Prospectus Supplement filed under Rule 424(b)(3)
Registration Number 333-115471
Prospectus Supplement No. 2, dated November 15, 2004
(To Prospectus dated August 12, 2004)
6,056,041 SHARES
CALLISTO PHARMACEUTICALS, INC.
COMMON STOCK
------------
This prospectus supplement to the prospectus dated August 12, 2004
relates to the public offering, which is not being underwritten, of 6,056,041
shares of our common stock that are held by the selling shareholders identified
in the prospectus.
This prospectus supplement should be read in conjunction with the
prospectus dated August 12, 2004 and Prospectus Supplement No. 1 dated September
8, 2004, each of which is to be delivered with this prospectus supplement. The
information in this prospectus supplement updates and supercedes certain
information contained in the prospectus dated August 12, 2004 as amended by
Prospectus Supplement No. 1 dated September 8, 2004.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT OR THE INVESTMENT MERITS OF OUR COMMON STOCK. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
On November 12, 2004, Callisto Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission the attached QUARTERLY REPORT on Form 10-QSB
for the fiscal quarter ended September 30, 2004.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 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
incorporation or organization) Identification No.)
420 Lexington Avenue, Suite 1609, New York, New York 10170
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 297-0010
--------------
(Registrant's telephone number)
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 past 90 days.
|X| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at November 12, 2004
----- --------------------------------
Common Stock, par value $0.0001 29,219,102 shares
Transitional Small Business Disclosure Format (check one): Yes No |X|
CALLISTO PHARMACEUTICALS, INC.
FORM 10-QSB
CONTENTS
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of September 30, 2004 1
Unaudited Condensed Consolidated Statements of Operations 2
for the Three and Nine Months Ended September 30, 2004 and 2003
and the period June 5, 1996 (Inception) to September 30, 2004
Unaudited Condensed Consolidated Statements of Changes in 3
Stockholders' Equity for the period June 5, 1996 (Inception) to
September 30, 2004
Unaudited Condensed Consolidated Statements of Cash 6
Flows for the Nine Months Ended September 30, 2004 and
2003 and for the period June 5, 1996 (Inception) to
September 30, 2004
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Controls and Procedures 14
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures
i
INTRODUCTORY NOTE
This Report on Form 10-QSB for Callisto Pharmaceuticals, Inc. (the "Company")
may 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-KSB for the year ended December 31, 2003 and
other periodic reports filed with the SEC. Accordingly, to the extent that this
Report contains forward-looking statements regarding the acquisitions, financial
condition, operating results, business prospects or any other aspect of the
Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by the Company in forward-looking statements.
ii
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2004
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,340,066
Prepaid expenses 72,561
-----------
6,412,627
Property and equipment, net of accumulated depreciation of $58,873 25,764
Rent deposits 82,196
-----------
$ 6,520,587
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $646,848
Accrued expenses 274,955
-----------
921,803
-----------
Stockholders' equity:
Preferred stock, $.0001 par value, authorized 20,000,000 shares,
none outstanding --
Common stock, $.0001 par value, authorized 75,000,000 shares,
29,175,102 outstanding 2,915
Additional paid-in-capital 40,634,767
Unamortized deferred stock-based compensation (3,877,772)
Deficit accumulated during the development stage (31,161,126)
-----------
5,598,784
-----------
$ 6,520,587
===========
The accompanying notes are an integral part of these
consolidated financial statements.
1
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30, June 5, 1996
--------------------------- ---------------------------- (Inception) to
2004 2003 2004 2003 September 30, 2004
------------ ------------ ------------ ------------ ------------------
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Research and development 1,777,062 885,252 851,410 576,266 6,679,423
Government grant (188,100) -- (87,880) -- (188,100)
General and administrative 1,646,673 839,775 572,440 342,157 7,896,146
Purchased in process R&D 209,735 6,814,363 -- (19,091) 6,944,553
Stock based compensation 1,952,945 2,938,734 287,351 475,727 10,571,447
------------ ------------ ------------ ------------ ------------
Loss from operations (5,398,315) (11,478,124) (1,623,321) (1,375,059) (31,903,469)
Interest income 54,919 8,301 17,635 1,245 520,519
Other income -- -- -- -- 221,824
------------ ------------ ------------ ------------ ------------
Net loss $ (5,343,396) $(11,469,823) $ (1,605,686) $ (1,373,814) $(31,161,126)
============ ============ ============ ============ ============
Weighted average
shares outstanding:
basic and diluted 28,239,940 20,621,950 29,175,102 23,209,139 --
Net loss per common share:
basic and diluted $ (0.19) $ (0.56) $ (0.06) $ (0.06) --
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED 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 stock 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
The accompanying notes are an integral part of these
consolidated financial statements.
