value, authorized
75,000,000 shares, 29,219,102 and
25,928,760 outstanding at December 31, 2004
and December 31, 2003, respectively 2,922 2,590
Additional paid-in-capital 39,910,187 34,149,975
Unamortized deferred stock based compensation (2,302,534) (5,480,007)
Deficit accumulated during the development stage (33,361,197) (25,817,730)
----------- -----------
4,249,378 2,854,828
----------- -----------
$ 5,469,667 $ 4,118,598
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Period from
June 5, 1996
For the years ended December 31, (Inception) to
---------------------------------------------- December 31,
2004 2003 2002 2004
------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ --
Costs and Expenses:
Research and development 2,817,387 1,369,985 491,430 7,719,748
Government grant (265,697) -- -- (265,697)
Purchased in-process research and development 209,735 6,734,818 -- 6,944,553
Stock-based compensation - research and development 1,508,588 434,187 -- 1,942,775
General and administrative 2,362,773 1,398,090 1,227,699 8,612,246
Stock-based compensation - general and administrative 1,224,182 3,399,759 332 9,408,497
------------ ------------ ------------ ------------
Loss from operations (7,856,968) (13,336,839) (1,719,461) (34,362,122)
Interest income 84,081 8,768 34,496 549,681
Other income 229,420 221,824 -- 451,244
------------ ------------ ------------ ------------
Net loss $ (7,543,467) $(13,106,247) $ (1,684,965) $(33,361,197)
============ ============ ============ ============
Weighted average shares outstanding:
Basic and diluted 28,485,227 21,357,659 17,318,994
Net loss per common share: basic and diluted $ (0.26) $ (0.61) $ (0.10)
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Common Additional
Preferred Stock, Par Common Stock, Par Paid in
Shares Value Shares Value Capital
----------- ----------- ----------- ----------- -----------
Balance at inception, June 5, 1996 -- -- -- -- --
Net loss for the period
Issuance of founder shares -- -- 2,642,500 264 528
Common stock issued -- -- 1,356,194 136 272
Common stock issued via private placement -- -- 1,366,667 137 1,024,863
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 -- -- 5,365,361 537 1,025,663
Net loss for the year -- -- -- -- --
Common stock issued via private placement -- -- 1,442,666 144 1,081,855
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 -- -- 6,808,027 681 2,107,518
Net loss for the year
Amortization of Stock based -- -- -- -- --
Compensation -- -- -- -- 52,778
Common stock issued via private placement -- -- 1,416,667 142 1,062,358
Common stock issued for services -- -- 788,889 79 591,588
Common stock repurchased and cancelled -- -- (836,792) (84) (96,916)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 -- -- 8,176,791 818 3,717,326
Net loss for the year -- -- -- -- --
Deferred Compensation - stock options -- -- -- -- 9,946
Amortization of Stock based Compensation -- -- -- -- --
Common stock issued for services -- -- -- -- 3,168,832
Common stock issued via private placement -- -- 346,667 34 259,966
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 -- -- 8,523,458 852 7,156,070
Net loss for the year -- -- -- -- --
Amortization of Stock based Compensation -- -- -- -- --
Common stock issued -- -- 4,560,237 455 250,889
Other -- -- -- -- 432
Preferred shares issued 3,485,299 348 -- -- 5,986,302
Preferred stock issued for services 750,000 75 -- -- 1,124,925
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 4,235,299 423 13,083,695 1,307 14,518,618
Net loss for the year -- -- -- -- --
Deferred Compensation - stock Options -- -- -- -- 20,000
Amortization of Stock based Compensation -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 4,235,299 423 13,083,695 1,307 14,538,618
Net loss for the year -- -- -- -- --
Amortization of Stock based Compensation -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 4,235,299 $423 13,083,695 $1,307 $14,538,618
F-5a
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
Unamortized Accumulated
Deferred during the Total
Stock Based Development Stockholders'
Compensation Stage Equity
------------ ------------ ------------
Balance at inception, June 5, 1996 -- -- --
Net loss for the year (404,005) (404,005)
Issuance of founder shares -- -- 792
Common stock issued -- -- 408
Common stock issued via private placement -- -- 1,025,000
------------ ------------ ------------
Balance, December 31, 1996 -- (404,005) 622,195
Net loss for the year -- (894,505) (894,505)
Common stock issued via private placement -- -- 1,081,999
------------ ------------ ------------
Balance, December 31, 1997 -- (1,298,510) 809,689
Net loss for the year -- (1,484,438) (1,484,438)
Amortization of Stock based
Compensation -- -- 52,778
Common stock issued 1,062,500
Common stock issued for -- -- --
services 591,667
Common Stock repurchased and cancelled -- -- (97,000)
------------ ------------ ------------
Balance, December 31, 1998 -- (2,782,948) 935,196
Net loss for the year -- (4,195,263) (4,195,263)
Deferred Compensation - stock options (9,946) -- --
Amortization of Stock based Compensation 3,262 -- 3,262
Common stock issued for services -- -- 3,168,832
Common stock issued via private placement -- -- 260,000
------------ ------------ ------------
Balance, December 31, 1999 (6,684) (6,978,211) 172,027
Net loss for the year (2,616,261) (2,616,261)
Amortization of Stock based Compensation 4,197 4,197
Common stock issue -- -- 251,344
Other -- -- 432
Preferred shares issued -- -- 5,986,650
Preferred stock issued for services -- -- 1,125,000
------------ ------------ ------------
Balance, December 31, 2000 (2,487) (9,594,472) 4,923,389
Net loss for the year -- (1,432,046) (1,432,046)
Deferred Compensation - stock options (20,000) -- --
Amortization of Stock based Compensation 22,155 -- 22,155
------------ ------------ ------------
Balance, December 31, 2001 (332) (11,026,518) 3,513,498
Net loss for the year -- (1,684,965) (1,684,965)
Amortization of Stock based Compensation 332 -- 332
------------ ------------ ------------
Balance, December 31, 2002 -- ($12,711,483) $1,828,865
The accompanying notes are an integral part of these
consolidated financial statements.
