DMK PHARMACEUTICALS Corp - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
one)
x
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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, 2008
OR
o
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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
ADAMIS
PHARMACEUTICALS CORPORATION
(Exact
name of registrant as specified in its charter)
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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2658
Del Mar Heights Rd., #555, Del Mar, CA 19512
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(Address
of Principal Executive Offices) (zip
code)
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Registrant’s
telephone number, including area code: (858) 401-3984
Securities
registered pursuant to Section 12(b) of the Act:
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.
YES ¨ NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES o 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.
YES o 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):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
YES o NO x
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2008 was $1,593,256.
As of
March 31, 2009, there were 29,834,796 shares of common stock outstanding, not
giving effect to the shares issuable in connection with the merger of Cellegy
Pharmaceuticals, Inc. and Adamis Pharmaceuticals Corporation and to the reverse
stock split of Cellegy shares effected on April 1, 2009, as described in this
Report.
Documents Incorporated by Reference:
None
ADAMIS PHARMACEUTICALS CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE
OF CONTENTS
Part I
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Item
1.
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BUSINESS
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2
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Item
1A.
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RISK
FACTORS
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31
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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45
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Item
2.
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PROPERTIES
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45
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Item
3.
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LEGAL
PROCEEDINGS
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45
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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45
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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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46
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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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46
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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53
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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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53
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Item 9A(T).
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CONTROLS
AND PROCEDURES
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53
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Item
9B.
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OTHER
INFORMATION
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54
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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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54
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Item
11.
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EXECUTIVE
COMPENSATION
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59
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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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64
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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66
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Item
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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66
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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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68
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Information
Relating to Forward-Looking Statements
This
Annual Report on Form 10-K includes “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995 which provides a
“safe harbor” for these types of statements. 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. These forward-looking statements include statements
include statements about our strategies, objectives and our future
achievement. To the extent statements in this Annual Report involve,
without limitation, our expectations for growth, estimates of future revenue,
our sources and uses of cash, our liquidity needs, our future products, expense,
profits, cash flow balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. These statements are
often, but not always, made through the use of word or phrases such as
“believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and
“would.” 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 differ materially from those discussed in this
Report. We undertake no obligation to release publicly the results of
any revisions to these forward-looking statements or to reflect events or
circumstances arising after the date of this Report. Important
factors that could cause actual result to differ materially from those in these
forward-looking statements are disclosed in this Annual Report on Form 10-K,
including, without limitation, those discussion under “Item 1A. Risk Factors,”
in “Item 1. Business” and in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” as well as other
risks identified from time to time in our filing’s with the Securities and
Exchange Commission, press releases and other communications.
Unless the context otherwise
requires, the terms “we,” “our,” and “the Company” refer to Adamis
Pharmaceuticals Corporation, a Delaware corporation (formerly Cellegy
Pharmaceuticals, Inc.), and its subsidiaries. Savvy®, Aerokid®,
AeroOtic®, and Prelone® are our trademarks. We also refer to
trademarks of other corporations and organizations in this
document.
PART I
Introductory
Note
Merger
of Cellegy and Adamis; Change of Corporate Name
On
February 12, 2008, Cellegy Pharmaceuticals, Inc. (“Cellegy,” and Cellegy before
the effective time of the merger described below sometimes referred to as “Old
Cellegy”) entered into an Agreement and Plan of Reorganization (the agreement as
amended, referred to as the “Merger Agreement”) with Adamis Pharmaceuticals
Corporation (“Old Adamis”) and Cellegy Holdings, Inc., a wholly-owned subsidiary
of Cellegy (“Merger Sub”), providing for the acquisition of Old Cellegy by Old
Adamis. The Merger Agreement provided that Merger Sub will
merge with and into Old Adamis, with Old Adamis becoming a wholly-owned
subsidiary of Cellegy and the surviving corporation in the merger (the
“Merger”). The stockholders of Old Cellegy and Old Adamis approved
the transaction at a special meeting of Adamis stockholders held on March 23,
2009, and at an annual meeting of Old Cellegy’s stockholders held on March 23,
2009.
Effective
as of the close of business on April 1, 2009, Old Adamis and Old Cellegy
completed the Merger transaction contemplated by the Merger
Agreement. In connection with the consummation of the Merger
and pursuant to the terms of the Merger Agreement, Old Cellegy changed its name
from Cellegy Pharmaceuticals, Inc. to Adamis Pharmaceuticals
Corporation, and Old Adamis changed its corporate name to “Adamis
Corporation.”
Reverse
Stock Split of Old Cellegy Common Stock
Pursuant
to the terms of the Merger Agreement, immediately before the consummation of the
Merger Old Cellegy effected a reverse stock split of its common
stock. Pursuant to this reverse stock split, each 9.929060333
shares of common stock of Old Cellegy that were issued and outstanding
immediately before the effective time of the Merger was converted into one share
of common stock of the Company, and any remaining fractional shares held by a
record holder of shares were rounded up to the nearest whole share.
As a
result, the total number of shares of Old Cellegy that were outstanding
immediately before the effective time of the Merger were converted into
approximately 3,000,000 shares of post-reverse split shares of common stock of
the Company.
Issuance of Shares to Old Adamis
Stockholders
Pursuant
to the terms of the Merger Agreement, at the effective time of the Merger, each
share of Old Adamis common stock that was issued and outstanding immediately
before the effective time of the Merger ceased to be outstanding and was
converted into the right to receive one share of common stock of the
Company. As a result, the Company expects to issue
approximately 42,978,067 post-reverse split shares of common stock of the
Company to persons who were Old Adamis stockholders before the effective time of
the Merger, and the former Old Adamis stockholders, together with the holders of
converted Old Adamis warrants, became entitled to receive shares of Company
common stock and warrants representing in the aggregate approximately 93.5% of
the outstanding shares of Company common stock outstanding immediately after the
effective time of the Merger.
In
connection with the Merger, each outstanding stock option, warrant, convertible
security and other right to purchase or acquire the capital stock of Old Adamis
was assumed by the Company and became an option, warrant, convertible security
or other right to purchase or acquire shares of common stock of the Company,
with the number of shares and exercise prices proportionately adjusted based on
the exchange ratio in the Merger. Because the exchange ratio in
the Merger was one-for-one, the exercise prices and numbers of shares covered by
outstanding Old Adamis options, warrants and convertible securities that the
Company assumed in the Merger remained the same after the
Merger. As a result, an outstanding Adamis warrant to purchase
1,000,000 shares of Old Adamis common stock was assumed by the Company in the
Merger and became a warrant to purchase 1,000,000 shares of common stock of the
Company.
Increase
in Authorized Shares of Capital Stock
Also in
connection with the closing of the Merger, the Company amended its certificate
of incorporation to increase the authorized number of shares of common stock
from 50,000,000 to 175,000,000 and the authorized number of shares of preferred
stock from 5,000,000 to 10,000,000.
1
New
2009 Equity Incentive Plan
At the
March 23, 2009 stockholders meeting, the Company’s stockholders also approved a
new 2009 Equity Incentive Plan (the “Plan”) which became effective upon the
closing of the Merger. The Plan provides for the grant of incentive
stock options, non-statutory stock options, restricted stock awards, restricted
stock unit awards, stock appreciation rights, performance stock awards, and
other forms of equity compensation (collectively, “stock
awards”). In addition, the Plan provides for the grant of
performance cash awards. The aggregate number of shares of
common stock that may be issued initially pursuant to stock awards under the
Plan is 7,000,000 shares. The number of shares of common stock
reserved for issuance will automatically increase on January 1 of each calendar
year, from January 1, 2010 through and including January 1, 2019, by the lesser
of (a) 5.0% of the total number of shares of common stock outstanding on
December 31 of the preceding calendar year or (b) a lesser number of shares of
common stock determined by our board of directors before the start of a calendar
year for which an increase applies.
Departure
of Directors or Certain Officers; Election of Directors
At the
Old Cellegy annual meeting of stockholders held on March 23, 2009, the
stockholders re-elected the five persons who were directors of Old Cellegy,
Richard C. Williams, Tobi B. Klar, M.D., John Q. Adams, Sr., Robert
B. Rothermel and Thomas M. Steinberg, to the Old Cellegy
board of directors. As was disclosed in the Form S-4
registration statement filed by the Company with the Securities and Exchange
Commission, registration number 333-155322, and the joint proxy
statement/prospectus included therein (the “Registration Statement” or the
“Proxy Statement”), pursuant to the terms of the Merger Agreement at the closing
of the Merger two Cellegy directors, Tobi B. Klar, M.D. and Thomas
M. Steinberg, resigned, and three additional persons, Dennis J.
Carlo, Ph.D., David J. Marguglio and Richard L. Aloi, each
of whom was a director and officer of Old Adamis, were appointed as directors of
the Company, to serve from and after consummation of the Merger until their
respective successors are duly elected and qualified, or until the earlier of
their death, resignation or removal. Richard C. Williams, Robert
B. Rothermel, and John Q. Adams, Sr. continued as directors of the
Company. In addition, at the closing of the Merger, Richard C.
Williams resigned as the Company’s interim chief executive officer and Robert J.
Caso resigned as the Company’s chief financial officer, Dennis J. Carlo, Ph.D.,
the chief executive officer of Adamis, became the chief executive officer of the
Company and the other executive officers of Adamis became executive officers of
the Company, as described in further detail below under “Item 10. Directors and
Executive Officers of the Registrant.”
Periods
Covered by this Annual Report
Cellegy’s
fiscal year ended on December 31, and accordingly this Annual Report on Form
10-K is with respect to Cellegy’s fiscal year ended December 31,
2008. Old Adamis’ fiscal year ends on March 31. The Merger
transaction is treated for accounting purposes as a reverse merger, and as a
result, for financial reporting purposes after the effective time of the Merger
the financial statements of the Company are deemed to be financial statements of
Old Adamis, and Old Adamis’ March 31 fiscal year-end will be the fiscal year end
of the Company. The Company will, within the time periods permitted
by applicable rules, file a report on Form 8-K that includes financial audited
statements of Old Adamis for the year ended March 31, 2009.
While this Annual Report on Form 10-K
relates to the fiscal year of Old Cellegy, since the Merger transaction was
completed before the filing of this Report, the description of the business of
the registrant under Item 1, and the risk factors contained in Item 1A “Risk
Factors,” also relates to the business of Old Adamis and the Company as intended
to be conducted following the effective time of the Merger, rather than just to
the business of Old Cellegy as it existed on December 31,
2008. This Report is not intended to present comprehensive
information concerning Old Adamis for the 2008 calendar year, since the Merger
had not become effective as of December 31, 2008. References to
“Cellegy” in the discussion below will refer to Old Cellegy before the effective
time of the Merger, unless the context otherwise requires.
ITEM
1: BUSINESS
Business of
Cellegy
Cellegy
is a specialty pharmaceuticals company. Cellegy’s wholly owned
subsidiary, Biosyn, Inc., 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. Biosyn’s product candidates
include: Savvy®, which underwent Phase 3 clinical trials in Ghana and Nigeria
for reduction in the transmission of Human Immunodeficiency Virus/Acquired
Immunodeficiency Disease, or HIV/AIDS, both of which were suspended in 2005 and
2006 and terminated before completion, and is the subject to a Phase 3
contraception trial in the United States. While the Savvy Phase 3
contraception trial in the United States has been completed and the
analysis of the results is expected to be completed by the end of 2009,
Cellegy is not directly involved with the conduct and funding thereof, and it is
uncertain that Savvy will be commercialized or that Cellegy will ever realize
revenues therefrom. Cellegy does not currently have any commercially
available products.
2
During
2008 and 2009 before the effective time of the Merger, Cellegy’s operations
related 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
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 monitors the progress of the Savvy
Phase 3 contraception trial in the United States and through communications with
the clinical regulatory organization, or CRO, that is involved in the conduct of
the trial and other parties involved in conducting the trial concerning matters
such as the status and progress of the trial, enrollment numbers and rates of
patient enrollment, issues that arise concerning conduct of the trial and
anticipated timelines regarding the trial. The Company receives
reports from the CRO concerning the progress of the trial, enrollment statistics
and rates, any adverse events, people leaving the trial and other
requests. The Company prepares and files required reports with
the United States Food and Drug Administration (the “FDA”) and other applicable
regulatory agencies concerning both the current contraception trial and its
suspended HIV trials.
On
September 12, 2007, Family Health International, or 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
Cellegy 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, or 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 uncertain 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, or CONRAD, for collaboration on the development of
Cellegy’s entire microbicide pipeline, including Savvy, UC-781 and
Cyanovirin-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.
Products
Cellegy
obtained rights to the product candidate Savvy with its October 2004 acquisition
of Biosyn. Savvy, a microbicidal gel, underwent Phase 3 trials for
the reduction in transmission of HIV. Savvy also showed promising
preliminary results in the prevention of other sexually transmitted diseases, or
STDs, including those caused by herpes simplex virus and
Chlamydia. 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 earlier trials
suggested it is also spermicidal. Because of its mechanism of action,
C31G has a low potential for resistance and is active against drug resistant
pathogens.
A Phase 3
trial for contraception in the United States, with 1,577 women enrolled out of
an expected total enrollment of 1,670 female subjects, was ongoing and was
completed in the fourth quarter of 2008. Analysis of the results
is expected to be completed by the end of 2009. 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. 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, or USAID; the National Institute
for Child Health and Development, or NICHD; the National Institute for Allergy
and Infectious Disease, or NIAID; CONRAD; and other governmental and
philanthropic organizations. It is uncertain that Savvy will be
commercialized or that Cellegy will ever realize revenues
therefrom. CONRAD, through its agreement entered into with Cellegy in
January 2006, has undertaken a portion of the funding and oversight
responsibilities in exchange for access to Biosyn’s current and past research
and related technological intangibles. The Company retains the right
to use the results of the clinical trials. 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 the Company would be able to achieve profitability with
this product, if approved.
3
Biosyn
acquired C31G Technology from the inventor of the technology, Edwin
B. Michaels, in October 1996. This technology is a
material component of the Savvy product candidate. 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
the 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 2017 and 2021. No payments have been made to date by
the Company or Biosyn to Mr. Michaels pursuant to this agreement.
In May
2001, Biosyn entered into an exclusive license agreement with Crompton
Corporation, now 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
Crompton a nonrefundable, upfront license fee of $50,000 that was recorded as
research and development. Crompton also received a warrant to
purchase Biosyn common stock, which converted into a Cellegy warrant in
connection with the acquisition of Biosyn by Cellegy. The
warrant entitles Chemtura to purchase up to 3,933 (post-reverse split) shares of
Cellegy common stock at a split adjusted exercise price of $173.96 per
share. The warrant is exercisable for a period of two years
upon initiation of Phase 3 trials of UC-781. Crompton is entitled to
milestone payments upon the achievement of certain development milestones and
royalties on product sales. If all development and product approval
milestone events were achieved, potential milestone payments would equal
approximately $1,150,000. If UC-781 is successfully developed as a
microbicide, then Biosyn has exclusive worldwide commercialization
rights. To date, no milestone payments have been made by the Company
or Biosyn to Chemtura pursuant to this agreement.
On
October 18, 2007, Cellegy and CONRAD amended their license agreement to modify
the non-exclusive license grant covering Cellegy’s intellectual property
relating to the 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
has previously entered into various other collaborative research and technology
agreements, however Biosyn has ceased actively participating in researching the
compounds or formulations covered by such agreements. The cessation
of these activities is primarily due the lack of funding and the lack of
technical infrastructure required in performing such research. 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 the license with the National
Institutes of Health 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.
The
agreement pursuant to which Cellegy acquired Biosyn provides for contingent
milestone payments of $15.0 million payable to the former shareholders of Biosyn
upon approval by the FDA of Savvy for contraception and HIV prevention or the
first commercial sale of Savvy in the U.S. for either
indication. Of that amount, $2.0 million is payable upon the first
arm’s length commercial sale of Savvy in Japan based on any regulatory approval
for any indication, and $1.0 million per country is payable upon the first arm’s
length commercial sale of Savvy in Germany, France and the United Kingdom based
on any regulatory approval for any indication. In addition,
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. Also, Chemtura Corporation is entitled to milestone
payments from Biosyn upon the achievement of certain development milestones and
royalties on products sales, if any, relating to the UC-781 product
candidate. In addition, Cellegy has obligations under Biosyn’s
promissory note to the Ben Franklin Technology Center of Southeastern
Pennsylvania; however, repayment of this note is based on a percentage of future
revenues of Biosyn (excluding unrestricted research and development funding
received by Biosyn from non-profit sources), if any, until the principal balance
of approximately $777,902 is satisfied.
4
Cellegy’s
incurred no research and development expenses in 2008. Research and
development expenses were approximately $23,000 in 2007.
Business of Adamis and the
Company
As a
result of the Merger, the Company changed its corporate name from Cellegy
Pharmaceuticals, Inc. to Adamis Pharmaceuticals Corporation, and Old
Adamis changed its corporate name from Adamis Pharmaceuticals Corporation to
Adamis Corporation. The Old Adamis corporation will be referred to in
the discussion below as “Adamis.” As a result of the Merger, Adamis
is a wholly-owned subsidiary of the Company.
In the
discussion below, all statements concerning market sizes, annual U.S. sales of
products, U.S. prescriptions and rates of prescriptions, the incidence of
diseases or conditions in the general population, and similar statistical or
market information are based on data published by the following sources: IMS
Health Sales Perspectives, Retail and Non-Retail Combined Report, referred to as
the IMS Report; National Data Corporation’s Epinephrine Prescription and Dollar
data for 2007, referred to as the NDC Report; Commercial and Pipeline Insight:
Allergic Rhinitis, published by Data Monitor October 2007, referred to as the
Data Monitor Report; and AAAAI – American Academy of Allergy, Asthma and
Immunology Allergy Statistics for the U.S. published in 2008, referred to as the
AAAAI Statistics.
Company
Overview
Adamis
was founded in June 2006 as a Delaware corporation. Adamis has two
wholly-owned subsidiaries: Adamis Viral Therapies, Inc. (biotechnology), or
Adamis Viral; and Adamis Laboratories, Inc. (specialty pharmaceuticals), or
Adamis Labs.
Adamis
Labs is a specialty pharmaceutical company that Adamis acquired in April
2007. Adamis Labs has a line of prescription products in the allergy
and respiratory field that are sold through its own sales
force. These products generated net revenues to Adamis of
approximately $622,000 for Adamis’ fiscal year ended March 31,
2008. Adamis Labs has two new product candidates currently in the
pipeline. The first new product is a pre-filled epinephrine syringe
used in the emergency treatment of extreme acute allergic reactions, or
anaphylactic shock. The second product is a generic inhaled nasal
steroid. The company’s goal is to commence commercial sales of the
syringe product in the second quarter of calendar year 2009 and the nasal
steroid product in the first quarter of 2011, assuming adequate funding and no
unexpected delays. Based on the Company’s knowledge of a previously
marketed pre-filled syringe indicated for anaphylaxis, the anticipated lower
price of the syringe product relative to the leading syringe products currently
marketed and the ease of use of its product, the Company believes that the
syringe product has the potential to compete successfully shortly after
commercial introduction of the product, although there can be no assurance that
this will be the case.
Adamis
Viral is focused on developing patented preventative and therapeutic vaccines
for a variety of viral diseases such as influenza and hepatitis. The
first target indication will be avian influenza. The Company believes
that avian flu is a good initial clinical application because there is a large
potential demand for a vaccine or other therapeutic product. However,
there are no assurances concerning whether such a product will be developed or
launched. The Company hopes to initiate an initial clinical trial in
the first half of 2010, if the results are successful to initiate clinical
trials in the United States by the end of 2010, assuming no unexpected delays
and adequate funding. Future potential disease targets might include
therapeutic vaccines for Hepatitis C and Human Papillomavirus.