3
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED 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 issued -- -- 251,344
Other -- -- 432
Preferred stock 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.
4
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Common Unamortized
Stock Stock Additional Deferred
Preferred Par Common Par Paid in Stock Based
Stock Value Stock Value Capital Compensation
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 4,235,299 423 13,083,695 1,307 $ 14,538,618 --
Net loss for the year -- -- -- -- --
Conversion of preferred
stock in connection
with the Merger (4,235,2)9 (423) 4,235,299 423 -- --
Common stock issued to
former Synergy
stockholders -- 4,329,927 432 6,494,458 --
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
stock based compensation -- -- -- -- -- 3,833,946
Private placement of
common stock, net -- -- 2,776,666 278 3,803,096 --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 -- -- 25,928,760 2,590 34,149,975 (5,480,007)
Net loss for the period -- -- -- -- -- --
(unaudited)
Amortization of deferred stock
based compensation expense
(unaudited) -- -- -- -- (67,797) 1,602,235
Stock-based compensation
expense (unaudited) -- -- -- -- 286,918 --
Common stock issued via
private placements
(unaudited) -- -- 3,311,342 331 6,098,681 --
Warrant and stock-based
compensation for
services in connection
with the Merger
(unaudited) -- -- -- -- 269,826 --
Common stock issued for
patent rights
(unaudited) -- -- 25,000 3 56,247 --
Common stock returned
from former
Synergy stockholders
(unaudited) -- -- (90,000) (9) (159,083) --
------------ ------------ ------------ ------------ ------------ ------------
Balance September 30, 2004
(Unaudited) -- $ -- 29,175,102 $ 2,915 $40,634,767 $(3,877,772)
============ ============ ============ ============ =========== ===========
Deficit
Accumulated
during the Total
Development Stockholders'
Stage Equity
------------ ------------
Balance, December 31, 2002 (12,711,483) $ 1,828,865
Net loss for the year (13,106,2) (13,106,247)
Conversion of preferred
stock in connection
with the Merger -- --
Common stock issued to
former Synergy
stockholders -- 6,494,890
Common stock issued in
exchange for Webtronics
common stock -- --
Deferred compensation -
stock options -- --
Amortization of
stock based compensation 3,833,946
Private placement of
common stock, net -- 3,803,374
------------ ------------
Balance, December 31, 2003 (25,817,730) 2,854,828
Net loss for the period (5,343,396) (5,343,396)
(unaudited)
Amortization of deferred stock
based compensation expense
(unaudited) -- 1,534,438
Stock-based compensation
expense (unaudited) -- 286,918
Common stock issued via
private placements
(unaudited) -- 6,099,012
Warrant and stock-based
compensation for
services in connection
with the Merger
(unaudited) -- 269,826
Common stock issued for
patent rights
(unaudited) -- 56,250
Common stock returned
from former
Synergy stockholders
(unaudited) -- (159,092)
------------ ------------
Balance September 30, 2004
(Unaudited) $(31,161,126) $ 5,598,784
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
5
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Nine months ended September 30, June 5, 1996
------------------------------- (Inception) to
2004 2003 September 30, 2004
---- ---- ------------------
Cash flows from operating activities:
Net loss $ (5,343,396) $(11,469,823) $(31,161,126)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
used in operating
activities:
Depreciation and amortization 20,724 14,261 58,873
Stock-based compensation expense 1,952,945 2,938,734 10,571,447
Purchased in-process research and development-non cash 106,235 6,814,363 6,841,053
Changes in operating assets and liabilities:
Prepaid expenses (19,917) (84,028) (72,561)
Rent deposits (19,216) (47,246) (82,196)
Accounts payable and accrued expenses (412,807) 369,930 611,035
------------ ------------ ------------
Total adjustments 1,627,964 10,006,014 17,927,651
------------ ------------ ------------
Net cash used in operating activities (3,715,432) (1,463,809) (13,233,475)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment -- (55,750) (84,637)
------------ ------------ ------------
Net cash used in investing activities -- (55,750) (84,637)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common
and preferred stock, net of repurchases 6,099,012 -- 19,658,178
------------ ------------ ------------
Net cash provided by financing activities 6,099,012 -- 19,658,178