F-5b
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
Preferred Common Unamortized Accumulated
Stock Stock Additional Deferred during the Total
Preferred Par Common Par Paid in Stock Based Development Stockholders'
Stock Value Stock Value Capital Compensation Stage Equity
--------- --------- ---------- --------- ----------- ------------ ------------ ------------
Balance December 31, 2002 4,235,299 $423 13,083,695 $1,307 $14,538,618 -- ($12,711,483) $1,828,865
Net loss for the year -- -- -- -- -- -- (13,106,247) (13,106,247)
Conversion of preferred
stock in connection
with the Merger (4,235,299) (423) 4,235,299 423 -- -- -- --
Common stock issued to
former Synergy stockholders -- 4,329,927 432 6,494,458 -- -- 6,494,890
Common stock issued in
exchange for Webtronics
common stock -- 1,503,173 150 (150) -- -- --
Deferred Compensation -
stock options -- -- -- 9,313,953 (9,313,953) -- --
Amortization of deferred
Stock based Compensation -- -- -- -- 3,833,946 -- 3,833,946
Private placement of
common stock, net -- -- 2,776,666 278 3,803,096 -- -- 3,803,374
--------- -------- ---------- --------- ----------- ------------ ------------ ------------
Balance, December 31, 2003 -- -- 25,928,760 2,590 34,149,975 (5,480,007) (25,817,730) 2,854,828
Net loss for the period -- -- -- -- -- -- (7,543,467) (7,543,467)
Amortization of deferred
Stock-based compensation expense -- -- -- -- -- 3,084,473 -- 3,084,473
Variable accounting for
stock options -- -- -- -- (816,865) -- -- (816,865)
Stock-based compensation net
of forfeitures -- -- -- -- 240,572 93,000 -- 333,572
Common stock issued via
private placements, net -- -- 3,311,342 331 6,098,681 -- -- 6,099,012
Warrant and stock-based
compensation for
services in connection
with the Merger -- -- -- -- 269,826 -- -- 269,826
Common stock returned from
former Synergy stockholders -- -- (90,000) (9) (159,083) -- -- (159,092)
Common stock issued for
patent rights -- -- 25,000 3 56,247 -- -- 56,250
Common stock issued for services -- -- 44,000 7 70,833 -- -- 70,840
--------- -------- ---------- --------- ----------- ------------ ------------ ------------
Balance, December 31, 2004 -- $ -- 29,219,102 $2,922 $39,910,187 ($2,302,534) ($33,361,197) $4,249,378
========= ======== ========== ========= =========== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5c
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Period from
June 5, 1996
For the years ended December 31, (Inception) to
---------------------------------------------- December 31,
2004 2003 2002 2004
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(7,543,467) $(13,106,247) $(1,684,965) $(33,361,197)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 27,632 27,755 6,778 65,781
Stock based compensation expense 2,732,770 3,833,946 332 11,351,272
Purchased in-process research and
development (non-cash portion) 106,235 6,734,818 -- 6,841,053
Changes in operating assets and liabilities:
Prepaid expenses 7,413 (24,188) (8,796) (45,231)
Security deposit (19,216) (62,980) -- (82,196)
Accounts payable and accrued expenses (43,481) 581,008 304,663 980,361
------------ ------------ ------------ ------------
Total adjustments 2,811,353 11,090,359 302,977 19,111,040
------------ ------------ ------------ ------------
Net cash used in operating activities (4,732,114) (2,015,888) (1,381,988) (14,250,157)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of equipment -- (54,462) (22,029) (84,637)
------------ ------------ ------------ ------------
Net cash used in investing activities -- (54,462) (22,029) (84,637)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common and
preferred stock, net of repurchases 6,099,012 3,803,374 -- 19,658,178
------------ ------------ ------------ ------------
Net cash provided by financing activities 6,099,012 3,803,374 -- 19,658,178
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,366,898 1,733,024 (1,404,017) 5,323,384
Cash and cash equivalents at beginning of year 3,956,486 2,223,462 3,627,479 --
------------
Cash and cash equivalents at end of year $5,323,384 $3,956,486 $2,223,462 $5,323,384
============ ============ ============ ============
Supplementary disclosure of cash flow information:
Cash paid for taxes $2,921 $23,834 $13,487 $62,963
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business overview:
Callisto Pharmaceuticals, Inc. ("Callisto") is a development stage
biopharmaceutical company, whose primary focus is on biopharmaceutical product
development. See footnote 4 for a complete description of Merger and
consolidation. Since inception in June of 1996 our efforts have been principally
devoted to research and development, securing and protecting our patents and
raising capital. From inception through December 31, 2004, Callisto has
sustained cumulative net losses of $33,361,197. Callisto's losses have resulted
primarily from expenditures incurred in connection with research and development
activities, application and filing for regulatory approval of our proposed
products, stock based compensation expense, patent filing and maintenance
expenses, purchase of in-process research and development, outside accounting
and legal services and regulatory, scientific and financial consulting fees.
From inception through December 31, 2004, Callisto has not generated any revenue
from operations, expects to incur additional losses to perform further research
and development activities and does not currently have any commercial
biopharmaceutical products, and does not expect to have such for several years,
if at all.
Callisto's product development efforts are thus in their early stages and
Callisto cannot make estimates of the costs or the time it will take to
complete. The risk of completion of any program is high because of the many
uncertainties involved in bringing new drugs to market including the long
duration of clinical testing, the specific performance of proposed products
under stringent clinical trial protocols, the extended regulatory approval and
review cycles, the nature and timing of costs and competing technologies being
developed by organizations with significantly greater resources.
2. Basis of presentation:
The accompanying consolidated financial statements of Callisto which include its
wholly owned subsidiaries: (1) Callisto Research Labs, LLC.(including its wholly
owned but inactive subsidiary, Callisto Pharma, GmbH (Germany)) and (2) Synergy
Pharmaceuticals Inc. ("Synergy" , including its wholly owned but inactive
subsidiary IgX, Ltd (Ireland)), have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
results of operations of Synergy are included in the consolidated statement of
operations for the twelve months ended December 31, 2004 and since May 1, 2003
in the period from June 5, 1996 (inception) to December 31, 2004 and for the
twelve months ended December 31, 2003. All significant intercompany balances and
transactions have been eliminated (see footnote 4).
3. Summary of significant accounting policies
Use of Estimates - The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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. Actual results could
differ from those estimates.
Cash equivalents - Cash and cash equivalents consist of short term, highly
liquid investments, with original maturities of less than three months when
purchased and are stated at cost.
Fair value of financial instruments - Callisto's financial instruments consist
of cash and accounts payable. These financial instruments are stated at their
respective carrying values which are equivalent to fair value due to their short
term nature.
