DMK PHARMACEUTICALS Corp - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
one)
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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for
the Fiscal Year Ended December 31, 2007
OR
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission
File Number 000-26372
CELLEGY
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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82-0429727
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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2085B
Quaker Point Drive Quakertown, PA 18951
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(Address
of Principal Executive Offices) (zip
code)
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Registrant’s
telephone number, including area code: (215)
529-6084
Securities
registered pursuant to Section 12(b) of the Act:
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None
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None
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.0001 par value
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
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YES ¨
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NO x
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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YES o
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NO x | |||
Note
-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those sections.
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.
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YES x
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NO o | |||
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
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YES o
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NO x | |||
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2007 was $2,048,472.
As
of
February 29, 2008, there were 29,834,796 shares of common stock
outstanding.
Documents
Incorporated By Reference:
The
information called for by Part III of this Report, and certain information
called for by Part II, Item 5 of this Report, to the extent not set forth
herein, is incorporated by reference to the definitive Proxy Statement relating
to the Annual Meeting of Stockholders of the Company which will be filed with
the Securities and Exchange Commission not later than 120 days after the end
of
the fiscal year to which this Report relates.
This
Annual Report includes forward-looking statements that involve substantial
risks
and uncertainties. These forward-looking statements are not historical facts,
but are based on current expectations, estimates and projections about our
industry, our beliefs and our assumptions. Words such as “believes,”
“anticipates,” “expects,” “intends” and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements are not guarantees
of future performance and concern matters that could subsequently differ
materially from those described in the forward-looking statements. Actual events
or results may also differ materially from those discussed in this Annual
Report. These risks and uncertainties include those described in “Risk Factors”
and elsewhere in this Annual Report. Except as required by law, we undertake
no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this Annual
Report.
CELLEGY
PHARMACEUTICALS, INC. 10-K ANNUAL REPORTFOR THE FISCAL YEAR ENDED DECEMBER
31,
2007
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Page
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Part I
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Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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10
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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15
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Item
2.
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PROPERTIES
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15
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Item
3.
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LEGAL
PROCEEDINGS
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15
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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15
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Part II
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
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16
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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16
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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23
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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23
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Item
9A(T).
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CONTROLS
AND PROCEDURES
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23
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Item
9B.
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OTHER
INFORMATION
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24
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Part III
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Item
10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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24
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Item
11.
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EXECUTIVE
COMPENSATION
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27
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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31
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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33
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Item
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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33
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Part IV
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Item
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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34
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Unless
the context otherwise requires, the terms “we”, “our”, “the Company”, and
“Cellegy” refer to Cellegy Pharmaceuticals, Inc., a Delaware corporation,
and its subsidiary. Savvy®, is our trademark. We also refer to trademarks of
other corporations and organizations in this document.
3
Cellegy
Pharmaceuticals, Inc. and subsidiary (“Cellegy,” “we,” us,” “our” or the
“Company”) is a specialty pharmaceuticals company. The Company’s wholly owned
subsidiary, Biosyn, Inc. (“Biosyn”), has intellectual property relating to a
portfolio of proprietary product candidates known as microbicides. Biosyn’s
product candidates, which include both contraceptive and non-contraceptive
microbicides, are used intravaginally and are intended to reduce transmission
of
sexually transmitted diseases (“STDs”) including Human Immunodeficiency Virus
(“HIV”) and Acquired Immunodeficiency Disease (“AIDS”). Biosyn’s product
candidates include Savvy®, which underwent Phase 3 clinical trials in Ghana and
Nigeria for anti-HIV microbicidal efficacy and is currently in a Phase 3
contraception trial in the United States, and UC-781, a non-nucleoside reverse
transcriptase (“RT”) inhibitor. The Company’s HIV Phase 3 clinical trials were
suspended in 2005 and 2006
and
have been terminated.
On
February 12, 2008, Cellegy entered into a definitive merger agreement (the
“Merger Agreement”) providing for the acquisition of Cellegy by Adamis
Pharmaceuticals Corporation. Adamis is a privately held specialty
pharmaceuticals company that is engaged in the research, development and
commercialization of products for the prevention of viral infections, including
influenza. Adamis currently markets and sells a line of prescription products
for a variety of allergy, respiratory disease and pediatric conditions, and
also
owns a good manufacturing practice (“GMP”) certified independent contract
packager of pharmaceutical and nutraceutical products. The transaction was
unanimously approved by the boards of directors of both companies and is
anticipated to close during the second or third quarter of 2008, subject to
the
filing of a registration statement and proxy statement with the Securities
and
Exchange Commission (“SEC”), the approval of Adamis’ and Cellegy’s respective
stockholders at stockholder meetings following distribution of a definitive
proxy statement, and other customary closing conditions. Holders of
approximately 40% of Cellegy’s outstanding common stock have entered into voting
agreements pursuant to which they agreed to vote their shares in favor of the
transaction. The combined company expects to continue to be publicly traded
after completion of the merger, although under a different corporate name.
If
the
merger is consummated, each Adamis stockholder will receive, in exchange for
each share of Adamis common stock held by such stockholder immediately before
the closing, one (post-reverse stock split) share of Cellegy common stock
(excluding in all cases dissenting shares). If the transaction is approved
by
Cellegy’s stockholders, before the closing Cellegy will implement a reverse
stock split of its common stock so that the outstanding Cellegy shares will
be
converted into a number of shares equal to the sum of (i) 3,000,000 plus (ii)
the amount of Cellegy’s net working capital as
of the
end of the month immediately preceding the month in which the closing
occurs
divided
by .50. Based on several assumptions that are subject to change, including,
without limitation, the number of shares of Cellegy common stock outstanding
immediately before the merger and the amount of Cellegy’s current assets and
liabilities as of the end of the month immediately prior to the closing, Cellegy
estimates that the reverse stock split will be between approximately 8.5 to
1
and 9.945 to 1. The actual amounts and percentages will depend on many factors,
and actual amounts and percentages could be higher or lower.
In
addition, the Merger Agreement contains certain termination rights for both
Cellegy and Adamis, and further provides that, upon termination of the merger
agreement under specified circumstances, either party may be required to pay
the
other party a termination fee of $150,000. Both parties have the right to
terminate the Merger Agreement if the merger is not consummated by (i) August
31, 2008, if the SEC does not review the registration statement and (ii)
September 30, 2008, if the SEC does review the registration statement, so long
as the terminating party is not in breach of the Merger Agreement and such
breach is a principal failure of the merger to occur by such date.
In
connection with the signing of the Merger Agreement, Cellegy also issued to
Adamis an unsecured convertible promissory note pursuant to which Cellegy agreed
to lend Adamis $500,000 to provide additional funds to Adamis during the
pendency of the merger transaction (the “Promissory Note”). Any principal
outstanding under the Promissory Note accrues interest at 10% per annum. The
Promissory Note becomes immediately due and payable in the event that the Merger
Agreement is terminated by Adamis or Cellegy for certain specified reasons
or on
the later of (i) the sixteen month anniversary of the issue date of the
Promissory Note or (ii) the date that is two business days following the first
date on which certain other notes issued by Adamis to a third party have been
repaid in full. If the Promissory Note is outstanding as of the closing of
the
merger transaction, the Promissory Note will convert into shares of Adamis
stock, and those shares will be cancelled.
There
is
no assurance that the Company will be able to close the transaction with Adamis.
Should Cellegy be unable to secure the additional shareholder votes necessary
to
approve the transaction with Adamis or otherwise be unable to close the
transaction, the Company may chose to pursue liquidation or voluntarily file
bankruptcy proceedings. The consolidated financial statements do not include
any
adjustments that might result from the outcome of this uncertainty. Any failure
to dispel any continuing doubts about our ability to continue as a going concern
could negatively affect the market price of our common stock and could otherwise
have a material adverse effect on our business, financial condition and results
of operations. These factors raise substantial doubt about our ability to
continue as a going concern.
4
Following
the Company’s sale of assets relating to most of its products and product
candidates to ProStrakan Group plc (“ProStrakan”), a publicly-traded
pharmaceutical company based in the United Kingdom in November 2006, the
Company’s operations currently relate primarily to the intellectual
property
rights relating to the Biosyn product candidates. The Company’s intellectual
property consists primarily of commercialization and territorial marketing
rights for its Savvy HIV and contraception compounds as well as related patents,
trademarks, license agreements, manufacturing and formulation technologies,
past
research and out-license arrangements with certain philanthropic and
governmental organizations. The Company is also engaged in monitoring the
progress of the Savvy Phase 3 contraception trial in the United States and
provides regulatory support for both the current contraception trial and its
suspended HIV trials.
While
the
Savvy Phase 3 contraception trial in the United States is ongoing and is
expected to be completed in the fourth quarter of 2008, the Company is not
directly involved with the conduct and funding thereof and, due to the cessation
of the HIV Phase 3 trials in 2005 and 2006, it is uncertain whether Savvy will
be commercialized or whether the Company will ever realize revenues there from.
We expect negative cash flows to continue for the foreseeable future. The
Company believes that it presently has enough financial resources to continue
operations as they currently exist until approximately September 30, 2008;
however, it does not have the technological nor the financial assets necessary
to fund the expenditures that would be required to conduct the future clinical
and regulatory work required to commercialize its Savvy technology or other
product candidates without additional funding.
Summary
of Certain Other Developments
On
September 12, 2007, Family Health International (“FHI”) released the final
results of two clinical trials halted in November 2005 and August 2006, that
examined the safety and effectiveness of Savvy®
(C31G
vaginal gel) as a potential microbicide for the prevention of male-to-female
transmission of HIV among women at high risk of infection. As of the time they
were halted, the trials—in Ghana and Nigeria—were unable to show that
Savvy®
was more
effective than a placebo gel. The FHI release noted that the trial results
possibly were influenced by the fact that all participants, including those
receiving the placebo gel, received risk reduction counseling and condoms.
These
final results are consistent with the information that the Company previously
reported concerning FHI’s initial decision to terminate the trials. Cellegy had
previously announced on November 8, 2005 and on August 28, 2006 that the Data
Monitoring Committees (“DMC”) had reviewed interim data from the Savvy® Ghana
and Nigeria Phase 3 HIV prevention trials, respectively, and made
recommendations that each trial not continue. A lower than expected rate of
HIV
seroconversion in these trials made it unlikely that the number of events
required to evaluate the effect of Savvy®
on HIV
could be reached, even if the trials were continued.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization (“CONRAD”), for collaboration on the development of
Cellegy’s entire microbicide pipeline, including Savvy, UC-781 and Cyanovirin-N
(“CV-N”). CONRAD is a nonprofit, philanthropic organization dedicated to
supporting the development of better, safer, and more acceptable methods to
prevent pregnancy and sexually transmitted infections, including HIV/AIDS.
The
agreement facilitated CONRAD’s access to Cellegy’s past research results,
formulation developments and other technological intangibles in the microbicidal
field in exchange for CONRAD’s funding of the remaining Phase 3 U.S.
contraception trial expenses. These expenses consist primarily of providing
the
clinical materials necessary for the conduct of the trial, along with certain
regulatory functions. Under this agreement, Cellegy retained all commercial
rights to its microbicidal technology.
On
April
25, 2006, the Cardiovascular Renal Drugs Advisory Committee (the “Committee”) of
the United States Food and Drug Administration (“FDA” or the “Agency”) met to
review Cellegy’s New Drug Application (“NDA”) relating to its Cellegesic product
candidate. The Committee voted on three questions in connection with its review,
with the following results:
| 1. |
A
majority of the Committee found that, taking all three studies
into
consideration, the data was compelling that there was an effect
of
nitroglycerin ointment on the pain associated with anal
fissures.
|
| 2. |
A
majority of the Committee agreed that the quadratic model was the
proper
statistical analysis for the purpose of
decision-making.
|
5
| 3. |
In
its final vote, six members of the Committee voted for “Approval” of
Cellegesic and six voted “Approvable pending another study of
effectiveness.” There were no votes for “Not
Approvable.”
|
On
July
7, 2006 the FDA issued an Approvable Letter for Cellegy’s product candidate,
Cellegesic, but indicated that before Cellegy’s NDA may be approved and the
product approved for marketing, Cellegy must conduct another clinical trial
to
demonstrate the efficacy at a level deemed statistically significant by the
FDA.
The letter indicated that the FDA was requiring an additional study because
it
believed the results of the three trials conducted to date did not provide
substantial evidence that the drug was effective. The letter also provided
a
number of comments on the results previously presented by Cellegy and
recommendations concerning the design and protocol of the additional required
study.
On
June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part
of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic
in
certain major European countries. Following the payment, ProStrakan had no
further payment obligations to Cellegy under the Rectogesic license agreement.
Simultaneously
with the signing of the Asset Purchase Agreement (“APA”) with ProStrakan, in
September 2006, ProStrakan loaned Cellegy $2,000,000 pursuant to a secured
promissory note, a patent collateral security and pledge agreement and a
trademark collateral and security agreement. The loan was paid in full in
connection with the closing of the asset sale transaction in November, 2006.
In
connection with the signing and closing of the APA with ProStrakan, Cellegy
also
resolved its obligations under previous agreements between the Company and
PDI,
Inc. (“PDI”). On September 20, 2006, Cellegy and PDI entered into a letter
agreement, pursuant to which Cellegy agreed to pay PDI, in full and final
settlement of all obligations due PDI, an aggregate amount of $3,000,000
subsequent to the sale of assets to ProStrakan which was consummated in November
2006.
On
November 28, 2006, for an aggregate purchase price of approximately $9.0
million, we completed the sale to ProStrakan of our rights to Cellegesic®
(nitroglycerin ointment), Fortigel® (testosterone gel), Tostrex® (testosterone
gel), Rectogesic® and Tostrelle® (testosterone gel), and related intellectual
property. Pursuant to the APA, ProStrakan also assumed various existing
distribution and other agreements, including in certain Southeast Asian
countries, relating to the intellectual property that was included in the sale.
Cellegy’s stockholders approved the transaction at a special meeting of
stockholders held on November 22, 2006.
Savvy
Cellegy
obtained rights to the late-stage product candidate, Savvy, with its October
2004 acquisition of Biosyn. Savvy, a microbicidal gel, is intended for the
reduction in transmission of HIV and also showed promising preliminary results
in the prevention of other STDs, including those caused by herpes simplex virus
and Chlamydia. Savvy has also shown activity against gonorrhea and syphilis.
The
active compound in Savvy is C31G, a broad-spectrum compound with antiviral,
antibacterial and antifungal activity. Its mechanism of action is via immediate
membrane disruption, and it is also spermicidal. Because of its mechanism of
action, C31G has a low potential for resistance and is active against drug
resistant pathogens.
Certain
Phase 3 trial expenses for Savvy, and certain other clinical and preclinical
development costs for the Biosyn pipeline, are funded by grant and contract
commitments through agencies including: the United States Agency for
International Development (“USAID”); the National Institute for Child Health and
Development (“NICHD”); the National Institute for Allergy and Infectious Disease
(“NIAID”); CONRAD; and other governmental and philanthropic
organizations.
A
Phase 3
trial for contraception is ongoing in the United States, with 1,577 women
enrolled out of an expected total enrollment of 1,670 female subjects. The
trial
is expected to be completed in the fourth quarter of 2008. While the Company
currently retains the commercial and technological rights to Savvy (with respect
to the United States and other developed countries), it is not directly involved
with the oversight and funding of the Savvy Phase 3 trial for contraception.
Due
to the cessation of the HIV Phase 3 trials in 2005 and 2006, it is uncertain
whether Savvy will be commercialized or whether the Company will ever realize
revenues there from. CONRAD, through its agreement entered into with Cellegy
in
January 2006, undertook a portion of the funding and oversight responsibilities
in exchange for access to Biosyn’s current and past research and related
technological intangibles. There can be no assurance that Savvy will be
successfully approved for contraception or any other indications or that it
would be the first of such products to enter the marketplace. There can be
no
assurance that Savvy could be profitably commercialized or that Cellegy would
be
able to achieve profitability with this product, if approved.
6
A
second-generation product candidate, UC-781, is a non-nucleoside RT inhibitor
that has demonstrated efficacy against a wide range of HIV-1 isolates, including
laboratory adapted strains, T cell and macrophage tropic isolates, and primary
isolates of all major clades (A through G and isolates that are resistant to
other RT inhibitors). Certain Phase 1 human safety studies as well as human
anal/rectal efficacy studies of UC-781 are underway.
Cellegy’s
research and development expenses were approximately $23,000 and $1,812,000
in
2007 and 2006, respectively.
The
Company currently hold five patents worldwide relating
to Savvy gel for contraception and the reduction in transmission of HIV
infection.
Cellegy
had previously entered into a license agreement with PDI for the promotion
and
distribution of Fortigel in North America. This agreement was also the subject
of a lawsuit between the two parties and was later renegotiated and settled.
In
2006, Cellegy settled all of its outstanding obligations to PDI for an aggregate
amount of $3,000,000 and recognized a gain of approximately $2,100,000 in
connection with the settlement.
From
2004
through 2006, Cellegy had license agreements with ProStrakan relating to
development and commercialization of Tostrex and Rectogesic in Europe and in
certain nearby non-European Union (“EU”) countries.
Effective
with the sale of assets to ProStrakan in November 2006, the Company’s license
agreements with ProStrakan were terminated, and Cellegy will not receive any
further amounts under these agreements.
In
October 1996, Biosyn acquired C31G Technology from the inventor of the
technology, Edwin B. Michaels. As part of the agreement, Biosyn is required
to
make annual royalty payments equal to the sum of 1% of net product sales of
up
to $100 million, 0.5% of the net product sales over $100 million and 1% of
any
royalty payments received by Biosyn under license agreement. The term of the
agreement lasts until December 31, 2011 or upon the expiration of the C31G
Technology’s patent protection, whichever is later. Biosyn’s current C31G
patents expire between 2011 and 2018.
In
May
2001, Biosyn entered into an exclusive license agreement with Crompton
Corporation, now Chemtura (“Chemtura”), under which Biosyn obtained the rights
to develop and commercialize UC-781, a non-nucleoside reverse transcriptase
inhibitor, as a topical microbicide. Under the terms of the agreement, Biosyn
paid Chemtura a nonrefundable, upfront license fee that was recorded as research
and development expense. Chemtura also received a warrant to purchase Biosyn
common stock, which converted into a Cellegy warrant in connection with
Cellegy’s acquisition of Biosyn in 2004 and is exercisable for a period of two
years upon initiation of Phase 3 trials of UC-781. Chemtura is entitled to
milestone payments upon the achievement of certain development milestones and
royalties on product sales. If UC-781 is successfully developed as a
microbicide, then Biosyn has exclusive worldwide commercialization
rights.
7
On
October 18, 2007, the Company and CONRAD amended its license agreement to modify
the non-exclusive license grant covering the Company’s intellectual property
relating to its UC-781 technology to an exclusive license; the general field
and
permitted uses, covering the public sector and only in developing countries,
were not changed.
Under
the
terms of certain of its funding agreements, Biosyn has been granted the right
to
commercialize products supported by the funding in developed and developing
countries and Biosyn is obligated to make its commercialized products, if any,
available in developing countries, as well as available to public sector
agencies in developed countries, at prices reasonably above cost or at a
reasonable royalty rate.
Biosyn
entered into various other research and technology agreements. Under these
other
agreements, Biosyn is working in collaboration with various other parties.
Should any discoveries be made under such arrangements, Biosyn may be required
to negotiate the licensing of the discovery for the development of the
respective technologies. Due to cancellation of its license with the National
Institutes of Health (“NIH”) in 2007, Biosyn forfeited the rights for the
commercialization of CV-N but the existing agreements between Biosyn and
research institutions related to CV-N remain in effect.
FDA
Requirements for Human Drugs. The
research, development, testing, manufacturing, storage, labeling, record
keeping, distribution, advertising, promotion and marketing of drug products
are
extensively regulated by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous FDA
regulations pursuant to, among other laws, the Food, Drug and Cosmetic
Act.
The
steps
ordinarily required before a new pharmaceutical product may be marketed in
the
United States include:
|
(i)
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preclinical
tests;
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(ii)
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the
submission to the FDA of an Investigational New Drug Application
(“IND”),
which must be approved before human clinical trials commence;
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(iii)
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adequate
and well-controlled clinical trials to establish the safety and efficacy
of the product for its proposed indication;
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(iv)
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the
submission to the FDA of an NDA; and
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(v)
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FDA
review and approval of the NDA or Product License Application before
any
commercial sale or shipment of the product. Preclinical tests include
laboratory evaluation of product formulation and animal studies (if
an
appropriate animal model is available) to assess the potential safety
and
efficacy of the product. Formulations must be manufactured according
to
the FDA’s current GMP requirements, and preclinical safety tests must be
conducted by laboratories that comply with FDA’s Good Laboratory Practice
regulations.
|
The
results of preclinical testing are submitted to the FDA as part of an IND and
are reviewed by the FDA before commencement of human clinical trials. Clinical
trials may begin thirty days after the IND is received, unless the FDA raises
concerns or questions about the conduct of the clinical trials. If concerns
or
questions are raised, the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials. In some instances, the IND application process can result in substantial
delay and expense. Clinical trials are normally done in three phases, although
the phases may overlap. Phase 1 trials are concerned primarily with the safety
and pharmacokinetics of the product. Phase 2 trials are designed primarily
to
demonstrative effectiveness and safety in treating the disease or condition
for
which the product is indicated. These trials typically explore various dose
regimens. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness necessary to clarify the
product’s benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug.
The
FDA receives reports on the progress of each phase of clinical testing and
may
require the modification, suspension or termination of clinical trials if an
unwarranted risk is presented to patients. When data is required from long-term
use of a drug following its approval and initial marketing, the FDA can require
Phase 4, or post-marketing, studies to be conducted. The FDA, upon request
through a Special Protocol Assessment, can also provide specific written
guidance on the acceptability of protocol designs for selected clinical
trials.
