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| CLSP.OB > SEC Filings for CLSP.OB > Form 10-Q on 20-May-2009 | All Recent SEC Filings |
20-May-2009
Quarterly Report
The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements.
Callisto Pharmaceuticals, Inc. (which may be referred to as "Callisto", "the Company", "we" or "us") was incorporated under the laws of the State of Delaware in May 2003. Our principal offices are located at 420 Lexington Avenue, Suite 1609, New York, NY 10170. We are a development stage biopharmaceutical company focused primarily on the development of drugs to treat neuroendocrine cancer (including advanced carcinoid cancer), rheumatoid arthritis ("RA"), acute leukemia and gastrointestinal ("GI") disorders and diseases. Our lead drug candidates are as follows:
1. SP-304, a guanylyl cyclase C ("GC-C") receptor agonist, to treat GI disorders, primarily chronic constipation ("CC") and constipation-predominant irritable bowel syndrome ("IBS-C"), currently being developed by our majority-owned subsidiary, Synergy Pharmaceuticals, Inc. ("Synergy").
2. Atiprimod, an orally administered drug with antiproliferative and antiangiogenic activity.
3. L-Annamycin, a novel compound from the anthracycline family of proven anti-cancer drugs, which has a novel therapeutic profile, including activity against drug resistant tumors and significantly reduced cardiotoxicity, or damage to the heart.
From inception through March 31, 2009, we have sustained cumulative net losses available to common stockholders of $92,281,353. Our losses have resulted primarily from expenditures incurred in connection with research and development activities, application and filing for regulatory approval of 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, as well as deemed dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance. From inception through March 31, 2009, we have not generated any revenue from operations, expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products, and do not expect to have such for several years, if at all.
Our product development efforts are thus in their early stages and we cannot make estimates of the costs or the time they 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, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies being developed by organizations with significantly greater resources.
Net cash used in operating activities was $701,687 during the three months ended March 31, 2009 as compared to $3,032,842 for the three months ended March 31, 2008. During the three months ended March 31, 2009 and 2008 we incurred net losses available to common stockholders of $1,294,086 and $2,991,758, respectively. To date our sources of cash have been primarily limited to the sale of equity securities. Net cash provided by financing activities for the three months ended March 31, 2009 and 2008 and for the period from June 5, 1996 (inception) to March 31, 2009, was $445,240, $0 and $49,454,528, respectively. On April 15, 2009 Synergy sold 1,045,714 shares of unregistered common stock at $0.70 per share to a private investor for aggregate proceeds of $732,000.
Recent Developments
On February 13, 2009, we sold 285,714 shares of unregistered common stock at $0.70 per share to a private investor for aggregate proceeds of $200,000. On March 31, 2009 we sold 280,000 shares of unregistered common stock at $0.70 per share to two private investors for aggregate proceeds of $196,000. There were no warrants issued or finder's fees associated with these transactions, although we incurred $5,000 in legal fees. Net proceeds during the three month ended March 31, 2009 was $391,000. The $191,000 net proceeds from the 280,000 shares sold on March 31, 2009 were included in cash in escrow at March 31, 2009 and were deposited into into our cash account April 2 and 13, 2009.
On January 27, 2009, we announced that we were focusing all further development of Atiprimod towards the treatment of RA. We recognized that although the ongoing Phase II clinical trial of Atiprimod in advanced carcinoid cancer gave encouraging results, the data were not sufficiently demonstrative to warrant further development of Atiprimod in this indication. We announced, instead, our intention that based on Atiprimod's demonstrated favorable clinical safety profile, robustly supported by earlier studies of Atiprimod in RA patients, as well as by the recent oncology trials in advanced carcinoid cancer patients, where the drug was dosed at levels and frequencies considerably higher than anticipated for use in RA, we believe that Atiprimod holds significant promise as a new class of orally-administered, disease-modifying agent in RA.
On December 30, 2008, Callisto entered into a securities purchase and exchange agreement ("Purchase Agreement") with several investors, each of whom were holders of record as of November 4, 2008 of outstanding warrants to purchase shares of the Company's common stock, exercisable at $0.50 or $0.70 per share until August 2, 2010 ("Series B Warrants"). The Series B Warrants were issued in connection with the private placement of the Company's Series B Preferred Shares on August 2, 2007. Pursuant to the Purchase Agreements Callisto issued $201,908 of an authorized $500,000 11% Secured Notes due April 15, 2010 ("11% Notes") with no discount. Interest on the 11% Notes is due at maturity and repayment of the 11% Notes is secured by a pledge of up to 1,900,000 shares (if all $500,000 principal amount of the 11% Notes is sold) of the common stock of Synergy owned by us. On February 3, 2009 Callisto issued an additional $51,374 of the 11% Notes bringing the aggregate proceeds from issuance of 11% Notes since inception to $253,282.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as of March 31, 2009.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008
We had no revenues during the three months ended March 31, 2009 and 2008 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 decreased $1,618,961 or 80% to $398,022 for the three months ended March 31, 2009 from $2,016,983 for the three months ended March 31, 2008. This decrease in research and development expense was attributable to significant curtailment in all program expenses incurred with outside contract research organizations ("CROs"), including pre-clinical animal testing, drug formulation, tableting, hospital patient costs, blood testing and FDA consultants. Our SP-304 program expenses decreased by $1,301,046 or 88% to $174,901 for the three months ended March 31, 2009 from $1,475,947 during the three months ended March 31, 2008. Also contributing to this reduction were lower Annamycin program expenses which decreased by $67,621 or 59% to $46,498 for the three months ended March 31, 2009 from $114,119 during the three months ended March 31, 2008.