Business concentrations and credit risks - All of Callisto's cash and cash
equivalents as of December 31, 2004 and 2003 are on deposit with two major money
center financial institutions. Deposits at any point in time may exceed
federally insured limits.
Accounting for stock based compensation - Callisto has adopted Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." As provided for by SFAS 123, Callisto has also elected to
continue to account for its stock-based compensation programs according to the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees ("APB 25")." Accordingly, compensation expense has been
recognized to the extent of employee or director services rendered based on the
intrinsic value of stock options granted under the plans.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
(see below) and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
F-7
Had compensation cost for stock options granted to employee and directors been
determined based upon the fair value at the grant date for awards, consistent
with the methodology prescribed under SFAS 123, Callisto's net loss would have
been as follows:
Years Ended December 31,
----------------------------------------------
2004 2003 2002
-------------- -------------- -----------
Net loss, as reported $(7,543,467) $(13,106,247) $(1,684,965)
Add: Stock-based employee compensation expense
recorded under APB No. 25 intrinsic method 1,317,108 1,996,890 --
Deduct: Stock-based employee compensation
expense determined under Fair Value based method
for all employee awards (2,916,720) (2,510,721) --
-------------- -------------- -----------
Pro forma net loss $(9,143,079) $(13,620,078) $(1,684,965)
============== ============== ===========
Net loss per share:
Basic and diluted -as reported $(0.26) $(0.61) $(0.10)
============== ============== ===========
Basic and diluted -pro forma $(0.32) $(0.64) $(0.10)
============== ============== ===========
Range of Fair Value per share for
options granted to employees $1.35 to $3.15 $0.58 to $5.50 $0.00 to $5.53
Black-Scholes Methodology Assumptions:
Dividend yield 0% 0% 0%
Risk free interest rate 2.87% to 4.0% 2.87% to 4.5% 2.87% to 4.5%
Expected lives of options 7 to 10 years 7 to 10 years 7 to 10 years
Volatility of 0% was used until Callisto's common stock began to trade publicly
on June 16, 2003. Since June 13, 2003 through December 31, 2004 Callisto has
used 100% volatility to determine Fair Value of options granted to employees.
Net Loss per Share - Basic and diluted net loss per share is presented in
conformity with SFAS No. 128, "Earnings per Share," for all periods presented.
In accordance with SFAS No. 128, basic and diluted net loss per common share was
determined by dividing net loss applicable to common stockholders by the
weighted-average common shares outstanding during the period. Diluted
weighted-average shares are the same as basic weighted-average shares since the
inclusion of issuable shares pursuant to the exercise of stock options and
warrants, would have been antidilutive. As of December 31, 2004, 2003 and 2002,
Callisto had 7,322,060, 4,853,560 and 2,991,505 stock options outstanding,
respectively. In addition Callisto had 758,995 common stock warrants outstanding
as of December 31, 2004 and none as of December 31, 2003.
Research and development - Callisto does not currently have any commercial
biopharmaceutical products, and does not expect to have such for several years,
if at all and therefore, research and development costs are expensed as
incurred. These include expenditures in connection with an in-house research and
development laboratory, salaries and staff costs, application and filing for
regulatory approval of our proposed products, patent filing and maintenance
expenses, purchase of in-process research and development, regulatory and
scientific consulting fees as well as contract research and royalty payments to
licensors, patient costs, drug formulation and tableting, data collection,
monitoring, insurance, and FDA consultants.
Government Grants - Callisto requests cash funding under approved grants as
expenses are incurred (not in advance) and records the receipt as an offset to
research and development expense. During 2004 Callisto had a research grant from
the National Institutes of Health for studies on Atiprimod. This amount totaled
$265,697 during the year ended December 31, 2004 and has been reported on our
Consolidated Statements of Operations as a separate line item entitled
"Government Grant".
Income taxes - Income taxes are accounted for under the asset and liability
method prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recorded for temporary
differences between financial statement carrying amounts and the tax basis of
assets and liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely than
not that some or the entire deferred tax asset will not be realized. F-8
F-8
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (Revised 2004),
"Share-Based Payment." SFAS No 123R is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation" and supersedes Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No 123R requires a public entity to measure the cost
of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. While Callisto cannot precisely determine the impact on net
loss as a result of the adoption of SFAS No 123R, estimated compensation expense
related to prior periods can be found above in this footnote.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets",
which is effective for fiscal years beginning after June 15, 2005. SFAS 153
amends APB 29, "Accounting for Nonmonetary Transactions", which is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in APB 29 included certain
exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of this statement is not expected to have a
material effect on our financial position or results of operations.
4. Merger and consolidation:
In March 2002, Callisto Pharmaceuticals, Inc. ("Old Callisto") purchased 99.7%
of the outstanding common shares of Webtronics, Inc., ("Webtronics") a public
company for $400,000. Webtronics was incorporated in Florida on February 2, 2001
and had limited operations during the year ended December 31, 2002. The purchase
price of Webtronics was treated as a cost of becoming a public company, however
because there was no capital raised at the time, the amount was charged to
general and administrative expense during the year ended December 31, 2002.
On April 30, 2003, pursuant to an Agreement and Plan of Merger dated March 10,
2003, as amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned
subsidiary of Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy")
and Callisto Acquisition Corp., a wholly-owned subsidiary of Webtronics merged
into Old Callisto (collectively, the "Merger"). As a result of the Merger, Old
Callisto and Synergy became wholly-owned subsidiaries of Webtronics. In
connection with the Merger Webtronics issued 17,318,994 shares of its common
stock in exchange for outstanding Old Callisto common stock and an additional
4,395,684 shares in exchange for outstanding Synergy common stock. Subsequently,
171,818 shares of common stock issued to former Synergy shareholders were
returned to Callisto under the terms of certain indemnification agreements. The
Merger was accounted for as a recapitalization of Old Callisto by an exchange of
Webtronics common stock for the net assets of Old Callisto consisting primarily
of cash and fixed assets. Old Callisto then changed its name to Callisto
Research Labs, LLC and Webtronics changed its name to Callisto Pharmaceuticals,
Inc. and changed its state of incorporation from Florida to Delaware. Callisto
remains the continuing legal entity and registrant for Securities and Exchange
Commission reporting purposes.