The
Company’s general business strategy is to attempt to increase sales of existing
and proposed products and services from its Adamis Labs operations in order to
generate cash flow to help support the vaccine product development efforts of
Adamis Viral. The Company believes that the potential for increased
revenues will be driven by two new products.
·
|
The Company’s goal is to commence
commercial sales of a low-cost, epinephrine syringe in the second quarter
of calendar year 2009 that will compete in a well-established U.S. market
estimated to be over $150 million in annual sales, based on industry data
published in the NDC
Report.
|
5
·
|
Adamis Labs intends to introduce
an aerosolized inhaled nasal steroid that is designed to take a small
share of the U.S. market for nasal steroid products, estimated by the
Company to be approximately $3 billion in annual sales, based on the
NDC Report. The Company currently believes that this product
could be introduced as early as the first calendar quarter of 2011,
although the actual date of introduction will depend on a number of
factors and the actual launch date could be later than that
date. Factors that could affect the actual launch date include
the outcome of discussions with the FDA concerning the number and kind of
clinical trials that the FDA will require before the FDA will consider
regulatory approval of the product, any unexpected difficulties in
licensing or sublicensing intellectual property rights for other
components of the product such as the inhaler, any unexpected difficulties
in the ability of our suppliers to timely supply quantities for commercial
launch of the product, any unexpected delays or difficulties in assembling
and deploying an adequate sales force to market the product, and adequate
funding to support sales and marketing
efforts.
|
To
achieve these goals, as well as to support the overall strategy, the Company
will need to raise a substantial amount of funding and make substantial
investments in equipment, new product development and working
capital. The Company estimates that approximately $3.0 million
will be required to support the final product development and initiate the
commercial launch of the epinephrine syringe product, and that an additional
approximately $10.0-15.0 million or more must be invested from the date of this
Report in the Adamis Labs operations to support development and commercial
introduction of the aerosolized nasal steroid product candidate. The
capital that is expected to be provided from expected sales of these products
will be important to help fund expansion of those businesses and the research
and development of the anti-viral technology. If adequate funding is
obtained, clinical trials proceed successfully, regulatory approvals are
obtained and sales are consistent with the Company’s current expectations,
following a period of initial commercial introduction, the Company believes that
revenues generated by Adamis Viral’s vaccine products could exceed revenues from
the Adamis Labs operations.
Adamis
Labs
On April
23, 2007, Adamis completed the acquisition of a specialty pharmaceutical company
named Healthcare Ventures Group, Inc., or HVG. HVG had previously
acquired a group of allergy and respiratory products and certain related assets
from a third party company. The third party also transferred to HVG
members of its sales force and management team. Adamis created the
Adamis Laboratories subsidiary, which then acquired HVG in a stock-for-stock
exchange. Adamis issued approximately 12.6 million new shares of
Adamis common stock to the shareholders of HVG. Under the terms of
the transaction agreements, approximately 7.5 million of these shares were
placed in escrow and are subject to restrictions on transfer as well as
potential forfeiture to cover indemnification obligations and/or repurchase by
the Company if certain performance targets based on revenue over a period of
three years are not achieved by Adamis Labs and if the holders do not remain
employed by Adamis during that period.
Adamis
Labs has a small base of established products, as well as several product
candidates that the Company believes have the potential to be successful
products.
Current
Products
The
current specialty pharmaceutical products are sold under a prescription and
promoted to physicians who specialize in allergy, respiratory disease and
pediatric medicine. The six currently marketed products
include:
·
|
AeroHist ® Caplets (chlorpheniramine
maleate 8mg, methscopolamine nitrate 2.5 mg) extended release, scored
caplets. Indicated for the relief of symptoms of seasonal or
perennial rhinitis.
|
·
|
AeroHist ® Plus Caplets (chlorpheniramine
maleate 8mg, phenylephrine hydrochloride 20mg, methscopolamine nitrate 2.5
mg). Indicated for the relief of symptoms of seasonal or
perennial rhinitis.
|
·
|
AeroKid ® Oral Liquid (chlorpheniramine maleate
4mg/5ml, phenylephrine hydrochloride 10mg/5ml, methscopolamine nitrate
1.25mg/5ml). Indicated for the relief of symptoms of seasonal
or perennial rhinitis.
|
·
|
AeroOtic ® HC Ear Drops (chloroxylenol 1mg,
pramoxine hydrochloride 10mg, hydrocortisone 10mg). Indicated
for the treatment of superficial infections of the external auditory canal
complicated by inflammation caused by organisms susceptible to the action
of the antimicrobial and to control itching and swimmer’s
ear.
|
6
·
|
Allergy
Extracts - allergy
extracts, sterile vials, and diluents used in preparation of allergy
therapy.
|
·
|
Prelone ® (prednisolone syrup, USP, 15 mg
per 5 ml). Indicated in various diseases and disorders
including allergic states and respiratory
diseases.
|
Net
revenues to Adamis from sales of these products from April 23, 2007, the date on
which Adamis acquired Adamis Labs, through Adamis’ fiscal year ended March 31,
2008, were approximately $622,000. During Adamis’ fiscal year ended
March 31, 2008, three customers, Cardinal Health, McKesson and
AmerisourceBergen, accounted for approximately 38%, 35% and 11%, respectively,
of Adamis’ revenues. The products have not been heavily promoted in
the past due to funding limitations and the competitive market for
antihistamine/decongestant products. The Company believes there
is limited growth potential for these products, due in part to the widespread
substitution of generic products at the dispensing pharmacy level for the
conditions indicated for the Adamis Labs products.
The
Prelone product is the subject of an ANDA approval from the
FDA. As the Company believes is common with many drug products,
the Prelone product is manufactured by a third party manufacturer which holds
the ANDA approval relating to the product. Adamis owns the
trademark and intellectual property rights relating to the product and
distributes the product pursuant to those rights.
Product
Pipeline
Two new
product candidates in the allergy and respiratory field are in the Adamis Labs
development pipeline. The rate of development and timing of market
launch will depend on several factors, including the amount of funding that the
Company receives. If adequate funding is obtained to develop and
market the products, the Company believes that these two product candidates
could generate significant revenues.
The first
product, a single-dose epinephrine syringe, is expected to be commercially
launched during the second quarter of calendar 2009. The second
product, an aerosolized inhaled nasal steroid product for the treatment of
seasonal and perennial allergic rhinitis, is targeted for commercial
availability in the first quarter of calendar year 2011, assuming adequate
funding to support product development and launch and no unanticipated delays in
obtaining regulatory approvals. Adamis Labs has secured an agreement
with Catalent Pharma Solutions, Inc. for sterile manufacturing product supply
for the epinephrine syringe product candidate and is in discussions with an
aerosol inhaler supplier for the aerosolized nasal steroid product
candidate.
Epinephrine
Pre-Filled Syringe
There is
a well-defined, growing market in the United States for patient-administered
emergency epinephrine injectors used in the treatment of
anaphylaxis. Based on information in the NDC Report, the Company
estimates that annual U.S. sales for emergency epinephrine injectors
were approximately $150 million in 2006 and have historically grown at a rate of
approximately 15% per year. Currently, the emergency epinephrine
market is dominated by one brand, EpiPen®, which
the Company believes is relatively high priced. The Company
believes there is an opportunity to bring to market a simpler, more intuitive
and user-friendly, lower-cost product that should be competitive with existing
products.
Anaphylaxis
is usually triggered by an allergic reaction to medication, food, insect stings,
skin allergies or latex allergies. This sudden, whole body allergic
reaction results in a potentially life threatening medical
emergency. The recognized treatment of choice for anaphylaxis is
aqueous epinephrine (adrenaline) delivered by injection.
There are
two major causes of consumption of emergency epinephrine injectors: use when a
patient experiences an anaphylactic attack, or expiration of the
product. Of the two, expiration is by far the largest cause of
consumption. The epinephrine contained in injectors has a limited
shelf life, and on average a new prescription must be obtained every 12 to 18
months. As a result, based on information in the AAAAI Statistics,
the Company estimates that at least 70% of all epinephrine injectors expire
unused.
EpiPen®,
EpiPen® Jr., and
Twinject® are the
only patient-administered epinephrine products available for sale as emergency
treatment of anaphylaxis in the United States. Based on information
in the IMS Report, the U.S. epinephrine injector market was
approximately $149 million in sales in 2005. EpiPen ® and
EpiPen ®
Jr. combined represented over approximately 99% of all sales in the
U.S. The physicians that prescribe self-administered epinephrine are
relatively concentrated, with over 70% of prescriptions originating from
allergists and primary care physicians, according to the IMS
Report.
7
Based on
information in the AAAAI Statistics, the U.S., an estimated 5% of the population
suffers from insect sting anaphylaxis, up to 6% are latex sensitive and up to
1.5% of adults and 5% of children under three years of age experience food
related anaphylaxis. Adamis believes that anaphylaxis may be
under-diagnosed. In January 2001, a published study by
AAAAI revealed that up to 40 million Americans (15% of the total
population) may be at risk for anaphylaxis, a significantly higher number than
the historically estimated at-risk population. According to
information in the AAAAI Statistics, approximately 3,000 people in the U.S. die
each year from anaphylaxis.
The
number of prescriptions has grown annually as the risk of anaphylaxis has become
more widely understood. According to the IMS Report, total prescriptions
for EpiPen products more than doubled in the five year period from 2001 to
2005. The Company estimates that the growth rate of annual
prescriptions will decline to a growth rate of approximately 4-5% per year by
2010.
Annual
Prescriptions for Emergency Epinephrine (000)
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg12.jpg)
EpiPen
®
was originally developed by Meridian Medical Technologies, Inc. as an
auto-injection system for use by military personnel. It was designed
for self-administration as an antidote for chemical warfare agents and
morphine. Meridian Medical Systems, which is the manufacturer of the
EpiPen and EpiPen Jr., continues to focus on products for the military, and its
major customer is the United States Department of Defense. The EpiPen
®
products were introduced to the market in 1982, and were the only epinephrine
injectors for allergic emergencies that were available until 2005. In
August 2005, another company introduced a competing product, Twinject ® Dual
Pack 0.3mg epinephrine auto injectors, which, the Company believes due to
pricing and ease of use issues, has enjoyed only a small market share in the
United States. Twinject is currently owned by Sciele Pharma,
Inc.
The
Company believes that there are barriers to market entry for new
competitors based on epinephrine’s susceptibility to contamination, sensitivity
to heat and light and a short shelf-life, as well as the need for a competitor
to possess the expertise to overcome the packaging and delivery challenges of
introducing a competing product to the market. The Company
also believes that the size of the market is too small to be a major focus
of the large pharmaceutical companies, although there can be no guarantees that
this will be the case.
The
Company believes that the primary opportunity lies in the 0.3 mg segment, which
constitutes approximately 72% of the total market (measured as a percent of
U.S. sales), based on EpiPen unit sales history and the NDC
Report. When sales of dual packs of EpiPen and TwinJect are converted
to single units, the total target market in the U.S. is about 2.5
million single units per year.
The
Company believes that there is an opportunity for a simpler, low-cost, more
intuitive and user-friendly pre-filled syringe to compete in this largest
segment of the market. The Company believes that its new
product can compete effectively against EpiPen ® based on
the following factors, among others:
8
·
|
Market
Knowledge. Mr. Aloi, president of Adamis
Labs, (formerly a Director at Center Laboratories of Long
Island, New York) was responsible for the U.S. introduction of EpiPen and
EpiPen Jr brands and helped to craft the marketing and sales strategy that
saw EpiPen brands grow by double digits in units and dollars
annually.
|
·
|
Market
Presence. Adamis Labs already provides
allergenic extracts for processing into desensitization or immunotherapy
injections to the same allergy physician group that would prescribe the
pre-filled syringe.
|
·
|
Lower
Price. The Company believes that a
lower-priced option would be particularly attractive to individuals
potentially susceptible to anaphylaxis as well as managed healthcare drug
reimbursement plans providing patient prescription
reimbursement. The Company expects to introduce the Epi
Syringe at a price point reflecting a discount to the price of the market
leader, EpiPen, in part to make the product more attractive to
customers. At this price, the Company believes it can still
obtain significant gross
margins.
|
·
|
Ease of
Use. The
EpiPen ®, EpiPen ® Jr., and Twinject ® are powerful spring-loaded
devices. If not administered properly, they can misfire or be
misused. Adamis’ Epi pre-filled 0.3mg syringe will allow
patients to self-administer (self-inject) a pre-measured epinephrine dose
quickly with a device that does not have moving parts that the user cannot
control, which the Company believes may increase product
safety.
|
There are
three key supply components used in the manufacture of Epi Syringe: the
pre-filled syringe containing the epinephrine; the formulation solution; a
specially designed plunger rod that expels only the appropriate emergency amount
of 0.3mg of epinephrine; and the plastic carrying case. Adamis owns a
proprietary epinephrine liquid formulation. Adamis has secured
component suppliers that will ship all components to the manufacturer which will
complete a finished labeled product. The Company estimates that
as of the date of this Report, pending adequate funding, the project development
will complete and commercial launch will take place in the second quarter of
calendar 2009.
The
Company believes that the market for emergency epinephrine injectors will grow,
driven by increasing awareness, lower cost alternatives, and promotion by new
market entrants. The Company expects that the total market unit
growth rate will continue to grow as additional lower priced epinephrine
products are introduced, but total dollar market will plateau as a result as the
market matures with multiple lower priced products. The Company
believes that the Epi Syringe product may acquire a share of the market in a
manner somewhat similar to the pattern established by generic drugs, in that the
price differential between the expected price of the Adamis syringe product and
the price at which the market-leading product is currently sold will motivate
purchasers and reimbursing payors to choose the lower cost
alternative. The Company also believes, however, that if its product
competes successfully, at least one of the current competitors may introduce a
competing, low-priced, pre-filled syringe while maintaining the price points of
its existing product lines. The Company believes that such a
competing product might have a comparable or lower price than the Adamis
product. The Company believes that the syringe product has the
potential to compete successfully shortly after commercial introduction of the
product, although there can be no assurance that this will be the
case.
Inhaled
Nasal Steroid
Adamis
Labs is developing an aerosolized inhaled nasal steroid for the treatment of
seasonal and perennial allergic rhinitis. The active ingredient is
beclomethasone diproprionate, a synthetic steroid that demonstrates potent
glucocorticoid activity. Glucocorticosteroids are hormones produced
by the adrenal cortex. Corticosteroids inhibit inflammation in
allergic reactions by interfering with the synthesis of prostaglandins and
leukotrienes, chemicals that are normally synthesized as part of the
inflammatory process. The Company refers to the product as
Beclomethasone Aerosolized Nasal Steroid, or BANS.
The
market for inhaled nasal steroids, or INS, as estimated by the Company based on
the DataMonitor Report, is about $3 billion annually in the U.S. and
growing steadily. Although the market is dominated by two
multi-national pharmaceutical companies, the Company believes there is a niche
that can be exploited, and that an Adamis product candidate can achieve a small
percentage share of this large market.
INS
products are sold under prescription for seasonal allergic
rhinitis. In addition to inhaled nasal steroids, many different types
of products treat the symptoms of allergic rhinitis: oral antihistamines and
decongestants are among the most popular for self-medication/patient
treatment. All physician specialties report that the majority of
their allergic rhinitis patients receive intranasal steroids, either alone or in
combination with oral antihistamines. In general, physicians view
intranasal steroids as safe and effective.
9
There are
four major physician specialties that treat patients with allergic rhinitis:
Allergists, Otolaryngologists, or ENTs; Primary Care Physicians, or PCPs; and
Pediatricians. Allergists, along with ENTs, tend to be the most
aggressive in terms of pharmacological treatment of allergic
rhinitis. On an individual basis, the allergist is the largest
prescriber of products within the INS category. ENT physicians
contribute half as many prescriptions as allergists, but that is still about
five times the volume of the average primary care physician.
The INS
market is highly seasonal with most of the sales occurring in two periods: a
spring season from April through May or June; and a fall season occurring in
September and October. Based on information in the DataMonitor
Report, the Company estimates that the INS market grew at an annual rate of over
5% from 31.7 million prescriptions in 2002 to an estimated 38.7 million
prescriptions in 2006.
Total
U.S. Prescriptions for Inhaled Nasal Steroids 2002-2006e (millions)
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg14a.jpg)
In the
same period, total U.S. market sales grew from $1.89 billion in 2002 to an
estimated $3 billion for 2006. This average growth rate is about 10%
per year, and resulted primarily from steady price increases.
Total
U.S. Sales of Prescription Inhaled Nasal Steroids 2002-2006e ($
millions)
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg14b.jpg)
The
Company expects that the growth rate in average price increases will decline and
reach zero by 2011, due to increasing competition from generic
products.
Currently,
the INS market is dominated by aqueous solution formulations delivered by a
pump. These aqueous pump spray formulations have replaced CFC
propellant INS products, which once dominated the INS market. The
propellant inhaled nasal steroids that were previously available have been
discontinued due to CFC concerns for the environment. Based
on information in the IMS Report concerning 2005 sales, the two
leading products account for over 70% of total product sales in this
market.
10
Product
|
2005 Sales
(millions)
|
Market
Share
|
||||||
Flonase
®
|
$ | 1,208 | 46.4 | % | ||||
Nasonex
®
|
$ | 705 | 27.1 | % | ||||
Nasacort
®
AQ
|
$ | 348 | 13.4 | % | ||||
Rhinocort
®
|
$ | 325 | 12.5 | % | ||||
Nasarel
®
|
$ | 17 | 0.6 | % | ||||
Total
|
$ | 2,603 | 100.0 | % |
The
Company believes that in general, prescribing physicians view all INS products
as being generally similar in terms of efficacy and safety. As a
result, the INS market is sensitive to promotion, and companies spend a great
deal of effort and money each year in the attempt to differentiate these
products from one another. The Company believes that large
amounts are spent on direct-to-consumer advertising for the two largest holders
of market share, Flonase ®,
marketed by GlaxoSmithKline, and Nasonex ®,
marketed by Schering. In addition to direct-to-consumer
advertisement, GSK and Schering also spend large amounts of dollars in personal
promotion detailing physicians and distributing samples as well as journal
advertisement.
The
Company does not anticipate competing directly against the two leading companies
in this market by attempting to out-spend or out-promote them in the
marketplace. The Company believes that its market opportunity
lies in taking a small portion of the market with a new aerosolized HFA version
of a well-established product at a substantial discount to the current prices of
the leading branded products.
The
Company expects BANS to be considered a “new” drug by the FDA, and accordingly
the Company believes that it will be required to submit data for a Section
505(b)(2) application for approval to market. Total time to
develop the BANS product is expected to be approximately 24 months from the date
of this report, assuming sufficient funding and no unexpected
delays. The table below shows the estimated development timeline for
the BANS product.
Developmental
Timeline for BANS
(beclomethasone
diproprionate)
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg15.jpg)
Factors
that could affect the actual launch date for the BANS product candidate include
the outcome of discussions with the FDA concerning the number and kind of
clinical trials that the FDA will require before the FDA will consider
regulatory approval of the product, any unexpected difficulties in licensing or
sublicensing intellectual property rights for other components of the product
such as the inhaler, any unexpected difficulties in the ability of our suppliers
to timely supply quantities for commercial launch of the product, any unexpected
delays or difficulties in assembling and deploying an adequate sales force to
market the product, and adequate funding to support sales and marketing
efforts.
Adamis
Viral Therapies
The
Adamis Viral Technologies subsidiary is focused on developing patented vaccine
technology that has the potential to provide protection against a number of
different viral infectious agents. This novel vaccination strategy,
which employs DNA plasmids, appears, based on preclinical studies conducted to
date, to have the ability to “train” a person’s immune system to recognize and
mount a defense against particular aspects of a virus’ structure. If
successful, the Company believes this technology will give physicians a new tool
in generating immunity against a number of viral infections that have been
difficult to target in the past.