Research and development in-house overhead, not allocated to specific programs, totaled approximately $148,000 and $382,000 during the three months ended March 31, 2009 and 2008, respectively, a decrease of approximately $234,000, or 61%. This decrease was attributable to lower compensation costs as a result of terminating in-house clinical monitors.
General and administrative expenses for the three months ended March 31, 2009 decreased $63,736 or 6%, to $956,576 for the three months ended March 31, 2009 from $1,020,312 for the three months ended March 31, 2008. This decrease was primarily due to lower corporate legal (down $25,119 or 62%), and lower investor relations costs (reduced $48,625 or 57%).
Net loss available to common stockholders for the three months ended March 31, 2009 decreased $1,697,671 or 57% to $1,294,086 compared to a net loss of $2,991,758 incurred for the three months ended March 31, 2008. The decreased net loss is the result of lower research and development, and general and administrative expenses discussed above, plus (i) lower interest income ($45,326) attributable to lower cash balances, (ii) higher interest expense ($41,486) attributable to the 11% Notes, (iii) a $217,103 charge incurred to increase the estimated fair value of the derivative liabilities during the three months ended March 31, 2009 and (iv) $318,890 of net losses attributable to the non-controlling interest in Synergy, our majority owned subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009 we had $44,876 in cash and cash equivalents, compared to $301,323 as of December 31, 2008. We had a working capital deficit of $4,976,391 as of March 31, 2009.
Net cash used in operating activities was $701,687 during the three months ended March 31, 2009 as compared to $3,032,842 for the three months ended March 31, 2008.To date our sources of cash have been primarily limited to the sale of equity securities. Net cash provided by financing activities for the three months ended March 31, 2009 and 2008 and for the period from June 5, 1996 (inception) to March 31, 2009, was $445,240, $0 and $49,454,528, respectively.
On February 13, 2009, we sold 285,714 shares of unregistered common stock at $0.70 per share to a private investor for aggregate proceeds of $200,000. On March 31, 2009 we sold 280,000 shares of unregistered common stock at $0.70 per share to two private investors for aggregate proceeds of $196,000. There were no warrants issued or finder's fees associated with these transactions, although we incurred $5,000 in legal fees. Net proceeds during the three month ended March 31, 2009 was
$391,000. The $191,000 net proceeds from the 280,000 shares sold on March 31, 2009 were included in cash in escrow at March 31, 2009 and were deposited into into our cash account April 2 and 13, 2009.
On April 15, 2009 Synergy sold 1,045,714 shares of unregistered common stock at $0.70 per share to a private investor for aggregate proceeds of $732,000.
Worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These developments will make it more difficult for us to obtain additional equity or credit financing, when needed. We have accordingly taken steps to conserve our cash which include extending payment terms to our vendors and suppliers as well as management and staff cuts and salary deferrals. These actions may not be sufficient to allow the Company time to raise additional capital.
Our working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of pharmaceutical research and development programs. We will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of 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 business. If we are unable to raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) 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.
Our consolidated financial statements as of March 31, 2009 and December 31, 2008 have been prepared under the assumption that we will continue as a going concern for the twelve months ending December 31, 2009. Our independent registered public accounting firm has issued a report dated April 15, 2009 that included an explanatory paragraph referring to our recurring losses from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the uncertainty of factors surrounding the estimates or assumptions used in the preparation of the consolidated financial statements, actual results may vary from these estimates.
Share-Based Payments
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, 2008 stock-based compensation expense has totaled $17,929,286 or 19% of our net loss available to common stockholders of $92,281,353.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard ("SFAS") No. 123 (Revised 2004), Share-Based Payments ("SFAS No. 123R"). 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 expense is to be recognized over the period during which an employee is required to provide services in exchange for the award.
SFAS No. 123R did not change the way we account for non-employee stock-based compensation. We continue to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. Stock-based compensation expense associated with these non-employee option grants is being recorded in accordance with EITF 96-18 and accordingly (i) the measurement date will be when "performance commitment is completed" and accordingly the fair value of these options is being "marked to market" quarterly until the measurement date is determined.
Upon adoption of SFAS No. 123R, we selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on our historical volatility. Our stock price has fluctuated from $3.95 per share as of December 31, 2003 to $0.08 per share as of March 31, 2009. The expected term was determined based on the simplified method provided in Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment, ("SAB No. 107"). The risk-free interest rate is based on observed interest rate appropriate for the expected term of our stock options. Forfeitures are estimated, based on our historical experience, at the time of grant.
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 benefitted.
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