After
successful completion of the required clinical testing, an NDA is generally
submitted. FDA approval of the NDA (as described below) is required before
marketing may begin in the United States. The FDA reviews all NDAs submitted
and
may request more information before it accepts the filing. The review process
is
often extended significantly by FDA requests for additional information or
clarification. The FDA may refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is
not
bound by the recommendation of an advisory committee. During the review process,
the FDA generally will conduct an inspection of the relevant drug manufacturing
facilities and clinical trial sites to ensure that the facilities are in
compliance with applicable GMP requirements. If FDA evaluations of the NDA
application, manufacturing facilities, and clinical sites are favorable, the
FDA
may issue either an approvable letter or a not approvable letter that contains
a
number of conditions that must be met in order to secure approval of the NDA.
When and if those conditions have been met to the FDA’s satisfaction, the FDA
will issue an approvable letter, authorizing commercial marketing of the drug
for certain specific indications.
8
If
the
FDA’s evaluation of the NDA submission or manufacturing facilities is not
favorable, the FDA may refuse to approve the NDA or may issue a not approvable
letter, outlining the deficiencies in the submission and often requiring
additional testing or information. Notwithstanding the submission of any
requested additional data or information in response to an approvable or not
approvable letter, the FDA ultimately may decide that the application does
not
satisfy the regulatory criteria for approval. Even if FDA approval is obtained,
a marketed drug product and its manufacturer are subject to continual review
and
inspection, and later discovery of previously unknown problems with the product
or manufacturer may result in restrictions or sanctions on such product or
manufacturer, including withdrawal of the product from the market.
The
process of developing and obtaining approval for a new pharmaceutical product
within this regulatory framework requires a number of years and the expenditure
of substantial resources. There can be no assurance that necessary approvals
will be obtained in a timely manner, if at all. Delays in obtaining regulatory
approvals could have a material adverse effect on the applicant. Failure to
comply with applicable regulatory requirements for marketing drugs could subject
the applicant to administrative or judicially imposed sanctions such as warning
letters, fines, product recalls or seizures, injunctions against production,
distribution, sales, or marketing, delays in obtaining marketing authorizations
or the refusal of the government to grant such approvals, suspensions and
withdrawals of previously granted approvals, civil penalties and/or criminal
prosecution.
Manufacturing.
Each
domestic drug manufacturing facility must be registered with the FDA. Domestic
drug manufacturing establishments are subject to routine inspection by the
FDA
and other regulatory authorities and must comply with GMP requirements and
any
applicable state or local regulatory requirements. Foreign manufacturing
facilities are also subject to periodic FDA inspections or inspections by
foreign regulatory authorities. Among other things, the FDA may withhold
approvals of NDAs or other product applications if deficiencies are found at
the
facility. Vendors that supply finished products or components used to
manufacture, package and label products are subject to similar regulation and
periodic inspection. There can be no assurances that manufacturing or quality
control problems will not arise at the manufacturing plants of contract
manufacturers or that such manufacturers will have the financial capabilities
or
management expertise to adequately supply products or maintain compliance with
the regulatory requirements necessary to continue manufacturing
products.
Foreign
Regulation of Drugs.
Whether
or not FDA approval has been obtained, approval of a product by comparable
regulatory authorities may be necessary in foreign countries before the
commencement of marketing of the product in such countries. The approval
procedures vary among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there are
some
procedures for unified filings for certain European countries, in general each
country has its own procedures and requirements, many of which are time
consuming and expensive. Under European Union (“EU”) regulatory systems, a
company may submit marketing authorization applications either under a
centralized or decentralized procedure. The centralized procedure, which is
available for medicines produced by biotechnology or which are highly
innovative, provides for the grant of a single marketing authorization that
is
valid for EU member states. This authorization is called a Marketing
Authorization Approval (“MAA”). The decentralized procedure provides for mutual
recognition of national approval decisions. Under this procedure, the holder
of
a national Marketing Authorization may submit an application to the remaining
member states. Each member state must then make its own determination regarding
approval. This procedure is referred to as the European Union Mutual Recognition
Procedure (“MRP”). There can be substantial delays in obtaining required
approvals from both the FDA and foreign regulatory authorities after the
relevant applications are filed.
Health
Care Reform. In
the
United States, there have been, and Cellegy expects there will continue to
be, a
number of federal and state proposals to implement cost controls and other
health care regulatory measures. Future legislation could result in a
substantial restructuring of the health care delivery system. While we cannot
predict whether any legislative or regulatory proposals will be adopted or
the
effect such proposals may have on our business, the uncertainty of such
proposals could have a negative effect on our ability to raise capital and
to
identify and reach agreements with potential partners, and the adoption of
such
proposals could have an adverse effect on Cellegy. In both domestic and foreign
markets, sales of therapeutic products will depend in part on the availability
of reimbursement from third-party payers. There can be no assurance that our
products, if commercially developed, will be considered cost effective or that
reimbursement will be available. We cannot predict the outcome of any government
or industry reform initiatives or the impact thereof on our financial position
or results of operations.
9
The
pharmaceutical industry is characterized by extensive research efforts and
rapid
and significant technological change and intense competition. Cellegy is much
smaller in terms of size and resources than many of its competitors in the
United States and abroad, which include, among others, major pharmaceutical,
chemical, consumer product, and biotechnology companies, specialized firms,
universities and other research institutions. Cellegy’s competitors may succeed
in developing technologies and products that are safer, more effective or less
costly than any developed by Cellegy, thus rendering its technology and
potential products obsolete and noncompetitive. Many of these competitors have
substantially greater financial and technical resources, clinical production
and
marketing capabilities and regulatory experience than Cellegy.
Savvy
is
subject to competition from other microbicides that are currently undergoing
clinical trials and which may be sold by prescription or over-the-counter,
as
well as non-microbicidal products such as condoms. There is also a number of
existing contraception products currently on the market which could greatly
limit the marketability of the Savvy contraception product candidate. As a
result, there can be no assurance that Biosyn’s products under development will
be able to compete successfully with existing products or other innovative
products under development.
As
of
December 31, 2007, the Company had three (3) full-time employees at its offices
in Quakertown, Pennsylvania.
In
addition, we utilize the services of several professional consultants, as well
as regulatory and clinical research organizations to supplement our internal
staff’s activities. None of our employees are represented by a labor union. We
have experienced no work stoppages and we believe that our employee
relations are good.
We
are
subject to the reporting requirements under the Securities Exchange Act of
1934.
Consequently, we are required to file reports and information with the SEC,
including reports on the following forms:
|
(i)
|
annual
report on Form 10-K,
|
|
(ii)
|
quarterly
reports on Form 10-Q,
|
|
(iii)
|
current
reports on Form 8-K,
|
|
(iv)
|
and
amendments to those reports filed or furnished pursuant to Section
13(a)
or 15(d) of the Securities Exchange Act of 1934.
|
These
reports and other information concerning us may be obtained at the SEC’s Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or
accessed through the SEC’s website at http://www.sec.gov
or by
calling 1-800-SEC-0330. Upon written request to the Company at Cellegy
Pharmaceuticals, Inc., 2085 B Quaker Point Drive, Quakertown, Pa, 18951,
Attention: Chief Financial Officer, Cellegy will provide a copy of the 10-K
to
any stockholder.
ITEM
1A: RISK FACTORS
There
is no assurance that the Company will be able to close the merger transaction
with Adamis.
Should
Cellegy be unable to secure the additional shareholder votes necessary to
approve the merger transaction with Adamis or if one or more other closing
conditions in the Merger Agreement are not satisfied and the merger transaction
does not close, the Company may choose to pursue liquidation or voluntarily
file
bankruptcy proceedings.
The
Company’s cash resources are dwindling
The
Company estimates that it has enough cash resources to continue operations
as
they currently exist until approximately September 30, 2008.
10
We
sold a material portion of our assets to a third party and have reduced the
scope of our operations.
In
November 2006, we sold a material portion of our assets, including intellectual
property rights and related assets concerning most of our products and product
candidates, to ProStrakan. The Company’s operations currently relate primarily
to the intellectual property rights of our Biosyn subsidiary. While the Savvy
Phase 3 contraception trial in the United States is ongoing, the Company is
not
directly involved with the conduct and funding thereof and, due to the cessation
of the Africa HIV Phase 3 trials, it is uncertain whether Savvy will be
commercialized or whether the Company will ever realize revenues there from.
We
have a history of losses and do not expect to achieve
profitability.
We
have
incurred accumulated losses since our inception and accumulated negative cash
flows from operations that raise substantial doubt about our ability to continue
as a going concern. We expect negative cash flows to continue for the
foreseeable future. The Company believes that it has enough financial resources
to continue operations as they currently exist until approximately September
30,
2008; however, it does not have the technological or the financial assets
necessary to fund the expenditures that would be required to conduct the future
clinical and regulatory work necessary to commercialize Savvy or other Biosyn
product candidates without additional funding. Without additional funds from
financing, sales of assets, intellectual property or technologies, or from
a
business combination or a similar transaction, we will exhaust our resources
and
will be unable to continue operations, and our accumulated deficit will continue
to increase as we continue to incur losses. These factors raise substantial
doubt about our ability to continue as a going concern.
We
have received a “going concern” opinion from our independent registered public
accounting firm, which may negatively impact our
business.
Our
audit
opinion from our independent registered public accounting firms regarding the
consolidated financial statements for the years ended December 31, 2007 and
2006, include an explanatory paragraph indicating that there is substantial
doubt about the Company’s ability to continue as a going concern. Doubts
concerning our ability to continue as a going concern could adversely affect
our
ability to enter into other strategic transactions or arrangements. Such an
outcome may negatively affect the market price of our common stock and could
otherwise have a material adverse effect on our business, financial condition
and results of operations.
We
are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products. Unexpected regulatory outcomes
could adversely affect our business and stock price.
Cellegy’s
remaining product candidates and our research and clinical activities are
subject to extensive regulation by governmental regulatory authorities in the
United States and in other countries. Before we obtain regulatory approval
for
the commercial sale of any potential drug products, we must demonstrate through
pre-clinical studies and clinical trials that the product is safe and
efficacious for use in the clinical indication for which approval is sought.
The
timing of NDA submissions, the outcome of reviews by the FDA and the initiation
and completion of other clinical trials are subject to uncertainty, change
and
unforeseen delays. Under the Prescription Drug User Fee Act (“PDUFA”), the FDA
establishes a target date to complete its review of an NDA. Although the FDA
attempts to respond by the relevant PDUFA date to companies that file NDAs,
there is no obligation on the FDA’s part to do so. In addition, extensive
current pre-clinical and clinical testing requirements and the current
regulatory approval process of the FDA in the United States and of certain
foreign regulatory authorities, or new government regulations, could prevent
or
delay regulatory approval of our product candidates.
The
process of developing and obtaining approval for a new pharmaceutical product
within this regulatory framework requires a number of years and substantial
expenditures. There can be no assurance that necessary approvals will be
obtained in a timely manner, if at all. Delays in clinical trials or obtaining
regulatory approvals could delay receipt of revenues from product sales,
increase our expenditures relating to obtaining approvals, jeopardize corporate
partnership arrangements that we might enter into with third parties regarding
particular products, or cause a decline in our stock price. If we fail to comply
with applicable regulatory requirements, we could be subject to a wide variety
of serious administrative or judicially imposed sanctions and penalties,
including regulatory actions, suspension or termination of clinical trials,
restrictions on our products or manufacturing processes, withdrawal of products
from the market, significant fines, or other sanctions or litigation. any of
which could result in significant financial penalties that could reduce our
available cash, delay introduction of products resulting in deferral or
elimination of revenues from product sales, and could result in a decline in
our
stock price.
11
Clinical
trial results are very difficult to predict in advance, and the clinical trial
process is subject to delays. Failure of one or more clinical trials or delays
in trial completion could adversely affect our business and our stock
price.
Results
of pre-clinical studies and early clinical trials may not be good predictors
of
results that will be obtained in later-stage clinical trials. We cannot provide
any assurance that Cellegy’s remaining clinical trial will demonstrate the
results required to continue advanced trial development and allow us to seek
marketing approval for our product candidate. Because of the independent and
blind nature of certain human clinical testing, there will be extended periods
during the testing process when we will have only limited, or no, access to
information about the status or results of the tests. Cellegy and other
pharmaceutical companies have believed that their products performed
satisfactorily in early tests, only to find their performance in later tests,
including Phase 3 clinical trials, to be inadequate or unsatisfactory, or that
FDA Advisory Committees have declined to recommend approval of the drugs, or
that the FDA itself refused approval, with a resulting decrease in stock
price.
Clinical
trials can be extremely costly. Certain costs relating to the Phase 3 trials
for
the Savvy product for contraception and, when they were conducted, for the
reduction in the transmission of HIV, and other clinical and preclinical
development costs for Savvy, were funded directly by certain grant and contract
commitments from several governmental and non-governmental organizations
(“NGOs”). Nevertheless, current or future clinical trials could require
substantial additional funding. There can be no assurance that funding from
governmental agencies and NGOs will continue to be available, and any other
Phase 3 trials that Cellegy may commence in the future relating to its products
could involve the expenditure of several million dollars through the completion
of the clinical trials. In addition, delays in the clinical trial process can
be
extremely costly in terms of lost sales opportunities and increased clinical
trial costs. The speed with which we complete our clinical trials and our
regulatory submissions, including NDAs, will depend on several factors,
including the following:
|
·
|
the
rate of patient enrollment, which is affected by the size of the
patient
population, the proximity of patients to clinical sites, the difficulty
of
the entry criteria for the study and the nature of the
protocol;
|
|
·
|
the
timely completion of clinical site protocol approval and obtaining
informed consent from subjects;
|
|
·
|
analysis
of data obtained from preclinical and clinical
activities;
|
|
·
|
changes
in policies or staff personnel at regulatory agencies during the
lengthy
drug application review; and
|
|
·
|
the
availability of experienced staff to conduct and monitor clinical
studies,
internally or through Contract Research Organizations
(“CRO”).
|
Adverse
events in our clinical trials may force us to stop development of our product
candidates or prevent regulatory approval of our product candidates, which
could
materially harm our business.
Patients
participating in the clinical trial of our product candidate may experience
serious adverse health events. A serious adverse health event includes death,
a
life-threatening condition, hospitalization, disability, congenital anomaly,
or
a condition requiring intervention to prevent permanent impairment or damage.
The occurrence of any of these events could interrupt, delay or halt clinical
trials of our product candidate and could result in the FDA, or other regulatory
authorities, denying approval of our product candidate for any or all targeted
indications. An institutional review board or independent data safety monitoring
board, the FDA, other regulatory authorities or we may suspend or terminate
clinical trials at any time. Our product candidates may prove not to be safe
for
human use. Delay in the regulatory approval of product candidates could increase
our product development costs and allow our competitors additional time to
develop or market competing products.
Due
to our reliance on contract research organizations or other third-parties to
assist us in conducting clinical trials, we are unable to directly control
all
aspects of our clinical trials.
We
have
relied on CROs, and other third parties to conduct our clinical trials. In
circumstances where trials are conducted by CROs or other third parties, we
have
had and will continue to have less control over the conduct of the clinical
trials, the timing and completion of the trials and the management of data
developed through the trial than would be the case if we were relying entirely
upon our own staff. Communicating with CROs can also be challenging, potentially
leading to difficulties in coordinating activities. CROs may:
|
·
|
have
staffing difficulties;
|
|
·
|
experience
regulatory compliance issues;
|
|
·
|
undergo
changes in priorities or may become financially distressed;
or
|
12
|
·
|
not
be able to properly control payments to government agencies or clinical
sites, particularly in less developed
countries.
|
These
factors may adversely affect their ability to conduct trials relating to our
product candidates. We may experience unexpected cost increases or experience
problems with the timeliness or quality of the work of the CRO. If we must
replace these CROs or any other third party contractor, our trials may have
to
be suspended until we find another CRO that offers comparable services. The
time
that it takes us to find alternative organizations may cause a delay in the
commercialization of our product candidates or may cause us to incur significant
expenses. Any delay in or inability to complete clinical trials could
significantly compromise our ability to secure regulatory approval of product
candidates, thereby limiting our ability to generate product revenue resulting
in a decrease in our stock price.
The
type and scope of the patent coverage we have may limit the commercial success
of our products.
Cellegy’s
success depends, in part, on our ability to obtain patent protection for our
products and methods, both in the United States and in other countries. No
assurance can be given that any additional patents will be issued to us, that
the protection of any patents that may be issued in the future will be
significant, or that current or future patents will be held valid if
subsequently challenged.
The
patent position of companies engaged in businesses such as Cellegy’s business
generally is uncertain and involves complex, legal and factual questions. There
is a substantial backlog of patent applications at the United States Patent
and
Trademark Office. Patents in the United States are issued to the party that
is
first to invent the claimed invention. There can be no assurance that any patent
applications relating to Cellegy’s products or methods will be issued as
patents, or, if issued, that the patents will not be challenged, invalidated
or
circumvented or that the rights granted thereunder will provide a competitive
advantage.
In
addition, many other organizations are engaged in research and product
development efforts that may overlap with Cellegy’s products. Such organizations
may currently have, or may obtain in the future, legally blocking proprietary
rights, including patent rights, in one or more products or methods under
development or consideration by Cellegy. These rights may prevent us from
commercializing technology, or may require Cellegy to obtain a license from
the
organizations to use the technology. Cellegy may not be able to obtain any
such
licenses that may be required on reasonable financial terms, if at all, and
cannot be sure that the patents underlying any such licenses will be valid
or
enforceable. Moreover, the laws of certain foreign countries do not protect
intellectual property rights relating to United States patents as extensively
as
those rights are protected in the United States. The issuance of a patent in
one
country does not assure the issuance of a patent with similar claims in another
country, and claim interpretation and infringement laws vary among countries;
therefore, the extent of any patent protection is uncertain and may vary in
different countries. As with other companies in the pharmaceutical industry,
we
are subject to the risk that persons located in other countries will engage
in
development, marketing or sales activities of products that would infringe
our
patent rights if such activities were conducted in the United
States.
We
have limited sales and marketing experience.
We
may
market products, if any are successfully developed and approved and if we obtain
sufficient funding, through a direct sales force in the United States. Cellegy
has very limited experience in sales, marketing or distribution. To market
these
products directly, we may seek to establish a direct sales force in the United
States or obtain the assistance of a marketing partner. However, Cellegy does
not presently have the financial capability or the experience to successfully
establish a direct sales force, marketing or distribution operations, which
could delay or prevent the successful commercialization of our products and
could reduce the ultimate profitability for Cellegy of such products if we
needed to rely on a third party marketing partner to commercialize the
products.
If
medical doctors do not prescribe our products or the medical profession does
not
accept our products, our product sales and business would be adversely
affected.
If
one or
more of our product candidates are approved for marketing, our business will
be
dependent in part on market acceptance of our products by physicians, healthcare
providers, patients and the medical community. Medical doctors’ willingness to
prescribe our products depends on many factors, including:
|
·
|
perceived
efficacy of our products;
|
|
·
|
convenience
and ease of administration;
|
|
·
|
prevalence
and severity of adverse side effects in both clinical trials and
commercial use;
|
|
·
|
availability
of alternative treatments;
|
13
|
·
|
cost
effectiveness;
|
|
·
|
effectiveness
of our marketing strategy and the pricing of our
products;
|
|
·
|
publicity
concerning our products or competing products;
and
|
|
·
|
our
ability to obtain third-party coverage or
reimbursement.
|
Even
if
we receive regulatory approval and satisfy the above criteria, physicians may
not prescribe our products if we do not promote our products effectively.
Factors that could affect our success in marketing our products
include:
|
·
|
the
experience, skill and effectiveness of the sales force and our sales
managers;
|
|
·
|
the
effectiveness of our production, distribution and marketing
capabilities;
|
|
·
|
the
success of competing products; and
|
|
·
|
the
availability and extent of reimbursement from third-party
payors.
|
Failure
of our products or product candidates to achieve market acceptance would limit
our ability to generate revenue and could harm our business.
We
have very limited staffing and will continue to be dependent upon key
personnel.
Our
success is dependent upon the efforts of a small management team and staff,
including Richard C. Williams, our interim chief executive officer, and Robert
J. Caso, our chief financial officer. We do not have key man life insurance
policies covering any of our executive officers or key employees. If key
individuals leave Cellegy, we could be adversely affected if suitable
replacement personnel are not quickly recruited. There is competition for
qualified personnel in all functional areas, which makes it difficult to attract
and retain the qualified personnel necessary for the development and growth
of
our business. Our future success depends upon our ability to continue to attract
and retain qualified scientific, clinical and administrative
personnel.
Our
corporate compliance programs cannot guarantee that we are in compliance with
all potentially applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a small company and we rely
heavily on third parties to conduct many important functions. We also have
significantly fewer employees than many other companies that have the same
or
fewer product candidates in late stage clinical development. In addition, as
a
publicly traded company, we are subject to significant regulations, including
the Sarbanes-Oxley Act of 2002, some of which have either only recently been
adopted. While we have developed and instituted a corporate compliance program
and continue to update the program in response to newly implemented or changing
regulatory requirements, we cannot assure you that we are now or will be in
compliance with all such applicable laws and regulations. Failure to comply
with
potentially applicable laws and regulations could lead to the imposition of
fines, cause the value of our common stock to decline, and impede our ability
to
raise capital or lead to the de-listing of our stock.
Risks
Relating to Our Industry
We
face intense competition from larger companies, and Cellegy may not have the
resources required to develop innovative products. Cellegy’s products are
subject to competition from existing products.
The
pharmaceutical industry is subject to rapid and significant technological
change. Cellegy is much smaller in terms of size and resources than many of
its
competitors in the United States and abroad, which include, among others, major
pharmaceutical, chemical, consumer product, specialty pharmaceutical and
biotechnology companies, universities and other research institutions. Cellegy’s
competitors may succeed in developing technologies and products that are safer
and more effective than any product or product candidates that we may develop
and could render Cellegy’s technology and potential products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources, clinical production and marketing capabilities and
regulatory experience. In addition, any Cellegy products will likely be subject
to competition from existing products. As a result, any future Cellegy products
may never be able to compete successfully with existing products or with
innovative products under development by other organizations.
14
We
are subject to the risk of clinical trial and product liability
lawsuits.
The
testing of human health care product candidates entails an inherent risk of
allegations of clinical trial liability, while the marketing and sale of
approved products entails an inherent risk of allegations of product liability.