The first
target indication will be avian influenza. Avian flu is a
particularly good initial clinical application because there is a large
potential demand. Subsequent disease targets might include
therapeutic vaccines for Hepatitis C and Human Papillomavirus.
11
The
technology that provides the basis of Adamis Viral Therapies’ research and
development was developed by Dr. Maurizio Zanetti, M.D., a professor
at the Department of Medicine at the University of California, San Diego.
Dr. Zanetti has developed and patented a method of DNA
vaccination by somatic transgene immunization, or STI. The Company
has entered into a world-wide exclusive license with Dr. Zanetti,
through a company of which he is the sole owner, Nevagen, LLC, to utilize the
technology within the field of viral infectious agents. The
Company believes that the technology has broad applications and is targeting
influenza for its initial proof of concept.
STI has
already been tested in Phase I studies in man for other vaccine
applications. An immune response was elicited in the study, and the
results suggested that the procedure was safe. Testing for influenza
is currently at the preclinical stage. If successful, STI may provide
a vaccine for immunity to all forms of influenza, including avian flu , although
of course there are no guarantees that any of the trials will be successful or
that a commercial product will be developed or marketed.
Current
flu vaccines act by giving the immune system a preview of certain proteins
expected to be found on the coat of the flu virus; however, the influenza virus
changes its coat every season. The changes make each year’s new
version of the flu unrecognizable to the immune system, and therefore immunity
to influenza must be reestablished with a new vaccine every fall. The
following summarizes the method proposed by the Company to develop long lasting
and cross-reactive immunity using STI:
·
|
Draw a small amount of blood from
patient
|
·
|
Separate the white blood
cells
|
·
|
Add plasmid (DNA) to the white
blood cells
|
·
|
Incubate overnight to allow the
plasmid to enter the white blood cells ( ex
vivo
transgenesis)
|
·
|
Inject white blood cells back to
the individual to induce immunity to the pathogen of choice, i.e.,
influenza, hepatitis, etc.).
|
The
Company intends to initiate a clinical “proof of concept” trial, currently
anticipated to be conducted in Thailand for the avian flu vaccine in the first
half of 2010. Preliminary discussions have been held with potential
Thai partners regarding the conduct of this trial. The Company’s
current plan is to test a small number of human patients (approximately 80) to
demonstrate that the Company’s procedure induces both a cell-mediated and
antibody response. An antibody response, as measured by increased
concentration of antibodies, is generally accepted by the FDA as an indicator of
increased immunity to the disease. The Company would further seek to
demonstrate a dose-response relationship for the treatment. If the
results of the initial trial are successful, the Company intends to file an
Investigative New Drug application, or IND, with the FDA and begin trials in the
United States in 2010, assuming adequate funding and no unexpected
delays. If the Company’s assumptions regarding the development
process and sufficient funding are correct, the Company believes the product
could be available for public use in the second half of 2012.
There are
a number of factors, including those identified in “Item 1A. Risk Factors,” that
could cause actual events to differ from the Company’s expectations concerning
the timeline for product development and the regulatory approval
process. The Company believes that it will be able to obtain
sufficient funding for its clinical trials and product launches, but there can
be no assurance that this will be the case. Similarly, there are no
assurances that the clinical trials will be successful or that the Company will
be able to submit an application for, or obtain approval from the FDA for, an
avian flu or vaccine product.
Overview
of History of the Flu
Avian
influenza is a highly contagious virus that affects birds and causes high
mortality rates among chickens, ducks, geese, etc. Humans that come
into contact with contaminated birds can become infected. However,
the more widespread concern is the possible mutation of the current form of
avian flu. Some experts predict that the virus will combine with
existing human flu viruses at some point and mutate to allow human-to-human
transfer. The result could be a worldwide pandemic.
A
pandemic occurs when a virus changes dramatically and spreads easily across the
world. A pandemic is not as common as an epidemic. A flu
epidemic happens nearly every year when a virus spreads rapidly through a
population. The history of major flu outbreaks is summarized in the
table below.
12
1918-1919:
Spanish flu pandemic
·
|
The virus is thought to have
spread through troop movements in World War
I.
|
·
|
Estimated 20-40% percent of the
world’s population fell ill during the
outbreak.
|
·
|
Unlike other flu viruses, Spanish
flu killed healthy adults - approximately 500,000 in the
U.S. and up to 50 million
worldwide.
|
1957:
Asian flu pandemic
·
|
Started in China and claimed an
estimated 70,000 lives in the U.S. - mostly among elderly
population.
|
·
|
Experts identified the virus
quickly and created a vaccine available in limited
quantities.
|
1968:
Hong Kong flu pandemic
·
|
Flu pandemic killed about 34,000
in the U.S., mostly among the elderly
population.
|
·
|
This was the mildest pandemic of
the 20th century, perhaps because a similar flu virus created some cross
immunity to the new strain.
|
1976:
Swine flu scare
·
|
The “killer virus” was identified
in Fort Dix, New Jersey.
|
·
|
Over 40 million Americans were
vaccinated and the virus did not
spread.
|
1977:
Russian flu scare
·
|
A flu virus, similar to the avian
flu that circulated in 1957, spread around the
world.
|
·
|
Mostly children and adults under
age 23 were infected with the new
virus.
|
·
|
Some experts explain that young
people, not exposed to the 1957 virus, were
susceptible.
|
1997:
Avian flu scare
·
|
An avian flu outbreak
hospitalized 18 people in Hong Kong with an infection seen before only in
birds.
|
·
|
Officials ordered all chickens
slaughtered after six people
died.
|
Potential
Impact of Avian Flu Pandemic
In March
2007, the Lowry Institute published a report entitled Global Macroeconomic Consequences of
Pandemic Influenza. The report considered the impact of four
possible scenarios:
·
|
Mild, in which the pandemic is
similar to the 1968-69 Hong Kong
flu;
|
·
|
Moderate, similar to the 1957
Asian flu;
|
·
|
Severe, similar to the 1918-19
Spanish flu;
|
·
|
An “ultra” scenario that is worse
than the Spanish flu
outbreak;
|
The
report estimated that a mild pandemic could kill 1.4 million people and cost
$330 billion. In the “ultra” scenario, they estimate
that:
13
·
|
as many as 142 million people
around the world could die;
|
·
|
global economic losses would be
$4.4 trillion - the equivalent of wiping out the Japanese economy's annual
output; and
|
·
|
there would be a large-scale
collapse of Asian economic activity causing global trade flows to dry
up.
|
The
Flu Virus
Influenza
viruses are classified as type A, B, or C based upon their protein
composition. Type A viruses are found in many kinds of animals,
including ducks, chickens, pigs, whales, and also in humans. The type
B virus widely circulates in humans. Type C has been found in humans,
pigs, and dogs and causes mild respiratory infections, but does not spark
epidemics. Type A influenza is the most dangerous of the
three. It is believed responsible for the global flu outbreaks of
1918, 1957 and 1968.
Type A
viruses are subdivided into subtypes based on the protein layers projecting in
spikes from the surface of the individual virus. There are two
different kinds of spikes on each virus: one is the protein hemagglutinin, or
HA, which allows the virus to “stick” to a host cell and initiate infection; the
other is a protein called neuraminidase, or NA, which enables newly formed
viruses to exit the host cell. Scientists have characterized
approximately 16 HA varieties and 9 NA varieties.
Type A
subtypes are classified by a naming system that includes the place the strain
was first found, a lab identification number, the year of discovery, and, in
parentheses, the variety of HA and NA it possesses, for example, A/Hong
Kong/156/97 (H5N1). If the virus infects non-humans, the host species
is included before the geographical site, as in A/Chicken/Hong Kong/G9/97
(H9N2). There are no type B or C subtypes.
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg18.jpg)
Influenza
virus is one of the most mutable of viruses. These genetic changes
may be small and continuous or large and abrupt. Small, continuous
changes happen in type A and type B influenza as the virus makes copies of
itself. The process is called antigenic drift. The
drifting is frequent enough to make the new strain of virus often unrecognizable
to the human immune system. Type A influenza also undergoes
infrequent and sudden changes, called antigenic shift. Antigenic
shift occurs when two different flu strains infect the same cell and exchange
genetic material. The novel assortment of HA or NA proteins in a
shifted virus creates a new influenza A subtype.
Because
people have little or no immunity to such a new subtype, its appearance tends to
cause very severe flu epidemics or pandemics. Due to either antigenic
drift or shift, a new flu vaccine must be produced each year to combat that
year's prevalent strains.
14
In
nature, the flu virus is found in wild aquatic birds such as ducks and shore
birds. It has persisted in these birds for millions of years and does
not typically harm them. But the frequently mutating bird (avian) flu
viruses can readily jump the species barrier from wild birds to domesticated
ducks and then to chickens.
From
there, the next stop in the infectious chain is often pigs. Pigs can
be infected by both bird influenza and the form of influenza that infects
humans. In a setting such as a farm, where chickens, humans and pigs
live in close proximity, pigs act as an influenza virus mixing
bowl. If a pig is infected with avian and human flu simultaneously,
the two types of virus may exchange genes. Such a “re-assorted” flu
virus can sometimes spread from pigs to people depending on the precise
assortment of bird-type flu proteins that are transported into the human
population; the flu may be more or less severe.
In 1997,
for the first time, scientists found that bird influenza skipped the
transitional step from bird to pig and infected humans
directly. Alarmed health officials feared a worldwide epidemic or a
pandemic. Fortunately, the virus could not pass between people and
thus did not spark an epidemic. Scientists speculate that chickens
may now also have the receptor used by human-type viruses.
The
recent spread of strains of avian influenza (H5N1) has highlighted the threat
posed by pandemic influenza. The H5N1 virus is one of 16 different
known subtypes of avian influenza (bird flu) viruses. All influenza
viruses (human and avian) are of significant concern to health officials because
of their ability to mutate rapidly and their propensity for acquiring genes from
viruses that infect other animal species.
H5N1
viruses have been found in birds around the world. As the spread of
H5N1 infection among birds increases, so too does the opportunity for H5N1 to be
transmitted directly from birds to humans. Recently, human H5N1
infection has occurred throughout Southeast Asia, most prominently in Indonesia,
during large H5N1 outbreaks among poultry, causing great concern among health
officials.
If cases
of human infections increase, people simultaneously infected with human and
avian influenza strains could become a “mixing vessel” for the
disease. The result could be the emergence of a lethal H5N1 influenza
virus that is easily transmitted from person to person. Such an
easily transmissible virus could result in an epidemic with severe public health
consequences similar to the pandemic of 1918.
Currently,
available anti-viral drugs and vaccines have limited efficacy, and may become
even less efficacious as the virus continues to mutate. The challenge
is to develop a vaccine that induces an immune response that will protect
against various strains of the flu virus.
Preclinical
Animal Studies
Recently,
experiments conducted by third parties for Adamis utilizing the STI technology
in mice have shown that T-cell immunity can be induced in vivo by a single
intravenous inoculation of naïve B lymphocytes genetically programmed by ex vivo
transgenesis. Trangenesis is accomplished by administering a plasmid
DNA under control of a B cell specific promoter. The process is
entirely spontaneous and mimics the process of viral infection, which is
intracellular replication. Results show the induction of systemic
effector CD4 and CD8 T-cell responses within 14 days after administration of the
transgenic B cells. Durable immunologic memory is also
induced. It has been demonstrated that a single injection of 5 X 10
3
transgenic B lymphocyte induces complete protection from a lethal virus
challenge. The following outlines the protocol used in the mouse
trial:
·
|
a small amount of blood was drawn
from mice
|
·
|
B cells were separated from the
blood and transfected with DNA from flu
virus
|
·
|
transfected lymphocyctes, or
priming B cells, were re-infused into the
mice
|
·
|
14-21 days after re-infusion a
lethal challenge of virus was administered via
aerosol
|
·
|
for controls, mice were injected
with priming B cells transfected with DNA not specific for the
flu
|
15
A single
injection of transgenic B lymphocytes in this trial was sufficient to generate
specific CD8 T-cell memory responses, which protected mice from a lethal viral
challenge. The immune response that was induced was a reaction
against the common components of the influenza virus, and was cross-reactive,
meaning that it reacted against various types of flu virus (avian or any
other). Thus, this type of vaccine may be utilized to protect
individuals from various strains of influenza that may occur.
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg20.jpg)
License
Agreement
On July
28, 2006, Adamis entered into a worldwide exclusive license agreement with Dr.
Zanetti, through a company of which he is the sole owner, Nevagen, to utilize
the technology within the field of viral infectious agents. The
intellectual property, or IP, licensed by Adamis includes the use of the
technology known as “Transgenic Lymphocyte Technology,” or TLI, covered by
patent applications titled “Somatic Transgene Immunization and related methods”
including but not limited to “ ex vivo treatment of an
individual’s lymphocytes with plasmid (non-viral) DNA and administration of
treated lymphocytes to the same individual.” The vaccine is constituted of the
individual’s lymphocytes harboring plasmid DNA, for example, DNA coding for
selected epitopes of influenza virus. The IP includes rights under
two issued U.S. patents, three U.S. patent applications and related
patent applications filed in European Union, Japan and Canada. The
U.S. patent was issued on October 9, 2007 and will expire on April 27, 2019, 20
years from the filing date of the earliest U.S. non-provisional application upon
which the patent claims priority.
The field
for this exclusive license is the prevention and treatment and detection of
viral infectious diseases. The geographic area covered by the
exclusive license is worldwide. The license will terminate with the
expiration of the U.S. patent for the IP.
As part
of the initial license fee Adamis granted Dr. Zanetti the right to
purchase 1.0 million shares of Adamis common stock at a price of $0.001 per
share, and he subsequently exercised that right. In addition, Adamis
paid the licensor an initial license fee of $55,000. For the first
product, Adamis will make payments upon reaching specified milestones in
clinical development and submission of an application regulatory approval,
potentially aggregating $900,000 if all milestone payments were
made. As of March 31, 2009, no milestones have been achieved and no
milestone payments have been made. The agreement also provides that
Adamis will pay the licensor royalties, in the low single digits, payable on net
sales received by Adamis of products covered by the IP. If additional
technologies are required to be licensed to produce a functional product, the
royalty rate will be reduced by the amount of the royalty paid to the other
licensor, but not more than one-half the specified royalty
rate. Royalties and incremental payments with respect to influenza
will continue until reaching a cumulative total of $10.0 million.
Adamis
and the licensor have the right to sublicense with written permission of the
other party. In the event that the licensor sublicenses or sells the
improved technology to a third party, then a portion of the total payments, to
be decided by mutual agreement, will be due to Adamis. If Adamis
sublicenses the IP for use in influenza to a third party, the licensor will be
paid a fixed percentage of all license fees, royalties, and milestone payments,
in addition to royalties due and payable based on net sales.
16
If the IP
is sublicensed by Adamis to another company for any indication in the field
covered by the license agreement other than with respect to influenza, the
licensor will be paid a portion of all license fees, royalties and milestone
payments, with the percentage declining over time based on the year in which the
sublicense is granted. Certain incremental non-flu sublicensing
payments described in the license agreement are specifically excluded from the
royalty cap.
All
improvements of the IP conceived of, or reduced to practice by Adamis, or made
jointly by Adamis and the licensor will be owned by Adamis. Adamis
granted Nevagen a royalty-free nonexclusive license to use any improvements made
on the existing technology for research purposes only. Adamis has
agreed to grant to Nevagen a royalty-free license for any improvement
needed for the commercialization of the IP for Nevagen’s use outside the field
licensed to Adamis. If Nevagen sublicenses or sells the improved
technology to a third party, then a portion of the total payments, to be decided
by mutual agreement, will be due to Adamis.
Adamis
will have the right of first offer to license the following additional
technology from the licensor, if and when it becomes available:
·
|
Technology for the application of
related intellectual property as a prophylactic or therapeutic cancer
vaccine; and
|
·
|
Any additional technology
developed by the licensor related to the
IP.
|
Adamis
has the right to terminate the agreement if it is determined that no viable
product can come from the technology. Upon such termination,
Adamis would be required to transfer and assign to the licensor all filings,
rights and other information in its control if termination
occurs. Adamis would retain the same royalty rights for
license, or sublicense, agreements if the technology is later developed into a
product. Either party may terminate the license agreement in
the event of a material breach of the agreement by the other party that has not
been cured or corrected within 90 days of notice of the breach.
Development
Process
The
statements below, and elsewhere in this Annual Report on Form 10-K,
concerning anticipated future events concerning the development process of the
Company’s vaccine product candidates, the clinical trial process, and the
regulatory approval process including the actions of the FDA, are subject to
several uncertainties and contingencies that could cause actual results to
differ in material respects from the results and timelines anticipated in the
discussion below. Some of these uncertainties and contingencies are
described below under the heading “Item 1A. Risk Factors.” There is no
guarantee that the Company will be able to complete clinical development and
obtain approval from the FDA for any vaccine product candidate.
Without
direct discussions with the FDA, it is difficult to precisely plan clinical
development of a new therapeutic treatment. However, the FDA has
announced that it will seek ways to accelerate the development and approval
process for new vaccines against avian influenza. Based on the
Company’s interpretations of the FDA’s position, the Company has developed a
plan for clinical development that includes seeking to formally apply for
marketing approval by mid-2012.
Preclinical Development. The Company
anticipates filing for an Investigational New Drug Application, or IND, based on
previously published data on this technology. The Company
believes that having this data could shorten the process of preclinical
development and preparation of the IND, although there can be no assurance that
this will be the case. The Company believes that clinical
trials could start within 60-90 days after acceptance of the IND by the
FDA. The total time to complete an IND application is expected to be
about one year following receipt of sufficient funding.
Phase I/II
Trial. The Phase I/II clinical trial that would be specified
in the IND would probably be conducted in one center and require about 8-1/2
months in total, as illustrated in the table below. The Company
estimates the total cost of the clinical trial to be about
$250,000. After completion of the anticipated Phase I/II trial, the
Company expects that it would meet with the FDA to review the trial results and
determine whether another Phase II trial will be required or whether the next
trial would be a Phase III trial, assuming a successful Phase I/II
trial.
17
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg22a.jpg)
Phase III Trial. The timing and
cost of the Phase III clinical trial will depend on the results of the Phase
I/II clinical trial, the amount of capital the Company is able to raise and
requirements of the FDA. For planning purposes, the Company estimates
that the Phase III trial will be a multiple center study and require a total of
approximately 17 months, primarily due to the need to monitor and test patients
after the vaccination. The Company estimates that the cost of
the trial will be approximately $10.7 million.
![](https://www.sec.gov/Archives/edgar/data/0000887247/000114420409025876/pg22b.jpg)
18
Absent
unexpected developments, the Company believes it may be able to submit its NDA
for the influenza vaccine by late 2011 and, if approved, the product could be
available for public use in the mid-2012 time period. However, there
is no guarantee that the Company will be able to submit NDA in such a time frame
or obtain approval from the FDA. The FDA has recently announced
guidelines for accelerated approval of influenza vaccines. These
timeframes are significantly shorter than the average review
process. The FDA NDA filing fee could be as much as $2.0
million. Even if the Phase 3 trial is successful, the FDA approval
process could take substantially longer than the Company anticipates, and there
can be no assurances that the FDA will eventually approve the Company’s
influenza vaccine product for marketing.