The merged companies are considered to be in the development stage. No revenues
have been realized since inception and all activities have been concentrated in
research and development of biopharmaceutical products not yet approved by the
Food and Drug Administration. The fair value of the net shares issued to former
Synergy shareholders in the Merger totaled $6,335,799 through December 31, 2004.
The fair value per share of $1.50, used to determine this amount, was the value
per share Callisto sold common stock in a private placement. The total
consideration was allocated in full to the Synergy research and development
projects which had not yet reached technological feasibility and having no
alternative use was charged to purchased in-process research and development
expense during the year ended December 31, 2003.
The results of operations of Synergy are included in the consolidated statement
of operations for the twelve months ended December 31, 2004 and since May 1,
2003 in the period from June 5, 1996 (inception) to December 31, 2004 and for
the twelve months ended December 31, 2003. The following combined pro forma
results of operations for the year ended December 31, 2003 have been prepared as
if the merger with Synergy had occurred at January 1, 2003.
Revenues $--
Net loss ($13,513,820)
Net loss per common share - basic and diluted (0.58)
(23,296,920 common shares in 2003)
F-9
In addition, Callisto assumed liabilities in excess of Synergy assets acquired
at April 30, 2003 as follows:
Cash $9,501
Accounts receivable 258,928
Rent deposit 44,746
Fixed assets 38,343
-----------
Total assets acquired 351,518
Accounts payable and other liabilities assumed (591,446)
-----------
Net liabilities assumed in excess of assets acquired (239,928)
Fair value of shares issued to Synergy shareholders (6,335,799)
-----------
Total consideration paid by Callisto to acquire Synergy $(6,575,727)
===========
5. Stockholders' equity:
On April 19, 2004, Callisto sold and issued in a private placement to accredited
investors an aggregate 2,151,109 shares of common stock at an issue price of
$2.25 per share for aggregate gross proceeds of $4,839,995. We incurred fees and
expenses aggregating $294,241 to various selling agents. In addition, we issued
an aggregate 124,711 warrants to purchase common stock to such selling agents.
The warrants are immediately exercisable at $2.48 per share and will expire five
years after issuance.
In January 2004 Callisto recorded $209,076 of purchased in process research and
development as a result of the issuance of 263,741 warrants to two Callisto
shareholders, which warrants are immediately exercisable at $1.50 per share and
will expire ten years after issuance; and $60,750 of stock-based compensation
expense associated with shares of common stock issued to a shareholder for
services performed.
From November 2003 through January 2004, Callisto sold and issued 3,905,432
shares of common stock at an issue price of $1.50 for aggregate gross proceeds
of $5,858,148. Callisto incurred an aggregate of $501,516 in fees to various
selling agents. In addition Callisto issued 31,467 shares of common stock and
370,543 warrants to purchase common stock to such selling agents. The warrants
are immediately exercisable at $1.90 per share and will expire five years after
issuance.
As of December 31, 2003 Callisto had closed on a portion of this transaction,
specifically 2,776,666 shares of common stock at a price of $1.50 per share for
aggregate gross proceeds of $4,164,999, less $361,625 incurred in fees to
various selling agents. During January 2004, Callisto completed this private
placement begun in late 2003 and issued 1,128,766 shares of common stock at an
issue price of $1.50 for aggregate proceeds of $1,693,149, less $139,891 in fees
to various selling agents.
During 2000, the Board of Directors approved an increase in the authorized
common shares from 35,000,000 shares to 60,000,000 shares and a one-for-three
reverse split of the common stock. All share and per share information has been
adjusted to reflect the stock split as if it had occurred at the beginning of
the earliest period presented. In May 2003, as part of the Merger, the
authorized common shares were increased to 75,000,000 shares.
During 2000, Callisto sold 2,252,441 shares of Series A convertible preferred
stock at $1.70 per share and 1,232,858 shares of Series B convertible preferred
stock at $1.75 per share. In addition, the Board of Directors authorized the
issuance of 750,000 shares of Series C convertible preferred stock at $0.10 per
share to an executive officer of Callisto. The net proceeds from the sale of
these 4,235,299 shares of convertible preferred stock totaled $6,061,650. The
holders of the convertible preferred stock had equal voting rights with the
common stockholders, had certain liquidation preferences and were convertible at
any time into shares of common stock at a ratio of one share of common stock for
each share of convertible preferred stock at the election of the holder.
Callisto recorded compensation expenses of approximately $1,050,000 related to
the shares sold to the executive officer. During the second quarter of 2003, all
of the convertible preferred stockholders converted their shares of preferred
stock to common stock in connection with the Merger.
During 2000, Callisto also sold 4,526,903 shares of common stock at a purchase
price of $0.05 per share to certain officers and directors of the company for
services performed in the year 1999. Based on the most recent private placement
of common stock during the fourth quarter of 1999, the value of these shares was
determined to be $0.70 per share and Callisto recorded $3,168,832 as stock based
compensation expense.
During 1998, as part of a settlement agreement between the founding partners of
CSO Ventures, Inc. and Callisto, one of the founders of CSO sold 836,792 shares
of common stock back to Callisto at a price of approximately $0.12 per share,
for $97,000. Concurrently, Callisto entered into a stock purchase agreement with
a private investor to sell him 766,667 shares of common stock at a price of
$92,000 or $0.12 per share. The fair value of the common stock issued was
determined to be $0.75 per share and Callisto recorded $483,000 of stock based
compensation expense.
F-10
During the period from December 1996 to December 1999, Callisto completed the
following private placements of its common stock:
Shares Price Per Share Gross Proceeds
------ --------------- --------------
December 1996 1,366,667 $0.75 $1,025,000
December 1997 1,442,667 $0.75 1,081,999
October 1998 1,416,667 $0.75 1,062,500
January 1999 146,667 $0.75 110,000
December 1999 200,000 $0.75 150,000
--------- ----- ----------
Total 4,572,668 $3,429,499
========= ==========
6. Stock option plan:
In 1996, Callisto adopted an incentive and non-qualified stock option plan (the
"Plan") for employees, consultants and outside directors to purchase up to
2,000,000 shares of common stock. The Plan was amended in December 2002 to
increase the number of shares authorized under the Plan to 10,000,000. The
option term for options granted under the Plan is ten years from date of grant
and there were 6,822,778 option shares available for future grants as of
December 31, 2004.