We are subject to the risk that substantial liability claims from the testing
or
marketing of pharmaceutical products could be asserted against us in the future.
Cellegy has obtained clinical trial insurance coverage relating to our clinical
trials in an aggregate amount of $1 million. If any of our product candidates
are approved for marketing, we may seek additional coverage.
There
can
be no assurance that Cellegy will be able to obtain or maintain insurance on
acceptable terms, particularly in overseas locations, for clinical and
commercial activities or that any insurance obtained will provide adequate
protection against potential liabilities. Moreover, our current and future
coverage may not be adequate to protect us from all of the liabilities that
we
may incur. If losses from liability claims exceed our insurance coverage, we
may
incur substantial liabilities that exceed our financial resources. In addition,
a product or clinical trial liability action against us would be expensive
and
time-consuming to defend, even if we ultimately prevail. If we are required
to
pay a claim, we may not have sufficient financial resources and our business
and
results of operations may be harmed.
Our
stock price could be volatile.
Our
stock
price has from time to time experienced significant price and volume
fluctuations. Since becoming a public company, our stock price has fluctuated
due to overall market conditions and due to matters or events more specific
to
Cellegy. Events or announcements that could significantly impact our stock
price
include:
|
·
|
Publicity
or announcements regarding regulatory developments relating to our
products;
|
|
·
|
Clinical
trial results, particularly the outcome of more advanced studies;
or
negative responses from both domestic and foreign regulatory authorities
with regard to the approvability of our
products;
|
|
·
|
Period-to-period
fluctuations in our financial results, including our cash and cash
equivalents balance, operating expenses, cash burn rate or revenue
levels;
|
|
·
|
Common
stock sales in the public market by one or more of our larger
stockholders, officers or directors;
|
|
·
|
A
negative outcome in any litigation or potential legal proceedings;
or
|
|
·
|
Other
potentially negative financial announcements such as: a review of
any of
our filings by the SEC, changes in accounting treatment or restatement
of
previously reported financial results or delays in our filings with
the
SEC.
|
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
The
Company presently leases approximately 1,900 square feet of office space in
Quakertown, Pennsylvania on a monthly basis and the terms of the lease include
a
60-day notice requirement. The Company believes its current facilities to be
adequate for its anticipated needs.
ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
15
PART II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Cellegy’s
common stock currently trades on the Over-The-Counter Bulletin Board (“OTCBB”)
under the symbol “CLGY.OB”. The following table sets forth the range of high and
low closing sales prices for the common stock as reported on the OTCBB for
the
periods indicated below.
|
High
|
Low
|
||||||
|
2006
|
|||||||
|
First
Quarter
|
0.93
|
0.42
|
|||||
|
Second
Quarter
|
0.90
|
0.37
|
|||||
|
Third
Quarter
|
0.65
|
0.07
|
|||||
|
Fourth
Quarter
|
0.18
|
0.05
|
|||||
|
2007
|
|||||||
|
First
Quarter
|
0.10
|
0.03
|
|||||
|
Second
Quarter
|
0.11
|
0.09
|
|||||
|
Third
Quarter
|
0.09
|
0.06
|
|||||
|
Fourth
Quarter
|
0.08
|
0.04
|
|||||
Holders
As
of
January 31, 2008, there were approximately 133 stockholders of record, excluding
beneficial holders of stock held in street name.
Dividend
Policy
We
have
never paid cash or declared dividends on our common stock. We do not anticipate
that we will declare or pay cash dividends on our common stock in the
foreseeable future. Future dividends on our common stock or other securities,
if
any, will be at the discretion of our board of directors and will depend on,
among other things, our operations, capital requirements and surplus,
general financial condition, contractual restrictions and such other factors
as
our board of directors may deem relevant.
Equity
Compensation Plan Information
See
Item
12.
Recent
Sales of Unregistered Securities
None.
ITEM
7: MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Cellegy
Pharmaceuticals is a specialty biopharmaceutical company. The Company’s
operations currently relate primarily to the intellectual property rights
relating to the Biosyn product candidates.
On
November 8, 2005, the Savvy Ghana trial was discontinued due to a lower than
expected rate of HIV seroconversion in the trial. The predicted annual rate
of
HIV seroconversion in the Ghana study population was approximately 3.7% at
the
time of trial initiation, but the observed annual rate was 1.2% eighteen (18)
months into the trial. This lower rate was possibly due in part to procedures
designed to ensure ethical trial design, including counseling on HIV prevention
and distribution of condoms. Also, as described in greater detail above, on
August 28, 2006, Cellegy announced that FHI planned to stop the
Savvy Phase
3
trial being conducted in Nigeria. The Savvy trials in Ghana and Nigeria began
screening volunteers in September 2004 and each site completed planned
enrollment of approximately 2,000 women in June 2006. No safety issues were
reported during either of these trials.
16
In
November 2005, Cellegy renegotiated its marketing agreement with ProStrakan.
Under the terms of the amended agreement, ProStrakan agreed to assume
responsibility for all manufacturing and other product support functions and
agreed to purchase the product directly from the manufacturer rather than from
Cellegy. In connection with its revised marketing agreement, Cellegy received
a
payment of $2.0 million.
On
January 16, 2006, Cellegy entered into an amendment of its Exclusive License
and
Distribution Agreement dated July 9, 2004, with ProStrakan. Under the amendment,
ProStrakan agreed to assume responsibility for all of the manufacturing and
other product support functions for Tostrex in Europe.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with CONRAD, for the collaboration on
the
development of Cellegy’s entire microbicide pipeline. The agreement encompassed
the licensing of Savvy, UC-781 and Cyanovirin-N.
On
March
24, 2006, Cellegy announced that ProStrakan had successfully completed the
MRP
for Rectogesic, and that following the successful conclusion of the MRP process,
national licenses would be sought and were expected to be issued in due course
in the nineteen (19) additional countries (in addition to the United Kingdom
where approvals have been previously obtained) included in the MRP submission
application. Cellegy received $250,000 for this milestone and under its previous
agreement with PDI, remitted one-half of these proceeds to PDI.
On
June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part
of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic
in
certain major European countries. Following the payment described above,
ProStrakan had no further payment obligations to Cellegy under the Rectogesic
license agreement.
On
July
7, 2006, the FDA issued an Approvable Letter for Cellegy’s product candidate,
Cellegesic, but indicated that before the Company's NDA may be approved and
the
product approved for marketing, Cellegy must conduct another clinical trial
to
demonstrate efficacy at a level deemed statistically significant by the agency.
The letter indicated that the agency was requiring an additional study because
it believed the results of the three trials conducted to date did not provide
substantial evidence that the drug is effective. The letter also provided a
number of comments on the results previously presented by Cellegy and
recommendations concerning the design and protocol of the additional required
study.
On
August
28, 2006, Cellegy announced that FHI planned to stop the Savvy Phase 3 trial
being conducted in Nigeria with enrollment of approximately 2,000 patients,
to
determine whether Savvy is safe and effective for reducing women’s risk of
acquiring HIV infection. In November 2005, a similar trial being conducted
in
Ghana with enrollment of approximately 2,100 patients was stopped for similar
reasons. Each of the trials was part of an international effort to evaluate
microbicides as a tool to reduce the risk of HIV infection in people at high
risk. The decision to stop these trials followed recommendations by the studies’
external independent DMC. After reviewing the study interim data, DMC members
concluded that the trials as designed were unlikely to provide statistically
significant evidence that Savvy protects against HIV, because of a lower than
expected rate of HIV seroconversion in the trial, which was less than half
of
the expected rate. This lower rate was possibly due in part to procedures
designed to ensure ethical trial design, including counseling on HIV prevention
and distribution of condoms. Without obvious signals of effectiveness in the
interim data, the study would be unlikely to detect a reduction in the HIV
risk
at a level deemed statistically significant if it were to continue.
On
November 28, 2006, Cellegy completed the sale to ProStrakan for $9.0 million
of
its rights to Cellegesic, Fortigel, Tostrex, Rectogesic, Tostrelle, and related
intellectual property assets. ProStrakan also assumed various existing
distribution and other agreements relating to the assets and intellectual
property. Cellegy’s stockholders approved the transaction at a special meeting
of stockholders held on November 22, 2006. In connection with the sale, Cellegy
renegotiated its outstanding obligations with PDI and settled these claims
for
$3.0 million.
17
On
September 12, 2007, FHI released the final results of two clinical trials halted
in November 2005 and August 2006 that examined the safety and effectiveness
of
Savvy®
(C31G
vaginal gel) as a potential microbicide for the prevention of male-to-female
transmission of HIV among women at high risk of infection. The trials—in Ghana
and Nigeria—were unable to show that Savvy®
was more
effective than a placebo gel. The FHI release noted that the trial results
possibly were influenced by the fact that all participants, including those
receiving the placebo gel, received risk reduction counseling and condoms.
These
final results are consistent with the information that Cellegy previously
reported on November 8, 2005 and on August 28, 2006 concerning FHI’s decision to
terminate the trials. The previous announcements indicated that a lower than
expected rate of HIV seroconversion in Ghana made it unlikely that the number
of
events required to evaluate the effect of Savvy®
on HIV
could be reached, even if the trials continued.
On
October 18, 2007, Cellegy and CONRAD amended their license agreement to modify
the non-exclusive license grant covering the Company’s intellectual property
relating to its UC-781 technology to an exclusive license; the general field
and
permitted uses, covering the public sector and only in developing countries,
were not changed.
As
more
fully described above under the heading “Business,” on February 12, 2008,
Cellegy entered into a definitive merger agreement with Adamis.
Critical
Accounting Policies and Estimates
Use
of Estimates. The
preparation of consolidated financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to
make
estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. We have identified below some of our more significant
accounting policies. For further discussion of our accounting policies, see
Note
1 in the Notes to the Consolidated Financial Statements.
Revenue
Recognition. Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk non-refundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
Cellegy received certain government and non-government grants that support
its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
were incurred. Advanced payments received under these agreements prior to
completion of the related work are recorded as deferred revenue until earned.
Should the research funded by federal grants result in patented technologies,
the federal government would be entitled to a nonexclusive, nontransferable,
irrevocable, paid-up license to utilize such technologies.
Revenues
related to product sales are recognized when title has been transferred to
the
customer and when all of the following criteria are met: a persuasive evidence
of an arrangement exists, delivery has occurred or service has been rendered,
the price is fixed or determinable and collectibility is reasonably assured.
There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at
the
time the payment is received and are subsequently recognized as revenue on
a
straight-line basis over the longer of the life of the agreement or the life
of
the underlying patent.
Royalties
payable to Cellegy under these license agreements are recognized as earned
when
the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Goodwill
and Intangible Assets.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,”
goodwill and other intangible assets with indefinite lives are no longer
systematically amortized, but rather Cellegy performs an annual assessment
for
impairment by applying a fair-value based test. This test is generally performed
each year in the fourth quarter. Additionally, goodwill and intangible assets
are reviewed for impairment whenever events or circumstances indicate that
the
carrying amount of the asset may not be recoverable. An impairment loss would
be
recognized based on the difference between the carrying value of the asset
and
its estimated fair value, which would be determined based on either discounted
future cash flows or other appropriate fair value methods. The evaluation of
goodwill and other intangibles for impairment requires management to use
significant judgments and estimates including, but not limited to, projected
future revenue, operating results and cash flows. An impairment would require
Cellegy to charge to earnings the write-down in value of such
assets.
18
Impairment
of Long Lived Assets.
Cellegy
reviews long-lived assets for impairment whenever events or changes in business
conditions indicate that these carrying values may not be recoverable in the
ordinary course of business. When such an event occurs, management determines
whether there has been an impairment by comparing the anticipated undiscounted
future net cash flows to the related asset’s carrying value. If an asset is
considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised value, depending
on the nature of the asset.
Research
and Development Expenses. Research
and development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities, are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and the number of subjects that have completed treatment for each
trial.
Milestone
payments that are made upon the occurrence of future contractual events prior
to
receipt of applicable regulatory approvals are charged to research and
development expense. Cellegy may capitalize and amortize certain future
milestone and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Derivative
Instruments. Cellegy
accounts for certain warrants issued in conjunction with its financings as
derivative financial instruments. As a derivative, the fair value of the warrant
is recorded as a liability in the balance sheet and changes in the fair value
of
the warrant are recognized as other income or expense during each period. The
fair value of the warrant is calculated using the Black-Scholes valuation model
and is expected to change primarily in response to changes in Cellegy’s stock
price. Significant increases in the fair value of our stock could give rise
to
significant expense in the period of the change. Likewise, a reduction in our
stock price could give rise to significant income in the period of the
change.
Results
of Operations
As
noted
above under “General”, in November 2006, Cellegy sold substantially all its
intellectual property related to Cellegesic, Rectogesic, Tostrex, Fortigel,
Tostrelle and certain other products to ProStrakan. As such, Cellegy will record
no additional sales or licensing revenues in connection with these products
or
the underlying technologies.
The
operations of Cellegy Australia Pty., Ltd. (“Cellegy Australia”) for the periods
presented are shown as discontinued operations due to the disposition of Cellegy
Australia in April of 2006.
Statements
below concerning expected future expenses or other activities relate to Cellegy
on a standalone basis and do not give any effect to the proposed merger
transaction with Adamis.
Years
Ended December 31, 2007 and 2006
Revenues.
Cellegy
had no revenues in 2007 and had total revenues of approximately $2,660,000
in
2006. Total revenues in 2006 consist of licensing, product sales and grant
revenues.
Licensing
revenues. Cellegy
had no licensing revenues in 2007. Licensing revenues were approximately
$477,000 in 2006. Licensing revenues in 2006 arose from the amortization to
income of deferred revenue recorded in connection with agreements relating
to
Rectogesic and Tostrex. We expect to recognize no licensing revenues in the
foreseeable future.
Grant
revenues. Cellegy
had no grant revenues in 2007. Grant revenues were approximately $1,926,000
in
2006. Grant revenues for 2006 were generated by funding from several agencies
in
support of the following development programs: $1,361,000 for Cyanovirin-N,
$55,000 for Savvy, $218,000 for UC-781 and $292,000 for a UC-781/C31G
combination product.
The
level
of grant funding under the various grant arrangements is generally dependent
upon the amount of direct labor (primarily laboratory personnel) and direct
expenses such as supplies, testing services and other direct costs expected
to
be incurred in connection with the given program over its duration. The grant
agreements generally provide for an overhead percentage that is applied to
the
direct labor costs. These amounts, along with the amounts billed to the grantor
for direct costs comprise the total amount billed and recorded as grant revenue.
Cellegy has discontinued its grant funding in connection with the reduction
of
Biosyn research activities and does not expect to record grant revenues in
the
future.
19
In
addition to the grant funding above, Biosyn benefits indirectly from agency
funding paid to third party contractors in support of its ongoing Phase 3
clinical trial. Payments from these funding agencies are made directly to the
service providers, not to Biosyn. Under the terms of certain of its funding
agreements, Biosyn has been granted the right to commercialize products
supported by the funding in developed and developing countries, and is obligated
to make its commercialized products, if any, available in developing countries,
as well as to public sector agencies in developed countries at prices reasonably
above cost or at a reasonable royalty rate.
Product
sales. Cellegy
had no product sales revenues in 2007. Product sales were approximately $257,000
in 2006. Sales revenue for 2006 consisted of the sale of certain inventory
items
to ProStrakan in connection with its purchase of Cellegy’s European rights to
Rectogesic. Due to the renegotiation of its agreements with ProStrakan and
the
asset sale transaction with ProStrakan in 2006, Cellegy no longer records
product sales revenue from ProStrakan. We expect to recognize no product sales
revenues in the foreseeable future.
Cost
of Product Sales.
Cost of
product sales is comprised primarily of direct labor and raw material
manufacturing costs for commercialized products and also includes shipping
costs
and those costs associated with stability and validation testing of finished
goods prior to shipment. The stability and validation testing components of
cost
of product sales comprise a significant percentage of gross sales since these
costs are substantially fixed in nature. Cellegy had no cost of product sales
in
2007. Cost of product sales were approximately $257,000 in 2006 and related
to
the sale of certain inventory items to ProStrakan.
Research
and Development Expenses. Research
and development expenses consist primarily of internal salaries and allocated
costs as well as external clinical costs, including: clinical site payments,
costs of manufacturing, testing and shipping clinical supplies and service
fees
to CROs that monitor the clinical sites and perform other related trial support
services. Additionally, research expenses consist of regulatory costs, including
the cost of filing product approval applications around the world, and the
costs
of various consultants to support the filings.
Following
the FDA’s decision in July 2006, Cellegy elected not to pursue substantial
additional research activities relating to Cellegesic. Cellegy is also not
currently devoting significant financial resources to its Savvy product
candidate, due in part to the cessation of the Nigeria and Ghana HIV clinical
trials in August 2006 and November 2005, respectively. In 2006, Cellegy
eliminated its direct research activities relating to its CV-N and UC-781
product candidates and has transferred certain IND’s to CONRAD pursuant to the
parties’ agreement. The Savvy Phase 3 contraception study conducted in the U.S.
is ongoing although Cellegy is not directly involved with the conduct or funding
of this trial. The manufacturing costs associated with supplying the clinical
materials for the study are being borne by CONRAD in exchange for access to
Cellegy’s past research in accordance with the agreements between the
parties.
Research
and development expenses were approximately $23,000 and $1,812,000 in 2007
and
2006, respectively. Research and development expenses, which are primarily
related to the costs of clinical trials and/or regulatory filings, represented
1% and 25% of our total operating expenses in 2007 and 2006, respectively.
Cellegy expects that there will be no significant research spending in the
foreseeable future.
Research
expenses in 2007 consist of regulatory filings and related supporting services.
In 2006, Cellegy eliminated all clinical and laboratory research
activities.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses (“SG&A”) were approximately $1,799,000
and $5,026,000 in 2007 and 2006, respectively. In 2007, SG&A expenses
decreased approximately $3.2 million as compared to 2006 due primarily to the
full year effect of staff reductions, lower patent trademark expenses, lower
legal and professional fees and generally lower expenses overall due to the
reduced business activities in 2007. In 2006, SG&A expenses decreased
approximately $3.9 million as compared to 2005. The decrease was due primarily
to further staffing reductions in 2006 of $1.2 million, and a decrease in
professional fees of $2.7 million relating to office
closures and reductions in consulting, litigation, patent, trademark, accounting
and legal costs.
Other
Income (Expense). Cellegy
recognized interest and other income of approximately $90,000, in 2007 and
$123,000 in 2006. Included in these amounts was interest income of approximately
$82,000 in 2007 and $25,000 in 2006. Other income for 2006 also included
approximately $97,000, of net Pennsylvania research and development credits
that
Cellegy has recognized as income in connection with the sale these credits.
Cellegy
recognized interest and other expense of approximately $198,000 in 2007 and
$808,000 in 2006. Amounts recognized in 2007 related primarily to interest
expense accreted in connection with the Ben Franklin note. Interest and other
expense for 2006 consisted primarily of interest expense related to the PDI
and
Ben Franklin notes payable. The PDI notes were renegotiated and paid in full
in
November 2006.
20
Gain
on
sale of technology of approximately $12.6 million in 2006 included $9.0 million
recognized in connection with the sale of intellectual property rights to
ProStrakan discussed above and approximately $3.6 million of unamortized
deferred revenue related to licensing agreements with ProStrakan under which
all
obligations were deemed to have been fulfilled in connection with the sale.
Cellegy renegotiated its outstanding debt obligations with PDI in 2006 which
resulted in the recognition of approximately $2.2 million in debt forgiveness
which was recorded in other income. Cellegy renegotiated its license agreement
with Neptune in 2006 and obtained a release from future obligations under this
agreement. In connection with the release, Cellegy paid Neptune $250,000 which
was recorded as other expense.
Cellegy
recorded approximately $189,000 in derivative revaluation income associated
with
the Kingsbridge and PIPE warrants in 2006 due to the decline in Cellegy’s share
price during this period.
Discontinued
Operations. On
April
11, 2006, Epsilon Pharmaceuticals Pty., Ltd purchased all of the shares of
Cellegy Australia and Cellegy has reflected Cellegy Australia as a discontinued
operation. The subsidiary was part of the Pharmaceutical Segment for the
Australian and Pacific Rim geographic areas. The purchase price for the shares
was $1.0 million plus amounts equal to the liquidated value of Cellegy
Australia's cash, accounts receivable and inventory. The total proceeds of
the
sale were approximately $1.3 million. Income from operations of the discontinued
operation was approximately $326,000 for 2006.
Liquidity
and Capital Resources
Our
cash
and cash equivalents were approximately $1.8 million and $3.8 million at
December 31, 2007 and 2006, respectively. Cash and cash equivalents
decreased approximately $2.0 million during 2007 as compared to 2006 due
primarily to operating expenses incurred in connection with Cellegy’s present
level of operations.
We
prepared the consolidated financial statements assuming that we will continue
as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities during the normal course of business. In preparing
these consolidated financial statements, consideration was given to Cellegy’s
future business alternatives as described below, which may preclude Cellegy
from
realizing the value of certain assets during their future course of business.
Cellegy’s
operations currently relate primarily to the intellectual property rights of
its
Biosyn subsidiary. While the Savvy Phase 3 contraception trial in the United
States is ongoing, Cellegy is not directly involved with the conduct and funding
thereof and, due to the cessation of the HIV Phase 3 trials in 2005 and 2006,
it
is uncertain whether Savvy will be commercialized or whether Cellegy will ever
realize revenues there from. We therefore expect negative cash flows to continue
for the foreseeable future. Cellegy believes that it presently has enough
financial resources to continue operations as they currently exist until
approximately September 30, 2008, absent unforeseen significant additional
expenses; however, it does not have the technological nor the financial assets
necessary to fund the expenditures that would be required to conduct the future
clinical and regulatory work necessary to commercialize Savvy or other product
candidates without additional funding.