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,383,580 (1,519,559) 6,340,065
Cash and cash equivalents at beginning of the period 3,956,486 2,223,462 --
------------ ------------ ------------
Cash and cash equivalents at end of the period $ 6,340,066 $ 703,903 $ 6,340,066
============ ============ ============
Supplementary disclosure of cash flows information:
Cash paid for taxes $ 2,921 $ 23,091 $ 62,962
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
CALLISTO PHAMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO SEPTEMBER 30, 2004 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation:
The accompanying unaudited condensed consolidated financial statements of
Callisto Pharmaceuticals, Inc., and its wholly owned subsidiaries Callisto
Research Labs, LLC., Synergy Pharmaceuticals Inc. ("Synergy") and Callisto
Pharmaceuticals, GmbH ("GmbH"), (collectively, "Callisto" a development stage
company), have been prepared in accordance with (i) accounting principles
generally accepted in the United States ("GAAP") for interim financial
information and (ii) the rules of the Securities and Exchange Commission (the
"SEC") for quarterly reports on Form 10-QSB. The results of operations of
Synergy are included in the condensed consolidated statement of operations for
the nine months ended September 30, 2004 and since May 1, 2003 in the period
from June 5, 1996 (inception) to September 30, 2004 and for the nine months
ended September 30, 2003. (See note 3.) These condensed consolidated financial
statements do not include all of the information and footnote disclosures
required by GAAP for complete financial statements. These statements should be
read in conjunction with Callisto's audited financial statements and notes
thereto for the year ended December 31, 2003, included in Form 10-KSB filed with
the SEC on April 14, 2004.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, primarily consisting of normal
adjustments, necessary for the fair presentation of the balance sheet and
results of operations for the interim periods. The results of operations for the
nine months ended September 30, 2004 are not necessarily indicative of the
results of operations to be expected for the full year ending December 31, 2004.
2. Accounting for stock based compensation:
Callisto has adopted Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). 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 options or shares
granted under the plans. Callisto has also adopted the disclosure provisions
required by SFAS 123, as amended by SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment to FASB Statement No.
123."
Had compensation cost for stock options granted 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 and net loss per share would have
been as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ --------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $ (5,343,396) $(11,469,823) $ (1,605,686) $ (1,373,814)
Add: Stock-based employee compensation
expense recorded under APB No. 25 1,666,936 1,525,178 332,494 279,301
Deduct: stock-based employee compensation
expense determined under fair value method (2,656,870) (1,893,512) (614,954) (389,313)
------------ ------------ ------------ ------------
Pro forma net loss $ (6,333,330) $(11,838,157) $ (1,888,146) $ (1,483,826)
============ ============ ============ ============
Net loss per share:
Basic and diluted -as reported $ (0.19) $ (0.56) $ (0.06) ($ 0.06)
============ ============ ============ ============
Basic and diluted -pro forma $ (0.22) $ (0.57) $ (0.06) ($ 0.06)
============ ============ ============ ============
The fair value of the options granted to employees during 2004 and 2003 ranged
from $0.26 to $5.53 on the date of the respective grant using the Black-Scholes
option-pricing model. The following weighted average assumptions were used for
2004 and 2003: no dividend yield, expected volatility of 0% to April 30, 2003
and 100% since Callisto's common stock began to trade publicly on June 16, 2003,
risk free interest rate ranged from 4.50% to 2.87% and an expected term of 7 to
10 years.
7
3. 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 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 through September 30,
2004. 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 $6,335,798 through
September 30, 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 consummated in January 2004. 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.