The Company recognizes deferred compensation expense for the intrinsic value of
unvested stock options granted to employees. Deferred stock-based compensation
is amortized to stock-based compensation expense over the vesting period of the
stock option. During the twelve months ended December 31, 2004, 2003 and for the
period from June 5, 1996 (inception) to December 31, 2004 Callisto recognized
$2,732,770, $3,833,946 and $11,351,272, respectively, as stock-based
compensation expense related to issuance of stock and stock options. At December
31, 2004, there was $2,302,534 remaining in unamortized deferred compensation.
The following represent options outstanding for the years since June 5, 1996
(inception) through December 31, 2004.
Number Exercise Price Weighted Average
of Shares Per Share Exercise Price
---------- -------------- ----------------
Balance, June 5, 1996 (inception) 0 $0.00 $0.00
1996: Granted 66,668 $0.75 $0.75
---------- ------------- -----
Balance, December 31, 1996 66,668 $0.75 $0.75
1997: Granted 166,668 $0.75 $0.75
---------- ------------- -----
Balance, December 31, 1997 233,336 $0.75 $0.75
1998: Granted 264,169 $0.75 $0.75
---------- ------------- -----
Balance, December 31, 1998 497,505 $0.75 $0.75
1999: Granted 633,334 $0.75 - $4.90 $1.92
---------- ------------- -----
Balance, December 31, 1999 1,130,839 $0.75 - $4.90 $1.41
---------- ------------- -----
2000: Granted 815,666 $2.85 - $6.75 $3.83
Forfeitures (15,000) $0.75 $0.75
---------- ------------- -----
Balance, December 31, 2000 1,931,505 $0.75 - $6.75 $2.44
2001: Granted 730,000 $1.25 - $6.50 $2.77
---------- ------------- -----
Balance, December 31, 2001 2,661,505 $0.75 - $6.75 $2.53
2002: Granted 330,000 $4.50 - $6.50 $5.50
---------- ------------- -----
Balance, December 31, 2002 2,991,505 $0.75 - $6.75 $2.86
2003: Granted 3,013,555 $1.10 - $2.50 $1.48
Forfeitures (1,151,500) $2.85 - $6.75 $4.51
---------- ------------- -----
Balance, December 31, 2003 4,853,560 $0.75 - $6.75 $1.61
========== ============= =====
2004: Granted 2,853,500 $1.50 - $3.60 $3.11
Forfeitures (385,000) $1.50 - $2.50 $1.66
---------- ------------- -----
Balance, December 31, 2004 7,322,060 $0.75 - $6.75 $2.19
========== ============= =====
Included in the balance at December 31, 2004 were 4,144,838 Non-Plan options, of
which 2,356,338 were exercisable.
F-11
Options are exercisable as follows at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Number Weighted Average Weighted Average Number Weighted Average
Exercise Price of Shares Remaining Life Exercise Price of Shares Exercise Price
--------- ---------------- ---------------- --------- ----------------
$0.75 - $1.10 1,115,839 5.3 years $0.91 1,115,839 $0.91
$1.25 - $1.75 2,603,555 8.2 years $1.44 1,626,888 $1.40
$1.95 - $3.60 3,441,000 8.5 years $3.03 957,500 $2.45
$4.90 - $6.75 161,666 5.4 years $5.32 61,666 $6.00
All options: --------- --------- --
$0.75 - $6.75 7,322,060 7.8 years $2.19 3,761,893 $1.60
========= ========= ===== ========= =====
6. Stock option plan (continued):
On April 26, 2004, Callisto's Board of Directors granted 100,000 stock options
to Gabriele M. Cerrone, Chairman of the Board, in recognition of his efforts
during the past year on behalf of the company. The stock options are immediately
exercisable at $3.20 per share and stock-based compensation expense of $286,918
was recorded in connection with the grant, based on a Black-Scholes fair value
of $2.87 per share.
On June 29, 2004, Callisto's Compensation Committee recommended and the Board of
Directors approved the grant of 275,000 stock options to Gary Jacob, Chief
Executive Officer, as additional compensation. The stock options are exercisable
at $3.00 per share. 25,000 options vest on each of June 1, 2005 and June 1, 2006
and 50,000 options vest on June 1, 2007. The remaining 175,000 options vest upon
the achievement of performance milestones associated with the successful
in-licensing, advancement and development of certain drug candidates. If the
milestones are achieved Callisto will record stock-based compensation expense
based on the intrinsic value of the options at that time.
On June 29, 2004, Callisto's Compensation Committee recommended and the Board of
Directors approved the grant of 400,000 stock options to Donald Picker,
Executive Vice President, R&D as additional compensation. The stock options are
exercisable at $3.00 per share. 50,000 options vest on each of June 1, 2005 and
June 1, 2006 and 75,000 options vest on June 1, 2007. The remaining 225,000
options vest upon the achievement of performance milestones associated with the
successful advancement and development of our drug candidates through various
stages of clinical trials. If the milestones are achieved Callisto will record
stock-based compensation expense based on the intrinsic value of the options at
that time.
7. Income taxes:
At December 31, 2004 and 2003, Callisto had available Federal net operating tax
loss carry forwards of approximately $16,000,000 and $14,000,000, respectively,
expiring through 2024 to offset future taxable income. The net deferred tax
asset has been fully offset by a valuation allowance due to uncertainties
regarding realization of benefits from these future tax deductions. As a result
of the change in control provisions of Internal Revenue Code Section 382, a
significant portion of these net operating loss carry forwards may be subject to
limitation on future utilization.
During the years ended December 31, 2004, 2003 and 2002, Synergy sold certain
New Jersey State tax loss carry forwards under a state economic development
program for cash of approximately $233,000, $222,000 and $0, respectively. The
proceeds of economic development funds have and will be used to support research
and development activities in New Jersey. This state tax benefit was recorded as
Other Income during the fourth quarter ended December 31, 2004 and 2003.
8. Commitments and contingencies:
License agreements:
On August 12, 2004, Callisto entered into a world-wide license agreement with
The University of Texas M. D. Anderson Cancer Center to research, develop, sell
and commercially exploit the patent rights for Annamycin, an anthracycline
cancer drug for leukemia therapy. Consideration paid for this license amounted
to $31,497 for reimbursement of out-of-pocket costs for filing, enforcing and
maintaining the Annamycin patent rights and a $100,000 initial license fee.