On
February 12, 2008, Cellegy entered into a definitive merger agreement providing
for the acquisition of Cellegy by Adamis Pharmaceuticals Corporation. In
connection with the signing of the Merger Agreement, Cellegy issued to Adamis
an
unsecured convertible promissory note pursuant to which Cellegy agreed to lend
Adamis $500,000 to provide additional funds to Adamis during the pendency of
the
merger transaction. Any principal outstanding under the Promissory Note accrues
interest at 10% per annum. The Promissory Note becomes immediately due and
payable in the event that the Merger Agreement is terminated by Adamis or
Cellegy for certain specified reasons or on the later of (i) the sixteen month
anniversary of the issue date of the Promissory Note or (ii) the date that
is
two business days following the first date on which certain other notes issued
by Adamis to a third party have been repaid in full. If the Promissory Note
is
outstanding as of the closing of the merger transaction, the Promissory Note
will convert into shares of Adamis stock, and those shares will be cancelled.
There
is
no assurance that Cellegy will be able to close the transaction with Adamis.
If
the merger with Adamis is not completed, Cellegy’s board of directors will be
required to explore alternatives for Cellegy’s business and assets. These
alternatives might include seeking to sell remaining assets to third parties,
seeking the dissolution and liquidation of Cellegy, merging or combining
with
another company, or initiating bankruptcy proceedings. There can be no assurance
that any third party will be interested in merging with Cellegy or acquiring
the
remaining assets of Cellegy or would agree to a price and other terms that
we
would deem adequate. Although Cellegy may try to pursue an alternative strategic
transaction, it will likely have very limited cash resources, and if no such
alternate transaction can be negotiated and completed within a reasonable
period
of time will likely be forced to file for federal bankruptcy protection.
If
Cellegy files for bankruptcy protection, Cellegy will most likely not be
able to
raise any type of funding from any source. In that event, the creditors of
Cellegy would have first claim on the value of the assets of Cellegy which,
other than remaining cash, would most likely be liquidated in a bankruptcy
sale.
Cellegy can give no assurance as to the magnitude of the net proceeds of
such
sale and whether such proceeds would be sufficient to satisfy Cellegy’s
obligations to its creditors, let alone to permit any distribution to its
equity
holders. These factors, among others, raise substantial doubt about our ability
to continue as a going concern.
21
The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Any failure to dispel any
continuing doubts about our ability to continue as a going concern could
adversely affect our ability to enter into business combination or other
agreements, therefore making it more difficult to obtain required financing
on
favorable terms or at all. Such an outcome may negatively affect the market
price of our common stock and could otherwise have a material adverse effect
on
our business, financial condition and results of operations.
Recent
Accounting Pronouncements
SFAS No. 157,
Fair Value Measurements
SFAS No. 157,
“Fair
Value Measurements”
(“SFAS 157”), has been issued by the Financial Accounting Standards Board
(the “FASB”). This new standard provides guidance for using fair value to
measure assets and liabilities. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value but
does
not expand the use of fair value in any new circumstances. Currently, over
40
accounting standards within GAAP require (or permit) entities to measure assets
and liabilities at fair value. The standard clarifies that for items that are
not actively traded, such as certain kinds of derivatives, fair value should
reflect the price in a transaction with a market participant, including an
adjustment for risk, not just the Company’s mark-to-model value. SFAS 157
also requires expanded disclosure of the effect on earnings for items measured
using unobservable data. Under SFAS 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants in the market in which the
reporting entity transacts. In this standard, FASB clarified the principle
that
fair value should be based on the assumptions market participants would use
when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable
data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy.
The
FASB
agreed to defer the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value
in
the financial statements on a recurring basis. The FASB again rejected the
proposal of a full one-year deferral of the effective date of SFAS 157.
SFAS 157 was issued in September 2006, and is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Accordingly, the Company will adopt
this statement on October 1, 2007, for assets and liabilities not subject
to the deferral and October 1, 2008, for all other assets and liabilities.
The Company is currently assessing the impact of this statement.
SFAS No. 141
(Revised 2007), Business Combinations
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business
Combinations”
(“SFAS 141R”). Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific items, including:
|
·
|
acquisition
costs will be generally expensed as
incurred;
|
|
·
|
non-controlling
interests will be valued at fair value at the acquisition
date;
|
|
·
|
acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
in-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date until the
completion or abandonment of the associated research and development
efforts;
|
|
·
|
restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition
date; and
|
|
·
|
changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS 141R
also includes a substantial number of new disclosure requirements.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. , Earlier adoption is
prohibited. The Company is currently assessing the impact of this statement.
SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements — An
Amendment of ARB No. 51”
22
On
December 4, 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB
No. 51”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in
the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if
the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value
of
the non-controlling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its non-controlling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company believes
that this pronouncement will have no effect on its consolidated financial
statements.
FIN No. 48,
“Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109”
FASB
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
(“FIN 48”) was issued on July 13, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with FASB Statement No. 109, “Accounting
for Income Taxes”.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The new FASB standard also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition.
The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to
be
recognized upon adoption of FIN 48. The cumulative effect of applying the
provisions of FIN 48 should be reported as an adjustment to the opening
balance of retained earnings (or other appropriate components of equity in
the
consolidated balance sheet) for that fiscal year. Cellegy adopted FIN 48 on
January 1, 2007 and its implementation did not a
material impact on Cellegy’s financial position, results of operations or cash
flows.
| ITEM 8: |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
The
financial statements and financial information required by Item 8 are set forth
below on pages F-1 through F-25 of this report.
|
Index
to Financial Statements
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Consolidated
Balance Sheets
|
|
F-3
|
|
Consolidated
Statements of Operations
|
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Income
|
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
| ITEM 9A(T): |
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
our
disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the
period covered by this Form 10-K. Based on their evaluation, our principal
executive officer and principal accounting officer concluded that our disclosure
controls and procedures were effective.
23
Internal
Control over Financial Reporting
Management’s
report on Cellegy’s internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) in the Exchange Act), is included
in this Annual Report on Form 10-K, under the headings, “Management’s Annual
Report on Internal Control Over Financial Reporting” and is incorporated herein
by reference. This report shall not be deemed to be filed for purposes of
Section 18 of the Exchange Act or otherwise subject to the liabilities of that
section, unless Cellegy specifically states that the report is to be considered
“filed” under the Exchange Act or incorporates it by reference into a filing
under the Securities Act of the Exchange Act.
Management’s
Annual Report on Internal Control over Financial Reporting
The
management of Cellegy Pharmaceuticals, Inc. is responsible for establishing
and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is a process designed by, or under the supervision
of,
our Chief Executive Officer and Chief Financial Officer and effected by our
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject
to
risk that controls may become inadequate due to changes in conditions, or that
the degree of compliance with policies and procedures may deteriorate.
With
the
participation of the Chief Executive Officer and the Chief Financial Officer,
our management conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework and criteria established
in Internal
Control—Integrated Framework,
issued
by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission. Based on this evaluation, our management has concluded that our
internal control over financial reporting was effective as of December 31,
2007.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to the attestation by our registered public
accounting firm pursuant to the rules of the SEC that permit us to provide
only
management’s report in this Annual Report.
Changes
in Internal Controls
There
have been no changes in Cellegy’s internal controls over financial reporting
during the last fiscal year that have materially affected, or are reasonably
likely to materially affect, Cellegy’s internal controls over financial
reporting.
| ITEM 9B: |
None.
Directors
The
following table sets forth certain information concerning the directors of
Cellegy.
|
Name
|
|
Age
|
|
Principal Occupation
|
|
Director
Since
|
|
Richard
C. Williams
|
|
64
|
|
President,
Conner-Thoele Ltd., Interim Chief Executive Officer, Cellegy
Pharmaceuticals, Inc.
|
|
2003
|
|
|
|
|
|
|
|
|
|
Tobi
B. Klar, M.D.(3)
|
|
53
|
|
Dermatologist
and Associate Clinical Professor in Dermatology, Albert Einstein
Medical
Center
|
|
1995
|
|
|
|
|
|
|
|
|
|
John
Q. Adams, Sr.(1)(2)(3)
|
|
71
|
|
President,
J.Q. Enterprises
|
|
2003
|
|
|
|
|
|
|
|
|
|
Robert
B. Rothermel (2)
|
|
64
|
|
Partner,
CroBern Management Partnership
|
|
2004
|
|
|
|
|
|
|
|
|
|
Thomas
M. Steinberg(1)(2)(3)
|
|
51
|
|
Financial
Advisor
|
|
2003
|
(1)
Member of the Compensation Committee.
24
(2)
Member of the Audit Committee.
(3)
Member of the Nominating and Governance Committee.
Richard
C. Williams. Mr. Williams
became Chairman and Interim Chief Executive Officer in January 2005. He
first joined Cellegy as Chairman of the Board in November 2003. He is
President and Founder of Conner-Thoele Ltd., a consulting and financial advisory
firm specializing in health care acquisition analysis, strategy formulation
and
post-merger consolidation and restructuring. Mr. Williams served as Vice
Chairman, Strategic Planning of King Pharmaceuticals from 2000 to 2001 following
the acquisition by King of Medco Research where he was Chairman. He has held
a
number of executive level positions with other pharmaceutical companies.
Mr. Williams is a director of EP Med Systems, a public electrophysiology
diagnostic company and is Chairman and a director of ISTA Pharmaceuticals,
a
public emerging ophthalmology company. Mr. Williams received a B.A. degree
in economics from DePauw University and an M.B.A. from the Wharton School of
Finance.
Tobi
B. Klar, M.D. Dr.
Klar
became a director for Cellegy in June 1995. She is a physician, board certified
in dermatology. Since 1986, Dr. Klar has maintained a private dermatology
practice and has served as Co-Chairperson of the Department of Dermatology
at
New Rochelle Hospital Medical Center, New Rochelle, New York, and Associate
Clinical Professor in Dermatology at Albert Einstein Medical Center in New
York
City. Dr. Klar holds a M.D. from the State University of New York.
John
Q. Adams, Sr. Mr.
Adams
became a director in November 2003. He is President of J.Q Enterprises, a
holding company for his interests. He has had a long career in the
pharmaceutical industry and has started three companies: Baylor Laboratories,
sold to Norwich Eaton Pharmaceuticals; his second company, Allerderm, Inc.,
sold
to Virbac Inc. in France; and Adams Laboratories, a pharmaceutical company
focused on respiratory therapy, sold to Medeva Pharmaceuticals, where from
1991
to 1995, Mr. Adams was a director and was also President of Medeva
Americas. Mr. Adams later repurchased Adams Laboratories from Medeva in
1997 and served as Chairman and CEO; he resigned as CEO in May 2003. Adams
Laboratories was renamed Adams Respiratory Therapeutics, Inc. and became a
public company in 2005, and Mr. Adams resigned in October 2005 as Chairman
of
the Board. He currently serves on the Board of Directors of Respirics,
Inc. a private company based in North Carolina. He also retains
memberships and board positions in several professional and philanthropic
organizations including the American College of Allergy. He is also an
Honorary Fellow of the American Academy of Otolaryngology-Head and Neck
Surgery. Mr. Adams holds a degree in Biology from Heidelberg College and
was elected to the board of trustees in 2006.
Robert
B. Rothermel. Mr.
Rothermel became a director in January 2004. He is currently a partner of
CroBern Management Partnership, a healthcare management and venture capital
firm. In November 2002, he retired from Deloitte & Touche, where in his last
position, he was the global leader of the firm’s Enterprise Risk Services
practice. He previously served as the lead audit engagement partner for several
multi-national corporations, and has led professional services in specialty
areas such as IPOs, acquisitions, divestitures, restructurings, and litigation
services. Mr. Rothermel holds a B.S. degree in business administration from
Bowling Green State University.
Thomas
M. Steinberg.
Mr.
Steinberg became a director in November 2003. Since 1991, Mr. Steinberg has
been
an adviser to certain members of the Tisch family concerning certain of their
business interests and activities. Mr. Steinberg formerly worked for Goldman
Sachs & Company as a Vice President in its Investment Banking Division. He
has served as a director of a number of other public and private companies
including Gunther International, Infonxx, Inc., and Ableco. Mr. Steinberg
received an economics degree from Yale University where he graduated Summa
Cum
Laude and Phi Beta Kappa. He also received an M.B.A. from Stanford
University.
25
Board
Composition
Our
board
of directors (the “Board”) currently consists of five members. The term of
office of each person elected as a director will continue until the next annual
meeting of stockholders or until his or her successor has been elected and
qualified. The Board has determined that Messrs. Adams, Klar, Rothermel and
Steinberg qualify as independent directors in accordance with the listing
requirements of the NASDAQ Global Select Market (“NASDAQ”) based on
representations from each director that they meet the relevant NASDAQ and SEC
definitions. The NASDAQ definition of independence includes a series of
objective tests, such as that the director is not, and has not been for at
least
three years, one of our employees and that neither the director, nor any of
his
family members, has engaged in various types of business dealings with us.
In
addition, as further required by the NASDAQ rules, our board of directors has
made a subjective determination as to each independent director that no
relationship exists that, in the opinion of our Board, would interfere with
the
director’s exercise of independent judgment in carrying out the responsibilities
of a director. In making these determinations, our directors reviewed and
discussed information provided by the directors and us with regard to each
director’s business and personal activities as they may relate to us and our
management.
Executive
Officers
|
Richard
C. Williams
|
64
|
Chairman
and Interim Chief Executive Officer, Director
|
|
Robert
J. Caso
|
52
|
Vice
President, Finance and Chief Financial
Officer
|
Richard
C. Williams. Please
see above.
Robert
J. Caso. Mr. Caso
became Vice President, Finance and Chief Financial Officer in March 2005. From
January 2003 through 2004, he headed a multinational team in connection with
the
implementation of an SAP application for Johnson & Johnson’s Worldwide
Pharmaceutical Group. Subsequent to Johnson & Johnson’s acquisition of
Centocor in 1999, Mr. Caso held the Financial Controller position at Centocor.
From 1988 through 1995 he held various finance positions at Centocor and held
the Corporate Controller position from 1996 to 1999. Mr. Caso has substantial
experience in finance operations, accounting systems, business financing and
domestic and international taxation. Mr. Caso is a Certified Public Accountant
and holds a BS in Accounting from Villanova University and an MBA in Finance
from Lehigh University.
Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with Cellegy.
Audit
Committee
Messrs.
Adams, Rothermel and Steinberg are the current members of the Audit Committee.
Mr. Rothermel is the current chair of the committee. During fiscal 2007 the
Audit Committee held six meetings. The Audit Committee assists the full Board
in
its general oversight of our financial reporting, internal controls and audit
functions, and is directly responsible for the appointment, compensation and
oversight of the work of our independent registered public accounting firm.
Subject to an approved charter, the Audit Committee reviews our financial
results, accounting practices, internal control systems and the fee arrangements
with our independent auditors as well as their independence and performance,
and
meets with our independent auditors concerning the scope and terms of their
engagement and the results of their audits. The Board has determined that each
member of the Audit Committee is “independent” as defined by the applicable
NASDAQ rules and by the Sarbanes-Oxley Act of 2002 and regulations of the
Securities and Exchange Commission (“SEC”), and that Mr. Rothermel qualifies as
an “audit committee financial expert” as defined in such regulations. The Board
has adopted a written charter for the Audit Committee, a copy of which is filed
as an exhibit to this Report.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires that our executive
officers and directors, and persons who own more than 10% of a registered class
of our equity securities, file reports of ownership and changes in ownership
(Forms 3, 4 and 5) with the SEC. Executive officers, directors and
greater-than-10% holders are required to furnish us with copies of all of these
forms which they file.
26
Based
solely on our review of these reports or written representations from certain
reporting persons, we believe that during 2007, all filing requirements
applicable to our officers, directors, greater-than-10% beneficial owners and
other persons subject to Section 16(a) of the Exchange Act were met.
Code
of Business Conduct and Ethics
The
Board
has adopted a Code of Business Conduct and Ethics that applies to all directors,
officers and employees of Cellegy. Cellegy will provide any person, without
charge, a copy of the Code. Requests for a copy of the Code may be made by
writing to Cellegy at Cellegy Pharmaceuticals, Inc., 2085B Quaker Point Drive,
Quakertown, PA 18951, Attention: Chief Financial Officer.
ITEM
11: EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth all compensation awarded, earned or paid for services
rendered in all capacities to Cellegy during fiscal year 2007 and 2006 to (i)
each person who served as our chief executive officer during 2007 (“CEO”) , (ii)
the two most highly compensated officers other than the chief executive officer
and principal financial officer who were serving as executive officers at the
end of 2007 and whose total compensation for such year exceeded $100,000 and
(iii) up to two additional individuals for whom disclosures would have been
provided in this table, but for the fact that such persons were not serving
as
executive officers as of the end of 2007 (collectively, the “Named
Officers”).
|
Name
and Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Option
Awards ($) (1)
|
All
Other
Compensation ($)(2)
|
Total
($)
|
|||||||||||||
|
Richard
C. Williams
Chairman
and Interim
Chief
Executive Officer
|
2007
|
$
|
294,022
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
294,022
|
||||||||
|
|
2006
|
540,000
|
(3)
|
—
|
—
|
—
|
|
540,000
|
|||||||||||
|
Robert
J. Caso
Vice
President, Chief Financial Officer
|
2007
|
200,000
|
—
|
29,207
|
—
|
229,207
|
|||||||||||||
|
|
2006
|
200,000
|
—
|
29,084
|
201,333
|
(4)
|
430,417
|
||||||||||||
| (1) |
The
amounts in this column represent the amount recognized for financial
reporting purposes in 2007 in accordance with SFAS 123(R). See
Item 15 of
our 2007 Annual Report on Form 10-K.
|
| (2) |
Includes
matching contributions under the Company’s 401(k) plan for 2006, of $1,333
for Mr. Caso.
|
| (3) |
This
amount includes compensation of $60,000 accrued in 2005 and paid
in
2006.
|
| (4) |
Includes
a retention payment made to Mr. Caso for $200,000 in July
2006.
|
In
2007,
the following actions were taken concerning the compensation of our Named
Officers:
| · |
We
did not pay any bonuses in 2007 with respect to the 2006 year,
and we did
not pay any bonuses to any Named Officer with respect to the 2007
year.
|
| · |
We
did not grant any stock options to any of the Named Officers during
2007
or 2008 through the date of this
Report.
|
| · |
In
January 2007, at Mr. Williams’ suggestion, we reduced the rate of base
compensation payable to Mr. Williams to $25,000 per
month.
|
| · |
In
order to induce Mr. Caso to remain with Cellegy, in November 2007,
we
entered into a retention
arrangement.
|
27
Employment
Arrangements
Interim
Chief Executive Officer. In
November 2003, in consideration of the agreement of Richard C. Williams to
serve as Chairman of the Board and a director, we agreed to pay
Mr. Williams a fee of $100,000 per year. We also granted a stock option to
Mr. Williams to purchase 1,000,000 shares of common stock, with 400,000
shares at an exercise price of $2.89 per share, which was the closing market
price of the common stock on the grant date, and 600,000 shares at an exercise
price of $5.00 per share. The option is vested and exercisable in full
immediately, although a portion of the option, covering up to 600,000 shares
initially and declining over a three-year period, was subject to cancellation
to
the extent the portion had not been exercised, in the event that
Mr. Williams voluntarily resigned as Chairman and a director within certain
time periods. Following the resignation of our former chief executive officer,
in January 2005, Mr. Williams became interim Chief Executive Officer. In
connection with his appointment, we agreed to pay Mr. Williams a total of
$40,000 per month during his service as interim Chief Executive Officer (which
amount includes the payments for services as Chairman). In connection with
the
negotiation of overall compensation arrangements for Mr. Williams in 2005,
Mr.
Williams and Cellegy agreed that there would be no severance payments in the
event of a termination of employment. In January 2007, at Mr. Williams’
suggestion and in light of Cellegy’s goals, objectives and strategic
alternatives, we reduced the rate of base compensation payable to Mr. Williams
from $40,000 per month to $25,000 per month.
Chief
Financial Officer. We
have
an employment agreement with Robert J. Caso, who became our Chief Financial
Officer in March 2005. The agreement provides for compensation at an annual
base
rate of $200,000 per annum. The agreement also provided for the grant of a
stock
option to purchase up to 100,000 shares of common stock at an exercise price
equal to the fair market value of the common stock on the date of grant, vesting
annually in three installments. Ms. Caso also became a participant in Cellegy’s
Retention and Severance Plan, and entered into Cellegy’s standard indemnity
agreement for officers of Cellegy. On November 12, 2007, in order to induce
Mr.
Caso to remain with us, we entered into a retention agreement with Mr. Caso.
The
agreement provides that if Mr. Caso does not voluntarily terminate his
employment with Cellegy and is not terminated for cause or performance related
reasons (or as a result of death or disability), in each case before the earlier
to occur of (i) June 30, 2008 and (ii) the closing of a change in control
transaction (as defined in the agreement) (the “Retention Period”), then Cellegy
will pay Mr. Caso, on or before the date of the next normal payroll period
after
the end of the Retention Period when Cellegy processes payments an amount
representing a sum equal to six months of his base salary in effect on the
date
of the agreement. Mr. Caso agreed that (i) during the Retention Period he will
cooperate with Cellegy in implementing such strategic alternatives as Cellegy
may choose to pursue; (ii) except for the payment described above, he will
not
be entitled to receive severance or similar payments upon a termination of
his
employment; and (iii) he will sign a general release of claims in favor of
Cellegy at the time of his termination of employment. This retention payment
replaced, and was in lieu of, any compensation that Mr. Caso would have been
entitled to receive, including any under the Retention and Severance
Plan.
Bonus
Compensation
In
light
of developments concerning our business and our cash position during 2007,
the
Board did not establish any bonus plans nor pay any bonuses during
2007.
Equity
Compensation
We
did
not grant any new stock awards, stock options or other equity awards to any
executive officer during 2007, reflecting primarily Cellegy’s performance and
anticipated operations for 2007 and the current stock and option holdings of
the
executive officers.
Compliance
with Section 162(m) of the Internal Revenue Code of 1986.