Cost
of Development
The
Company estimates that the total cost of clinical development for the avian
influenza vaccine is in the range of approximately $20.0-$25.0
million. Of this amount, approximately $5.0-$10.0 million will be
internal research and development expenses associated with optimizing the
effectiveness of the influenza DNA plasmid, management of the clinical trials,
and other activities conducted by the Company personnel; and the Company
estimates that about $15.0 million will be spent on activities anticipated to be
conducted by third parties, such as:
·
|
Production of the
plasmid
|
·
|
Preclinical
studies
|
·
|
Phase I/II clinical
trials
|
·
|
Phase III clinical
trials
|
·
|
FDA Application
fees
|
If
clinical trials for the influenza vaccine are progressing successfully,
depending on a number of factors, including the status of the Company’s other
business activities and products, the amount of funds that the Company has
raised, and the Company’s other capital needs, as well as the terms of any such
partnership, the Company anticipates that it may seek to form a strategic
partnership with a large, international pharmaceutical company capable of
commercializing the Company’s product in markets outside of the United States,
in the U.S. markets, or worldwide. In addition, the Company has also
considered an alliance with one or more nongovernmental organizations, such as
the Red Cross, as a viable method of commercializing some of the Company’s
products domestically.
Sources
and Availability of Raw Materials
The
Company purchases, in the ordinary course of business, necessary raw materials,
components and supplies essential to its operations from several suppliers in
the U.S. and overseas. Adamis Labs has entered into a contract with a
contract manufacturing organization for the development and production of its
epinephrine syringe product, and a contract with a different contract
manufacturing organization for the development and production of its BANS
product candidate. The Company intends to monitor these situations and to
seek to provide a continued supply of both raw materials and
components.
Sales
and Marketing
Adamis
Labs’ field force includes sales management, customer service representatives,
trade relations/reimbursement specialists and executive
management. The Company’s expansion plan, depending upon securing
adequate funding, includes hiring and training approximately 15-30
additional sales representatives to be strategically deployed in the most
valuable prescribing U.S. markets by the launch of the epi syringe product
candidate. For future field force expansion and before the launch of
the Company’s aerosolized inhaled nasal steroid, the Company has identified the
top prescribing markets in the U.S. by utilizing physician data aligned with zip
code alignment data. The Company expects to expand to approximately
50 specialty field force sales representatives before introducing the
aerosolized nasal steroid product. Physician calls by the Company’s
sales force are expected to be to the highest prescribers of emergency
epinephrine injectors in each market and then modified, if required, when the
aerosolized nasal steroid product introduction occurs.
19
Governmental
Regulation
The
production and marketing of the Company’s products and potential products and
its ongoing research and development, preclinical testing and clinical trial
activities are currently subject to extensive regulation and review by numerous
governmental authorities in the United States and will face similar regulation
and review for overseas approval and sales from governmental authorities outside
of the United States. Most of the products the Company is currently
developing must undergo rigorous preclinical and clinical testing and an
extensive regulatory approval process before they can be
marketed. This process makes it longer, harder and more costly to
bring the Company’s potential products to market, and the Company cannot
guarantee that any of its potential products will be approved. The
pre-marketing approval process can be particularly expensive, uncertain and
lengthy, and a number of products for which FDA approval has been sought by
other companies have never been approved for marketing. In addition
to testing and approval procedures, extensive regulations also govern marketing,
manufacturing, distribution, labeling, and record-keeping
procedures. If the Company or its collaboration partners do not
comply with applicable regulatory requirements, such violations could result in
non-approval, suspensions of regulatory approvals, civil penalties and criminal
fines, product seizures and recalls, operating restrictions, injunctions, and
criminal prosecution.
Withdrawal
or rejection of FDA or other government entity approval of the Company’s
potential products may also adversely affect the Company’s
business. Such rejection may be encountered due to, among other
reasons, lack of efficacy during clinical trials, unforeseen safety issues,
inability to follow patients after treatment in clinical trials, inconsistencies
between early clinical trial results and results obtained in later clinical
trials, varying interpretations of data generated by clinical trials, or changes
in regulatory policy during the period of product development in the United
States and abroad. In the United States, there is stringent FDA
oversight in product clearance and enforcement activities, causing medical
product development to experience longer approval cycles, greater risk and
uncertainty, and higher expenses. Internationally, there is a risk
that the Company may not be successful in meeting the quality standards or other
certification requirements. Even if regulatory approval of a product
is granted, this approval may entail limitations on uses for which the product
may be labeled and promoted, or may prevent the Company from broadening the uses
of the Company’s current or potential products for different
applications. In addition, the Company may not receive FDA approval
to export the Company’s potential products in the future, and countries to which
potential products are to be exported may not approve them for
import.
Manufacturing
facilities for the Company’s products will also be subject to continual
governmental review and inspection. The FDA has stated publicly that
compliance with manufacturing regulations will continue to be strictly
scrutinized. To the extent the Company decides to manufacture its own
products, a governmental authority may challenge the Company’s compliance with
applicable federal, state and foreign regulations. In addition, any
discovery of previously unknown problems with one of the Company’s potential
products or facilities may result in restrictions on the potential product or
the facility. If the Company decides to outsource the commercial
production of its products, any challenge by a regulatory authority of the
compliance of the manufacturer could hinder the Company’s ability to bring its
products to market.
To the
extent that the Company is able to successfully advance a product candidate
through clinical trials, it will be required to obtain regulatory approval prior
to marketing and selling such product. The Company is subject to
extensive government regulation that increases the cost and uncertainty
associated with its efforts to gain regulatory approval of its product
candidates. Preclinical development, clinical trials, manufacturing,
and commercialization of its product candidates are all subject to extensive
regulation by U.S. and foreign governmental
authorities. It takes many years and significant expenditures to
obtain the required regulatory approvals for biological
products. Satisfaction of regulatory requirements depends upon the
type, complexity and novelty of the product candidate and requires substantial
resources. The Company cannot be certain that any of its product
candidates will be shown to be safe and effective, or that it will ultimately
receive approval from the FDA or foreign regulatory authorities to market these
products. In addition, even if granted, product approvals and
designations such as “fast-track” may be withdrawn or limited at a later
time.
The
process of obtaining FDA and other required regulatory approvals is
expensive. The time required for FDA and other approvals is
uncertain and typically takes a number of years, depending on the complexity or
novelty of the product. The process of obtaining FDA and other
required regulatory approvals for many of the Company’s products under
development is further complicated because some of these products use
non-traditional or novel materials in non-traditional or novel
ways. For example:
·
|
the FDA has not established
guidelines concerning the scope of clinical trials required for gene-based
therapeutic and vaccine
products;
|
·
|
the FDA has provided only limited
guidance on how many subjects it will require to be enrolled in clinical
trials to establish the safety and efficacy of gene-based products;
and
|
·
|
current regulations and guidance
are subject to substantial review by various governmental
agencies.
|
20
Therefore,
U.S. or foreign regulations could prevent or delay regulatory
approval of Adamis’ products or limit its ability to develop and commercialize
products. These delays could:
·
|
impose costly
procedures;
|
·
|
diminish any competitive
advantages; or
|
·
|
negatively affect results of
operations and cash flows.
|
The
Company believes that the FDA and comparable foreign regulatory bodies will
regulate separately each product containing a particular gene depending on its
intended use. Presently, to commercialize any product the Company
must sponsor and file a regulatory application for each proposed
use. The Company must conduct clinical studies to demonstrate the
safety and efficacy of the product necessary to obtain FDA
approval. The results obtained so far in clinical trials may not be
replicated in future trials. This may prevent any of the potential
products from receiving FDA approval.
The
Company will utilize recombinant DNA molecules in its product candidates, and
therefore must comply with guidelines instituted by the NIH and its Office of
Biotechnology Activities. The NIH could restrict or delay the
development of its product candidates. In March 2004, the NIH Office
of Biotechnology Activities and the FDA Center for Biologics Evaluation and
Research launched the jointly developed Genetic Modification Clinical
Research Information System, or GeMCRIS, an Internet-based database of human
gene transfer trials. In its current form, GeMCRIS enables
individuals to easily view information on particular characteristics of clinical
gene transfer trials, and includes special security features designed to protect
patient privacy and confidential commercial information. These
security features may be inadequate in design or enforcement, potentially
resulting in disclosure of confidential commercial information.
The FDA
and the NIH are considering rules and regulations that would require public
disclosure of additional commercial development data that is presently
confidential. In addition, the NIH, in collaboration with the FDA,
has developed an Internet site, ClinicalTrials.gov, which provides public access
to information on clinical trials for a wide range of diseases and
conditions. Such disclosures of confidential commercial information,
whether by implementation of new rules or regulations, by inadequacy of GeMCRIS
security features, or by intentional posting on the Internet, may result in loss
of advantage of competitive secrets.
A rule
published in 2002 by the FDA, known commonly as the “Animal Rule,” established
requirements for demonstrating effectiveness of drugs and biological products in
settings where human clinical trials for efficacy are not feasible or
ethical. The rule requires as conditions for market approval the
demonstration of safety and biological activity in humans, and the demonstration
of effectiveness under rigorous test conditions in up to two appropriate species
of animal. The Company believes that with appropriate guidance from the
FDA, it may seek and win market approval under the Animal Rule for certain
DNA-based products for which human clinical efficacy trials are not feasible or
ethical. At the moment, however, it cannot determine whether the
Animal Rule would be applied to any products of the Company, or if applied, that
its application would result in expedited development time or regulatory
review.
Any
regulatory approval to market a product may be subject to limitations on the
indicated uses for which the Company may market the product. These
limitations may restrict the size of the market for the product and affect
reimbursement by third-party payers. In addition, regulatory agencies
may not grant approvals on a timely basis or may revoke or significantly modify
previously granted approvals.
The
Company, or its collaborative partners, are subject to numerous foreign
regulatory requirements governing the manufacturing and marketing of the
Company’s potential future products outside of the United States. The
approval procedure varies among countries, additional testing may be required in
some jurisdictions, and the time required to obtain foreign approvals often
differs from that required to obtain FDA approvals. Moreover,
approval by the FDA does not ensure approval by regulatory authorities in other
countries, and vice versa.
In
addition to regulations imposed by the FDA, the Company may also be subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Research Conservation and
Recovery Act, as well as regulations administered by the Nuclear Regulatory
Commission, national restrictions on technology transfer, import, export and
customs regulations and certain other local, state or federal
regulations. From time to time, other federal agencies and
congressional committees have indicated an interest in implementing further
regulation of biotechnology applications. The Company cannot predict
whether any such regulations will be adopted or whether, if adopted, such
regulations will apply to its business, or whether the Company would be able to
comply with any applicable regulations.
21
Even if
the Company’s products are approved by regulatory authorities, if it fails to
comply with ongoing regulatory requirements, or if there are unanticipated
problems with the products, these products could be subject to restrictions or
withdrawal from the market. Even if regulatory approval of a product
is granted, the approval may be subject to limitations on the indicated uses for
which the product may be marketed or contain requirements for costly
post-marketing testing and surveillance to monitor the safety or efficacy of the
product. Later discovery of previously unknown problems with the
products, including unanticipated adverse events or adverse events of
unanticipated severity or frequency, or failure to comply with regulatory
requirements, may result in restrictions on such products or manufacturing
processes, withdrawal of the products from the market, voluntary or mandatory
recall, fines, suspension of regulatory approvals, product seizures, injunctions
or the imposition of civil or criminal penalties.
As a
result of these factors, the Company may not successfully begin or complete
clinical trials in the time periods estimated, if at all. Moreover,
if the Company incurs costs and delays in development programs or fails to
successfully develop and commercialize products based upon its technologies, the
Company may not become profitable, and its stock price could
decline.
FDA
Approval Process
General
In the
United States, the FDA regulates drug products under the Federal Food, Drug, and
Cosmetic Act, or FFDCA, and its implementing regulations, and regulates
biological drug products under both the Public Health Service Act, or PHS Act,
and its implementing regulations, as well as the FFDCA. The Company’s
product candidates include both biological drug products and drug
products. The process required by the FDA before the Company’s drug
and biological drug product candidates may be marketed in the United States
generally involves the following:
·
|
completion of extensive
preclinical laboratory tests, preclinical animal studies and formulation
studies all performed in accordance with the FDA’s current Good Laboratory
Practice, or cGLP,
regulations;
|
·
|
submission to the FDA of an IND,
which must become effective before human clinical trials may
begin;
|
·
|
performance of adequate and well
controlled human clinical trials to establish the safety and efficacy of
the product candidate for each proposed
indication;
|
·
|
submission to the FDA of a new
drug application, or NDA, for drug products, or a Biologic License
Application, or BLA, for biological drug
products;
|
·
|
satisfactory completion of an FDA
pre-approval inspection of the manufacturing facilities at which the
product is produced to assess compliance with cGMP regulations;
and
|
·
|
FDA review and approval of the
NDA or BLA prior to any commercial marketing, sale or shipment of the drug
or biological drug.
|
Preclinical
tests include laboratory evaluation of product chemistry, formulation and
stability, as well as studies to evaluate toxicity in animals. The
results of preclinical tests, together with manufacturing information and
analytical data, are submitted as part of an IND to the FDA. The IND
becomes effective 30 days after receipt by the FDA, unless the FDA, within the
30-day time period, raises concerns or questions about the conduct of the
clinical trial, including concerns that human research subjects will be exposed
to unreasonable health risks. In such a case, the IND sponsor and the
FDA must resolve any outstanding concerns before the clinical trial can
begin. A separate submission to an existing IND must also be made for
each successive clinical trial conducted during product development, and the FDA
must grant permission before each clinical trial can begin. Further,
an independent institutional review board, or IRB, for each medical center
proposing to conduct the clinical trial must review and approve the plan for any
clinical trial before it commences at that center and it must monitor the study
until completed. The FDA, the IRB or the sponsor may suspend a
clinical trial at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health
risk. Clinical testing also must satisfy extensive good clinical
practices, or GCPs, regulations and regulations for informed
consent.
22
Clinical
Trials
For
purposes of an NDA or BLA submission and approval, human clinical trials are
typically conducted in the following three sequential phases, which may
overlap:
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Phase I Clinical
Trials. Studies are initially conducted in a limited population
to test the product candidate primarily for safety, dose tolerance,
pharmacokinetics and, for vaccine products, immunogenicity, is n healthy
humans or in patients. In some cases, a sponsor may decide to
conduct what is referred to as a “Phase Ib” evaluation, which is a second,
safety-focused Phase I clinical trial typically designed to evaluate the
impact of the drug candidate in combination with currently approved
drugs;
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Phase II Clinical
Trials. Studies are generally conducted in a limited patient
population to identify possible adverse effects and safety risks, to
determine the efficacy of the product for specific targeted indications
and to determine dose tolerance and optimal dosage. Multiple
Phase II clinical trials may be conducted by the sponsor to obtain
information prior to beginning larger and more extensive Phase III
clinical trials. In some cases, a sponsor may decide to run
what is referred to as a “Phase IIb” evaluation, which is a second,
confirmatory Phase II clinical trial;
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Phase III Clinical
Trials. These are commonly referred to as pivotal
studies. When Phase II evaluations demonstrate that a dose
range of the product is effective and has an acceptable safety profile,
Phase III clinical trials are undertaken in large patient populations to
further evaluate dosage, to provide substantial evidence of clinical
efficacy and to further test for safety in an expanded and diverse patient
population at multiple, geographically-dispersed clinical trial sites;
and
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Phase IV Clinical
Trials. In some cases, the FDA may condition approval of an NDA
or BLA for a product candidate on the sponsor’s agreement to conduct
additional clinical trials to further assess the drug’s safety and
effectiveness after NDA or BLA approval. Such post-approval
trials are typically referred to as Phase IV
studies.
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There can
be no assurance that Phase I, Phase II trials or Phase III will be completed
successfully within any specific time period, if at all, with respect to any of
the Company’s potential products subject to such testing.
After
completion of the required clinical testing, an NDA or BLA is prepared and
submitted to the FDA. FDA approval of the NDA is required before
marketing of the product may begin in the United States. The NDA and
BLA must include the results of all preclinical, clinical and other testing and
a compilation of data relating to the product’s pharmacology, chemistry,
manufacture and controls. The cost of preparing and submitting an NDA
or BLA is substantial, and there can be no assurance that any approval will be
granted on a timely basis, if at all. Under federal law, the
submission of most NDAs and BLAs are additionally subject to a substantial
application user fee, and the manufacturer and/or sponsor under an approved new
drug application is also subject to annual product and establishment user
fees. These fees are typically increased annually.
The FDA
has 60 days from its receipt of an NDA or BLA to determine whether the
application will be accepted for filing based on the agency’s threshold
determination that it is sufficiently complete to permit substantive
review. Once the submission is accepted for filing, the FDA begins an
in-depth review. The FDA has agreed to certain performance goals in
the review of new drug applications. Most such applications for
non-priority drug products are reviewed within ten months. The review
process may be extended by the FDA for three additional months to consider
certain information or clarification regarding information already provided in
the submission. The FDA may also refer applications for novel drug
products or drug products which present difficult questions of safety or
efficacy to an advisory committee, typically a panel that includes clinicians
and other experts, for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the
recommendations of an advisory committee, but it considers such recommendations
carefully when making decisions. The FDA may deny approval of an NDA
or BLA if the applicable regulatory criteria are not satisfied, or it may
require additional information including clinical or CMC data. Even
if such data are submitted, the FDA may ultimately decide that the NDA or BLA
does not satisfy the criteria for approval. Data from clinical trials
are not always conclusive and the FDA may interpret data differently than the
Company or its collaborators interpret data. Once issued, the FDA may
withdraw product approval if ongoing regulatory requirements are not met or if
safety problems occur after the product reaches the market.
23
Before
approving an NDA or BLA, the FDA will typically inspect one or more clinical
sites to assure compliance with Good Clinical Practices, or
GCP. Additionally, the FDA will inspect the facility or the
facilities at which the drug is manufactured. The FDA will not
approve the product unless compliance with current good manufacturing practices,
or cGMP, is satisfactory and the NDA or BLA contains data that provides
substantial evidence that the drug is safe and effective in the indication
studied. Failure to comply with GMP or other applicable regulatory
requirements may result in withdrawal of marketing approval, criminal
prosecution, civil penalties, recall or seizure of products, warning letters,
total or partial suspension of production, suspension of clinical trials, FDA
refusal to review pending marketing approval applications or supplements to
approved applications, or injunctions, as well as other legal or regulatory
action against Adamis or its corporate partners.
After the
FDA evaluates the NDA or BLA and the manufacturing facilities, it issues an
approval letter, an approvable letter or a not-approvable
letter. Both approvable and not-approvable letters generally outline
the deficiencies in the submission and may require substantial additional
testing or information in order for the FDA to reconsider the
application. If and when those deficiencies have been addressed to
the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue
an approval letter.
An
approval letter authorizes commercial marketing of the drug with specific
prescribing information for specific indications. As a condition of
NDA or BLA approval, the FDA may require substantial post-approval testing and
surveillance to monitor the drug’s safety or efficacy and may impose other
conditions, including labeling or distribution restrictions or other
risk-management mechanisms which can materially affect the potential market and
profitability of the drug. Once granted, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or problems
are identified following initial marketing.
Adamis
Labs Products
Several
of Adamis Labs’ products, including AeroHist Caplets, AeroHist Plus Caplets,
AeroKid Oral Liquid and AeroOtic HC Ear Drops, were not the subject of a new
drug application or abbreviated new drug application and have not been approved
for marketing by the FDA. These products have been marketed for
many years and, the Company believes, are similarly situated to products
marketed by many companies that are marketed without an approved new drug
application or abbreviated new drug application. The products
are drug listed with the FDA in the National Drug Code Directory but such
listing does not constitute FDA approval of the products. In
June 2006, the FDA issued a Compliance Policy Guide for Marketed Unapproved
Drugs, which addressed some of the considerations utilized by the FDA in
exercising its discretion with respect to products marketed without FDA
approval. The guide does not establish legally enforceable
responsibilities on the FDA and generally only represents the agency’s current
thinking on a topic. The guide emphasizes that any product that
is being marketed without required FDA approvals is subject to FDA enforcement
action at any time. If the FDA were to issue a Federal Register
Notice outlining revised conditions for marketing, which could include calling
for the submission of an application for products such as the Company’s
cough/cold products, then Adamis would take appropriate action so as to be in
compliance with any such policies. The FDA might also require
clinical trials in support of any such applications, and the Company would need
to evaluate its alternatives in light of the costs required to conduct such
trials, which could be substantial, compared to the economic benefit to the
Company from such products. The FDA could also exercise its
discretion to proceed against the Company and/or other companies that market
similar products without an FDA approval and require immediate withdrawal of the
products from the market, to prohibit the Company from marketing these products
without first conducting required trials and obtaining approvals, or to impose
other penalties on the Company. Some of Adamis Labs’ unapproved
products include extended release formulations, which may subject the Company to
a higher risk of FDA enforcement action. Such actions could
have a material adverse effect on the Company’s business, financial condition
and results of operations.