4. Net loss per share:
The assumed exercise of all of Callisto's outstanding stock options was excluded
from the computation of net loss per share due to their anti-dilutive effect
because of the net losses reported for the three and nine months ended September
30, 2004 and 2003. As of September 30, 2004 and 2003, Callisto had 6,783,560 and
4,675,227 stock options outstanding, respectively. In addition Callisto had
758,995 common stock warrants outstanding as of September 30, 2004 and none as
of September 30, 2003.
5. Government Research Grant:
On October 7, 2003, Callisto was awarded a $265,697 Small Business Technology
Transfer Research Grant from the National Institutes of Health for studies on
Atiprimod. No funding was received during 2003. During the three and nine months
ended September 30, 2004, Callisto received $87,880 and $188,100 of grant
funding, respectively, as reimbursement of expenses and recorded the receipt as
an offset to research and development expense. As of September 30, 2004 Callisto
had unused grant funding available of $77,597.
6. Stockholders' equity:
During the three months ended March 31, 2004:
In January 2004, Callisto 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, Callisto 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.
a.) Callisto issued to Houston Pharmaceuticals, Inc. ("HPI") 25,000 shares of
common stock at a fair value of $56,250 in connection with the acquisition of
certain patent rights, which cost was charged to purchased in-process research
and development expense (see note 7);
b.) 90,000 shares of common stock issued to former Synergy shareholders were
returned to Callisto and purchased in process research and development expense
was decreased by $159,092;
c.) 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.
During the three months ended June 30, 2004:
On April 19, 2004, Callisto sold and issued 2,151,109 shares of common stock at
an issue price of $2.25 per share for aggregate gross proceeds of $4,839,995 and
incurred fees and expenses aggregating $294,241 to various selling agents. In
addition, Callisto 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.
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 grants, based on a Black-Scholes fair value
of $2.87 per share.
8
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.
During the three months ended September 30, 2004:
On August 12, 2004, in connection with the Annamycin license (see Note 7),
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 had not yet been issued as of September 30, 2004,
however we accrued stock based compensation expense totaling $70,840 based on
the closing stock price of $1.61 on August 12, 2004, the date on which the
Company became obligated to issue the stock. In addition, Callisto will grant
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.
7. Commitments and contingencies:
License agreements:
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 by Synergy of up to $14 million based on achieving regulatory
submissions and approvals for an initial indication and additional payments of
$16 million for each additional indication based on achieving regulatory
submissions and approvals. In addition, the license agreement requires Synergy
to pay royalties based on net sales to AnorMED. 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 made on January 22, 2004 was
reported as research and development expense in the nine months ended September
30, 2004. The agreement will terminate upon expiration of the last to expire of
any patents included in the licensed patents as defined in the agreement.
On February 24, 2004, Callisto entered into an agreement with HPI, a privately
held company, to acquire the rights to two key patents covering a novel cancer
platform technology. 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. (See note
6)
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. If the milestones are achieved, Callisto will record additional
purchased in-process research and development expense based upon the fair value
of the options at that time. Callisto also agreed to pay HPI a royalty of 2% of
net sales from any products resulting from commercializing the patents.
On August 12, 2004, Callisto entered into a world-wide license agreement with
The University of Texas M. D. Anderson Cancer Center ("UTMDACC") 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. Annamycin has not yet reached technological feasibility, and having
no alternative use, these costs were recorded as research and development
expense in the quarter ended September 30, 2004. Callisto also agreed to pay
UTMDACC 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 the life of the
underlying patent rights.
9
Employment Agreements:
On June 13, 2003, Callisto entered into an employment agreement 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 and is automatically
renewable for successive one year periods at the end of the term. Dr.
Shailubhai's salary is $170,000 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. Shailubhai received a grant of 25,000 stock options which are
fully vested and have an exercise price of $1.50 per share. Dr. Shailubhai also
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. Shailubhai's employment agreement was terminated and he
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. His unvested options for 325,000 shares granted June 13,
2003 were cancelled and Dr. Shailubhai received a new grant of 100,000 stock
options which are exercisable at $1.50 per share. 50,000 of such stock options
vested in June 2004 and the remainder in December 2004.
The unamortized balance of deferred stock based compensation expense associated
with the 225,000 cancelled options, amounting to $706,813 as of the date of
cancellation, was charged to stock-based compensation expense during the quarter
ended June 30, 2004. The deferred balance of stock-based compensation expense
associated with the remaining 100,000 options of $314,139, will be expensed over
the vesting period of the new grant (e.g. April 7, 2004 through December 31,
2004). During the quarter ended September 30, 2004 this expense amounted to
$108,203.