Section
162(m) of the Internal Revenue Code generally disallows a tax deduction for
non-qualifying compensation in excess of $1,000,000 paid to in any taxable
year
to any individual who is the chief executive officer at the end of the taxable
year and the four other highest compensated officers of Cellegy during the
taxable year. Cash compensation for fiscal 2007 for any individual was not
in
excess of $1,000,000, and Cellegy does not expect cash compensation for fiscal
2008 to be in excess of $1,000,000. We manage our compensation programs in
light
of applicable tax provisions, including 162(m), and may revise compensation
plans from time to time to maximize deductibility. However, the compensation
committee and the Board have the right to approve compensation that does not
qualify for deduction when and if it deems it to be in the best interests of
Cellegy to do so.
28
Other
Benefits
Executive
officers are eligible to participate in all of our employee benefit plans,
such
as medical, dental, vision and group life insurance in each case on the same
basis as other employees. Under the terms of the employment agreements with
our
executive officers, we are obligated to reimburse each executive officer for
all
reasonable business other expenses incurred by them in connection with the
performance of his duties and obligations under the agreement.
Other
The
Compensation Committee, as plan administrator of Cellegy’s equity incentive
plans, has the authority in certain circumstances to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
the
Named Officers as well as other optionees under the plans in connection with
certain kinds of changes in control of Cellegy.
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information as of December 31, 2007, regarding
unexercised stock options held by each of our Named Officers.
|
Option
Awards
|
|||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
|||||||||
|
Richard
C. Williams
|
600,000
|
—
|
$
|
5.00
|
11/06/2013
|
||||||||
|
|
400,000
|
—
|
2.89
|
11/06/2013
|
|||||||||
|
Robert
J. Caso
|
66,666
|
(1)
|
33,334
|
1.75
|
03/30/2015
|
||||||||
|
(1)
|
The
shares of common stock underlying this option vest in three equal
annual
installments beginning March 30,
2006.
|
Potential
Payments Upon Termination or Change in Control
We
have
entered into employment agreements with certain of our Named Officers that
require us to make payments upon termination or a change of control in Cellegy.
These arrangements are discussed below.
Under
the
terms of the option agreement relating to the option held by Mr. Caso, upon
a
change in control of Cellegy, vesting of the option may accelerate and the
option may become exercisable in full. However, the exercise price of the option
is $1.75 per share, and as of December 31, 2007, the market price of our common
stock was $0.07 per share, and as a result no compensation would be payable
if a
change of control event had occurred as of that date. Other than that noted
above and under the heading “Employment Arrangements” above, there is no other
contract, agreement, plan or arrangement with any Named Officer providing for
payments following or in connection with, any termination of employment, other
than statutory obligations to pay accrued unused vacation time and to make
health insurance available, at Mr. Caso’s expense, pursuant to COBRA
requirements.
Other
than described above and under the heading “Employment Arrangements” above, we
do not have any contract, agreement, plan or arrangement with any Named Officer
providing for payment to the officer at, following, or in connection with any
termination, or a change of control of Cellegy or a change in such officer’s
responsibilities, other than statutory obligations to pay accrued but unused
vacation time and obligations to provide insurance benefits, at the officer’s
expense pursuant to the requirements of COBRA laws.
29
Retention
and Severance Plan; Options
The
Board
adopted a Retention and Severance Plan in April 2003, and Cellegy entered into
related agreements with each of its then officers and certain other employees.
Mr.
Williams and Mr. Caso are not participants in the plan and Cellegy intends
to
terminate the plan before the closing of the proposed merger transaction with
Adamis.
Other
The
Compensation Committee, as plan administrator of the Cellegy’s equity incentive
plans (the “Plans”), has the authority in certain circumstances to provide for
accelerated vesting of the shares of common stock subject to outstanding options
held by the Named Officers as well as other optionees under the Plans in
connection with a change in control of Cellegy, which the 2005 Equity Incentive
Plan (the “2005 Plan”) defines as: (a) a dissolution or liquidation of Cellegy,
(b) a merger or consolidation in which Cellegy is not the surviving corporation
(other than a merger or consolidation with a wholly-owned subsidiary, a
reincorporation of Cellegy in a different jurisdiction, or other transaction
in
which there is no substantial change in the shareholders of Cellegy or their
relative stock holdings and the awards granted under the Plans are assumed,
converted or replaced by the successor corporation, which assumption will be
binding on all Participants), (c) a merger in which Cellegy is the surviving
corporation but after which the shareholders of Cellegy immediately before
such
merger (other than any shareholder which merges (or which owns or controls
another corporation which merges) with Cellegy in such merger) cease to own
their shares or other equity interests in Cellegy, (d) the sale of substantially
all of the assets of Cellegy, or (e) any other transaction which qualifies
as a
"corporate transaction" under Section 424(a) of the Code wherein the
shareholders of Cellegy give up all of their equity interest in Cellegy
(except
for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of Cellegy from or by the shareholders of Cellegy).
Director
Compensation
The
following Director Compensation Table (“DCT”) sets forth summary information
concerning the compensation paid to our non-employee directors in 2007 for
services to our Company. There were no option grants to outside directors during
2007.
|
Name
|
Fees earned or
paid in cash
($)
|
Option Awards ($)
|
All Other
Compensation ($)(5)
|
Total
($)
|
|||||||||
|
John
Q. Adams, Sr.(1)
|
$
|
9,250
|
$
|
—
|
$
|
15,921
|
$
|
25,171
|
|||||
|
Tobi
B. Klar, M.D.(2)
|
5,750
|
—
|
7,810
|
13,560
|
|||||||||
|
Robert
B. Rothermel(3)
|
26,750
|
—
|
21,527
|
48,277
|
|||||||||
|
Thomas
M. Steinberg(4)
|
7,750
|
—
|
7,810
|
15,560
|
|||||||||
|
Total
|
$
|
49,500
|
$
|
—
|
$
|
53,068
|
$
|
102,568
|
|||||
|
(1)
|
A
total of 54,000 options were outstanding as of December 31, 2007,
of which
32,375 were exercisable as of December 31, 2007.
|
|
(2)
|
A
total of 100,944 options were outstanding as of December 31, 2007,
of
which 84,944 were exercisable as of December 31, 2007.
|
|
(3)
|
Of
this amount, $23,750 is for fees related to services provided in
2006 but
paid in 2007. A total of 54,000 options were outstanding as of December
31, 2007, of which 26,750 were exercisable as of December 31, 2007.
|
|
(4)
|
A
total of 54,000 options were outstanding as of December 31, 2007,
of which
32,375 were exercisable as of December 31, 2007.
|
|
(5)
|
The
amounts in this column reflect the compensation expense recognized
for
2007 financial statement reporting purposes related to stock options
in
accordance with FAS 123R.
|
30
We
reimburse our non-employee directors for all reasonable out-of-pocket expenses
incurred in the performance of their duties as directors. Directors who are
officers or employees of Cellegy are not compensated for Board services in
addition to their regular employee compensation.
Annual
cash compensation:
Effective January 1, 2007, the Board eliminated the annual retainers for service
on the Board and committees of the Board. During fiscal 2007, each member of
the
Board of Directors was eligible to receive cash compensation consisting
of a meeting fee of $1,500 for each meeting attended.
Equity
Compensation:
During
fiscal 2007, each member of the Board of Directors was eligible to receive
option awards under the terms of Cellegy’s 2005 Plan. New members of the Board
receive an initial option grant to purchase 30,000 shares of Cellegy’s common
stock with one-third of the shares vesting after one year from the date of
grant
and one-third of the shares vesting annually thereafter. Continuing members
of
the Board, who have served at least twelve months receive an annual option
grant
of 12,000 shares of common stock, reduced to be granted on the first business
day after Cellegy’s annual shareholder meeting, with vesting annually over a
three-year period contingent on continued service on the Board of Directors
for
one year. No such options were issued in 2007.
See
also
“Certain Relationships and Related Transactions” for additional information
concerning compensation to directors.
| ITEM 12: |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Equity
Compensation Plan Information
The
following table sets forth, as of December 31, 2007, information with respect
to
our equity compensation plans, including our 1995 Equity Incentive Plan, the
1995 Directors’ Stock Option Plan and the 2005 Equity Incentive Plan, and with
respect to certain other options and warrants, as follows:
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)
|
|||||||
|
Plan
Category
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved by security holders
|
1,363,944
|
$
|
3.91
|
963,333
|
||||||
|
|
||||||||||
|
Equity
compensation plans not approved by security holders
|
81,869
|
(1)
|
11.72
|
—
|
||||||
|
|
32,229
|
(2)
|
6.93
|
—
|
||||||
|
Total
|
1,478,042
|
$
|
4.42
|
963,333
|
||||||
|
(1)
|
Represents
shares subject to outstanding warrants and have exercise prices ranging
from $5.84 to $17.52 per share and expire between the years 2013
and
2014.
|
|
(2)
|
Represents
options to purchase common stock and are fully vested with exercise
prices
ranging from $0.06 to $21.02 and expire between the years 2007 and
2015.
|
31
The
following table sets forth certain information regarding the beneficial
ownership known to us of the common stock of Cellegy as of February 29, 2008,
by
(i) each person known to Cellegy to be a beneficial owner of more than 5%
of the outstanding shares of common stock, (ii) each director,
(iii) each Named Officer and (iv) all current directors and executive
officers as a group.
|
|
Shares Beneficially Owned(1)
|
||||||
|
Name
|
Number
|
Percent
|
|||||
|
SJ
Strategic Investments, LLC(2)
|
7,343,993
|
24.7
|
%
|
||||
|
Andrew
H. Tisch (3)
|
1,104,886
|
3.70
|
|||||
|
David
R. Tisch (3)
|
1,104,886
|
3.70
|
|||||
|
James
S. Tisch (3)
|
1,104,886
|
3.70
|
|||||
|
Thomas
J. Tisch (3)
|
1,104,886
|
3.70
|
|||||
|
Richard
C. Williams(4)
|
1,030,000
|
3.3
|
|||||
|
Robert
J. Caso (5)
|
100,000
|
*
|
|||||
|
Tobi
B. Klar, M.D.(6)
|
130,328
|
*
|
|||||
|
John
Q. Adams(7)
|
54,000
|
*
|
|||||
|
Robert
B. Rothermel(7)
|
54,000
|
*
|
|||||
|
Thomas
M. Steinberg(7)
|
54,000
|
*
|
|||||
|
All
directors and officers as a group; 6 Persons (8)
|
1,608,042
|
5.1
|
|||||
*less
than 1%
|
(1)
|
Based
upon information supplied by officers, directors and principal
stockholders. Beneficial ownership is determined in accordance with
rules of the SEC that deem shares to be beneficially owned by any
person who has or shares voting or investment power with respect
to such
shares. Unless otherwise indicated, the persons named in this table
have
sole voting and sole investing power with respect to all shares shown
as
beneficially owned, subject to community property laws where applicable.
Shares of common stock subject to an option that is currently exercisable
or exercisable within 60 days of the date of the table are deemed
to be
outstanding and to be beneficially owned by the person holding such
option
for the purpose of computing the percentage ownership of such person
but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Except as otherwise indicated, the
address of each of the persons in this table is as follows: c/o Cellegy
Pharmaceuticals, Inc., 2085B Quaker Point Drive, Quakertown, PA
18951.
|
|
(2)
|
Based
on filings by SJ Strategic Investments, LLC. with the SEC. Includes
290,000 shares subject to warrants. While SJ Strategic Investments,
LLC.
believes it possesses sole voting and investment power over such
shares,
John M. Gregory may be deemed to also have voting and investment
power over such shares due to his position as Managing Member and
Chief
Manager of SJ Strategic Investments, LLC., pursuant to the entity’s
Operating Agreement. While SJ Strategic Investments, LLC disclaims
the
existence of a group, due to the indirect beneficial ownership of
its
members, such members may be deemed to constitute a
group.
|
|
(3)
|
Based
on filings on Schedule 13D with the SEC by Andrew H. Tisch, Daniel R.
Tisch, James S. Tisch, Thomas J. Tisch, Jessica S. Tisch,
Benjamin Tisch, Merryl H. Tisch and Thomas M. Steinberg
(the “Reporting Persons”). The Schedule 13D, as amended through the date
of this report, covered a total of 5,525,168 shares, or approximately
18%
of the outstanding shares. According to information furnished by
the
Reporting Persons, 1,104,886 shares are beneficially owned by each of
Andrew H. Tisch, Daniel R. Tisch and James S. Tisch;
1,152,586 shares are beneficially owned by Thomas J. Tisch;
6,400 shares are beneficially owned by each of Jessica S. Tisch and
Benjamin Tisch and by Merryl H. Tisch as custodian for Samuel
Tisch; and 17,125 shares are beneficially owned by Thomas M.
Steinberg. Each of the Reporting Persons has disclaimed beneficial
ownership of any shares owned by any other Reporting Person, except
to the
extent that beneficial ownership has been expressly reported in filings
with the Securities and Exchange Commission. The address of Andrew H.
Tisch, James S. Tisch, Thomas J. Tisch and Thomas M.
Steinberg is 667 Madison Avenue, New York, N.Y. 10021, of
Daniel R. Tisch is c/o Tower View LLC, 500 Park Avenue, New York,
N.Y. 10022, and of Benjamin Tisch, Jessica S. Tisch and
Merryl H. Tisch is c/o Tisch Financial Management, 655 Madison
Avenue, 19th
Floor,
New York, N.Y. 10021.
|
32
|
(4)
|
Includes
1,000,000 shares issuable upon the exercise of stock
options.
|
|
(5)
|
Includes
100,000 shares subject to stock
options.
|
|
(6)
|
Includes
100,944 shares issuable upon the exercise of stock options.
|
|
(7)
|
Includes
54,000 shares issuable upon the exercise of stock options.
|
|
(8)
|
Includes
1,362,944 shares issuable upon the exercise of stock
options.
|
Certain
information responsive to this Item is disclosed in Item 11: “Executive
Compensation,” and the disclosures under such items are incorporated herein by
reference.
During
2007, we believe that there has not been any transaction or series of similar
transactions to which we were or are to be a party in which the amount involved
exceeds $120,000 and in which any director, executive officer or holder of
more
than 5% of our common stock, or members of any such person’s immediate family,
had or will have a direct or indirect material interest, other than compensation
described in “Executive Compensation,” including retention bonus payments
severance compensation and payments for consulting services to certain of the
Named Officers. Pursuant to the charter of the Audit Committee, the Audit
Committee has the responsibility to review and approve the terms of all
transactions between Cellegy and any related party, as that term is defined
under applicable NASDAQ listing standards; however, compensation arrangements
with related parties are reviewed by the compensation committee or the entire
Board, and the Board retains the authority to review and approve other related
party transactions. In connection with consideration of related party
transactions, the Audit Committee or the Board requires full disclosure of
material facts concerning the relationship and financial interest of the
relevant individuals involved in the transaction, and then determines whether
the transaction is fair to Cellegy. Approval is by means of a majority of the
independent directors entitled to vote on the matter.
We
intend
that any such future transactions will be approved by the Audit Committee of
the
Board of Directors and will be on terms no less favorable to our Company than
could be obtained from unaffiliated third parties.
The
following table presents fees for professional services rendered by Mayer
Hoffman McCann P.C. (“MHM”) for the audit of our annual consolidated financial
statements for the years ended December 31, 2007 and 2006, and fees billed
for
audit-related services, tax services and all other services rendered to us
by
MHM. The table also presents fees paid in 2006 for professional services
rendered by PricewaterhouseCoopers LLP (“PwC”) for the audit of our annual
consolidated financial statements for the year end of December 31, 2005, and
fees billed for audit-related services, tax services, and all other services
rendered to us by PwC for 2005, during the time that PwC served as our principal
accountant.
|
Fees
|
2007
|
2006
|
|||||
|
Audit
fees and expenses
|
$
|
77,500
|
$
|
281,762
|
(1)
|
||
|
Audit-related
fees and expenses
|
4,992
|
23,978
|
|||||
|
Tax
fees
|
20,200
|
20,450
|
|||||
|
All
other fees
|
-
|
2,100
|
|||||
|
Total
|
$
|
102,692
|
$
|
328,290
|
|||
|
(1)
|
Includes
$136,186 billed by PwC and $145,576 billed by MHM in
2006.
|
33
Audit
fees and expenses. Audit
fees relate to services related to the audit of Cellegy’s consolidated financial
statements and reviews of consolidated financial statements included in
Cellegy’s quarterly reports on Form 10-Q, including review of registration
statements filed with the SEC.
Audit-related
fees and expenses. This
category includes fees for assurance and related services that are reasonably
related to the performance of the audit or review of Cellegy’s consolidated
financial statements and are not included under “Audit Fees,” and include fees
for consultations concerning financial accounting and reporting
matters.
Tax
fees. Tax
fees
include fees for services rendered in connection with preparation of federal,
state and foreign tax returns and other filings and tax consultation
services.
All
other fees.
All
other fees include amounts charged by Cellegy’s auditor in connection with
services not generally considered to be audit or audit-related
matters.
Pre-Approval
Policies
Under
our
pre-approval policies with respect to our independent accountants, the Audit
Committee pre-approves all audit and non-audit services provided by our
independent accountants prior to the engagement of the independent accountants
for such services. The Chairman of the Audit Committee has the authority to
approve any additional audit services and permissible non-audit services,
provided the Chairman informs the Audit Committee of such approval at its next
regularly scheduled meeting.
All
fees
reported under the headings Audit fees and expenses, Audit-related fees and
expenses, Tax fees and All other fees above for 2007 were approved by the Audit
Committee before the respective services were rendered, which concluded that
the
provision of such services was compatible with the maintenance of the
independence of the firm providing those services in the conduct of its auditing
functions. Accordingly, none of the fees reported under the headings were
approved by the Audit Committee pursuant to federal regulations that permit
the
Audit Committee to waive its pre-approval requirement under certain
circumstances.
| ITEM 15: |
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
Exhibits
The
following exhibits are attached hereto or incorporated herein by reference:
|
Exhibit
Number
|
|
Exhibit Title
|
|
2.1
|
|
Agreement
and Plan of Share Exchange dated as of October 7, 2004, by and
between Cellegy and Biosyn, Inc. (Incorporated by reference to
Exhibit 2.1 to Cellegy’s Report on Form 8-K filed
October 26, 2004.)
|
|
2.2
|
Share
Purchase Agreement dated as of March 31, 2006 by and between the
Registrant and Epsilon Pharmaceuticals Pty. Ltd. (Incorporated by
reference to Exhibit 2.1 to Cellegy’s Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 2006.)
|
|
|
2.3
|
Asset
Purchase Agreement dated September 26, 2006, between the Registrant
and
Strakan International Limited. (Incorporated by reference to Exhibits
filed with the Cellegy’s Schedule 14A, which includes Cellegy’s Report on
Form 8-K, filed September 27, 2006, with the SEC.)
|
|
|
2.4
|
Agreement
and Plans of Reorganization dated as of February 12, 2008, by and
among
Cellegy Pharmaceuticals, Inc., Cellegy Holdings, Inc. and Adamis
Pharmaceuticals Corporation. (Incorporated by reference to Exhibit
2.1 to
the Company’s Report on Form 8-K filed February 13,
2008.)
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation. (Incorporated by reference
to
Exhibit 3.1 to Cellegy’s Report on Form 8-K filed with the SEC
on September 3, 2004.)
|
34
|
3.2
|
|
Bylaws
of Cellegy. (Incorporated by reference to Exhibit 3.2 to Cellegy’s
Report on Form 8-K filed with the SEC on September
3, 2004.)
|
|
4.1
|
|
Specimen
Common Stock Certificate. (Incorporated by reference to Exhibit 4.1
to Cellegy’s Report on Form 8-K filed with the SEC on September
3, 2004.)
|
|
*10.1
|
|
1995
Equity Incentive Plan. (Incorporated by reference to Exhibit 4.03 to
Cellegy’s Registration Statement on Form S-8, file no. 333-91588,
filed on June 28, 2002.)
|
|
*10.2
|
|
Form of
Option Agreement under the 1995 Equity Incentive Plan. (Incorporated
by
reference to Exhibit 4.05 to Cellegy’s Post-effective Amendment
No. 1 to Registration Statement on Form S-8, file no. 333-91588,
filed on September 7, 2004 (the “2004
Form S-8”).)
|
|
*10.3
|
|
1995
Directors’ Stock Option Plan. (Incorporated by reference to
Exhibit 10.8 to Cellegy’s Quarterly Report on Form 10-Q for the
fiscal quarter ended filed June 30, 2002.)
|
|
*10.4
|
|
Form of
option agreement under the 1995 Directors’ Stock Option Plan.
(Incorporated by reference to Exhibit 4.07 to the 2004 Form S-8.
(Incorporated by reference to Exhibit 10.6 to Cellegy’s Annual Report on
Form 10-K for the year ended December 31, 2004 (the "2004 Form
10-K").)
|
|
*10.5
|
|
Employment
Agreement, effective January 1, 2003, between Cellegy and K. Michael
Forrest. (Incorporated by reference to Exhibit 10.24 to Cellegy’s Annual
Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form
10-K”).)
|
|
10.6
|
|
Exclusive
License Agreement dated as of December 31, 2002, by and between
Cellegy and PDI, Inc. (Confidential treatment has been requested with
respect to portions of this agreement.) (Incorporated herein by reference
to Exhibit 10.10 to Cellegy’s Annual Report on Form 10-K for the
year ended December 31, 2002.)
|
|
*10.7
|
|
Retention
and Severance Plan. (Incorporated by reference to Exhibit 10.01 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended March
31,
2003.)
|
|
*10.8
|
|
Form of
Agreement of Plan Participation under Retention and Severance Plan.
(Incorporated by reference to Exhibit 10.01 to Cellegy’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31,
2003.)
|
|
*10.9
|
|
Letter
agreement dated November 6, 2003 between Cellegy and Richard C.
Williams. (Incorporated by reference to Exhibit 10.14 to the 2003
Form 10-K.)
|
|
*10.10
|
|
Stock
option agreement dated November 6, 2003 between Cellegy and Richard
C. Williams. (Incorporated by reference to Exhibit 10.15 to the 2003
Form 10-K.)
|
|
*10.11
|
|
Form of
Indemnity Agreement between Cellegy and its directors and executive
officers. (Incorporated by reference to Appendix B to Cellegy’s definitive
proxy statement filed on April 28, 2004.)
|
|
10.12
|
|
Registration
Rights Agreement dated as of October 1, 2004 between Cellegy and
certain former stockholders of Biosyn, Inc. (Incorporated by
reference to Exhibit 10.1 to Cellegy’s Report on Form 8-K filed
October 26, 2004.)
|
|
10.13
|
|
Exclusive
License Agreement for Tostrex dated as of July 9, 2004, by and
between ProStrakan International Limited and Cellegy. (Incorporated
by
reference to Exhibit 10.1 to Cellegy’s Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2004.)