Annamycin has not reached technological feasibility and having no alternative
use these costs were recorded as research and development expense. Callisto also
agreed to pay The University of Texas M. D. Anderson Cancer Center royalties
based on net sales from any licensed products, plus aggregate milestone payments
of up to $750,000 based upon achieving certain regulatory submissions and
approvals. The term of the agreement is from August 12, 2004 until November 2,
2019. Under the terms of the license agreement, Callisto is required to make
certain good faith expenditures towards the clinical development of at least one
licensed product within the two year period after March 2005. In addition, at
any time after 5 years from August 12, 2004, The University of Texas M.D.
Anderson Cancer Center has the right to terminate the license if Callisto fails
to provide evidence within 90 days of written notice that it has commercialized
or it is actively and effectively attempting to commercialize Annamycin.
On February 24, 2004, Callisto entered into an agreement with Houston
Pharmaceuticals, Inc. ("HPI") to sublicense the rights to a key patent covering
a technology platform for site-directed DNA intercalation and Callisto acquired
the rights to a patent covering new anthracycline analogs. Callisto issued to
HPI 25,000 shares of common stock at a fair value of $56,250 and reimbursed HPI
approximately $103,500 for various costs and expenses. The total consideration
of $159,750 was allocated in full to the HPI patent rights, which have not yet
reached technological feasibility, and having no alternative use, was accounted
for as purchased in-process research and development expense during the quarter
ended March 31, 2004. The fair value of the common stock issued to HPI was
$2.25, based on the price per share paid in the April 2004 private placement,
which closed on April 19, 2004.
F-12
In addition, Callisto granted to HPI 1,170,000 performance based stock options,
exercisable at $3.50 per share, which vest upon the achievement of certain
milestones. Callisto also agreed to pay HPI royalties of 2% on net sales from
any products resulting from commercializing the site-directed DNA intercalation.
Pursuant to the sublicense agreement, in the event Callisto's Board of Directors
determines to abandon its development and commercialization of the site-directed
DNA intercalation, HPI shall have the right to terminate the sublicense
agreement.
On August 28, 2002, Synergy entered into a worldwide license agreement with
AnorMED, Inc. ("AnorMED") to research, develop, sell and commercially exploit
the Atiprimod patent rights. The license agreement provides for aggregate
milestone payments of up to $14 million based upon achieving certain regulatory
submissions and approvals for an initial indication, and additional payments of
up to $16 million for each additional indication based on achieving certain
regulatory submissions and approvals. In addition the agreement requires Synergy
to pay AnorMED royalties on net sales. Commencing on January 1, 2004 and on
January 1 of each subsequent year Synergy is obligated to pay AnorMED a
maintenance fee of $200,000 until the first commercial sale of the product. The
first of these annual maintenance fee payments under this agreement was made on
January 22, 2004 and was recorded as research and development expense in 2004.
Pursuant to the license agreement, failure to pay the maintenance fee is a
material breach of the license agreement. The license agreement will terminate
in 2018.
On July 25, 2001, Callisto entered into a license agreement to research,
develop, sell and commercially exploit certain Rockefeller University licensed
patents covering peptides and antibodies useful in treating toxic shock syndrome
and septic shock. Callisto will pay Rockefeller a $7,500 annual maintenance fee
until the first commercial sale of the product, plus royalties of 2% and 0.75%
of net sales of product depending on whether the product is covered by a claim
under the licensed patents or derived from a claim under the licensed patents
and will pay Rockefeller 15% of any sublicense fee paid by sublicensees. The
agreement will terminate on July 25, 2021. During the twelve months ended
December 31, 2004 and 2003, Callisto made no payments to Rockefeller University.
Prior to 2003, $7,500 in total payments had been made under this license
agreement. Rockefeller may terminate the license agreement if Callisto is more
than 30 days late in paying Rockefeller any amounts due under the license
agreement or if Callisto breachs the license agreement.
Employment and Consulting Agreements:
On December 27, 2004, Callisto entered into a consulting agreement (the
"Agreement") with Gabriele M. Cerrone, Callisto's Chairman of the Board (the
"Consultant"). The duties of the Consultant and the obligations of Callisto to
pay compensation commenced on January 10, 2005 (the "Start Date"). The duties of
the Consultant pursuant to the Agreement will consist of business development,
strategic planning, capital markets and corporate financing consulting advice.
The term of the Agreement will commence upon the Start Date and continue until
December 31, 2006 with automatic renewal for successive one year periods unless
either party gives notice to the other not to renew the Agreement. No
compensation expense was recorded during the year ended December 31, 2004.
Callisto will pay Consultant the annual sum of $205,000 (the "Base
Compensation") at the rate of $17,083.33 per month commencing on the Start Date.
In addition, Consultant was granted 375,000 ten year non-qualified stock options
at an exercise price of $1.70 per share. One half of such options vest on each
of the first two anniversaries of the date of the Agreement. Stock-based
compensation expense associated with these option grants will be recorded based
on an initial Black-Scholes Fair Value of $1.52 per share and marked to market
quarterly from January 10, 2005 until the measurement date is known. The
measurement date in this case will be the earlier of the second anniversary of
the agreement or the accelerated vesting date if Mr. Cerrrone is terminated
without cause or good reason.
In the event the Agreement is terminated without cause or for good reason, the
Consultant will receive a cash payment equal to the aggregate amount of Base
Compensation for the then remaining term of the Agreement and all unvested stock
options will immediately vest and the exercise period of such options will be
extended to the later of the longest period permitted by Callisto's stock option
plans or ten years following termination. In the event a change of control of
Callisto occurs, Consultant shall be entitled to such compensation upon the
subsequent termination of the Agreement within two years of the change in
control unless such termination is the result of the Consultant's death,
disability or retirement or the Consultant's termination for cause.
On December 22, 2004 the Board of Directors of Callisto, acting upon advice of
its Compensation Committee, awarded Mr. Cerrone a cash bonus of $200,000 in
recognition of his contributions to the Company including negotiation and
acquisition of certain intellectual property licenses during 2004. Accordingly
this bonus was charged to research and development expense during 2004.
On August 12, 2004, in connection with the Annamycin license, Callisto entered
into a consulting agreement with Roman Perez-Soler, M.D., for a term concurrent
with the Annamycin license agreement. In connection therewith Dr. Perez-Soler
agreed to be appointed to the Company's Scientific Advisory Board. As
consideration for consulting and advisory services Dr. Perez-Soler shall receive
a $30,000 per year consulting fee and, 44,000 shares of restricted common stock.