On July 22, 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
achievement of which cash bonuses of up to $92,500 over a 12 month period may be
paid. During the quarter ended September 30, 2004 no milestones were achieved
and no expense was recorded.
Lease agreements:
On June 7, 2004 Callisto extended its lease for its corporate headquarters in
New York City two additional years through August 2010, and increased its space
by approximately 60%. This increases average annual rent by approximately
$50,000 to $150,000. 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 was unchanged in the nine months ended
September 30, 2004.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly 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 September 30, 2004, we have sustained cumulative net losses
of $31,161,126. Our losses have resulted primarily from expenditures incurred in
connection with 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 September
30, 2004 we have not generated any revenue from operations. We expect to incur
additional losses to perform further research and development activities. We do
not currently have any commercial biopharmaceutical products, and do not expect
to have such for several years, if at all.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003.
The results of operations of Synergy are included in the consolidated statement
of operations for the full quarter ended September 30, 2004 and September 30,
2003.
We had no revenues during the three months ended September 30, 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 $275,144, or 48%, to
$851,410 for the three months ended September 30, 2004 from $576,266 for the
same period in 2003. Of this increase in research and development expense,
approximately $95,000 was associated with the patient cost of our Phase I/IIa
clinical trials of Atiprimod currently underway. Also contributing to higher
research and development expenses in the quarter ended September 30, 2004 was
approximately $75,000 in higher license fees attributable to Annamycin and
approximately $95,000 of higher expenses incurred under our NIH research grant.
During the three months ended September 30, 2004, a portion of our research and
development expenses consisted of costs incurred developing commercial
production capacity for future trials of Atiprimod as compared to the three
month period ended September 30, 2003 during which a portion of our research and
development expenses were pre-clinical costs associated with preparing our
Atiprimod IND application.
Government grant funding for the three months ended September 30, 2004 was
$87,880 as compared to $0 for the three months ended September 30, 2003. We
request grant funding for research and development expenses as incurred.
General and administrative expenses for the three months ended September 30,
2004 increased $230,283, or 67%, to $572,440, from $342,157 for the three months
ended September 30, 2003. The increase was due in part to approximately $80,000
in higher salaries and wages as a result of our CEO devoting more of his time to
administrative and fund raising activities and the hiring of permanent financial
staff. During the three months ended September 30, 2003 our CEO's salary was
recorded as research and development expense because of his heavy involvement in
the IND application process and other patent and research grant related efforts.
Also contributing to this increase in general and administrative expenses were
approximately $90,000 of higher travel and registration fees related to investor
and technical conferences, approximately $30,000 in higher facilities overhead,
$24,000 in higher outside directors fees and $16,000 in higher transfer agent
costs during the quarter ended September 30, 2004.
Net loss for the three months ended September 30, 2004 was $1,605,686 compared
to a net loss of $1,373,814 incurred for the three months ended September 30,
2003. This increase of $231,872, or 17%, in our net loss is primarily the result
of the operating expense increases discussed above, partially offset by a
decrease of $188,376 or 40% in stock-based compensation expense. This decrease
is the result of substantially fewer options being granted (resulting in lower
amortization of deferred stock based compensation) during the three months ended
September 30, 2004 as compared to 2003, as well as a decline in the market price
of our common stock from $4.05 as of September 30, 2003 to $1.49 per share on
September 30, 2004.
11
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003.
The results of operations of Synergy are included in the consolidated statement
of operations for the full nine months ended September 30, 2004 but only five
months of the nine months ended September 30, 2003.