(Confidential treatment has been requested for portions of this
agreement.)
|
|
10.14
|
|
Exclusive
License and Distribution Agreement for Rectogesic dated as of
December 9, 2004, by and between ProStrakan International Limited and
Cellegy. (Confidential treatment has been requested for portions
of this
agreement.) (Incorporated by reference to Exhibit 10.20 to Cellegy’s 2004
Annual Report on Form 10-K.)
|
|
10.15
|
|
Agreement
dated as of October 8, 1996 by and among Biosyn, Inc., Edwin B.
Michaels and E.B. Michaels Research Associates, Inc.
(Confidential treatment has been requested with respect to portions
of
this agreement.) (Incorporated by reference to Exhibit 10.21 to Cellegy’s
2004 Annual Report on Form 10-K.)
|
|
10.16
|
|
Patent
License Agreement by and among Biosyn, Inc., and certain agencies of
the United States Public Health Service. (Confidential treatment
has been
requested with respect to portions of this agreement.) (Incorporated
by
reference to Exhibit 10.22 to Cellegy’s 2004 Annual Report on Form
10-K.)
|
|
10.17
|
|
License
Agreement dated as of May 22, 2001, by and between Crompton
Corporation and Biosyn, Inc. (Confidential treatment has been
requested for portions of this agreement.) Incorporated by reference
to
Exhibit 10.23 to Cellegy’s 2004 Annual Report on Form
10-K.)
|
|
*10.18
|
|
2005
Equity Incentive Plan. (Incorporated by reference to Exhibit 10.24
to
Cellegy’s Annual Report on Form 10-K for the year ended December 31,
2005).
|
|
*10.19
|
|
Forms
of Option Agreements under the 2005 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.25 to Cellegy’s 2005 Annual Report on Form
10-K.)
|
|
10.20
|
|
First
Amended and Restated Exclusive License and Distribution Agreement
dated as of November 9, 2005, between Cellegy and ProStrakan International
Limited. (Confidential treatment has been requested for portions
of this
exhibit.) (Incorporated by reference to Exhibit 10.30 to Cellegy’s 2005
Annual Report on Form 10-K.)
|
|
10.21
|
|
First
Amended and Restated Exclusive License Agreement dated as of January
16,
2006, between Cellegy and ProStrakan International Limited. (Confidential
treatment has been requested for portions of this exhibit.) (Incorporated
by reference to Exhibit 10.31 to Cellegy’s 2005 Annual Report on Form
10-K.)
|
35
|
10.22
|
Termination
Agreement and Release of Claims dated as of September 22, 2006, by
and
between the Registrant and Stephen R. Gorfine, M.D., as representative.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September
27,
2006, with the SEC.)
|
|
|
10.23
|
Letter
Agreement dated September 20, 2006, between the Registrant and PDI,
Inc.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September
27,
2006, with the SEC.)
|
|
|
10.24
|
Promissory
Note dated September 26, 2006, in favor of Strakan International
Limited.
(Incorporated by reference to Exhibit 10.3 to Cellegy’s Quarterly Report
on Form 10-Q for the period ended September 30, 2006.)
|
|
|
10.25
|
Patent
Collateral Assignment and Security Agreement dated September 26,
2006,
between the Registrant and Strakan International Limited. (Incorporated
by
reference to Exhibit 10.4 to Cellegy’s Quarterly Report on Form 10-Q for
the period ended September 30, 2006.)
|
|
|
10.26
|
License
Agreement dated January 30, 2006, by and between CONRAD, Eastern
Virginia
Medical School, and Biosyn, Inc. (Confidential treatment has been
requested for portions of this agreement) (Incorporated
by reference to Exhibit 10.36 to Cellegy’s Annual Report on form 10-K for
the year ended December 31, 2006).
|
|
|
*10.27
|
Retention
Letter Agreement dated November 14, 2007, between Cellegy and Robert
J.
Caso. (Incorporated by reference to Exhibit 10.1 to Cellegy’s Report on
Form 8-K filed on November 14, 2007.)
|
|
|
21.1
|
|
Subsidiaries
of the Registrant.
|
|
23.1
|
|
Consent
of Mayer Hoffman McCann P.C., Independent Registered Public Accounting
Firm.
|
|
24.1
|
|
Power
of Attorney (See signature page.)
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
99.1
|
Charter
of the Audit Committee
|
|
*
|
Represents
a management contract or compensatory plan or
arrangement.
|
36
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Quakertown, Commonwealth of Pennsylvania, March 20, 2008.
|
Cellegy
Pharmaceuticals, Inc.
|
||
| |
|
|
| By: |
/s/
Richard C. Williams
|
|
|
Richard
C. Williams
|
||
|
Chairman
and Interim Chief Executive
Officer
|
||
37
Power
of Attorney
Each
person whose signature appears below constitutes and appoints each of Richard
C.
Williams and Robert J. Caso, true and lawful attorney-in-fact, with the power
of
substitution, for him in any and all capacities, to sign amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact,
or
his substitute or substitutes, may do or cause to be done by virtue
thereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
|
Name
|
|
Title
|
|
Date
|
||||||
|
Principal
Executive Officer:
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
/s/
RICHARD C. WILLIAMS
|
|
Chairman,
Interim Chief Executive Officer
|
|
March
20, 2008
|
||||||
|
Richard
C. Williams
|
|
and
Director
|
|
|
||||||
|
|
|
|
|
|
||||||
|
Principal
Financial Officer
|
|
|
|
|
||||||
|
and
Principal Accounting Officer:
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
/s/
ROBERT J. CASO
|
|
Vice
President, Finance, Chief Financial
|
|
March
20, 2008
|
||||||
|
Robert
J. Caso
|
|
Officer
and Secretary
|
|
|
||||||
|
|
|
|
|
|
||||||
|
Directors:
|
|
|
|
|
||||||
|
/s/
JOHN Q. ADAMS
|
|
Director
|
|
March
20, 2008
|
||||||
|
John
Q. Adams, Sr.
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
/s/
TOBI B. KLAR, M.D.
|
|
Director
|
|
March
20, 2008
|
||||||
|
Tobi
B. Klar, M.D.
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
/s/
ROBERT B. ROTHERMEL
|
|
Director
|
|
March
20, 2008
|
||||||
|
Robert
B. Rothermel
|
|
|
|
|
||||||
|
|
|
|
|
|
||||||
|
/s/
THOMAS M. STEINBERG
|
|
Director
|
|
March
20, 2008
|
||||||
|
Thomas
M. Steinberg
|
|
|
|
|
||||||
38
Index
to Consolidated Financial Statements
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Consolidated
Balance Sheets
|
|
F-3
|
|
Consolidated
Statements of Operations
|
|
F-4
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive
Income
|
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
F-1
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
Cellegy
Pharmaceuticals, Inc.
We
have
audited the accompanying consolidated balance sheets of Cellegy Pharmaceuticals
Inc. and its subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (PCAOB). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 consolidated 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 consolidated financial position of Cellegy
Pharmaceuticals Inc. and its subsidiary as of December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the years
then
ended in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses
from operations and has limited working capital to pursue its business
alternatives. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans with regard to these matters
are also described in Note 1. The 2007 and 2006 consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Mayer
Hoffman McCann P.C.
Plymouth
Meeting, Pennsylvania
March
19,
2008
F-2
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,826,614
|
$
|
3,803,832
|
|||
|
Accounts
receivable
|
-
|
62,605
|
|||||
|
Prepaid
expenses and other current assets
|
267,478
|
278,740
|
|||||
|
Total
assets
|
$
|
2,094,092
|
$
|
4,145,177
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
-
|
$
|
174,839
|
|||
|
Accrued
expenses and other current liabilities
|
396,088
|
536,591
|
|||||
|
Current
portion of notes payable
|
-
|
44,700
|
|||||
|
Total
current liabilities
|
396,088
|
756,130
|
|||||
|
Notes
payable
|
507,067
|
322,125
|
|||||
|
Derivative
instruments
|
1,189
|
3,987
|
|||||
|
Total
liabilities
|
904,344
|
1,082,242
|
|||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
Stock, no par value; 5,000,000 shares authorized;
|
|||||||
|
no
shares issued and outstanding at December 31, 2007 and
2006
|
|||||||
|
Common
stock, par value $.0001; 50,000,000 shares authorized;
|
|||||||
|
29,834,796
shares issued and outstanding at December 31, 2007 and
2006
|
2,984
|
2,984
|
|||||
|
Additional
paid-in capital
|
125,753,019
|
125,699,145
|
|||||
|
Accumulated
deficit
|
(124,566,255
|
)
|
(122,639,194
|
)
|
|||
|
Total
stockholders' equity
|
1,189,748
|
3,062,935
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
2,094,092
|
$
|
4,145,177
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
|
Years
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Revenues:
|
|||||||
|
Licensing,
milestone and development funding
|
$
|
-
|
$
|
477,082
|
|||
|
Grants
|
-
|
1,925,779
|
|||||
|
Product
sales
|
-
|
257,197
|
|||||
|
Total
revenues
|
-
|
2,660,058
|
|||||
|
Costs
and expenses:
|
|||||||
|
Cost
of product sales
|
-
|
257,197
|
|||||
|
Research
and development
|
23,022
|
1,812,088
|
|||||
|
Selling,
general and administrative
|
1,798,626
|
5,025,786
|
|||||
|
Equipment
fair market value adjustment
|
-
|
250,729
|
|||||
|
Total
costs and expenses
|
1,821,648
|
7,345,800
|
|||||
|
Operating
loss
|
(1,821,648
|
)
|
(4,685,742
|
)
|
|||
|
Other
income (expenses):
|
|||||||
|
Interest
and other income
|
85,334
|
122,983
|
|||||
|
Gain
on sale of technology
|
-
|
12,615,540
|
|||||
|
Debt
forgiveness
|
4,700
|
2,162,776
|
|||||
|
Contingency
settlement
|
-
|
(250,000
|
)
|
||||
|
Interest
and other expense
|
(198,245
|
)
|
(807,945
|
)
|
|||
|
Derivative
revaluation
|
2,798
|
188,583
|
|||||
|
Total
other income (expenses)
|
(105,413
|
)
|
14,031,937
|
||||
|
Net
income (loss) from continuing operations applicable
|
|||||||
|
to
common stockholders
|
(1,927,061
|
)
|
9,346,195
|
||||
|
Discontinued
operations
|
|||||||
|
Income
from operations of the discontinued component,
|
|||||||
|
including
gain on the disposal of $249,451, in 2006
|
-
|
325,610
|
|||||
|
Net
income (loss) applicable to common stockholders
|
$
|
(1,927,061
|
)
|
$
|
9,671,805
|
||
|
From
continuing operations
|
$
|
(0.06
|
)
|
$
|
0.31
|
||
|
From
discontinued operations
|
-
|
-
|
|||||
|
Basic
net income (loss) per common share:
|
$
|
(0.06
|
)
|
$
|
0.31
|
||
|
From
continuing operations
|
$
|
(0.06
|
)
|
$
|
0.31
|
||
|
From
discontinued operations
|
-
|
-
|
|||||
|
Diluted
net income (loss) per common share:
|
$
|
(0.06
|
)
|
$
|
0.31
|
||
|
Weighted
average number of common shares used in per share
|
|||||||
|
calculations:
|
|||||||
|
Basic
|
29,834,796
|
29,833,609
|
|||||
|
Diluted
|
29,834,796
|
29,851,254
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive
Income
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
||||||||
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Stockholders'
|
|
||||||
|
|
|
Common
Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Equity
|
|
||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
(Loss)
|
|
Deficit
|
|
(Deficit)
|
|||||||
|
Balances
at December 31, 2005
|
29,831,625
|
$
|
2,983
|
$
|
125,547,788
|
$
|
283,694
|
$
|
(132,310,999
|
)
|
$
|
(6,476,534
|
)
|
||||||
|
Exercise
of options to purchase common stock
|
3,171
|
1
|
895
|
-
|
-
|
896
|
|||||||||||||
|
Noncash
compensation expense related to stock options
|
-
|
-
|
150,462
|
-
|
-
|
150,462
|
|||||||||||||
|
Unrealized
loss on investments
|
-
|
-
|
-
|
(8,598
|
)
|
-
|
(8,598
|
)
|
|||||||||||
|
Loss
on foreign currency translation
|
-
|
-
|
-
|
(275,096
|
)
|
-
|
(275,096
|
)
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
9,671,805
|
9,671,805
|
|||||||||||||
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
9,388,111
|
|||||||||||||
|
Balances
at December 31, 2006
|
29,834,796
|
2,984
|
125,699,145
|
-
|
(122,639,194
|
)
|
3,062,935
|
||||||||||||
|
Noncash
compensation expense related to stock options
|
-
|
-
|
53,874
|
-
|
-
|
53,874
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
(1,927,061
|
)
|
(1,927,061
|
)
|
||||||||||||
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Balances
at December 31, 2007
|
29,834,796
|
$
|
2,984
|
$
|
125,753,019
|
$
|
-
|
$
|
(124,566,255
|
)
|
$
|
1,189,748
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Cash Flows
|
Years
Ended December 31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
Operating
activities
|
|||||||
|
Net
income (loss)
|
$
|
(1,927,061
|
)
|
$
|
9,671,805
|
||
|
Adjustments
to reconcile net income (loss) from continuing
|
|||||||
|
operations
to net cash used in operating activities:
|
|||||||
|
Bad
debt expense and other noncash items
|
-
|
21,861
|
|||||
|
Depreciation
and amortization expenses
|
-
|
121,132
|
|||||
|
Intangible
assets amortization and impairment
|
-
|
196,204
|
|||||
|
Loss
on sale of property and equipment
|
-
|
375,286
|
|||||
|
Equity
compensation expense
|
53,874
|
150,462
|
|||||
|
Derivative
revaluation
|
(2,798
|
)
|
(188,583
|
)
|
|||
|
Interest
accretion on notes payable
|
184,942
|
762,872
|
|||||
|
PDI
settlement
|
-
|
(2,162,776
|
)
|
||||
|
MPI
settlement
|
(4,700
|
)
|
-
|
||||
|
Gain
on sale of technology
|
-
|
(12,615,540
|
)
|
||||
|
Gain
on sale of Australian subsidiary
|
-
|
(249,451
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Prepaid
expenses and other current assets
|
11,262
|
778,106
|
|||||
|
Inventory
|
-
|
257,197
|
|||||
|
Accounts
receivable
|
62,605
|
989,507
|
|||||
|
Accounts
payable
|
(174,839
|
)
|
(1,568,814
|
)
|
|||
|
Accrued
expenses and other current liabilities
|
(140,503
|
)
|
(1,847,107
|
)
|
|||
|
Other
long-term liabilities
|
-
|
(7,663
|
)
|
||||
|
Deferred
revenue
|
-
|
273,018
|
|||||
|
Net
cash used in operating activities
|
(1,937,218
|
)
|
(5,042,484
|
)
|
|||
|
Investing
activities:
|
|||||||
|
Proceeds
from the sale of short-term investments
|
-
|
11,189
|
|||||
|
Proceeds
from sale of Australian subsidiary
|
-
|
1,331,033
|
|||||
|
Proceeds
from the sale of technology
|
-
|
9,000,000
|
|||||
|
Transfer
of cash balance upon disposition of discontinued/ held for
sale
operations
|
-
|
(185,554
|
)
|
||||
|
Net
cash provided by investing activities
|
-
|
10,156,668
|
|||||
|
Financing
activities:
|
|||||||
|
Issuance
of notes payable
|
-
|
2,000,000
|
|||||
|
Repayment
of notes payable
|
(40,000
|
)
|
(5,458,500
|
)
|
|||
|
Net
proceeds from issuance of common stock
|
-
|
896
|
|||||
|
Net
cash used in financing activities
|
(40,000
|
)
|
(3,457,604
|
)
|
|||
|
Effect
of exchange rate changes on cash
|
-
|
34,244
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(1,977,218
|
)
|
1,690,824
|
||||
|
Cash
and cash equivalents, beginning of year
|
3,803,832
|
2,113,008
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
1,826,614
|
$
|
3,803,832
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Cash Flows (Continued)
|
Years
Ended December 31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
Supplemental
cash flow information:
|
|||||||
|
Interest
paid
|
$
|
-
|
$
|
23,029
|
|||
|
Supplemental
disclosure of noncash transactions:
|
|||||||
|
Interest
expense amortization for long-term obligations
|
$
|
184,942
|
$
|
762,872
|
|||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|||||||
F-7
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Notes
to Consolidated Financial Statements
1.
Accounting
Policies
Description
of Business and Principles of Consolidation
The
consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. (“Cellegy,” or the “Company”) and its wholly-owned
subsidiary, Biosyn, Inc. (“Biosyn”). All
intercompany balances and significant intercompany transactions have been
eliminated.
Cellegy
is a specialty pharmaceutical company engaged in the development and
commercialization of prescription drugs targeting primarily women’s health care,
including the reduction in transmitting of Human Immunodeficiency Virus (“HIV”),
female sexual dysfunction and gastrointestinal conditions using proprietary
topical formulations and nitric oxide donor technologies. Biosyn’s technology
includes a portfolio of proprietary product candidates known as microbicides
that are used intravaginally to reduce transmission of sexually transmitted
diseases, (“STDs”), including HIV and Acquired Immunodeficiency Disease
(“AIDS”). Biosyn’s product candidates, which include both contraceptive and
non-contraceptive microbicides, include Savvy, which is undergoing Phase
3
clinical trials in the United States; and UC-781 vaginal gel, in Phase 1
trials.
Our
cash
and cash equivalents were approximately $1.8 million and $3.8 million at
December 31, 2007 and 2006, respectively.
We
prepared the consolidated financial statements assuming that we will continue
as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities during the normal course of business. In preparing
these consolidated financial statements, consideration was given to the
Company’s future business alternatives as described below, which may preclude
the Company from realizing the value of certain assets during their future
course of business.
Cellegy’s
operations currently relate primarily to the intellectual property rights
of its
Biosyn subsidiary. While the Savvy Phase 3 contraception trial in the United
States is ongoing, the Company is not directly involved with the conduct
and
funding thereof and, due to the cessation of the HIV Phase 3 trials in 2005
and
2006, it is uncertain whether Savvy will be commercialized or whether the
Company will ever realize revenues there from. We therefore expect negative
cash
flows to continue for the foreseeable future. The Company believes that it
presently has enough financial resources to continue operations as they
currently exist until approximately September 30, 2008, absent unforeseen
significant additional expenses; however, it does not have the technological
nor
the financial assets to fund the expenditures that would be required to conduct
the future clinical and regulatory work required to commercialize Savvy or
other
product candidates without additional funding.
On
February 12, 2008, Cellegy entered into a definitive merger agreement providing
for the acquisition of Cellegy by Adamis Pharmaceuticals Corporation (“Adamis”).
There is no assurance that the Company will be able to close the transaction
with Adamis. If the merger with Adamis is not completed, Cellegy’s board of
directors will be required to explore alternatives for Cellegy’s business and
assets. These alternatives might include seeking to sell remaining assets
to
third parties, seeking the dissolution and liquidation of Cellegy, merging
or
combining with another company, or initiating bankruptcy proceedings. There
can
be no assurance that any third party will be interested in merging with Cellegy
or acquiring the remaining assets of Cellegy or would agree to a price and
other
terms that we would deem adequate. Although Cellegy may try to pursue an
alternative strategic transaction, it will likely have very limited cash
resources, and if no such alternate transaction can be negotiated and completed
within a reasonable period of time, will likely be forced to file for federal
bankruptcy protection. If Cellegy files for bankruptcy protection, Cellegy
will
most likely not be able to raise any type of funding from any source. In
that
event, the creditors of Cellegy would have first claim on the value of the
assets of Cellegy which, other than remaining cash, would most likely be
liquidated in a bankruptcy sale. Cellegy can give no assurance as to the
magnitude of the net proceeds of such sale and whether such proceeds would
be
sufficient to satisfy Cellegy’s obligations to its creditors, let alone to
permit any distribution to its equity holders. These factors, among others,
raise substantial doubt about our ability to continue as a going concern.
F-8
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosures of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported amounts
of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk nonrefundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
The
Company received certain government and non-government grants that support
its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each
grant
incurred. Advanced payments received under these agreements, prior to completion
of the related work, are recorded as deferred revenue until earned. Should
the
research funded by federal grants result in patented technologies, the federal
government would be entitled to a nonexclusive, nontransferable, irrevocable,
paid-up license to utilize such technologies. In 2006, the Company discontinued
its grant funding in connection with the reduction of its Biosyn research
activities.
Revenues
related to product sales are recognized when title has been transferred to
the
customer and when all of the following criteria are met; i.e., a persuasive
evidence of an arrangement exists, delivery has occurred or service has been
rendered, the price is fixed or determinable and, collectibility is reasonably
assured. There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue
at the
time the payment is received and are subsequently recognized as revenue on
a
straight-line basis over the longer of the life of the agreement or the life
of
the underlying patent.
Royalties
payable to Cellegy under these license agreements are recognized as earned
when
the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Research
and Development
Research
and development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and number of subjects that have completed treatment for each
trial.
Milestone
payments that are made upon the occurrence of future contractual events prior
to
receipt of applicable regulatory approvals are charged to research and
development expenses. The Company may capitalize and amortize certain future
milestones and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of demand deposits and highly liquid financial
instruments with original maturities of three months or less. The carrying
value
of cash and cash equivalents approximates fair value as of December 31,
2007 and 2006. As of December 31, 2007, the Company’s cash and cash equivalents
are maintained at two financial institutions in the United States. Deposits
in
these financial institutions may, from time to time, exceed federally insured
limits.
Accounts
Receivable
Accounts
receivable are carried at cost, less an allowance for losses. The Company
does
not accrue finance or interest charges. On a quarterly basis, the Company
evaluates its accounts receivable and establishes an allowance for losses,
based
on the history of past write-offs and collections and current economic
conditions.