These shares were recorded as stock based compensation expense during the 12
months ended December 31, 2004 for a total of $70,840 based on the closing stock
price of $1.61 on August 23, 2004. In addition, Callisto granted to Dr.
Perez-Soler an option to purchase 468,500 shares of common stock at an exercise
price of $3.00 per share. The option shares vest upon achievement of specific
milestones related to future development of Annamycin, at which time stock-based
compensation expense will be recorded based upon the fair value of the options
at that time.
On April 6, 2004, Kunwar Shailubhai, Ph.D. entered into an employment agreement
with Synergy in which he agreed to serve as Senior Vice President, Drug
Discovery. Dr. Shailubhai's employment agreement is for a term of 12 months
beginning April 6, 2004 and is automatically renewable for successive one year
periods at the end of the term. Dr. Shailubhai's salary is $150,000 per year and
he is eligible to receive a cash bonus of up to 15% of his salary per year. Dr.
Shailubhai received a grant of 100,000 stock options which are exercisable at
$1.50 per share. 50,000 of such stock options vest in June 2004 and the
remainder vest in December 2004.
F-13
Callisto previously had an employment agreement dated June 13, 2003 with Kunwar
Shailubhai, Ph.D. to serve as Executive Vice President and Head of Research and
Development for a term of 18 months beginning June 13, 2003. Dr. Shailubhai's
salary was $170,000 per year and he was eligible to receive a cash bonus of up
to 15% of his salary per year. In connection with his employment agreement, Dr.
Shailubhai received a grant of 25,000 stock options which were fully vested and
have an exercise price of $1.50 per share. Dr. Shailubhai also received a grant
of 325,000 stock options which were to have vested over a three year period and
were exercisable at $1.50 per share. This employment agreement was terminated on
April 6, 2004 and unvested options were forfeited.
The new grant of 100,000 options will be subject to variable accounting because
it was deemed that his agreement was a continuation of employment with a wholly
owned subsidiary of Callisto. The unamortized deferred compensation cost
associated with the 225,000 cancelled options of $706,813 as of the date of
cancellation, was charged to stock-based compensation expense during the quarter
ended June 30, 2004. The remaining deferred balance, based on the original
intrinsic value, associated with the remaining 100,000 options of $314,139, was
expensed over the vesting period of the new grant (e.g. April 7, 2004 through
December 31, 2004).
8. Commitments and contingencies (Continued):
On January 15, 2004, Callisto entered into an employment agreement with Bernard
Denoyer, its Vice President, Finance. Mr. Denoyer's employment agreement is for
a term of 12 months beginning January 15, 2004 and is automatically renewable
for successive one year periods at the end of the term. Mr. Denoyer's salary is
$90,000 per year and he is eligible to receive a cash bonus of up to 10% of his
salary per year. Mr. Denoyer received a grant of 100,000 stock options which
vest over a three year period and are exercisable at $3.60 per share.
On September 23, 2003, Callisto entered into an employment agreement with Donald
H. Picker, Ph.D., to serve as Vice President, Drug Development. The employment
agreement is for a term of 18 months beginning September 23, 2003 and is
automatically renewable for successive one year periods at the end of the term.
Dr. Picker's salary is $175,000 per year and he is eligible to receive a cash
bonus of up to $45,000 per year upon the achievement of certain performance
milestones. In connection with his employment agreement, Dr. Picker received a
grant of 325,000 stock options which vest over a three year period and are
exercisable at $1.50 per share. On April 6, 2004 the employment agreement of
Donald H. Picker, Callisto's Executive Vice President, R&D was amended. Dr,
Picker's salary was increased from $175,000 to $200,000 per year and certain
milestones were added upon which cash bonuses of up to $92,500 over a 12 month
period may be paid. During the twelve months ended December 31, 2004, Dr. Picker
was paid a bonus $37,500 based on certain milestones he achieved during 2004.
The balance of the annual bonus Dr. Picked is eligible to receive will be paid
only if and when certain other milestones are reached.
On June 13, 2003, Callisto entered into an employment agreement with Gary S.
Jacob, Ph.D., to serve as our Chief Executive Officer and Chief Scientific
Officer. Dr. Jacob's employment agreement is for a term of 18 months beginning
June 13, 2003 and is automatically renewable for successive one year periods at
the end of the term. Dr. Jacob's salary is $225,000 per year and he is eligible
to receive a cash bonus of up to 15% of his salary per year. In connection with
his employment agreement, Dr. Jacob received a grant of 500,000 stock options
which vest over a three year period and are exercisable at $1.50 per share.
Calisto has various consulting agreements with members of its scientific
advisory board to provide services. Fees are based and paid on services
provided.
Lease agreements:
On August 20, 2003, Callisto entered into a five year lease for its corporate
headquarters in New York City with an approximate rent of $100,000 annually
through August 2008. On June 7, 2004 Callisto extended its lease for its
corporate headquarters in New York City three additional years through June 30,
2011, and increased its space. This increased average annual rent to
approximately $150,000. On November 4, 2003, Synergy entered a two year lease
for laboratory space in New Jersey, principally to support combined Callisto and
Synergy research efforts, with an approximate rent of $50,000 annually through
November 2005. During the years ended December 31, 2004, 2003 and 2002 and for
the period from June 5, 1996 (inception) to December 31, 2004, total rent
expense was $217,297, $67,261, $51,856 and $404,579, respectively. Total annual
commitments under these leases for each of the twelve months ended December 31,
are as follows:
2005 193,552
2006 148,553
2007 151,524
2008 154,555
2009 157,646
2010 160,799
2011 81,464
----------
Total $1,048,093
==========
Other:
In April 2003 Callisto settled legal fees totaling approximately $352,000,
accrued as of December 31, 2002, for approximately $100,000. The balance was
reversed into general and administrative expense in the second quarter of 2003.
F-14
9. Property and equipment:
Equipment consists of laboratory, testing and computer equipment and furniture
and fixtures consists of office furniture, both stated at cost, with useful
lives ranging from 2-4 years, depreciated on a straight line basis. Depreciation
expense for the years ended December 31, 2004, 2003 and 2002 and from June 5,
1996 (inception) to December 31, 2004 was $27,632, $27,755, $6,778 and $65,781,
respectively.