The Prelone product is the subject of
an ANDA approval from the FDA. As the Company believes is
common with many drug products, the Prelone product is manufactured by a third
party manufacturer which holds the ANDA approval relating to the
product. The Company owns the trademark and intellectual
property rights relating to the product and distributes the product pursuant to
those rights.
24
The
Hatch-Waxman Act
Abbreviated
New Drug Applications
In
seeking approval for a drug through an NDA, applicants are required to list with
the FDA each patent with claims that cover the applicant’s
product. Upon approval of a drug, each of the patents listed in the
application for the drug is then published in the FDA’s Approved Drug Products
with Therapeutic Equivalence Evaluations, commonly known as the Orange
Book. Drugs listed in the Orange Book can, in turn, be cited by
potential competitors in support of approval of an ANDA. An ANDA provides
for marketing of a drug product that has the same active ingredients in the same
strengths and dosage form as the listed drug and has been shown through
bioequivalence testing to be therapeutically equivalent to the listed
drug. ANDA applicants are not required to conduct or submit results
of pre-clinical or clinical tests to prove the safety or effectiveness of their
drug product, other than the requirement for bioequivalence
testing. Drugs approved in this way are commonly referred to as
“generic equivalents” to the listed drug, and can often be substituted by
pharmacists under prescriptions written for the original listed
drug.
The ANDA
applicant is required to certify to the FDA concerning any patents listed for
the approved product in the FDA’s Orange Book. Specifically, the
applicant must certify that: (i) the required patent information has not
been filed; (ii) the listed patent has expired; (iii) the listed
patent has not expired, but will expire on a particular date and approval is
sought after patent expiration; or (iv) the listed patent is invalid or
will not be infringed by the new product. A certification that the
new product will not infringe the already approved product’s listed patents or
that such patents are invalid is called a Paragraph IV
certification. If the applicant does not challenge the listed
patents, the ANDA application will not be approved until all the listed patents
claiming the referenced product have expired.
If the
ANDA applicant has provided a Paragraph IV certification to the FDA, the
applicant must also send notice of the Paragraph IV certification to the NDA and
patent holders once the ANDA has been accepted for filing by the
FDA. The NDA and patent holders may then initiate a patent
infringement lawsuit in response to the notice of the Paragraph IV
certification. The filing of a patent infringement lawsuit within 45
days of the receipt of a Paragraph IV certification automatically prevents the
FDA from approving the ANDA until the earlier of 30 months, expiration of the
patent, settlement of the lawsuit or a decision in the infringement case that is
favorable to the ANDA applicant.
The ANDA
application also will not be approved until any non-patent exclusivity, such as
exclusivity for obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired. Federal law
provides a period of five years following approval of a drug containing no
previously approved active ingredients, during which ANDAs for generic versions
of those drugs cannot be submitted unless the submission contains a Paragraph IV
challenge to a listed patent, in which case the submission may be made four
years following the original product approval. Federal law provides
for a period of three years of exclusivity following approval of a listed drug
that contains previously approved active ingredients but is approved in a new
dosage form, route of administration or combination, or for a new use, the
approval of which was required to be supported by new clinical trials conducted
by or for the sponsor, during which FDA cannot grant effective approval of an
ANDA based on that listed drug.
Section 505(b)(2)
New Drug Applications
Most drug
products obtain FDA marketing approval pursuant to an NDA or an
ANDA. A third alternative is a special type of NDA, commonly referred
to as a Section 505(b)(2) NDA, which enables the applicant to rely, in
part, on the FDA’s findings of safety and efficacy of an existing product, or
published literature, in support of its application. Section
505(b)(2) NDAs often provide an alternate path to FDA approval for new or
improved formulations or new uses of previously approved
products. Section 505(b)(2) permits the filing of an NDA where
at least some of the information required for approval comes from studies not
conducted by or for the applicant and for which the applicant has not obtained a
right of reference. The applicant may rely upon the FDA’s findings
with respect to certain pre-clinical or clinical studies conducted for an
approved product. The FDA may also require companies to perform
additional studies or measurements to support the change from the approved
product. The FDA may then approve the new product candidate for all
or some of the label indications for which the referenced product has been
approved, as well as for any new indication sought by the Section 505(b)(2)
applicant.
To the
extent that the Section 505(b)(2) applicant is relying on studies conducted
for an already approved product, the applicant is subject to existing
exclusivity for the reference product and is required to certify to the FDA
concerning any patents listed for the approved product in the Orange Book to the
same extent that an ANDA applicant would. Thus approval of a
Section 505(b)(2) NDA can be stalled until all the listed patents claiming
the referenced product have expired, until any non-patent exclusivity, such as
exclusivity for obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired, and, in the case of a
Paragraph IV certification and subsequent patent infringement suit, until the
earlier of 30 months, settlement of the lawsuit or a decision in the
infringement case that is favorable to the Section 505(b)(2)
applicant.
25
Fast
Track Designation
The FDA’s
fast track program is intended to facilitate the development and to expedite the
review of drugs and biological drugs that are intended for the treatment of a
serious or life-threatening condition for which there is no effective treatment
and which demonstrate the potential to address unmet medical needs for the
condition. Under the fast track program, the sponsor of a new drug or
biological drug candidate may request the FDA to designate the drug candidate
for a specific indication as a fast track drug concurrent with or any time after
the filing of the IND for the drug or biological drug candidate. The
FDA must determine if the candidate qualifies for fast track designation within
60 days of receipt of the sponsor’s request.
If fast
track designation is obtained, the FDA may initiate review of sections of an NDA
or BLA before the application is complete. This rolling review is
available if the applicant provides and the FDA approves a schedule for the
submission of the remaining information and the applicant pays applicable user
fees. However, the time period specified in PDUFA, which governs the
time period goals the FDA has committed to reviewing an application, does not
begin until the complete application is submitted. Additionally, the
fast track designation may be withdrawn by the FDA if the FDA believes that the
designation is no longer supported by data emerging in the clinical trial
process.
In some
cases, a fast track designated candidate may also qualify for one or more of the
following programs:
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Priority Review. Under
FDA policies, a drug or biological drug candidate is eligible for priority
review, or review within a six-month time frame from the time a complete
NDA or BLA is accepted for filing, if the candidate provides a significant
improvement compared to marketed drugs or biological drugs in the
treatment, diagnosis or prevention of a disease. A fast track
designated drug or biological drug candidate would ordinarily meet the
FDA’s criteria for priority review, however, fast track designation is not
required to be eligible for priority
review.
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Accelerated
Approval. Under the FDA’s accelerated approval regulations, the
FDA is authorized to approve drug and biological drug candidates that have
been studied for their safety and efficacy in treating serious or
life-threatening illnesses and that provide meaningful therapeutic benefit
to patients over existing treatments based upon either an endpoint that is
reasonably likely to predict clinical benefit or on the basis of an effect
on a clinical endpoint other than patient survival. In clinical
trials, surrogate endpoints are alternative measurements of the symptoms
of a disease or condition that are substituted for measurements of
observable clinical symptoms. A candidate approved on the basis
of a surrogate endpoint is subject to rigorous post-marketing compliance
requirements, including the completion of Phase IV or post-approval
clinical trials to validate the surrogate endpoint or confirm the effect
of the drug candidate on the clinical endpoint. Failure to
conduct required post-approval studies, or to validate a surrogate
endpoint or confirm a clinical benefit during post-marketing studies, will
result in the FDA withdrawing the drug or biological drug from the market
on an expedited basis. All promotional materials for drug and
biological drug candidates approved under accelerated regulations are
subject to prior review by the
FDA.
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When
appropriate, the Company intends to seek fast track designation, accelerated
approval or priority review for its biological drug candidates.
Satisfaction
of FDA regulations and approval requirements or similar requirements of foreign
regulatory agencies typically takes several years and the actual time required
may vary substantially based upon the type, complexity and novelty of the
product or disease. Typically, if a drug or biological drug candidate
is intended to treat a chronic disease, safety and efficacy data must be
gathered over an extended period of time. Government regulation may
delay or prevent marketing of drug or biological drug candidates for a
considerable period of time and impose costly procedures upon our
activities. The FDA or any other regulatory agency may not grant
approvals for new indications for our drug and biological drug candidates on a
timely basis, or at all. Even if a drug or biological drug candidate
receives regulatory approval, the approval may be significantly limited to
specific disease states, patient populations and dosages. Further,
even after regulatory approval is obtained, later discovery of previously
unknown problems with a drug or biological drug may result in restrictions on
the product or even complete withdrawal of the drug or biological drug from the
market. Delays in obtaining, or failures to obtain, regulatory
approvals for any of our drug or biological drug candidates would harm our
business. In addition, we cannot predict what adverse governmental
regulations may arise from future U.S. or foreign governmental
action.
26
Citizen
Petitions
FDA
regulations set forth procedures under which parties can petition the FDA to
take or refrain from taking certain actions. NDA applicants
occasionally submit such citizen petitions requesting that the FDA deny or delay
approval of an ANDA, or impose specific additional requirements for approval on
ANDAs for a particular drug product. Many such petitions are
eventually denied by the FDA, but the submission of such petitions, especially
when submitted near the end of an ANDA review, has often delayed the approval of
an ANDA while the FDA considers and responds to the issues
presented. Congress included provisions to address this practice in
the recently enacted FDA Amendments Act of 2007, or FDAAA. The FDAAA
prohibits the FDA from delaying approval of an ANDA due to the submission of a
citizen petition unless the delay is necessary to protect the public health, and
requires that the FDA take final action on any such petition within 180 days of
its submission. In addition, the FDAAA requires that petitioners
certify, among other things, the date upon which the petitioner first became
aware of the information that forms the basis of the request and the name of the
person or entity funding the petition.
Post-Approval
Requirements
Once an
NDA is approved, a product will be subject to certain post-approval
requirements. For instance, the FDA closely regulates the
post-approval marketing and promotion of drugs, including standards and
regulations for direct-to-consumer advertising, off-label promotion,
industry-sponsored scientific and educational activities and promotional
activities involving the internet.
Drugs may
be marketed only for the approved indications and in accordance with the
provisions of the approved labeling. Changes to some of the
conditions established in an approved application, including changes in
indications, labeling, or manufacturing processes or facilities, require
submission and FDA approval of a new NDA or BLA or NDA or BLA supplement before
the change can be implemented. An NDA or BLA supplement for a new
indication typically requires clinical data similar to that in the original
application, and the FDA uses the same procedures and actions in reviewing NDA
or BLA supplements as it does in reviewing NDAs or BLAs.
Adverse
event reporting and submission of periodic reports is required following FDA
approval of an NDA or BLA. The FDA also may require post-marketing
testing, known as Phase 4 testing, risk minimization action plans and
surveillance to monitor the effects of an approved product or place conditions
on an approval that could restrict the distribution or use of the
product. In addition, quality control as well as drug manufacture,
packaging, and labeling procedures must continue to conform to cGMP after
approval. Drug manufacturers and certain of their subcontractors are
required to register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by the FDA during
which the agency inspects manufacturing facilities to assess compliance with
cGMP. Accordingly, manufacturers must continue to expend time, money and
effort in the areas of production and quality control to maintain compliance
with cGMP. Regulatory authorities may withdraw product approvals or
request product recalls if a company fails to comply with regulatory standards,
if it encounters problems following initial marketing, or if previously
unrecognized problems are subsequently discovered.
The
distribution of prescription pharmaceutical products is also subject to the
Prescription Drug Marketing Act, or PDMA, which regulates the distribution of
drugs and drug samples at the federal level, and sets minimum standards for the
registration and regulation of drug distributors by the states. Both
the PDMA and state laws limit the distribution of prescription pharmaceutical
product samples and impose requirements to ensure accountability in
distribution.
Anti-Kickback,
False Claims Laws & The Prescription Drug Marketing Act
In
addition to FDA restrictions on marketing of pharmaceutical products, several
other types of state and federal laws have been applied to restrict certain
marketing practices in the pharmaceutical industry in recent
years. These laws include anti-kickback statutes and false claims
statutes. The federal healthcare program anti-kickback statute
prohibits, among other things, knowingly and willfully offering, paying,
soliciting or receiving remuneration to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order of any
healthcare item or service reimbursable under Medicare, Medicaid or other
federally financed healthcare programs. This statute has been
interpreted to apply to arrangements between pharmaceutical manufacturers on the
one hand and prescribers, purchasers and formulary managers on the
other. Violations of the anti-kickback statute are punishable by
imprisonment, criminal fines, civil monetary penalties and exclusion from
participation in federal healthcare programs. Although there are a
number of statutory exemptions and regulatory safe harbors protecting certain
common activities from prosecution or other regulatory sanctions, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration
intended to induce prescribing, purchases or recommendations may be subject to
scrutiny if they do not qualify for an exemption or safe
harbor.
27
Federal
false claims laws prohibit any person from knowingly presenting, or causing to
be presented, a false claim for payment to the federal government, or knowingly
making, or causing to be made, a false statement to have a false claim
paid. In addition, certain marketing practices, including off-label
promotion, may also violate false claims laws. The majority of states
also have statutes or regulations similar to the federal anti-kickback law and
false claims laws, which apply to items and services reimbursed under Medicaid
and other state programs, or, in several states, apply regardless of the
payor.
New
Legislation
On
September 27, 2007, the President of the United States signed into law the Food
and Drug Administration Amendments Act of 2007, or FDAAA. The
legislation grants significant new powers to the FDA, many of which are aimed at
improving drug safety and assuring the safety of drug products after
approval. In particular, the new law authorizes the FDA to, among
other things, require post-approval studies and clinical trials, mandate changes
to drug labeling to reflect new safety information, and require risk evaluation
and mitigation strategies for certain drugs, including certain currently
approved drugs. In addition, it significantly expands the federal
government’s clinical trial registry and results databank and creates new
restrictions on the advertising and promotion of drug products. Under
the FDAAA, companies that violate these and other provisions of the new law are
subject to substantial civil monetary penalties.
While the
above provisions of the FDAAA, among others, will undoubtedly have a significant
effect on the pharmaceutical industry, the extent of that effect is not yet
known. As regulations, guidance and interpretations are issued by the
FDA relating to the new legislation, its impact on the industry, as well as our
business, will become clearer. The changes and new requirements it
imposes on the drug review and approval process and post-approval activities
could make it more difficult, and certainly more costly, to obtain approval for
new pharmaceutical products, or to produce, market, and distribute existing
products.
Approval
Outside the United States
In order
to market any product outside of the United States, the Company must comply with
numerous and varying regulatory requirements of other countries regarding safety
and efficacy and governing, among other things, clinical trials and commercial
sales and distribution of our products. Approval procedures vary
among countries and can involve additional product testing and additional
administrative review periods. The time required to obtain approval
in other countries might differ from and be longer than that required to obtain
FDA approval. Regulatory approval in one country does not ensure
regulatory approval in another, but a failure or delay in obtaining regulatory
approval in one country may negatively impact the regulatory process in
others.
To date,
the Company has not initiated any discussions with the European Medicines
Agency, or EMEA, or any other foreign regulatory authorities with respect to
seeking regulatory approval for any indication in Europe or in any other country
outside the United States. As in the United States, the regulatory
approval process in Europe and in other countries is a lengthy and challenging
process. If the Company fails to comply with applicable foreign
regulatory requirements, it may be subject to fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution.
Competition
The
biotechnology and pharmaceutical industries are characterized by rapidly
advancing technologies, intense competition and a strong emphasis on proprietary
products. Many of our competitors, including biotechnology and
pharmaceutical companies, academic institutions and other research
organizations, are actively engaged in the discovery, research and development
of products that could compete directly or indirectly with our products under
development.
Adamis Labs Allergy
Products. Adamis Labs’ current line of allergy and respiratory
products compete with numerous prescription and non-prescription
over-the-counter products targeting similar conditions, including, in the
seasonal or perennial rhinitis areas, cough and cold, as well as prescription
generic products. In addition, a number of companies, including GSK,
Merck, and AstraZeneca, produce pharmaceutical products, such as antihistamines,
corticosteroids and anti-leukotriene agents, which manage allergy
symptoms.
Epinephrine
Syringe. Adamis’ syringe product, if developed, launched and
marketed, is expected to compete against other self-administered epinephrine
products, including EpiPen, EpiPen Jr. and Twinject.
28
BANS. Adamis’
inhaled nasal steroid BANS products if developed, launched and marketed, is
expected to compete with several inhaled nasal steroid products that are
currently marketed, including Flonase, marketed by GlaxoSmithKline, Nasonex,
marketed by Schering, Nasacort AQ, marketed by Aventis and Rhinocort, marketed
by AstraZeneca.
Vaccine
Technology. If the Company successfully develops a vaccine
product for avian or other kinds of influenza based on the STI technology, that
product is expected to compete with traditional and emerging influenza vaccines
from companies currently marketing these products, including GSK, Novartis,
Sanofi-Pasteur, Medimmune/AstraZeneca and CSL. In addition, the
Company is aware of several companies developing potentially competing universal
vaccines for influenza, including Acambis, VaxInnate, Merck, Vical and Dynavax
Technologies Corporation, and other companies of which the Company is not aware
are also likely developing products intended to address influenza and other
indications targeted by the Company.
Savvy. 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.
Many of
the entities developing and marketing these competing products have
significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing than the
Company. Smaller or early-stage companies may also prove to be
significant competitors, particularly for collaborative agreements with large,
established companies and access to capital. These entities may also
compete with Adamis in recruiting and retaining qualified scientific and
management personnel, as well as in acquiring technologies complementary to, or
necessary for, the Company’s programs.
Product Liability
Insurance
The
manufacture and sale of human therapeutic products involve an inherent risk of
product liability claims and associated adverse publicity. The
Company currently has only limited product liability insurance, and there can be
no assurance that the Company will be able to maintain existing or obtain
additional product liability insurance on acceptable terms or with adequate
coverage against potential liabilities. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. An inability to obtain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims could inhibit the Company’s business. A product liability
claim brought against the Company its insurance coverage, if any, could have a
material adverse effect upon its business, financial condition and results of
operations.
The
pharmaceutical industry is characterized by extensive research efforts and rapid
and significant technological change and intense competition. The
Company 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. The
Company’s competitors may succeed in developing technologies and products that
are safer, more effective or less costly than any developed by the Company, 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 the Company.
Patents and Proprietary
Technologies
Patents
and other proprietary rights are important to the Company’s
business. The Company’s policy is to file patent applications and
protect inventions and improvements to inventions that are commercially
important to the development of its business. The Company also relies
on trade secrets, know-how, confidentiality agreements, continuing technology
innovations and licensing opportunities to protect its technology and develop
and maintain its competitive position.
It is our
policy to require our employees to execute an invention assignment and
confidentiality agreement upon employment. Each agreement provides
that all confidential information developed or made known to the employee during
the course of employment will be kept confidential and not disclosed to third
parties except in specific circumstances. The invention assignment
generally provides that all inventions conceived by the employee will be the
exclusive property of the Company. In addition, it is our policy to
require collaborators and potential collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements
will provide meaningful protection of our trade secrets.