F-9
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Concentration
of Credit Risk
As
of
December 31, 2007, the Company had its cash in demand deposits and money
market funds.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of property and equipment are computed using
the
straight-line method over the estimated useful lives of the respective
assets.
|
Estimated Useful Lives
|
|
|
Furniture
and fixtures
|
3
years
|
|
Office
equipment
|
3
years
|
|
Laboratory
equipment
|
5
years
|
|
Leasehold
improvements
|
10
years
|
Amortization
for leasehold improvements and equipment held under capital leases is taken
over
the shorter of the estimated useful life of the asset or the remaining lease
term. Upon sale or retirement, the asset’s cost and related accumulated
depreciation or amortization are removed from the accounts and the related
gain
or loss is reflected in operations.
Intangible
Assets
Statement
of Financial Accounting Standards (“SFAS”) No. 142 requires that intangible
assets with definite lives be amortized over their estimated useful lives.
The
Company amortizes intangible assets on a straight-line basis over their
estimated useful lives.
Stock-based
Compensation
Effective
January 1, 2006, the Company began recording compensation expense associated
with stock options and other forms of equity compensation in accordance with
SFAS No. 123 (revised 2004), Share-Based
Payment (“SFAS
No. 123R”), as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to
January 1, 2006, the Company accounted for stock options according to the
provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (“APB
Opinion No. 25”), and related interpretations and, therefore, no related
compensation expense was recorded for awards granted with no intrinsic value.
The Company adopted the modified prospective transition method provided for
under SFAS No. 123R and, consequently, has not retroactively adjusted results
from prior periods. Under this transition method, compensation cost associated
with stock options recognized in the year ended December 31, 2006, includes:
1)
amortization related to the remaining unvested portion of all stock option
awards granted prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation;
and 2)
amortization relating to all stock option awards granted or modified on or
subsequent to January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS No. 123R.
As
a
result of the adoption of SFAS No. 123R, the Company’s net income for the year
ended December 31, 2006, was approximately $150,000 lower than under the
Company’s previous accounting method for share-based compensation.
Prior
to
the adoption of SFAS No. 123R, the Company presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Consolidated
Statements of Cash Flows. SFAS No. 123R requires that cash flows resulting
from
tax deductions in excess of the cumulative compensation cost recognized for
options exercised (excess tax benefits) be classified as financing cash flows.
The Company has sufficient net operating loss carryforwards to generally
eliminate cash payments for income taxes. Therefore, no cash has been retained
as a result of excess tax benefits relating to share-based payments made
to
directors and employees.
For
the
years ended December 31, 2007 and 2006, for stock options granted prior to
the
adoption of SFAS No. 123R, there is no difference between reported amounts
and
pro forma net loss and basic and diluted income per common share if compensation
expense for the Company’s various stock option plans had been determined based
upon estimated fair values at the grant dates in accordance with SFAS No.
123.
F-10
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Cellegy
values its options on the date of grant using the Black-Scholes valuation
model.
The Company did not grant any stock options during 2007 and 2006.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”)
Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” Under EITF Issue No. 96-18, the fair value of the equity
instrument is calculated using the Black-Scholes valuation model at each
reporting period with charges amortized to the results of operations over
the
instrument’s vesting period.
Recent
Accounting Pronouncements
SFAS No. 157,
Fair Value Measurements
SFAS No. 157,
“Fair
Value Measurements”
(“SFAS 157”), has been issued by the Financial Accounting Standards Board
(the “FASB”). This new standard provides guidance for using fair value to
measure assets and liabilities. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value but
does
not expand the use of fair value in any new circumstances. Currently, over
40
accounting standards within GAAP require (or permit) entities to measure
assets
and liabilities at fair value. The standard clarifies that for items that
are
not actively traded, such as certain kinds of derivatives, fair value should
reflect the price in a transaction with a market participant, including an
adjustment for risk, not just the Company’s mark-to-model value. SFAS 157
also requires expanded disclosure of the effect on earnings for items measured
using unobservable data. Under SFAS 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants in the market in which the
reporting entity transacts. In this standard, FASB clarified the principle
that
fair value should be based on the assumptions market participants would use
when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used
to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable
data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy.
The
FASB
agreed to defer the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value
in
the financial statements on a recurring basis. The FASB again rejected the
proposal of a full one-year deferral of the effective date of SFAS 157.
SFAS 157 was issued in September 2006, and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Accordingly, the Company will
adopt
this statement on October 1, 2007 for assets and liabilities not subject to
the deferral and October 1, 2008, for all other assets and liabilities. The
Company is currently assessing the impact of this statement.
SFAS No. 141
(Revised 2007), Business Combinations
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business
Combinations”
(“SFAS 141R”). Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific items, including:
|
·
|
acquisition
costs will be generally expensed as
incurred;
|
|
·
|
non-controlling
interests will be valued at fair value at the acquisition
date;
|
|
·
|
acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
in-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date until
the
completion or abandonment of the associated research and development
efforts;
|
|
·
|
restructuring
costs associated with a business combination will be generally
expensed
subsequent to the acquisition
date; and
|
F-11
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
|
·
|
changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS 141R
also includes a substantial number of new disclosure requirements.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is currently assessing the impact of this statement.
SFAS No. 160,“Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB
No. 51”
On
December 4, 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB
No. 51”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in
the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions
if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value
of
the non-controlling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of
the
parent and its non-controlling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company believes
that this pronouncement will have no effect on its financial statements.
FIN No. 48,
“Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109”
FASB
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
(“FIN 48”) was issued on July 13, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with FASB Statement No. 109, “Accounting
for Income Taxes”.
FIN 48 prescribes a recognition threshold and measurement attribute for the
consolidated financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The new FASB standard also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue
to be
recognized upon adoption of FIN 48. The cumulative effect of applying the
provisions of FIN 48 should be reported as an adjustment to the opening
balance of retained earnings (or other appropriate components of equity in
the
consolidated balance sheet) for that fiscal year. Cellegy adopted FIN 48 on
January 1, 2007 and its implementation did not
have a
material impact on Cellegy’s financial position, results of operations or cash
flows.
Basic
and Diluted Net Income (Loss) per Common Share
Basic
net
income (loss) per common share is computed using the weighted average number
of
common shares outstanding during the period. Diluted net income (loss) per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. The total number of
shares that had their impact excluded were:
|
Years
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Options
|
1,349,741
|
1,381,589
|
|||||
|
Warrants
|
2,114,593
|
2,374,593
|
|||||
|
Total
number of shares excluded
|
3,464,334
|
3,756,182
|
|||||
F-12
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform with current
year presentation.
2. Accounts
Receivable
At
December 31, 2007 and 2006, accounts receivable consist of the
following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Grant
receivable
|
$
|
-
|
$
|
62,605
|
|||
3. Prepaid
Expenses and Other Current Assets
At
December 31, 2007 and 2006, prepaid expenses and other current assets includes
the following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Prepaid
insurance
|
$
|
134,248
|
$
|
236,815
|
|||
|
Security
deposits
|
8,100
|
18,100
|
|||||
|
Retention
Compensation
|
120,130
|
-
|
|||||
|
Other
|
5,000
|
23,825
|
|||||
|
Total
prepaid expenses and other current assets
|
$
|
267,478
|
$
|
278,740
|
|||
Retention
compensation of approximately $120,000 represents the unamortized portion
of
approximately $139,000 in retention payments offered and accepted by employees
in 2007. The retention payments are to be paid if the employee maintains
his or
her employment with the Company through the retention period indicated in
the
individual’s retention agreement. The retention payment was in lieu of all other
severance or similar payments that the Company may have been obligated to
make
under any other existing agreement, arrangement or understanding, but would
be
in addition to any accrued salary and vacation earned through the end of
the
respective retention period. The retention periods terminate between March
31
and June 30, 2008.
4. Intangible
Assets, Net
|
Year
Ended December 31, 2007
|
Year
Ended December 31, 2006
|
||||||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortiation
|
Net
Carrying Amount
|
Gross
Carrying Amount
|
Accumulated
Amortiation
|
Net
Carrying Amount
|
||||||||||||||
|
Capitalized
workforce -
|
|||||||||||||||||||
|
Biosyn
acquisition
|
$
|
381,558
|
$
|
(381,558
|
)
|
$
|
-
|
$
|
381,558
|
$
|
(381,558
|
)
|
$
|
-
|
|||||
Subsequent
to the purchase of Biosyn in 2004, several of its key people left the Company
in
2006. The departure of these employees required the reduction in the carrying
value of the intangible asset recorded in connection with the acquisition.
Estimating the fair market value of the key people remaining resulted in
an
impairment of the asset as of December 31, 2006 and $149,352 was recognized
as
impairment expense in 2006.
The
Company recorded no amortization expense in 2007. Amortization expense recorded
for the year ended December 31, 2006 was $46,852.
F-13
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
5. Property
and Equipment, Net
At
December 31, 2007 and 2006, property and equipment, net consist of the
following:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Furniture,
fixtures and office equipment
|
$
|
19,855
|
$
|
19,855
|
|||
|
Less:
accumulated depreciation
|
(19,855
|
)
|
(19,855
|
)
|
|||
|
Total
property and equipment, net
|
$
|
-
|
$
|
-
|
|||
Cellegy
recorded no depreciation expense in 2007. Depreciation and leasehold
amortization expenses for 2006 were approximately $121,000.
On
September 30, 2006, Cellegy closed its offices in Brisbane, California and
disposed of certain property and equipment. At that time, the Company relocated
its Huntingdon Valley, Pennsylvania headquarters to Quakertown, Pennsylvania
and
either disposed of or wrote down all of its research and development equipment
and certain other fixed assets, and recorded impairment charges of approximately
$251,000.
6. Accrued
Expenses and Other Current Liabilities
Cellegy
accrues for services received but for which billings have not been received.
Accrued expenses and other current liabilities at December 31, 2007 and 2006,
were as follows:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Accrued
legal fees
|
$
|
29,317
|
$
|
22,262
|
|||
|
Accrued
compensation
|
29,739
|
99,989
|
|||||
|
Accrued
retention
|
139,370
|
-
|
|||||
|
Accrued
accounting and consulting fees
|
125,000
|
175,000
|
|||||
|
Insurance
payable
|
12,995
|
163,554
|
|||||
|
Other
|
59,667
|
75,786
|
|||||
|
Total
accrued expenses and other current liabilitites
|
$
|
396,088
|
$
|
536,591
|
|||
7. Notes
Payable
Ben
Franklin Note
Biosyn
issued a note to Ben Franklin Technology Center of Southeastern Pennsylvania
(“Ben Franklin Note”) in October 1992, in connection with funding the
development of a compound to prevent the transmission of AIDS.
The
Ben
Franklin Note was recorded at its estimated fair value of $205,000 and was
assumed by Cellegy in connection with its acquisition of Biosyn in 2004.
The
repayment terms of the non-interest bearing obligation include the remittance
of
an annual fixed percentage of 3% applied to future revenues of Biosyn, if
any,
until the principal balance of $777,902 is satisfied. Under the terms of
the
obligation, revenues are defined to exclude the value of unrestricted research
and development funding received by Biosyn from nonprofit sources. Absent
a
material breach of contract by Cellegy, there is no obligation to repay the
amounts in the absence of future Biosyn revenues. Cellegy is accreting the
discount of $572,902 against earnings using the interest rate method over
the
discount period of five years, which was estimated in connection with the
note’s
valuation at the time of the acquisition. At December 31, 2007 and 2006,
the
outstanding balance of the note was $507,067 and $322,125,
respectively.
F-14
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
PDI
Notes
In
connection with a settlement agreement dated April 11, 2005, PDI, Inc. (“PDI”)
issued two non-interest bearing notes; a $3.0 million secured promissory
note
payable on October 12, 2006, and a $3.5 million nonnegotiable senior convertible
debenture with a maturity date of April 11, 2008 (the “PDI Notes”). The PDI
Notes were settled in full for $3.0 million in September 2006.
The
$3.0
million secured promissory note was originally payable on October 12, 2006.
There was no stated interest rate and no periodic payments were
required. The net present value of the secured promissory note was
recalculated based on its remaining principal whenever a payment was made
by
Cellegy. Payments in 2006 totaled $458,500.
Prior
to
the settlement and repayment, the $3.5 million nonnegotiable senior convertible
debenture had a maturity date of April 11, 2008, three years from the PDI
settlement date of April 11, 2005. There was no stated interest rate and
no
periodic payments were required.
In
an
agreement dated September 20, 2006, Cellegy agreed to pay PDI an aggregate
amount of $3.0 million as full and final settlement of the PDI Notes. In
accordance with the terms of the settlement, Cellegy remitted $500,000 to
PDI on
September 28, 2006, and remitted $2.5 million on November 29, 2006. PDI and
Cellegy agreed to release each other and related parties from any claims
or
liabilities arising before the date of their agreement relating to any of
the
terms of the previous settlement agreement, other than as a result of the
released person’s gross negligence or willful misconduct.
Cellegy
recorded debt forgiveness of approximately $2.2 million as a result of the
settlement in other income. For the year ended December 31, 2006, Cellegy
recorded interest expense relating to the PDI Notes of $645,384.
ProStrakan
Note
In
September 2006, ProStrakan Group plc (LSE: PSK) (“ProStrakan”) loaned Cellegy
$2.0 million, evidenced by a secured promissory note (the “ProStrakan Note”). On
November 29, 2006, Cellegy satisfied the ProStrakan Note by making payments
of
$2.0 million in principal and approximately $20,000 in interest
expense.
MPI
Note
In
2007,
Cellegy settled its obligation to MPI, Inc. of $44,700 for $40,000 and recorded
$4,700 in other income. At December 31, 2007, future minimum payments on
the notes were payable as follows:
|
2009
and thereafter
|
$
|
777,902
|
||
|
Less:
amount representing discount
|
(270,835
|
)
|
||
|
Net
present value of notes at December 31, 2007
|
$
|
507,067
|
8. Derivative
Instruments
Warrants
issued in connection with the May 2005, financing and the Kingsbridge SSO
are
considered derivative instruments and are revalued at the end of each reporting
period as long as they remain outstanding. The estimated fair value of these
warrants using the Black-Scholes valuation model and recorded as derivative
liability at December 31, 2007 and 2006 was approximately $1,200 and $4,000,
respectively. The changes in the estimated fair value of the warrants have
been
recorded as other income (expenses) in the consolidated statements of
operations. For the years ended December 31, 2007 and 2006, the Company
recognized approximately $2,800 and $189,000, respectively, as other income
from
derivative revaluation.
9. Deferred
Revenue
At
December 31, 2007 and 2006, the Company had no current and long-term deferred
revenue. Upon the consummation of the sale of its intellectual property to
ProStrakan in November 2006, the Company recognized all of the remaining
current
and long-term deferred revenue as part of the gain on the sale of technology,
as
all remaining obligations under the license agreements were deemed to have
been
fulfilled in connection with the sale of assets. Current and long-term deferred
revenue totaling approximately $3.3 million at December 31, 2005,
represents the remaining unamortized and unearned portion of upfront licensing
fees received from licensees for the right to store, promote, sell and/or
distribute the Company’s products. These amounts were included in revenue at the
time of the PDI settlement.
F-15
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
10. Commitments
and Contingencies
Operating
Leases
The
Company leases its facilities under a non-cancelable operating lease on a
month-to-month basis and has no future minimum lease payments as of December
31,
2007. Operating lease expense is recorded on a straight-line basis over the
term
of the lease. Rent expense was $32,400 and $205,000 for the years ended
December 31, 2007 and 2006, respectively.
Legal
Proceedings
The
Company has no significant ongoing legal proceedings.
11. 401(k) Plan
The
Company maintained a savings and retirement plan under
Section 401(k) of the Internal Revenue Code until it was terminated in
August 2006. All employees were eligible to participate on the first day
of the
calendar quarter following three months of employment with the Company. Under
the plan, employees could contribute up to 15% of their salaries per year
subject to statutory limits. The Company provided a matching contribution
equal
to 25% of the employee’s rate of contribution, up to a maximum contribution rate
of 4% of the employee’s annual salary. Expenses related to the plan for the
years ended December 31, 2006, were not significant.
12. License
and Other Agreements
Cellegy
In
July 2004, Cellegy and ProStrakan entered into to an exclusive license
agreement for the future commercialization of Tostrex® (testosterone gel) in
Europe. Under the terms of the agreement, ProStrakan was responsible for
regulatory filings, sales, marketing and distribution of Tostrex throughout
the
European Union (“EU”) and in certain nearby non-EU countries. Under the original
agreement, the Company was responsible for supplying finished product to
ProStrakan through Cellegy’s contract manufacturer. Assuming successful
commercial launch, Cellegy was entitled to receive up to $5.75 million in
total
payments including a $500,000 non-refundable upfront payment made in
July 2004, and a royalty on net sales of Tostrex. The advanced payment
received by the Company was recorded as deferred revenue to be amortized
to
income over eighteen (18) years, which represents the estimated life of the
underlying patent.
In
December 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the commercialization of Cellegesic, branded Rectogesic outside
of
the United States, in Europe. Under the terms of the agreement, Cellegy received
a nonrefundable payment of $1.0 million and was entitled to receive an
additional $4.6 million in milestone payments, along with additional payments
based on sales of product to ProStrakan for distribution in Europe. ProStrakan
was responsible for additional regulatory filings, sales, marketing and
distribution of Rectogesic throughout Europe. In all, the agreement covered
thirty-eight (38) European territories, including all EU member states. Cellegy
was responsible for supplying finished product to ProStrakan through its
contract manufacturer. The $1.0 million upfront fee received by the Company
was
recorded as deferred revenue to be amortized to income over ten (10) years,
which represented the estimated life of the underlying patent.
In
November 2005, Cellegy amended its December 2004 agreement with ProStrakan
concerning Rectogesic. Under
the
terms of the amended agreement, ProStrakan assumed responsibility for all
manufacturing and other product support functions. In return, Cellegy received
a
nonrefundable payment of $2.0 million which was recorded as deferred revenue
and
was amortized to income over the remaining estimated life of the underlying
patent considered in connection with the December 2004, agreement.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan assumed
responsibility for all manufacturing and other product support functions
and
agreed to purchase Tostrex directly from Cellegy’s contract manufacturer rather
than purchasing the product from Cellegy under the terms of the original
agreement. Cellegy was entitled to continue to receive milestones and royalties
as set forth in the original agreement.
F-16
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
On
June
20, 2006, Cellegy amended its December 2004 agreement with ProStrakan concerning
Rectogesic. This second amendment added several countries and territories
in
Eastern Europe, including several countries and territories that were part
of
the former Soviet Union, to the territories covered by the original agreement.
As part of the amendment, ProStrakan paid to Cellegy the sum of $500,000
representing a prepayment of the milestone due upon approval of Rectogesic
in
certain major European countries.
On
November 28, 2006, Cellegy sold to ProStrakan for $9.0 million its rights
to
Cellegesic, Rectogesic, Fortigel, Tostrex, Tostrelle, and related intellectual
property assets. ProStrakan also assumed various existing distribution and
other
agreements relating to the intellectual property. Cellegy’s stockholders
approved the transaction at a special meeting of stockholders held on November
22, 2006. ProStrakan has no further obligations to Cellegy under the previous
license agreement. The Company recorded a gain on sale of technology of
approximately $12.6 million as other income which includes $9.0 million
recognized in connection with the sale of Cellegy’s intellectual property
discussed above and approximately $3.6 million of unamortized deferred revenue
related to licensing agreements under which all obligations were deemed to
have
been fulfilled in connection with the sale.
Biosyn
In
October 1989, Biosyn entered into an agreement, whereby it obtained an
exclusive license to develop and market products using the C31G Technology.
In
October 1996, Biosyn acquired the C31G Technology from its inventor, Edwin
B. Michaels. As part of the agreement, Biosyn is required to make annual
royalty
payments equal to the sum of 1% of net product sales of up to $100 million,
0.5%
of the net product sales over $100 million and 1% of any royalty payments
received by Biosyn under license agreements. The term of the agreement lasts
until December 31, 2011, or upon the expiration of the C31G Technology’s
patent protection, whichever is later. Biosyn’s current C31G patents expire
between 2011 and 2018. There were no royalty payments incurred for the years
ended December 31, 2007, and 2006.
In
May 2001, Biosyn entered into an exclusive license agreement with Crompton,
now Chemtura (“Chemtura”) ,under which Biosyn obtained the rights to develop and
commercialize UC-781, a non-nucleoelostide reverse transcriptase inhibitor,
as a
topical microbicide. Under the terms of the agreement, Biosyn paid Chemtura
a
nonrefundable, upfront license fee that was expensed in research and
development. Chemtura also received 39,050 warrants to purchase Cellegy stock
in
connection with Cellegy’s acquisition of Biosyn in 2004 and are exercisable for
a period of two years upon initiation of Phase 3 trials of UC-781. Chemtura
is
entitled to milestone payments upon the achievement of certain development
milestones and royalties on product sales. If UC-781 is successfully developed
as a microbicide, then Biosyn has exclusive worldwide commercialization rights.
There were no royalty payments incurred for the years ended December 31,
2007
and 2006.
In
February 2003, Biosyn acquired exclusive worldwide rights from the National
Institutes of Health (“NIH”), for the development and commercialization of
protein Cyanovirin-N as a vaginal gel to prevent the sexual transmission
of HIV.
NIH is entitled to milestone payments upon achievement of certain development
milestones and royalties on product sales. There were no royalty payments
incurred for the years ended December 31, 2007 and 2006. Due to cancellation
of
its license with the NIH in 2007, Biosyn forfeited the rights for the
commercialization of CV-N but the existing agreements between Biosyn and
research institutions related to CV-N remain in effect.
On
January 31, 2006, Cellegy announced that it had entered into a nonexclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization (“CONRAD”) for the collaboration on the development of
Cellegy’s entire microbicide pipeline. The agreement encompasses the licensing
in the developing countries (as defined in the agreements) of Savvy, UC-781
and
Cyanovirin-N. The agreement provided CONRAD with access to Biosyn’s current and
past microbicidal research.