We had no revenues during the nine months ended September 30, 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 $891,810, or 101%, to
$1,777,062 for the nine months ended September 30, 2004 from $885,252 for the
same period in 2003. Of this increase in research and development expense,
$300,000 was attributable to our payments of the first annual $200,000
maintenance fee to AnorMED, Inc. for the Atiprimod license and $100,000 to the
University of Texas MD Anderson Cancer Center for the Annamycin license. Also
contributing to this increase in research and development expense was
approximately $152,000 associated with the patient cost (including insurance) of
our Phase I/IIa clinical trials of Atiprimod currently underway. In addition
personnel costs increased approximately $106,000 as we retained two Synergy
executive staff scientists, Drs. Picker and Shailubhai, subsequent to the
Merger. The remainder of the increase was primarily associated with higher
expenses incurred under our NIH research grant. During the nine months ended
September 30, 2004, a portion of our research and development expenses consisted
of costs incurred developing commercial production capacity for future trials of
Atiprimod as compared to the nine month period ended September 30, 2003 during
which a portion of our research and development expenses were pre-clinical costs
associated with preparing our Atiprimod IND application.
Government grant funding for the nine months ended September 30, 2004 was
$188,100 as compared to $0 for the nine months ended September 30, 2003. We
request grant funding to reimburse research and development expenses as
incurred.
General and administrative expenses for the nine months ended September 30, 2004
were $1,646,673, an increase of $806,898, or 96%, from $839,775 for the nine
months ended September 30, 2003. The increase was due primarily to approximately
(i) $200,000 of increased personnel costs as a result of the Merger and the
hiring of a senior financial officer in January 2004, (ii) $118,000 in higher
facilities and office overhead related to the move into our new corporate
headquarters in New York City late in the quarter ended September 30, 2003,
(iii) $110,000 in higher legal and accounting fees related to certain regulatory
filings and corporate business development activities, (iv) $199,000 in higher
outside services associated with being a public company including outside
directors, transfer agent fees and investor relations and (v) $155,000 in higher
business travel principally attending investor, professional and medical
conferences in the United States, England, Italy and Germany.
Purchased in-process research and development was $209,735 for the nine months
ended September 30, 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 nine months ended September 30, 2003 we
recorded $6,814,363 of purchased in-process research and development expense in
connection with the Merger.
Net loss for the nine months ended September 30, 2004 was $5,343,396 compared to
a net loss of $11,469,823 incurred for the nine months ended September 30, 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 $1,952,945 during the nine
months ended September 30, 2004, as compared to $2,938,734 recorded during the
same period ended September 30, 2003, due to (i) substantially fewer options
being granted (resulting in lower amortization of deferred stock based
compensation) during the nine months ended September 30, 2004 as compared to
2003 (ii) more immediately vested options granted during the nine months ended
September 30, 2003, with exercise prices below market value and (iii) a decline
in the market price of our common stock from $4.05 as of September 30, 2003 to
$1.49 per share on September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES:
As of September 30, 2004 we had $6,340,066 in cash and cash equivalents,
compared to $3,956,486 as of December 31, 2003. This increase in cash of
$2,383,580 during the nine months ended September 30, 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 $3,715,432 during the nine months ended September 30, 2004. Cash
used in operating activities was primarily for research & development and
general & administrative expenses discussed above totaling $3,423,735, plus
$341,625 used to reduce December 31, 2003 accrued finders fees payable on that
portion of our private placement closed during 2003.
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 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.
12
CONTRACTUAL OBLIGATIONS:
On July 22, 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 may be paid over a 12 month period.
On August 12, 2004, We entered into a world-wide license agreement with The
University of Texas M. D. Anderson Cancer Center ("UTMDACC") 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 UTMDACC 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 the life of the underlying patent rights.
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; pre-clinical and clinical testing; obtaining regulatory
approvals; technological advances and our ability to establish collaborative
arrangements with research organizations and individuals needed to commercialize
our products. Our capital resources will be focused primarily on the clinical
development and regulatory approval of our current product candidates, and the
acquisition of licenses and rights to certain other cancer related drug
technologies. 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.
13
ITEM 3. Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer, based on the
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 the end of the
period covered by this report, 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.
During the three months ended September 30, 2004, there were no changes in our
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
(b) Reports on Form 8-K.
On September 7, 2004 we filed a Form 8-K announcing we had entered into a
license agreement with the University of Texas M.D. Anderson Cancer Center.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CALLISTO PHARMACEUTICALS, INC.
(Registrant)
Date: November 12, 2004 By: /s/ Gary S. Jacob
---------------------
Gary S. Jacob
Chief Executive Officer
Date: November 12, 2004 By: /s/ Bernard F. Denoyer
--------------------------
Bernard F. Denoyer
Vice President, Finance