29
Adamis is
the exclusive licensee, under the license agreement with Nevagen, of rights
under two issued U.S. patents, three U.S. patent applications and related
patent applications filed in the European Union, Japan and Canada, relating to
the STI technology, in the field of prevention and treatment and detection of
viral infectious diseases.
The
licensed intellectual property, or IP, includes the use of the technology known
as “Transgenic Lymphocyte Technologym,” or TLI, covered by patent applications
entitled “Somatic Transgene Immunization and Related Methods” and related know
how. TLI includes, but is not limited to, creating a vaccine by
exposing an individual’s lymphocytes to plasmid DNA encoding certain epitopes
and re-administering the treated lymphocytes to the
individual. The vaccines are made up of the individual’s
lymphocytes harboring plasmid DNA encoding epitopes, e.g., selected epitopes of
influenza virus. Virtually all of the Company’s current viral
product candidates, including the avian influenza candidate, are based on
technology covered by these patents and applications.
The IP
includes rights under the following patents, including all divisionals,
continuations, continuations-in-part, reexaminations and reissues:
·
|
US Patent # 5,658,762 entitled
DNA MOLECULES, EXPRESSION VECTORS AND HOST CELLS EXPRESSING ANTIGENIZED
ANTIBODIES, filed June 6, 1995, granted August 19,
1997. The expiration date for this patent is
2014.
|
·
|
US Patent # 7,279,462 entitled
SOMATIC TRANSGENE IMMUNIZATION AND RELATED METHODS, filed April 27, 1999,
granted October 9, 2007. The expiration date for this
patent is 2019.
|
·
|
PCT Patent Application
US00/11372/ WO 00/64488 entitled SOMATIC TRANSGENE IMMUNIZATION AND
RELATED METHODS, filed April 27,
2000.
|
·
|
European Patent Application
009301284.7 entitled SOMATIC TRANSGENE IMMUNIZATION AND RELATED METHODS,
international filing date April 27,
2000.
|
·
|
Canadian Patent Application #
2,369, 616 entitled SOMATIC TRANSGENE IMMUNIZATION AND RELATED METHODS,
international filing date April 27,
2000.
|
·
|
Japan Patent Application
#2000-613478 entitled SOMATIC TRANSGENE IMMUNIZATION AND RELATED METHODS,
international filing date April 27,
2000.
|
·
|
US Patent Application
No. 10,030,003 entitled SOMATIC TRANSGENE IMMUNIZATION AND
RELATED METHODS, international filing date April 27,
2000.
|
·
|
US Patent Application
No. 11,640,778, entitled SOMATIC TRANSGENE IMMUNIZATION AND
RELATED METHODS, filed December 16,
2006.
|
The
Company currently hold five patents worldwide relating to Savvy gel for
contraception and the reduction in transmission of HIV
infection. These patents expire at various dates between 2017 and
2021. The Company is not aware of any organization that currently has
legally blocking proprietary rights relating to the Company’s Savvy product
candidate. However, it is impossible to anticipate the breadth or
degree of protection that any such patents will afford, or whether we can
meaningfully protect our rights to our unpatented trade secrets. No
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques, or otherwise
gain access to our trade secrets or disclose such technology.
The
Company’s failure to obtain patent protection or otherwise protect its
proprietary technology or proposed products may have a material adverse effect
on the Company’s competitive position and business prospects. The
patent application process takes several years and entails considerable
expense. There is no assurance that additional patents will issue
from these applications or, if patents do issue, that the claims allowed will be
sufficient to protect the Company’s technology.
30
The
patent positions of pharmaceutical and biotechnology firms are often uncertain
and involve complex legal and factual questions. Furthermore, the breadth of
claims allowed in biotechnology patents is unpredictable. The Company cannot be
certain that others have not filed patent applications for technology covered by
the pending STI applications or that the licensor of the STI technology was the
first to invent the technology that is the subject of such patent applications.
Competitors may have filed applications for, or may have received patents and
may obtain additional patents and proprietary rights relating to compounds,
products or processes that block or compete with those of the Company. The
Company is aware of patent applications filed and patents issued to third
parties relating to HFA propellant technology and aerosolized inhalers, and
there can be no assurance that any patent applications or patents will not have
a material adverse effect on potential products the Company is developing or may
seek to develop in the future.
Patent
litigation is widespread in the biotechnology industry. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company, to protect trade secrets or know-how owned or licensed by
the Company, or to determine the scope and validity of the proprietary rights of
third parties. Although no third party has asserted that the Company is
infringing such third party’s patent rights or other intellectual property,
there can be no assurance that litigation asserting such claims will not be
initiated, that the Company would prevail in any such litigation or that the
Company would be able to obtain any necessary licenses on reasonable terms, if
at all. Any such claims against the Company, with or without merit, as well as
claims initiated by the Company against third parties, can be time-consuming and
expensive to defend or prosecute and to resolve. If other companies prepare and
file patent applications in the United States that claim technology also claimed
by the Company, it may have to participate in interference proceedings to
determine priority of invention which could result in substantial cost to the
Company even if the outcome is favorable to the Company. There can be no
assurance that third parties will not independently develop equivalent
proprietary information or techniques, will not gain access to the Company’s
trade secrets or disclose such technology to the public or that the Company can
maintain and protect unpatented proprietary technology. The Company typically
requires its employees, consultants, collaborators, advisors and corporate
partners to execute confidentiality agreements upon commencement of employment
or other relationships with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for the Company’s technology in the event of unauthorized use or disclosure of
such information, that the parties to such agreements will not breach such
agreements or that the Company’s trade secrets will not otherwise become known
or be discovered independently by its competitors.
Employees
As
of December 31, 2008, Adamis, including its subsidiaries, employed 14
full-time employees. Most employees are located in Florida and are
engaged in activities relating to the Adamis Labs operations. Adamis
plans to continue to expand its product development programs. To
support this growth, the Company will need to expand managerial,
operations, development, regulatory, sales, commercialization, finance and other
functions. As of December 31, 2008, Cellegy had two full-time
employees. In addition, Cellegy utilized the services of professional
consultants, as well as regulatory and clinical research organizations to
supplement its internal staff’s activities. None of the Company’s
employees are represented by a labor union. We have experienced no
work stoppages and we believe that our employee relations are
good.
Available
Information
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,
and
|
(iv)
|
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 Adamis
Pharmaceuticals Corporation, 2658 Del Mar Heights Road, #555, Del Mar, CA 92014,
Attention: Chief Financial Officer, the Company will provide a copy of the
annual report on Form 10-K to any stockholder.
ITEM
1A: RISK FACTORS
The
following discussion of risk factors relates not only to the business of
Cellegy, but also to the business of Adamis and the combined Company as
conducted and as proposed to be conducted.
31
The
Company will require additional financing.
The Company will require additional
cash resources to continue operations at substantially their current level
during 2009, assuming no significant unexpected expenses. As of
December 31, 2008, the Company and its subsidiaries together had cash and cash
equivalents of approximately $129,000. The Company estimates that
capital needs during calendar year 2009 will include approximately $3.3 million
for product development and approximately $2.3 million of the combined Company
ongoing sales, general and administrative activities and
expenses. These funds will be needed at various times
throughout the first half of the calendar 2009 year. Additional funding will be used to
satisfy existing obligations and liabilities and future working capital needs,
to build working capital reserves and to fund a number of projects, which may
include the following:
·
|
develop and market the Adamis
Labs epinephrine syringe product and the generic nasal steroid product
candidate;
|
·
|
pursue the development of other
product candidates;
|
·
|
fund clinical trials and seek
regulatory approvals;
|
·
|
expand the Company’s research and
development activities;
|
·
|
access manufacturing and
commercialization
capabilities;
|
·
|
implement additional internal
systems and infrastructure;
|
·
|
maintain, defend and expand the
scope of the Company’s intellectual property portfolio;
and
|
·
|
hire additional management,
sales, research, development and clinical
personnel.
|
Statements
in this Report, including concerning the Company’s anticipated or hoped-for
target dates for commercial introduction of its epinephrine syringe product and
its nasal steroid and vaccine product candidates, and for the commencement of
clinical trials relating to the steroid and vaccine product candidates, assume
that the Company will have sufficient funding to support the timely introduction
of products and the conduct of clinical trials. Failure to have
sufficient funding could require the Company to delay product launches or
clinical trials, which would have an adverse effect on its business and results
of operations and which could increase the need for additional financing in the
future.
The
Company has financed its operations to date primarily through the sale of equity
securities. At December 31, 2008, Cellegy had current liabilities of
approximately $256,000, including accounts payable of approximately $72,000
including general operating expenses, and approximately $184,000 accrued
expenses and other current liabilities related primarily to legal, accounting
and payroll items. Until the Company can generate a sufficient amount
of revenue to finance its cash requirements, which the Company may never do, the
Company expects to finance future cash needs primarily through public or private
equity offerings, debt financings, or licensing revenues from strategic
collaborations. Sales of additional equity securities will dilute
current stockholders’ ownership percentage in the Company. The
Company does not know whether additional financing will be available on
acceptable terms, or at all. If the Company is not able to secure
additional equity or debt financing when needed on acceptable terms, the Company
may have to sell some of its assets or enter into a strategic collaboration for
one or more of the Company’s product candidate programs at an earlier stage of
development than would otherwise be desired. This could lower the
economic value of these collaborations to the Company. In addition,
the Company may have to delay, reduce the scope of, or eliminate one or more of
its clinical trials or research and development programs, or ultimately, cease
operations.
If
adequate funding is not obtained, the board of directors will be required to
explore alternatives for the Company’s business and assets. These
alternatives might include seeking the dissolution and liquidation of the
Company, seeking to merge or combine with another company, selling or licensing
some of the Company’s intellectual property, or initiating bankruptcy
proceedings. There can be no assurance that any third party will be
interested in merging with the Company or would agree to a price and other terms
that the Company would deem adequate. If the Company filed for
bankruptcy protection, the Company would most likely not be able to raise any
type of funding from any source. In that event, the creditors of the
Company would have first claim on the value of the assets of the Company which,
other than remaining cash, would most likely be liquidated in a bankruptcy
sale. The Company can give no assurance as to the magnitude of the
net proceeds of such sale and whether such proceeds would be sufficient to
satisfy the Company’s obligations to its creditors, let alone to permit any
distribution to its equity holders.
32
The
Company has incurred losses since inception and anticipates that the Company
will continue to incur losses. The Company may never achieve or
sustain profitability.
Cellegy
incurred net losses of approximately $1.5 million and $1.9 million for its
fiscal years ended December 31, 2008 and 2007, respectively. The
Company’s net operating losses are expected to continue as a result of
increasing marketing and sales expenses, research and development expenses,
clinical trial activity and preparation for regulatory submissions necessary to
support regulatory approval of its products. These losses may
increase as the Company continues its research and development activities, seeks
regulatory approvals for its product candidates and commercializes any approved
products. These losses may cause, among other things, the Company’s
stockholders’ equity and working capital to decrease. The future
earnings and cash flow from operations of the Company’s business are dependent,
in part, on its ability to further develop its products and on revenues and
profitability from sales of products and product candidates of its Adamis Labs
operations. There can be no assurance that the Company will grow and
be profitable. There can be no assurance that the Company will be
able to generate sufficient product revenue to become profitable at all or on a
sustained basis. The Company expects to have quarter-to-quarter
fluctuations in expenses, some of which could be significant, due to expanded
manufacturing, marketing, research, development, and clinical trial
activities. If product candidates fail in clinical trials or do not
gain regulatory approval, or if the Company’s products do not achieve market
acceptance, the Company may never become profitable. The Company will
need to increase product marketing and brand awareness and conduct significant
research, development, testing and regulatory compliance activities that,
together with projected general and administrative expenses, are expected to
result in substantial operating losses for the foreseeable
future. Even if the Company does achieve profitability, it may not be
able to sustain or increase profitability on a quarterly or annual
basis.
Substantial
doubt exists about the Company’s 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. Cellegy’s audit
opinions from its independent registered public accounting firm regarding the
consolidated financial statements for the years ended December 31, 2008 and 2007
include an explanatory paragraph indicating that Cellegy has incurred recurring
losses from operations and has negative working capital, liabilities that exceed
its assets and recurring cash flow deficiencies and that these factors raise
substantial doubt about its ability to continue as a going concern. Without
additional funds from debt or equity financing, sales of assets, intellectual
property or technologies, or from a business combination or a similar
transaction, the Company will exhaust its resources and will be unable to
continue operations. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The
Company’s limited operating history may make it difficult to evaluate its
business to date and the Company’s future viability.
The
Company is in the early stage of operations and development, and has only a
limited operating history on which to base an evaluation of its business and
prospects. Moreover, Adamis acquired Adamis Labs during calendar year 2007, and
integrating those businesses with the Company’s other business activities could
be challenging. The Company will be subject to the risks inherent in the
ownership and operation of a company with a limited operating history such as
regulatory setbacks and delays, fluctuations in expenses, competition, the
general strength of regional and national economies, and governmental
regulation. Any failure to successfully address these risks and uncertainties
could seriously harm the Company’s business and prospects. The Company may not
succeed given the technological, marketing, strategic and competitive challenges
it will face. The likelihood of the Company’s success must be considered in
light of the expenses, difficulties, complications, problems and delays
frequently encountered in connection with the growth of a new business, the
continuing development of new drug development technology, and the competitive
and regulatory environment in which the Company operates or may choose to
operate in the future.
Some
of the Company’s potential products and technologies are in early stages of
development.
The
development of new pharmaceutical products is a highly risky undertaking, and
there can be no assurance that any future research and development efforts the
Company might undertake will be successful. The Company’s potential products in
the influenza and other viral fields will require extensive additional research
and development before any commercial introduction, and development work on the
epinephrine syringe product and the generic nasal steroid product must still be
completed. There can be no assurance that any future research, development or
clinical trial efforts will result in viable products or meet efficacy
standards. Future clinical or preclinical results may be negative or
insufficient to allow the Company to successfully market its product candidates.
Obtaining needed data and results may take longer than planned or may not be
obtained at all. Any such delays or setbacks could have an adverse effect on the
ability of the Company to achieve its financial goals.
33
The
Company is subject to substantial government regulation, which could materially
adversely affect the Company’s business.
The
production and marketing of the Company’s products and potential
products and its ongoing research and development, pre-clinical testing and
clinical trial activities are currently subject to extensive regulation and
review by numerous governmental authorities in the United States and will face
similar regulation and review for overseas approval and sales from governmental
authorities outside of the United States. Some of the product
candidates that the Company is currently developing must undergo rigorous
pre-clinical and clinical testing and an extensive regulatory approval process
before they can be marketed. This process makes it longer, harder and
more costly to bring the Company’s potential products to market, and the Company
cannot guarantee that any of its potential products will be
approved. The pre-marketing approval process can be particularly
expensive, uncertain and lengthy, and a number of products for which FDA
approval has been sought by other companies have never been approved for
marketing. In addition to testing and approval procedures, extensive
regulations also govern marketing, manufacturing, distribution, labeling, and
record-keeping procedures. If the Company or its collaboration
partners do not comply with applicable regulatory requirements, such violations
could result in non-approval, suspensions of regulatory approvals, civil
penalties and criminal fines, product seizures and recalls, operating
restrictions, injunctions, and criminal prosecution.
Withdrawal
or rejection of FDA or other government entity approval of the Company’s
potential products may also adversely affect Adamis’ business. Such
rejection may be encountered due to, among other reasons, lack of efficacy
during clinical trials, unforeseen safety issues, inability to follow patients
after treatment in clinical trials, inconsistencies between early clinical trial
results and results obtained in later clinical trials, varying interpretations
of data generated by clinical trials, or changes in regulatory policy during the
period of product development in the United States and abroad. In the
United States, there is stringent FDA oversight in product clearance and
enforcement activities, causing medical product development to experience longer
approval cycles, greater risk and uncertainty, and higher
expenses. Internationally, there is a risk that the Company may not
be successful in meeting the quality standards or other certification
requirements. Even if regulatory approval of a product is granted,
this approval may entail limitations on uses for which the product may be
labeled and promoted, or may prevent the Company from broadening the uses of the
Company’s current or potential products for different
applications. In addition, the Company may not receive FDA approval
to export the Company’s potential products in the future, and countries to which
potential products are to be exported may not approve them for
import.
Manufacturing
facilities for the Company’s products will also be subject to continual
governmental review and inspection. The FDA has stated publicly that
compliance with manufacturing regulations will continue to be strictly
scrutinized. To the extent the Company decides to manufacture its own
products, a governmental authority may challenge the Company’s compliance with
applicable federal, state and foreign regulations. In addition, any
discovery of previously unknown problems with one of the Company’s potential
products or facilities may result in restrictions on the potential product or
the facility. If the Company decides to outsource the commercial
production of its products, any challenge by a regulatory authority of the
compliance of the manufacturer could hinder the Company’s ability to bring its
products to market.
Some
of Adamis Labs’ products which have been drug listed with the FDA are marketed
without an approved new drug application or abbreviated new drug
application. The FDA could at some future date seek to prevent
marketing of these products, require that such products be marketed only after
submission and approval of drug applications, or take other regulatory action
against the Company with respect to these products, which could have an adverse
effect on the Company.
Several
of Adamis Labs’ products, including AeroHist Caplets, AeroHist Plus Caplets,
AeroKid Oral Liquid and AeroOtic HC Ear Drops, were not the subject of a new
drug application or abbreviated new drug application, or ANDA, and have not been
approved for marketing by the FDA. These products have been
marketed for many years and, the Company believes, are similarly situated to
products marketed by many companies that are marketed without an approved new
drug application or abbreviated new drug application. The
products are drug listed with the FDA in the National Drug Code Directory but
such listing does not constitute FDA approval of the
products. In June 2006, the FDA issued a Compliance Policy
Guide for Marketed Unapproved Drugs, which addressed some of the considerations
utilized by the FDA in exercising its discretion with respect to products
marketed without FDA approval. The guide does not establish
legally enforceable responsibilities on the FDA and generally only represents
the agency’s current thinking on a topic. The guide emphasizes that
any product that is being marketed without required FDA approvals is subject to
FDA enforcement action at any time. If the FDA were to issue a
Federal Register Notice outlining revised conditions for marketing, which could
include calling for the submission of an application for products such as the
Company’s cough/cold products, then the Company would take appropriate action so
as to be in compliance with any such policies. The FDA might
also require clinical trials in support of any such applications, and the
Company would need to evaluate its alternatives in light of the costs required
to conduct such trials, which could be substantial, compared to the economic
benefit to the Company from such products. The FDA could also
exercise its discretion to proceed against the Company and/or other companies
that market similar products without an FDA approval and require immediate
withdrawal of the products from the market, to prohibit the Company from
marketing these products without first conducting required trials and obtaining
approvals, or to impose other penalties on the Company. Some of
Adamis Labs’ unapproved products include extended release formulations, which
may subject the Company to a higher risk of FDA enforcement
action. Such actions could have a material adverse effect on
the Company’s business, financial condition and results of
operations.
34
The
Company intends to rely on third parties to conduct its clinical
trials. If these third parties do not successfully carry out their
contractual duties or meet expected deadlines, the Company may be unable to
obtain, or may experience delays in obtaining, regulatory approval, or may not
be successful in commercializing the Company’s planned and future
products.
Like many
companies its size, the Company does not have the ability to conduct preclinical
or clinical studies for its product candidates without the assistance of third
parties who conduct the studies on its behalf. These third parties
are usually toxicology facilities and clinical research organizations, or CROs,
that have significant resources and experience in the conduct of pre-clinical
and clinical studies. The toxicology facilities conduct the
pre-clinical safety studies as well as all associated tasks connected with these
studies. The CROs typically perform patient recruitment, project
management, data management, statistical analysis, and other reporting
functions. The Company intends to rely on third parties to
conduct clinical trials of its product candidates and to use different
toxicology facilities and CROs for its pre-clinical and clinical
studies.