Under
the
terms of certain of its funding agreements, Biosyn has been granted the right
to
commercialize products supported by the funding in developed and developing
countries, and is obligated to make its commercialized products, if any,
available in developing countries, as well as to public sector agencies in
developed countries at prices reasonably above cost or at a reasonable royalty
rate.
F-17
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Biosyn
has previously entered into various other collaborating research and technology
agreements. Should any discoveries be made under such arrangements, Biosyn
may
be required to negotiate the licensing of the technology for the development
of
the respective discoveries. There are no significant funding commitments
under
any of these other agreements.
13. Stockholders’
Equity
Preferred
Stock
The
Company’s Restated Certificate of Incorporation provides that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The
Board
of Directors is authorized to establish, from time to time, the number of
shares
to be included in, and the designation of, any such series and to determine
or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and to increase
or
decrease the number of shares of any such series without any further vote
or
action by the stockholders.
Stock
Market Listing
Cellegy’s
common stock currently trades on the Over-the-Counter Bulletin Board (“OTCBB”)
under the symbol: CLGY.OB.
Stock
Option Plans
2005
Equity Incentive Plan
The
2005
Equity Incentive Plan (the “2005 Plan”) replaced the 1995 Equity Incentive
Plan (“Prior Plan”) which had expired. The 2005 Plan is administered by the
Company’s Compensation Committee. The Board of Directors may at any time amend,
alter, suspend or discontinue the 2005 Plan without stockholders’ approval,
except as required by applicable law. The 2005 Plan is not subject to ERISA
and
is not qualified under Section 401(a) of the Code.
The
2005
Plan provides for the granting of options and other awards to employees,
directors and consultants. Options granted under the 2005 Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
may be granted only to employees. The Compensation Committee determines who
will
receive options or other awards under the 2005 Plan and their terms, including
the exercise price, number of shares subject to the option or award, and
the
vesting and exercisability thereof. Options granted under the 2005 Plan
generally have a term of ten years from the grant date, and exercise price
typically is equal to the closing price of the common stock on the grant
date.
Options typically vest over a three-year or four-year period. Options granted
under the 2005 Plan typically expire if not exercised within 90 days from
the
date on which the optionee is no longer an employee, director or consultant.
The
vesting and exercisability of options may also be accelerated upon certain
change of control events. As of December 31, 2007, the future compensation
expense to be recognized for unvested options is approximately $20,000 over
the
remaining weighted average period of 1.75 years.
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
Average
|
|
||
|
|
|
Option
|
|
Exercise
Price
|
|||
|
Balance
at December 31, 2006
|
48,000
|
$
|
1.34
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
-
|
-
|
|||||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2007
|
48,000
|
1.34
|
|||||
F-18
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
following table summarizes those stock options outstanding related to the
2005
Plan at December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|||||||
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
||||||||
|
48,000
|
7.74
Years
|
$
|
1.34
|
$
|
-
|
32,000
|
7.74
Years
|
$
|
1.34
|
$
|
-
|
|||||||||||
There
were 16,000 options vested under the 2005 Plan for the year
ended December 31, 2007.
Prior
Plan
The
total
number of shares reserved and available for issuance pursuant to the exercise
of
awards under the Prior Plan is 4,850,000 shares. The Prior Plan will continue
to
govern the stock options previously granted thereunder, however, no further
stock options or other awards will be made pursuant to the Prior Plan. As
of
December 31, 2007, the future compensation expense to be recognized for unvested
options is approximately $60,000 over the remaining weighted average period
of
approximately 1.40 years.
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
Average
|
|
||
|
|
|
Option
|
|
Exercise
Price
|
|||
|
Balance
at December 31, 2006
|
222,944
|
$
|
3.12
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(18,000
|
)
|
(8.43
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2007
|
204,944
|
2.66
|
|||||
The
following table summarizes those stock options outstanding and exercisable
related to the Prior Plan at December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
Number
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Contractual
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Contractual
Life
|
|
Price
|
|
Value
|
||||||||
|
204,944
|
6.42
Years
|
$
|
2.66
|
$
|
-
|
165,986
|
6.27
Years
|
$
|
2.78
|
$
|
-
|
|||||||||||
There
were 50,209 options vested under the Prior Plan for the year ended December
31,
2007. No
future
options may be offered under the Prior Plan.
1995
Directors’ Stock Option Plan
In
1995,
Cellegy adopted the 1995 Directors’ Stock Option Plan (the “Directors’ Plan”) to
provide for the issuance of nonqualified stock options to eligible outside
Directors. When the plan was established, Cellegy reserved 150,000 shares
for
issuance. From 1996 to 2005, a total of 350,000 shares were reserved for
issuance under the Directors’ Plan. The 2005 Plan replaces the Directors’
Plan.
The
Directors’ Plan provides for the grant of initial and annual nonqualified stock
options to non-employee directors. Initial options vest over a four-year
period
and subsequent annual options vest over three years. The exercise price of
options granted under the Directors’ Plan is the fair market value of the common
stock on the grant date. Options generally expire 10 years from the grant
date,
and generally expire within 90 days of the date the optionee is no longer
a
director. The vesting and exercisability of options may also be accelerated
upon
certain change of control events.
F-19
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Activity
under the Directors’ Plan is summarized as follows:
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
Average
|
|
||
|
|
|
Option
|
|
Exercise
Price
|
|||
|
Balance
at December 31, 2006
|
93,000
|
$
|
4.44
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(1,000
|
)
|
(3.25
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2007
|
92,000
|
4.45
|
|||||
The
following table summarizes those stock options outstanding and exercisable
related to the Directors’ Plan at December 31, 2007:
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|||||||||||||||||||
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
Number
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Contractual
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Contractual
Life
|
|
Price
|
|
Value
|
||||||||
|
92,000
|
4.83
Years
|
$
|
4.45
|
$
|
-
|
92,000
|
4.83
Years
|
$
|
4.45
|
$
|
-
|
|||||||||||
There
were 16,000 options vested under the Directors’ Plan for the year ended December
31, 2007. As of December 31, 2007 and 2006, there were no options available
for
future grants under the Directors’ Plan.
Non-Plan
Options
In
November 2003, the Company granted an initial stock option to
Mr. Richard Williams, on his appointment to become Chairman of the Board,
to purchase 1,000,000 shares of common stock. 400,000 of the options have
an
exercise price of $2.89 per share, the closing price of the stock on the
grant
date and 600,000 of the options have an exercise price of $5.00 per share.
The
option was vested and exercisable in full on the grant date, although a portion
of the option, covering up to 600,000 shares initially and declining over
time,
is subject to cancellation if they have not been exercised in the event that
Mr. Williams voluntarily resigns as Chairman and a director within certain
future time periods. As of December 31, 2007, none of these options
have been exercised.
In
October 2004, in conjunction with its acquisition of Biosyn, Cellegy issued
stock options to certain Biosyn option holders to purchase 236,635 shares
of
Cellegy common stock. All options issued were immediately vested and
exercisable.
|
|
|
Weighted
|
|
||||
|
|
|
Shares
Under
|
|
Average
|
|
||
|
|
|
Option
|
|
Exercise
Price
|
|||
|
Balance
at December 31, 2006
|
39,229
|
$
|
6.93
|
||||
|
Granted
|
-
|
-
|
|||||
|
Canceled
|
(34,432
|
)
|
(7.85
|
)
|
|||
|
Exercised
|
-
|
-
|
|||||
|
Balance
at December 31, 2007
|
4,797
|
0.29
|
|||||
F-20
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
following table summarizes information about stock options outstanding and
exercisable related to Biosyn option grants at December 31,
2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|||||||
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|||||||
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|||||||
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Number
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
|||||||
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
||||||||
|
4,797
|
6.05
Years
|
$
|
0.29
|
$
|
-
|
4,797
|
6.05
Years
|
$
|
0.29
|
$
|
-
|
|||||||||||
Shares
Reserved
As
of
December 31, 2007, the Company has reserved shares of common stock for
future issuance as follows:
|
Biosyn
options
|
4,797
|
|||
|
Director's
Plan
|
92,000
|
|||
|
Warrants
|
2,114,593
|
|||
|
Nonplan
options
|
1,000,000
|
|||
|
1995
Equity Incentive Plan
|
204,944
|
|||
|
2005
Equity Incentive Plan
|
1,000,000
|
|||
|
Total
shares reserved
|
4,416,334
|
Warrants
The
Company has the following warrants outstanding to purchase common stock as
of
December 31, 2007:
|
|
|
Exercise
|
|
|
|
|
|
||||||
|
|
|
Warrant
|
|
Price
Per
|
|
|
|
Expiration
|
|
||||
|
|
|
Shares
|
|
Share
|
|
Date
Issued
|
|
Date
|
|||||
|
June
2004 PIPE
|
604,000
|
$
|
4.62
|
July
27, 2004
|
July
27, 2009
|
||||||||
|
Biosyn
warrants
|
81,869
|
5.84-17.52
|
October
22, 2004
|
2008
- 2014
|
|||||||||
|
May
2005 PIPE
|
|||||||||||||
|
Series
A
|
714,362
|
2.25
|
May
13, 2005
|
May
13, 2010
|
|||||||||
|
Series
B
|
714,362
|
2.50
|
May
13, 2005
|
May
13, 2010
|
|||||||||
|
Total
warrants
|
2,114,593
|
||||||||||||
Non
Cash Compensation Expense Related to Stock Options
For
the
year ended December 31, 2007, the Company recorded non-cash compensation
expense of approximately $54,000, all of which was charged to selling, general
and administrative expenses (“SG&A”) expense. For the year ended
December 31, 2006, the Company recorded non cash compensation expense of
approximately $150,000, of which approximately $136,000 and $14,000 was charged
to SG&A and research and development expense, respectively.
14. Income
Taxes
At
December 31, 2007, the Company had net operating loss carryforwards of
approximately $94.4 million and $17.3 million for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
between the years 2007 and 2027. The state net operating loss carryforwards
expire between the years 2007 and 2017. At December 31, 2007, the Company
also had state research and development credit carryforwards of approximately
$2.8 million and $200,000 for federal and state purposes, respectively. The
federal credits expire between the years 2007 and 2027 and the state credits
expire between the years 2015 and 2019. The Tax Reform Act of 1986 (the “Act”)
provides for a limitation on the annual use of net operating loss and research
and development tax credit carryforwards following certain ownership changes
that could limit the Company’s ability to utilize these carryforwards. The
Company most likely has experienced various ownership changes, as defined
by the
Act, as a result of past financings. Accordingly, the Company’s ability to
utilize the aforementioned carryforwards may be limited. A future sale or
merger
of the Company, as contemplated and described in Footnote 1, may also impact
the
ability for the Company to utilize its current net operating loss carryforwards.
Additionally, U.S. tax laws limit the time during which these carryforwards
may
be applied against future taxes; therefore, the Company may not be able to
take
full advantage of these carryforwards for federal income tax purposes. The
Company determined that the net operating loss carryforwards relating to
Biosyn
are limited due to its acquisition in 2004 and has reflected the estimated
amount of usable net operating loss carryforwards in its deferred tax assets
below.
F-21
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Deferred
income taxes reflect the net tax effects of temporary differences between
the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The amount of deferred tax assets
in
2007 and 2006, not available to be recorded as a benefit due to the exercise
of
nonqualified employee stock options are approximately $559,000 and $643,000,
respectively.
Under
the
provisions of paragraph 30 of SFAS No. 109, Accounting
for Income Taxes (“SFAS
No. 109”), if a valuation allowance is recognized for the deferred tax asset for
an acquired entity's deductible temporary differences or operating loss or
tax
credit carryforwards at the acquisition date, the tax benefits for those
items
that are first recognized in the consolidated financial statements after
the
acquisition date shall be applied: (a) first to reduce to zero any goodwill
related to the acquisition, (b) second to reduce to zero other non-current
intangible assets related to the acquisition, and (c) third to reduce income
tax
expense. The future tax benefit of the Biosyn pre-acquisition net operating
losses, tax credits, and other deductible temporary differences, when they
are
ultimately recognized, will be recorded in accordance with paragraph 30 of
SFAS
No. 109. Significant components of the Company’s deferred tax liabilities and
assets are as follows (in thousands):
|
December
31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforward
|
$
|
32,100
|
$
|
31,900
|
|||
|
Credit
carryforward
|
2,900
|
3,700
|
|||||
|
Capitalized
research and development
|
7,400
|
9,800
|
|||||
|
Depreciation
and amortization
|
1,000
|
1,300
|
|||||
|
Other,
net
|
300
|
500
|
|||||
|
Total
deferred tax assets
|
43,700
|
47,200
|
|||||
|
Valuation
allowance
|
(43,700
|
)
|
(47,200
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
Reconciliation
of the statutory federal income tax rate to the Company’s effective income
tax rate (dollars in thousands):
|
Years
Ended December 31,
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
Net
income (loss)
|
$
|
(1,927
|
)
|
$
|
9,672
|
||||||||
|
Tax
(benefit) at Federal statutory rate
|
$
|
(655
|
)
|
33.99
|
%
|
$
|
3,289
|
34.00
|
%
|
||||
|
Meals
and entertainment
|
1
|
(0.05
|
)
|
3
|
0.03
|
||||||||
|
Stock
compensation expense
|
24
|
(1.25
|
)
|
20
|
0.21
|
||||||||
|
Gain
on sale of subsidiary
|
-
|
-
|
30
|
0.31
|
|||||||||
|
Research
credits
|
6
|
(0.31
|
)
|
8
|
0.09
|
||||||||
|
Deferred
taxes not benefited
|
624
|
(32.38
|
)
|
(3,350
|
)
|
(34.64
|
)
|
||||||
|
Provision
for taxes
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
|||||
The
valuation allowance for deferred tax assets for 2007 and 2006 decreased by
approximately $3.5 and $2.8 million, respectively.
On
January 1, 2007, the Company adopted FIN 48 which clarifies
the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken, or expected to be taken,
in
a tax return. FIN 48 requires that Cellegy recognize in the financial statements
the impact of a tax position, if that position is more likely than not of
being
sustained on audit, based on the technical merits of the position. FIN 48
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The implementation of FIN 48
did
not have a material impact on the Company's consolidated financial statements.
At January 1, 2007 and December 31, 2007 the Company had no unrecognized
tax
benefits and has not accrued any tax liabilities for unrecognized tax benefits.
F-22
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
Company does not believe the total amount of unrecognized benefit as of December
31, 2007 will increase or decrease significantly in the next twelve months.
The Company’s Federal, California, and Pennsylvania tax returns are
subject to examination by the tax authorities. At December 31, 2007, the
statute
of limitations for Federal, California and Pennsylvania tax examinations
vary
from 2003 to 2011.
15. Segment
Reporting
Cellegy’s
revenues consisted of Rectogesic sales in Europe, Australia, New Zealand,
Singapore and South Korea, as well as licensing revenue relating to Fortigel,
Rectogesic and Tostrex. Revenues also consist of grant funding from various
domestic agencies and foundations.
Management
regularly assesses segment operating performance and makes decisions as to
how
resources are allocated based upon segment performance. The accounting policies
of the reportable segments are consistent with those described in Accounting
Policies (Note 1).
Revenues
from external sources by major geographic area are as follows:
|
Years
Ended December 31,
|
|||||||
|
Revenues
|
2007
|
|
2006
|
||||
|
North
America
|
|||||||
|
Pharmaceuticals
|
$
|
-
|
$
|
1,925,779
|
|||
|
Europe
|
|||||||
|
Pharmaceuticals
|
-
|
734,279
|
|||||
|
Revenue
from continuing operations
|
$
|
-
|
$
|
2,660,058
|
|||
Net
operating income (loss) from continuing operations by geographic region is
as
follows:
|
Years
Ended December 31,
|
|||||||
|
Operating
Income (Loss)
|
2007
|
|
2006
|
||||
|
North
America
|
|||||||
|
Pharmaceuticals
|
$
|
(1,927,061
|
)
|
$
|
9,119,113
|
||
|
Europe
|
|||||||
|
Pharmaceuticals
|
-
|
227,082
|
|||||
|
Net
income (loss) from continuing operations
|
$
|
(1,927,061
|
)
|
$
|
9,346,195
|
||
F-23
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Assets
by major geographic region are as follows:
|
December
31,
|
|
||||||
|
|
2007
|
2006
|
|||||
|
Assets
|
|||||||
|
North
America
|
$
|
2,094,092
|
$
|
4,145,177
|
|||
|
Pacific
Rim
|
-
|
-
|
|||||
|
Total
assets
|
$
|
2,094,092
|
$
|
4,145,177
|
|||
16. Related
Party Transactions
The
Company pays fees to its board members in connection with services rendered
to
the board. In 2007, the Company began paying fees to its board members for
their
services rendered only as board members and not for services rendered in
connection with the audit, nominating, and compensation committees. The total
cash payments to
board
members made in connection with these services during the years ended December
31, 2007 and 2006 were $49,500 and $104,250, respectively.
17. Discontinued
Operations
On
April
11, 2006, Epsilon Pharmaceuticals Pty., Ltd. purchased all of the shares
of
Cellegy Australia Pty., Ltd. (“Cellegy Australia”) The subsidiary was part of
the Pharmaceutical Segment for the Australian and Pacific Rim geographic
areas.
The purchase price for the shares was $1.0 million plus amounts equal to
the
liquidated value of Cellegy Australia's cash, accounts receivable and inventory.
The total amount received was approximately $1.3 million. Below is a summary
of
the assets and liabilities included in the sale:
|
Cash
|
$
|
185,554
|
||
|
Inventory
|
69,427
|
|||
|
Accounts
Receivable
|
52,305
|
|||
|
Goodwill
|
955,415
|
|||
|
Current
liabilities
|
13,747
|
Cellegy
recorded a pretax gain of approximately $88,000 which is reflected in other
income. There was no income tax effect to this transaction. Cellegy's
discontinued operations reflect the operating results for the disposal group
through the date of disposition and recognize the subsidiary's foreign currency
translation balance as income in the current period pursuant to SFAS No.
52,
“Foreign
Currency Translation.”
Below
is a summary of those results:
|
Years
Ended December 31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
Net
revenue
|
$
|
-
|
$
|
165,805
|
|||
|
Cost
of revenues
|
-
|
26,586
|
|||||
|
Gross
Profit
|
-
|
139,219
|
|||||
|
R&D
expenses
|
-
|
-
|
|||||
|
SG&A
expenses
|
-
|
(64,614
|
)
|
||||
|
Operating
income
|
-
|
74,605
|
|||||
|
Interest
income
|
-
|
1,554
|
|||||
|
Gain
on foreign currency translation
|
-
|
249,451
|
|||||
|
Income
from discontinued operations
|
$
|
-
|
$
|
325,610
|
|||
19. Subsequent
Events
On
February 12, 2008, Cellegy entered into a definitive merger agreement providing
for the acquisition of Cellegy by Adamis. The transaction was unanimously
approved by the boards of directors of both companies and is anticipated
to
close during the second or third quarter of 2008, subject to the filing of
a
registration statement and proxy statement with the Securities and Exchange
Commission, the approval of Adamis’ and Cellegy’s respective stockholders at
stockholder meetings following distribution of a definitive proxy statement,
and
other customary closing conditions. Holders of approximately 40% of Cellegy’s
outstanding common stock have entered into voting agreements pursuant to
which
they agreed to vote their shares in favor of the transaction.
F-24
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements
(Continued)
If
the
merger is consummated, each Adamis stockholder will receive, in exchange
for
each share of Adamis common stock held by such stockholder immediately before
the closing, one (post-reverse stock split) share of Cellegy common stock
(excluding in all cases dissenting shares). If the transaction is approved
by
Cellegy’s stockholders, before the closing Cellegy will implement a reverse
stock split of its common stock so that the outstanding Cellegy shares will
be
converted into a number of shares equal to the sum of (i) 3,000,000 plus
(ii)
the amount of Cellegy’s net working capital as of the end of the month
immediately preceding the month in which the closing occurs divided by .50.
Based on several assumptions that are subject to change, including, without
limitation, the number of shares of Cellegy common stock outstanding immediately
before the merger and the amount of Cellegy’s current assets and liabilities as
of the end of the month immediately prior to the closing, Cellegy estimates
that
the reverse stock split will be between approximately 8.5 to 1 and 9.945
to 1.
The actual amounts and percentages will depend on many factors, and actual
amounts and percentages could be higher or lower.
In
addition, the Merger Agreement contains certain termination rights for both
Cellegy and Adamis, and further provides that, upon termination of the merger
agreement under specified circumstances, either party may be required to
pay the
other party a termination fee of $150,000. Both parties have the right to
terminate the Merger Agreement if the merger is not consummated by (i) August
31, 2008, if the SEC does not review the registration statement and (ii)
September 30, 2008, if the SEC does review the registration statement, so
long
as the terminating party is not in breach of the Merger Agreement and such
breach is a principal failure of the merger to occur by such date.
In
connection with the signing of the Merger Agreement, Cellegy also issued
to
Adamis an unsecured convertible promissory note pursuant to which Cellegy
agreed
to lend Adamis $500,000 to provide additional funds to Adamis during the
pendency of the merger transaction (the “Promissory Note”). Any principal
outstanding under the Promissory Note accrues interest at 10% per annum.
The
Promissory Note becomes immediately due and payable in the event that the
Merger
Agreement is terminated by Adamis or Cellegy for certain specified reasons
or on
the later of (i) the sixteen month anniversary of the issue date of the
Promissory Note or (ii) the date that is two business days following the
first
date on which certain other notes issued by Adamis to a third party have
been
repaid in full. If the Promissory Note is outstanding as of the closing of
the
merger transaction, the Promissory Note will convert into shares of Adamis
stock, and those shares will be cancelled.
The
terms
of the Promissory Note provide Cellegy with no collateralized interest in
the
assets of Adamis. In the event the merger is not consummated with Adamis,
Cellegy bears the risk of collecting the Promissory Note and therefore is
subject to the risks and uncertainties of being in the position of an unsecured
creditor. While the Company feels that it is more likely than not that the
merger will be consummated, in the event it is not, the Cellegy will have
no
ability to attach a claim to Adamis’ assets.
F-25