December 31
-------------------------
2004 2003
-------- --------
Equipment $46,294 $46,294
Furniture and fixtures 38,343 38,343
Less - Accumulated depreciation (65,781) (38,149)
-------- --------
Property and equipment, net
$18,856 $46,488
======== ========
10. Subsequent event:
On March 9, 2005 Callisto completed a private placement of an aggregate
1,985,791 shares of its common stock at a per share price of $1.52, for
aggregate gross proceeds of approximately $3.02 million. The financing was led
by certain current institutional shareholders and included certain members of
the Callisto's management; therefore no selling agent fees were incurred.
Callisto has agreed to file a registration statement covering resale of the
shares within 30 days of closing.
Had this private placement been completed on December 31, 2004 pro forma
selected balance sheet items would have been as follows:
As reported Pro forma
2004 2004
----------- ----------
Cash and cash equivalents $5,323,384 $8,343,384
Stockholders' equity $4,249,278 $7,269,278
Common shares outstanding 29,219,102 31,218,102
F-15
Index to Exhibits
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger by and among Callisto
Pharmaceuticals, Inc., Webtronics, Inc., Callisto Acquisition
Corp., Synergy Pharmaceuticals Inc. and Synergy Acquisition
Corp. dated as of March 10, 2003 (1)
2.2 Amendment to Agreement and Plan of Merger dated as of April 4,
2003 (2)
3.1 Certificate of Incorporation (3)
3.2 Bylaws (4)
4.1 1996 Incentive and Non-Qualified Stock Option Plan (5)
4.2 Form of Warrant to purchase shares of common stock issued in
connection with the sale of common stock (6)
10.1 Employment Agreement dated June 13, 2003 by and between Callisto
Pharmaceuticals, Inc. and Gary S. Jacob (7)*
10.2 Employment Agreement dated April 6, 2004 by and between Synergy
Pharmaceuticals Inc. and Kunwar Shailubhai (8)*
10.3 Employment Agreement dated June 13, 2003 by and between Callisto
Pharmaceuticals, Inc. and Donald H. Picker (9)*
10.4 Amendment to Employment Agreement dated April 6, 2004 by and
between Callisto Pharmaceuticals, Inc. and Donald H. Picker
(10)*
10.5 License Agreement dated as of August 28, 2002 by and between
Synergy Pharmaceuticals Inc. and AnorMED Inc. (11)**
10.6 Employment Agreement dated January 15, 2004 by and between
Callisto Pharmaceuticals, Inc and Bernard Denoyer (12)*
10.7 Form of Registration Rights Agreement dated as of January 21,
2004 by and among the Registrant and the Purchasers set fourth
on the signature page thereto (13)
10.8 Common Stock Purchase Agreement dated as of April 19, 2004, by
and between Callisto Pharmaceuticals, Inc. and the Purchasers
set forth on Exhibit A thereto. (14)
10.9 Patent and Technology License Agreement dated August 12, 2004 by
and between The Board of Regents of the University of Texas
System, on behalf of The University of Texas M. D. Anderson
Cancer Center and Callisto Pharmaceuticals, Inc. (15)**
10.10 Consulting Agreement dated as of December 27, 2004 between the
Registrant and Gabriele M. Cerrone. *+
10.11 Common Stock Purchase Agreement dated as of March 9, 2005 by and
between Callisto Pharmaceuticals, Inc. and the Purchasers set
forth on Exhibit A thereto. (16)
10.12 License Agreement between Callisto Pharmaceuticals, Inc. and The
Rockefeller University effective as of July 25, 2001.
10.13 Asset Purchase Agreement dated as of February 24, 2004 between
Callisto Pharmaceuticals, Inc. and Houston Pharmaceuticals, Inc.
10.14 Sublicense Agreement dated as of February 24, 2004 between
Callisto Pharmaceuticals, Inc. and Houston Pharmaceuticals, Inc.
10.15 Agreement among Davos Chemical Corporation, Callisto
Pharmaceuticals, Inc. and Antibioticos S.p.A. dated July 28,
2004.
14 Code of Business Conduct and Ethics (17)
22 List of Subsidiaries+
23 Consent of BDO Seidman, LLP
38
31.1 Certification of Chief Executive Officer required under Rule
13a-14(a)/15d-14(a) under the Exchange Act
31.2 Certification of Principal Financial Officer required under Rule
13a-14(a)/15d-14(a) under the Exchange Act
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this form pursuant to Item 601 of Regulation S-K.
** Confidential treatment has been requested with respect to deleted portions
of this agreement.
+ Previously filed.
(1) Incorporated by reference to Exhibit 2.1 filed with the Company's Current
Report on Form 8-K filed on March 19, 2003.
(2) Incorporated by reference to Exhibit 2.2 filed with the Company's Current
Report on Form 8-K filed on April 30, 2003.
(3) Incorporated by reference to Exhibit 99.1 filed with the Company's Current
Report on Form 8-K filed on May 28, 2003.
(4) Incorporated by reference to Exhibit 99.2 filed with the Company's Current
Report on Form 8-K filed on May 28, 2003.
(5) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on May 15, 2003.
(6) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on January 28, 2004.
(7) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 10-QSB filed on August 20, 2003.
(8) Incorporated by reference to Exhibit 10.2 filed with the Company's Annual
Report on Form 10-KSB on April 14, 2004.
(9) Incorporated by reference to Exhibit 10.3 filed with the Company's Current
Report on Form 10-QSB filed on November 14, 2003.
(10) Incorporated by reference to Exhibit 10.6 filed with the Company's Annual
Report on Form 10-KSB filed on April 14, 2004.
(11) Incorporated by reference to Exhibit 10.4 filed with the Company's Current
Report on Form 10-QSB filed on November 14, 2003.
(12) Incorporated by reference to Exhibit 10.6 filed with the Company's Annual
Report on Form 10-KSB on April 14, 2004.
(13) Incorporated by reference to Exhibit 4.1 filed with the Company's Current
Report on Form 8-K filed on January 28, 2004.
(14) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on April 19, 2004.
(15) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on September 7, 2004.
(16) Incorporated by reference to Exhibit 10.1 filed with the Company's Current
Report on Form 8-K filed on March 5, 2005.
(17) Incorporated by reference to Exhibit 14 filed with the Company's Annual
Report on Form 10-KSB filed on April 14, 2004.
39