The
Company’s reliance on these third parties for development activities will reduce
its control over these activities. If these third parties do not
successfully carry out their contractual duties or obligations or meet expected
deadlines, or if the quality or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to the Company’s clinical protocols or
for other reasons, the Company’s clinical trials may be extended, delayed or
terminated. If these third parties do not successfully carry out
their contractual duties or meet expected deadlines, the Company may be required
to replace them. Although the Company believes there are a number of
third-party contractors it could engage to continue these activities, replacing
a third-party contractor may result in a delay of the affected
trial. Accordingly, the Company may not be able to obtain regulatory
approval for or successfully commercialize its product candidates.
Delays
in the commencement or completion of clinical testing of the Company’s product
candidates could result in increased costs to the Company and delay its ability
to generate significant revenues.
Delays in
the commencement or completion of clinical testing could significantly impact
the Company’s product development costs. The Company does not know
whether current or planned clinical trials will begin on time or be completed on
schedule, if at all. The commencement of clinical trials can be
delayed for a variety of reasons, including delays in:
·
|
obtaining regulatory approval to
commence a clinical trial;
|
·
|
reaching agreement on acceptable
terms with prospective contract research organizations and clinical trial
sites;
|
·
|
obtaining sufficient quantities
of clinical trial materials for any or all product
candidates;
|
·
|
obtaining institutional review
board approval to conduct a clinical trial at a prospective site;
and
|
·
|
recruiting participants for a
clinical trial.
|
In
addition, once a clinical trial has begun, it may be suspended or terminated by
the Company or the FDA or other regulatory authorities due to a number of
factors, including:
·
|
failure to conduct the clinical
trial in accordance with regulatory
requirements;
|
35
·
|
inspection of the clinical trial
operations or clinical trial site by the FDA or other regulatory
authorities resulting in the imposition of a clinical
hold;
|
·
|
failure to achieve certain
efficacy and/or safety standards;
or
|
·
|
lack of adequate funding to
continue the clinical trial.
|
Clinical
trials require sufficient participant enrollment, which is a function of many
factors, including the size of the target population, the nature of the trial
protocol, the proximity of participants to clinical trial sites, the
availability of effective treatments for the relevant disease, the eligibility
criteria for the Company’s clinical trials and competing
trials. Delays in enrollment can result in increased costs and longer
development times. The Company’s failure to enroll participants in
its clinical trials could delay the completion of the clinical trials beyond
current expectations. In addition, the FDA could require the Company
to conduct clinical trials with a larger number of participants than it may
project for any of its product candidates. As a result of these
factors, the Company may not be able to enroll a sufficient number of
participants in a timely or cost-effective manner.
Furthermore,
enrolled participants may drop out of clinical trials, which could impair the
validity or statistical significance of the clinical trials. A number
of factors can influence the discontinuation rate, including, but not limited
to: the inclusion of a placebo in a trial; possible lack of effect of the
product candidate being tested at one or more of the dose levels being tested;
adverse side effects experienced, whether or not related to the product
candidate; and the availability of numerous alternative treatment options that
may induce participants to discontinue from the trial.
The
Company, the FDA or other applicable regulatory authorities may suspend clinical
trials of a product candidate at any time if Adamis or they believe the
participants in such clinical trials, or in independent third-party clinical
trials for drugs based on similar technologies, are being exposed to
unacceptable health risks or for other reasons.
The
Company is 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. As the Company conducts additional clinical trials and
introduces products into the United States market, the risk of adverse events
increases and the Company’s requirements for liability insurance coverage are
likely to increase. The Company is subject to the risk that
substantial liability claims from the testing or marketing of pharmaceutical
products could be asserted against it in the future. There can be no
assurance that the Company will be able to 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, the Company’s current and
future coverage may not be adequate to protect the Company from all of the
liabilities that it may incur. If losses from liability claims exceed
the Company’s insurance coverage, the Company may incur substantial liabilities
that exceed its financial resources. In addition, a product or
clinical trial liability action against the Company would be expensive and
time-consuming to defend, even if the Company ultimately
prevailed. If the Company is required to pay a claim, the Company may
not have sufficient financial resources and its business and results of
operations may be harmed.
The
Company does not have commercial-scale manufacturing capability, and it lacks
commercial manufacturing experience. The Company will likely rely on
third parties to manufacture and supply its product candidates.
The
Company does not own or operate manufacturing facilities for clinical or
commercial production of product candidates. The Company does not
have any experience in drug formulation or manufacturing, and it will lack the
resources and the capability to manufacture any of the Company’s product
candidates on a clinical or commercial scale. Accordingly, the
Company expects to depend on third-party contract manufacturers for the
foreseeable future. Any performance failure on the part of the
Company’s contract manufacturers could delay clinical development, regulatory
approval or commercialization of the Company’s current or future product
candidates, depriving the Company of potential product revenue and resulting in
additional losses.
36
The
manufacture of pharmaceutical products requires significant expertise and
capital investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of pharmaceutical
products often encounter difficulties in production, particularly in scaling up
initial production. These problems include difficulties with
production costs and yields, quality control (including stability of the product
candidate and quality assurance testing), shortages of qualified personnel, as
well as compliance with strictly enforced federal, state and foreign
regulations. If the Company’s third-party contract manufacturers were
to encounter any of these difficulties or otherwise fail to comply with their
obligations or under applicable regulations, the Company’s ability to provide
product candidates to patients in its clinical trials would be
jeopardized. Any delay or interruption in the supply of clinical
trial supplies could delay the completion of the Company’s clinical trials,
increase the costs associated with maintaining the Company’s clinical trial
programs and, depending upon the period of delay, require the Company to
commence new trials at significant additional expense or terminate the trials
completely.
The
Company’s products can only be manufactured in a facility that has undergone a
satisfactory inspection by the FDA and other relevant regulatory
authorities. For these reasons, the Company may not be able to
replace manufacturing capacity for its products quickly if it or its contract
manufacturer(s) were unable to use manufacturing facilities as a result of
a fire, natural disaster (including an earthquake), equipment failure, or other
difficulty, or if such facilities were deemed not in compliance with the
regulatory requirements and such non-compliance could not be rapidly
rectified. An inability or reduced capacity to manufacture the
Company products would have a material adverse effect on the combined entity’s
business, financial condition, and results of operations.
If
the Company fails to obtain acceptable prices or appropriate reimbursement for
its products, its ability to successfully commercialize its products will be
impaired.
Government
and insurance reimbursements for healthcare expenditures play an important role
for all healthcare providers, including physicians and pharmaceutical companies
such as the Company that plan to offer various products in the United States and
other countries in the future. The Company’s ability to earn
sufficient returns on its products and potential products will depend in part on
the extent to which reimbursement for the costs of such products will be
available from government health administration authorities, private health
coverage insurers, managed care organizations, and other
organizations. In the United States, the Company’s ability to have
its products eligible for Medicare, Medicaid or private insurance reimbursement
will be an important factor in determining the ultimate success of its
products. If, for any reason, Medicare, Medicaid or the insurance
companies decline to provide reimbursement for the Company’s products, its
ability to commercialize its products would be adversely
affected. There can be no assurance that the Company’s potential drug
products will be eligible for reimbursement.
There has
been a trend toward declining government and private insurance expenditures for
many healthcare items. Third-party payors are increasingly
challenging the price of medical and pharmaceutical products.
If
purchasers or users of the Company’s products and related treatments are not
able to obtain appropriate reimbursement for the cost of using such products,
they may forego or reduce such use. Even if the Company’s products
are approved for reimbursement by Medicare, Medicaid and private insurers, of
which there can be no assurance, the amount of reimbursement may be reduced at
times, or even eliminated. This would have a material adverse effect
on the Company’s business, financial condition and results of
operations.
Significant
uncertainty exists as to the reimbursement status of newly approved
pharmaceutical products, and there can be no assurance that adequate third-party
coverage will be available.
Legislative
or regulatory reform of the healthcare system may affect the Company’s ability
to sell its products profitably.
In both
the United States and certain foreign jurisdictions, there have been a number of
legislative and regulatory changes to the healthcare system in ways that could
impact the Company’s ability to sell its products profitably. In
recent years, new legislation has been enacted in the United States at the
federal and state levels that effects major changes in the healthcare system,
either nationally or at the state level. These new laws include a
prescription drug benefit plan for Medicare beneficiaries and certain changes in
Medicare reimbursement. Given the recent enactment of these laws, it
is still too early to determine their impact on the biotechnology and
pharmaceutical industries and the Company’s business. Further,
federal and state proposals are likely. The adoption of these
proposals and pending proposals may affect the Company’s ability to raise
capital, obtain additional collaborators or profitably market its
products. Such proposals may reduce the Company’s revenues, increase
its expenses or limit the markets for its products. In particular,
the Company expects to experience pricing pressures in connection with the sale
of its products due to the trend toward managed health care, the increasing
influence of health maintenance organizations and additional legislative
proposals.
37
The
Company has limited sales, marketing and distribution experience.
The
Company has limited experience in the sales, marketing, and distribution of
pharmaceutical products. There can be no assurance that the Company
will be able to establish sales, marketing, and distribution capabilities or
make arrangements with its current collaborators or others to perform such
activities or that such efforts will be successful. If the Company
decides to market any of its new products directly, it must either acquire or
internally develop a marketing and sales force with technical expertise and with
supporting distribution capabilities. The acquisition or development
of a sales, marketing and distribution infrastructure would require substantial
resources, which may not be available to the Company or, even if available,
divert the attention of its management and key personnel, and have a negative
impact on further product development efforts.
The
Company may seek to enter into collaborative arrangements to develop and
commercialize its products. These collaborations, if secured, may not
be successful.
The
Company may seek to enter into collaborative arrangements to develop and
commercialize some of its potential products both in North America and
international markets. There can be no assurance that the Company
will be able to negotiate collaborative arrangements on favorable terms or at
all or that its current or future collaborative arrangements will be
successful.
The
Company’s strategy for the future research, development, and commercialization
of its products is expected to be based in part on entering into various
arrangements with corporate collaborators, licensors, licensees, health care
institutions and principal investigators and others, and its commercial success
is dependent upon these outside parties performing their respective contractual
obligations responsibly and with integrity. The amount and timing of
resources such third parties will devote to these activities may not be within
the Company’s control. There can be no assurance that such parties
will perform their obligations as expected. There can be no assurance
that the Company’s collaborators will devote adequate resources to its
products.
Even
if the Company receives regulatory approval to market its product candidates,
such products may not gain the market acceptance among physicians, patients,
healthcare payors and the medical community.
Any
products that the Company may develop may not gain market acceptance among
physicians, patients, healthcare payors and the medical community even if they
ultimately receive regulatory approval. If these products do not
achieve an adequate level of acceptance, the Company, or future collaborators,
may not be able to generate material product revenues and the Company may not
become profitable. The degree of market acceptance of any of the
Company’s product candidates, if approved for commercial sale, will depend on a
number of factors, including:
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demonstration
of efficacy and safety in clinical
trials;
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the
prevalence and severity of any unexpected side
effects;
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the
introduction and availability of generic substitutes for any of the
Company’s products, potentially at lower prices (which, in turn, will
depend on the strength of the Company’s intellectual property protection
for such products);
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potential
or perceived advantages over alternative
treatments;
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the
timing of market entry relative to competitive
treatments;
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the
ability to offer the Company’s product candidates for sale at competitive
prices;
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relative
convenience and ease of
administration;
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the
strength of marketing and distribution
support;
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sufficient
third party coverage or reimbursement;
and
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the
product labeling or product insert (including any warnings) required by
the FDA or regulatory authorities in other
countries.
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38
If
the Company is not successful in acquiring or licensing additional product
candidates on acceptable terms, if at all, the Company’s business may be
adversely affected.
As part
of its strategy, the Company may acquire or license additional product
candidates that it believes have growth potential. There are no
assurances that the Company will be able to identify promising product
candidates. Even if the Company is successful in identifying
promising product candidates, the Company may not be able to reach an agreement
for the acquisition or license of the product candidates with their owners on
acceptable terms or at all.
The
Company may not be able to successfully identify any other commercial products
or product candidates to in-license, acquire or internally
develop. Moreover, negotiating and implementing an economically
viable in-licensing arrangement or acquisition is a lengthy and complex
process. Other companies, including those with substantially greater
resources, may compete with the Company for the in-licensing or acquisition of
product candidates and approved products. The Company may not be able
to acquire or in-license the rights to additional product candidates and
approved products on terms that it finds acceptable, or at all. If it
is unable to in-license or acquire additional commercial products or product
candidates, the Company’s ability to grow its business or increase its profits
could be severely limited.
If
the Company’s competitors develop and market products that are more effective
than the Company’s product candidates or obtain regulatory and marketing
approval for similar products before the Company does, the Company’s commercial
opportunity may be reduced or eliminated.
The
development and commercialization of new pharmaceutical products which target
influenza and other viral conditions, and allergy and other respiratory
conditions addressed by the current and future products of Adamis Labs, is
competitive, and the Company will face competition from numerous sources,
including major biotechnology and pharmaceutical companies
worldwide. Many of the Company’s competitors have substantially
greater financial and technical resources, and development, production and
marketing capabilities than the Company does. In addition, many of
these companies have more experience than the Company in pre-clinical testing,
clinical trials and manufacturing of compounds, as well as in obtaining FDA and
foreign regulatory approvals. The Company will also compete with
academic institutions, governmental agencies and private organizations that are
conducting research in the same fields. Competition among these
entities to recruit and retain highly qualified scientific, technical and
professional personnel and consultants is also intense. As a result,
there is a risk that one of the competitors of the Company will develop a more
effective product for the same indications for which the Company is developing a
product or, alternatively, bring a similar product to market before the Company
can do so. Failure of the Company to successfully compete will
adversely impact the ability to raise additional capital and ultimately achieve
profitable operations.
The Company faces
intense competition from larger companies and may not have the resources
required to develop innovative products. The Company’s product
candidates are subject to competition from existing
products.
The
pharmaceutical industry is subject to rapid and significant technological
change. The Company’s and much smaller in terms of size and resources
than many of their 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. The Company’s competitors may succeed in developing
technologies and products that are safer and more effective than any product or
product candidates that the Company may develop and could render 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. In addition, any products of the Company will likely be
subject to competition from existing products. As a result, any
future products of the Company may never be able to compete successfully with
existing products or with innovative products under development by other
organizations.
If
the Company suffers negative publicity concerning the safety of its products in
development, its sales may be harmed and Adamis may be forced to withdraw such
products.
If
concerns should arise about the safety of any of the Company’s products that are
marketed, regardless of whether or not such concerns have a basis in generally
accepted science or peer-reviewed scientific research, such concerns could
adversely affect the market for these products. Similarly, negative
publicity could result in an increased number of product liability claims,
whether or not these claims are supported by applicable law.
39
The
Company’s failure to protect adequately or to enforce its intellectual property
rights or secure rights to third party patents could materially harm its
proprietary position in the marketplace or prevent the commercialization of its
products.
The
Company’s success will depend in part on its ability to obtain and maintain
protection in the United States and other countries for the intellectual
property covering or incorporated into its technologies and
products. The patents and patent applications in the Company’s
existing patent portfolio are either owned by the Company or licensed to the
Company. The Company’s ability to protect its product candidates from
unauthorized use or infringement by third parties depends substantially on its
ability to obtain and maintain valid and enforceable patents. Due to
evolving legal standards relating to the patentability, validity and
enforceability of patents covering pharmaceutical inventions and the scope of
claims made under these patents, the Company’s ability to obtain and enforce
patents is uncertain and involves complex legal and factual questions for which
important legal principles are unresolved.
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 the Company’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. The Company may not be
able to obtain patent rights on products, treatment methods or manufacturing
processes that it may develop or to which the Company may obtain license or
other rights. Even if the Company does obtain patents, rights under
any issued patents may not provide it with sufficient protection for the
Company’s product candidates or provide sufficient protection to afford the
Company a commercial advantage against its competitors or their competitive
products or processes. It is possible that no patents will be issued
from any pending or future patent applications owned by the Company or licensed
to the Company. Others may challenge, seek to invalidate, infringe or
circumvent any patents the Company owns or licenses. Alternatively,
the Company may in the future be required to initiate litigation against third
parties to enforce its intellectual property rights. The defense and
prosecution of patent and intellectual property claims are both costly and time
consuming, even if the outcome is favorable to the Company. Any
adverse outcome could subject the Company to significant liabilities, require
the Company to license disputed rights from others, or require the Company to
cease selling its future products.
In addition, many other organizations
are engaged in research and product development efforts that may overlap with
the Company’s products. For example, with regard to the Savvy product
candidates Tibotec Pharmaceuticals, which is owned by Johnson & Johnson, is
engaged in the development of innovative HIV/AIDS drugs and anti-infectives, and
many companies are engaged in efforts to develop HIV/AIDS therapeutic
products. In addition, Ortho Pharmaceuticals and many other
companies offer contraceptive vaginal gel 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 the Company. These rights may
prevent the Company from commercializing technology, or may require the Company
to obtain a license from the organizations to use the technology. The
Company 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. As with
other companies in the pharmaceutical industry, the Company is subject to the
risk that persons located in other countries will engage in development,
marketing or sales activities of products that would infringe the Company’s
patent rights if such activities were conducted in the United
States.
The
Company’s patents also may not afford protection against competitors with
similar technology. The Company may not have identified all patents,
published applications or published literature that affect its business either
by blocking the Company’s ability to commercialize its product candidates, by
preventing the patentability of its products or by covering the same or similar
technologies that may affect the Company’s ability to market or license its
product candidates. For example, patent applications filed with the
United States Patent and Trademark Office, or USPTO, are maintained in
confidence for up to 18 months after their filing. In some cases,
however, patent applications filed with the USPTO remain confidential for the
entire time before issuance as a U.S. patent. Patent applications
filed in countries outside the United States are not typically published until
at least 18 months from their first filing date. Similarly,
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries. Therefore, the Company or its licensors
might not have been the first to invent, or the first to file, patent
applications on the Company’s product candidates or for their
use. The laws of some foreign jurisdictions do not protect
intellectual property rights to the same extent as in the United States, and
many companies have encountered significant difficulties in protecting and
defending these rights in foreign jurisdictions. If the Company
encounters such difficulties or is otherwise precluded from effectively
protecting its intellectual property rights in either the United States or
foreign jurisdictions, the Company’s business prospects could be substantially
harmed.
40
If
the Company is unable to retain its management, research, development, and
clinical teams and scientific advisors or to attract additional qualified
personnel, the Company’s product operations and development efforts may be
seriously jeopardized.
The
Company’s success is dependent upon the efforts of a small management team and
staff, including Dennis J. Carlo, Ph.D., its Chief Executive
Officer. The employment of Mr. Carlo may be terminated at any
time by either the Company or Mr. Carlo. The Company does not have
key man life insurance policies covering any of its executive officers or key
employees. If key individuals leave the Company, the Company 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 operation of the Company’s business.
The loss
of the services of any principal member of the Company’s management and
research, development and clinical teams could significantly delay or prevent
the achievement of the Company’s scientific and business
objectives. Competition among biotechnology and pharmaceutical
companies for qualified employees is intense, and the ability to retain and
attract qualified individuals is critical to the Company’s
success. The Company may be unable to attract and retain key
personnel on acceptable terms, if at all. The Company does not
maintain “key person” life insurance on any of its officers, employees or
consultants.
The
Company has relationships with consultants and scientific advisors who will
continue to assist the Company in formulating and executing its research,
development, regulatory and clinical strategies. These consultants
and scientific advisors are not employees of Adamis or the Company and may have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to the Company. The Company will have
only limited control over the activities of these consultants and scientific
advisors and can generally expect these individuals to devote only limited time
to the Company’s activities. The Company also relies on these
consultants to evaluate potential compounds and products, which may be important
in developing a long-term product pipeline for the
Company. Consultants also assist the Company in preparing and
submitting regulatory filings. The Company’s scientific advisors
provide scientific and technical guidance on the company’s drug discovery and
development. Failure of any of these persons to devote sufficient
time and resources to the Company’s programs could harm its
business. In addition, these advisors may have arrangements with
other companies to assist those companies in developing technologies that may
compete with the Company’s products.
The
Company may not achieve the benefits that were expected from the Merger, which
may have a material adverse effect on the Company’s business, financial
condition and operating results.
Cellegy
and Adamis entered into the merger agreement with the expectation that the
Merger will result in benefits to the Company. Post-merger challenges
include the following:
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maintaining
an OTC Bulletin Board listing or a stock exchange listing to promote
liquidity for stockholders of the Company and potentially greater access
to capital;
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retaining
the management and employees of the
Company;
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obtaining
additional financing required to fund operations;
and
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developing
new product candidates that utilize the assets and resources of the
Company.
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If the
Company is not successful in addressing these and other challenges, then the
benefits of the merger may not be realized and, as a result, the Company’s
operating results and the market price of the Company’s common stock may be
adversely affected.
The
Company’s common stock price is expected to be volatile, and the market price of
its common stock may drop following the merger.
The
market price of the Company’s common stock may decline following the closing of
the Adamis/Cellegy Merger for a number of reasons, including the
following:
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if
the Company does not achieve the perceived benefits of the Merger as
rapidly or to the extent anticipated by the Company or financial or
industry analysts;
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if
the Company is unable to obtain required
financing;
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41
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if
the effect of the Merger on the Company’s business and prospects is not
consistent with the expectations of the Company or financial or industry
analysts;
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if
revenues and net income from sales of the Company’s products are less than
investors’ expectations; or
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if
the Company’s product research and development efforts do not
meet investors’ expectations.
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The
market price of the Company’s common stock could also be subject to significant
fluctuations following the Merger. Market prices for securities of
early-stage pharmaceutical, biotechnology and other life sciences companies have
historically been particularly volatile. Some of the factors that may
cause the market price of the Company’s common stock to fluctuate
include:
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the results of the Company’s
current and any future clinical trials of its product
candidates;
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the timing and results of ongoing
preclinical studies and planned clinical trials of the Company’s
preclinical product
candidates;
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the entry into, or termination
of, key agreements, including, among others, key collaboration and license
agreements;
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the results and timing of
regulatory reviews relating to the approval of the Company’s product
candidates;
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the initiation of, material
developments in, or conclusion of, litigation to enforce or defend any of
the Company’s intellectual property
rights;
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failure of any of the Company’s
product candidates, if approved, to achieve commercial
success;
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general and industry-specific
economic conditions that may affect the Company’s research and development
expenditures;
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the results of clinical trials
conducted by others on drugs that would compete with the Company’s product
candidates;
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issues in manufacturing the
Company’s product candidates or any approved
products;
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the loss of key
employees;
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the introduction of technological
innovations or new commercial products by competitors of the
Company;
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changes in estimates or
recommendations by securities analysts, if any, who cover the Company’s
common stock;
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future sales of the Company’s
common stock;
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period-to-period fluctuations in
the Company’s financial
results;
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publicity or announcements
regarding regulatory developments relating to the Company’s
products;
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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 the Company’s
products;
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period-to-period fluctuations in
the Company’s financial results, including the Company’s cash and cash
equivalents balance, operating expenses, cash burn rate or revenue
levels;
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common stock sales in the public
market by one or more of the Company’s larger stockholders, officers or
directors;
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42
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its filing for protection under
federal bankruptcy laws;
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a negative outcome in any
litigation or potential legal proceedings;
or
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other potentially negative
financial announcements including: a review of any of the Company’s
filings by the SEC, changes in accounting treatment or restatement of
previously reported financial results or delays in the Company’s filings
with the SEC.
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Following
the merger, stockholders of the Company may sell a significant number of shares
of common stock of the Company that they received in the Merger. Such
holders previously had no ready market for their Adamis shares and might be
eager to sell some or all of their shares once the Merger is
completed. Significant sales could adversely affect the market price
for the Company’s common stock for a period of time after completion of the
Merger.
Moreover,
the stock markets in general have experienced substantial volatility that has
often been unrelated to the operating performance of individual
companies. These broad market fluctuations may also adversely affect
the trading price of the Company’s common stock.
In the
past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted,
could result in substantial costs and diversion of management attention and
resources, which could significantly harm the Company’s profitability and
reputation.
The
Company’s common stock will initially be traded on the OTC Bulletin Board and be
subject to additional trading restrictions as a “penny stock,” which could
adversely affect the liquidity and price of such stock.
The
Company’s common stock is currently traded on the OTC Bulletin
Board. Because the Company’s common stock will not initially be
listed on any national securities exchange, such shares will also be subject to
the regulations regarding trading in “penny stocks,” which are securities
trading for less than $5.00 per share. The following is a list of the
general restrictions on the sale of penny stocks:
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Before the sale of penny stock by
a broker-dealer to a new purchaser, the broker-dealer must determine
whether the purchaser is suitable to invest in penny stocks. To
make that determination, a broker-dealer must obtain, from a prospective
investor, information regarding the purchaser’s financial condition and
investment experience and objectives. Subsequently, the
broker-dealer must deliver to the purchaser a written statement setting
forth the basis of the suitability finding and obtain the purchaser’s
signature on such statement.
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A broker-dealer must obtain from
the purchaser an agreement to purchase the securities. This
agreement must be obtained for every purchase until the purchaser becomes
an “established customer.” A broker-dealer may not effect a purchase of a
penny stock less than two business days after a broker-dealer sends such
agreement to the purchaser.
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The Securities Exchange Act of
1934, or the Exchange Act, requires that before effecting any transaction
in any penny stock, a broker-dealer must provide the purchaser with a
“risk disclosure document” that contains, among other things, a
description of the penny stock market and how it functions and the risks
associated with such investment. These disclosure rules are
applicable to both purchases and sales by
investors.
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A dealer that sells penny stock
must send to the purchaser, within ten days after the end of each calendar
month, a written account statement including prescribed information
relating to the security.
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These
requirements can severely limit the liquidity of securities in the secondary
market because few brokers or dealers are likely to be willing to undertake
these compliance activities. As a result of the Company’s common
stock not being listed on a national securities exchange and the rules and
restrictions regarding penny stock transactions, an investor’s ability to sell
to a third party and the Company’s ability to raise additional capital may be
limited. The Company makes no guarantee that its market-makers will
continue to make a market in its common stock, or that any market for its common
stock will continue.
43
The
Company’s shares of common stock may never be approved for listing on a national
securities exchange, which may adversely affect the stockholders’ ability to
sell shares of the Company’s common stock.
The
Company’s common stock is currently traded on the OTC Bulletin
Board. If at some future date the Company seeks to be listed on the
Nasdaq Capital Market or other national securities exchange, it would need to
satisfy the requirements for initial listing on the exchange. The
initial listing qualification standards are stringent and include both
quantitative and qualitative requirements. Although the Company may
at a future date explore various actions to meet the minimum initial listing
requirements for a listing on a national securities exchange, there is no
guarantee that any such actions will be successful in bringing it into
compliance with such requirements.
If the
Company fails to achieve listing of its common stock on a national securities
exchange, the Company’s common shares may continue to be traded on the OTC
Bulletin Board, the Pink Sheets, or other over-the-counter markets in the United
States, although there can be no assurance that its common shares will remain
eligible for trading on any such alternative markets or exchanges in the United
States.
In the
event that the Company is not able to obtain a listing on a national securities
exchange or maintain its reporting on the OTC Bulletin Board, Pink Sheets or
other quotation service for its common shares, it may be more difficult for
stockholders to sell their common shares in the United
States. Moreover, if the common stock of the Company remains quoted
on the OTC Bulletin Board, Pink Sheets or other over-the-counter market, the
liquidity will likely be less, and therefore the price will be more volatile,
than if its common stock was listed on a national securities
exchange. Stockholders may not be able to sell their common shares in
the quantities, at the times, or at the prices that could potentially be
available on a more liquid trading market. As a result of these
factors, if the Company’s common shares fail to achieve listing on a national
securities exchange, the price of its common shares may decline. In
addition, a decline in the price of the Company’s common shares could impair its
ability to achieve a national securities exchange listing or to obtain financing
in the future.
The
Company’s principal stockholders will have significant influence over the
Company, and your interests may conflict with the interests of those
persons.
The
Company’s five largest stockholders beneficially own approximately 49% of the
outstanding the Company common stock. As a result, those stockholders
will be able to exert a significant degree of influence or actual control over
the Company’s management and affairs after the merger and over matters requiring
stockholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of the Company’s assets, and
any other significant corporate transaction. The interests of these
persons may not always coincide with the interests of the Company or its other
stockholders. For example, such persons could delay or prevent a
change of control of the Company even if such a change of control would benefit
the Company’s other stockholders. The significant concentration of
stock ownership may adversely affect the trading price of the Company’s common
stock due to investors’ perception that conflicts of interest may exist or
arise.
The Company’s corporate compliance
programs cannot guarantee that the Company is in compliance with all potentially
applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of pharmaceutical
products, together with the Company’s 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. The
Company is a small company and it relies on third parties to conduct certain
important functions. The Company relies on a third party clinical
regulatory organization, Health Decisions, Inc., pursuant to an agreement
between the Company and the National Institute of Child Health and Human
Development, to conduct its Phase 3 Savvy clinical trial, and will rely on third
parties to assist in evaluation of the results of that
trial. In addition, the Company also has significantly fewer
employees than many other companies that have the same or fewer product
candidates in clinical development. If the Company fails to comply
with any of these regulations, the Company could be subject to a range of
regulatory actions, including suspension or termination of clinical trials,
restrictions on its products or manufacturing processes, or other sanctions or
litigation. In addition, as a publicly traded company the Company is
subject to significant regulations, including the Sarbanes-Oxley Act of
2002. While the Company has developed and instituted a corporate
compliance program and continues to update the program in response to newly
implemented or changing regulatory requirements, the Company cannot assure you
that it is now or will be in compliance with all such applicable laws and
regulations. Failure to comply with potentially applicable laws and
regulations could also lead to the imposition of fines, cause the value of
Cellegy’s common stock to decline and impede the Company’s ability to raise
capital or lead to the failure of Cellegy’s common stock to continue to be
traded on the OTC Bulletin Board.
44
If the Company is
unable to favorably assess the effectiveness of its internal controls over
financial reporting, or if the Company’s independent registered public
accounting firm is unable to provide an unqualified attestation report on the
Company’s assessment, the price of the Company’s common stock could be adversely
affected.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, the Company’s management is
required to report on the effectiveness of its internal control over financial
reporting as part of its annual reports for fiscal years ending after December
15, 2007, and the Company’s independent auditor will be required to attest to
the effectiveness of the Company’s internal control over financial reporting,
for the fiscal year ending March 31, 2010. Before the Merger, Adamis,
as a private company, was not subject to the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. For financial periods after the closing
of the Merger, if management identifies one or more material weaknesses in the
Company’s internal control over financial reporting that are not remediated, the
Company will be unable to assert that its internal controls are
effective. Any failure to have effective internal control over
financial reporting could cause investors to lose confidence in the accuracy and
completeness of the Company’s financial reports, which could lead to a
substantial price decline in the Company’s common stock.
In
addition, although the Company believes that it currently has adequate finance
and accounting systems, procedures and controls for its business, in light of
the closing of the merger with Adamis, the Company may decide to upgrade the
existing, and implement additional, procedures and controls to incorporate
Adamis’ business operations. These updates may require significant
time and expense, and there can be no guarantee that the Company will be
successful in implementing them. If the Company is unable to complete
any required modifications to its internal control reporting or if the Company’s
independent registered public accounting firm is unable to provide the Company
with an unqualified report as to the effectiveness of its internal control over
financial reporting, investors could lose confidence in the reliability of
the Company’s internal control over financial reporting, which could lead
to a substantial price decline in the Company’s common stock.
The
Company has never paid cash dividends on its common stock, and neither company
anticipates that the Company will pay any cash dividends on its common stock in
the foreseeable future.
The
Company has never declared or paid cash dividends on its common
stock. The Company does not anticipate that it will pay any cash
dividends on its common stock in the foreseeable future. The Company
intends to retain all available funds and any future earnings to fund the
development and growth of its business. Accordingly, the stockholders
of the Company will not receive a return on their investment unless the value of
the Company’s shares increases, which may or may not occur.
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
ITEM
2: PROPERTIES
Following
completion of the Merger, the Company intends to lease space for its executive
offices in or near Del Mar, California. Adamis currently leases
approximately 5,200 square feet of office and approximately 1,800 square feet of
warehouse space in Boca Raton and Coconut Creek, Florida, relating to its Adamis
Labs operations. The term of the office lease expired in December
2008. The leases are continuing on a month-to-month basis, and Adamis
expects either to enter into extensions of the leases or enter into new lease
arrangements. The Company is currently evaluating its space
requirements and expects to either extend its current leases or move into new
facilities that will better accommodate its needs.
ITEM
3: LEGAL PROCEEDINGS
The
Company is not currently a party to any material legal proceedings.
ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None. No
matter was submitted during the fourth quarter of 2008 to a vote of the
Company’s stockholders.
45
PART II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price
Range of Common Stock
During
2008, the Company’s common stock traded on the OTC Bulletin Board, sometimes
referred to as the OTCBB, under the symbol “CLGY.OB.” In April, 2009,
and in connection with its merger with Adamis, the Company changed its common
stock symbol to “ADMP” and the common stock currently trades on the
OTCBB.. The following table sets forth the range of high and low
closing sales prices for the common stock as reported on The NASDAQ Small Cap
Market and OTCBB for the periods indicated below. The prices in the
table below reflect prices of the pre-reverse split shares of common stock and
have not been adjusted to give effect to the Reverse Split of the common stock
that occurred in April 2009.
High
|
Low
|
|||||||
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 | ||||
2008
|
||||||||
First
Quarter
|
$ | 0.10 | $ | 0.02 | ||||
Second
Quarter
|
$ | 0.10 | $ | 0.04 | ||||
Third
Quarter
|
$ | 0.09 | $ | 0.04 | ||||
Fourth
Quarter
|
$ | 0.07 | $ | 0.01 | ||||
2009
|
||||||||
First
Quarter through March 31, 2009
|
$ | 0.07 | $ | 0.02 |
As of
April 15, 2009, there were approximately 245 holders of record common stock,
excluding beneficial holders of stock held in street name.
Dividend
Policy
We have
has never declared or paid any cash dividends on its common stock, and we do not
intend to do so in the foreseeable future. Accordingly, the
stockholders of the Company will not receive a return on their investment unless
the value of the Company’s shares increases, which may or may not
occur. Any future determination to pay cash dividends will be at the
discretion of the Company’s board of directors and will depend upon its
financial condition, operating results, capital requirements, any applicable
contractual restrictions and such other factors as the Company’s board of
directors deems relevant.
Equity
Compensation Plan Information
See the
information under Item 12 of this Report, “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters,” which is
incorporated herein by reference.
Recent
Sales of Unregistered Securities
None.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except
where the context otherwise requires, the following discussion and analysis
relates only to Old Cellegy and Old Cellegy’s fiscal year ended December 31,
2008. It does not include financial results of Old Adamis or a
discussion of any products or developments concerning the business of Old
Adamis, except where specifically discussed. Following the April 1,
2009, effective date of the merger transaction between Cellegy and Adamis, the
business of the Company will consist primarily of the business and intended
business of Old Adamis.
46
The
following discussion and analysis of financial condition and results of
operations should be read together with the consolidated financial statements
and accompanying notes of the Company appearing elsewhere in this
Report. This discussion of Cellegy’s financial condition and results
of operations contains certain statements that are not strictly historical and
are “forward-looking” statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve a high degree of risk and
uncertainty. Actual results may differ materially from those
projected in the forward-looking statements due to other risks and uncertainties
that exist in Cellegy’s operations, development efforts and business
environment, including those set forth in this Item 7, and in the sections
entitled “1A. Risk Factors” and “1. Business” in this Report and uncertainties
described elsewhere in this Report. All forward-looking statements
included in this Report are based on information available to the Company as of
the date hereof, and except as may be required under the Securities Exchange Act
of 1934 and the rules and regulations promulgated thereunder, the Company
assumes no obligation to update any such forward-looking statement.
General
The Company is a specialty
biopharmaceutical company. Cellegy’s operations during 2008 related
primarily to the intellectual property rights relating to the Biosyn product
candidates. Cellegy’s wholly owned subsidiary, Biosyn, Inc., has
intellectual property relating to a portfolio of proprietary product candidates
known as microbicides. Cellegy’s intellectual property consists
primarily of commercialization and territorial marketing rights for its Savvy
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. Biosyn’s product candidates, which include both
contraceptive and non-contraceptive microbicides, are used
intravaginally. Biosyn’s product candidates include Savvy®, which
underwent Phase 3 clinical trials in Ghana and Nigeria for reduction in the
transmission of Human Immunodeficiency Virus/Acquired Immunodeficiency Disease,
or HIV/AIDS, both of which were suspended in 2005 and 2006 and terminated before
completion, and is currently in a Phase 3 contraception trial in the United
States. Cellegy monitors the progress of the Savvy Phase 3
contraception trial in the United States and through communications with the
clinical regulatory organization, or CRO, that is involved in the conduct of the
trial and other parties involved in conducting the trial concerning matters such
as the status and progress of the trial, enrollment numbers and rates of patient
enrollment, issues that arise concerning conduct of the trial and anticipated
timelines regarding the trial. Cellegy receives reports from
the CRO concerning the progress of the trial, enrollment statistics and rates,
any adverse events, people leaving the trial and other
requests. Cellegy is required to prepare and file reports with
the FDA and other applicable regulatory agencies concerning both the current
contraception trial and its suspended HIV trials. While the Savvy Phase 3 contraception
trial in the United States has been completed and the analysis of the
results is expected to be completed by the end of 2009, Cellegy is not directly
involved with the conduct and funding thereof, and it is uncertain whether Savvy
will be commercialized or whether Cellegy will ever realize revenues
therefrom.
On August
28, 2006, Cellegy announced that Family Health International 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 Data
Monitoring Committee, or 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 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.
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.
47
On
October 18, 2007, Cellegy and CONRAD amended their license agreement to modify
the non-exclusive license grant to CONRAD covering Cellegy’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.
Critical
Accounting Policies and 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.
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.
Research and
Development. Research and development expenses include
expenses associated with regulatory filings for ongoing clinical trials and are
charged to expense as they are incurred.
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 consist of demand deposits and short term money market
funds.The carrying value of cash and cash equivalents approximates fair value as
of December 31, 2008 and 2007. As of December 31, 2008, 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.
Concentration of Credit
Risk. As of December 31, 2008, the Company had its cash
in demand deposits and in 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
|
Stock-based
Compensation. For the years ended December 31, 2008 and 2007,
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.
Cellegy
values its options on the date of grant using the Black-Scholes valuation model.
The Company did not grant any stock options during 2008 and 2007.
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.
Accounting for Merger Related
Costs. For the year ended December 31, 2008, Cellegy incurred
certain accounting, legal and other filing costs in conjunction with its pending
merger with Adamis. These costs were expensed as
incurred.
48
Results
of Operations
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, 2008 and 2007
Research
and development expenses include expenses associated with regulatory filings for
ongoing clinical trials and are charged to expense as they are
incurred.
Cellegy
had no research and development expenses in 2008. Research and
development expenses were approximately $23,000 in 2007. Research and
development expenses, which were primarily related to the costs of clinical
trials and/or regulatory filings, represented 1% of our total operating expenses
in 2007. Cellegy expects that research and development spending will be
conducted for the foreseeable future in connection with the development of
Adamis product candidates.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
(“SG&A”) were approximately $1,322,000 and $1,799,000 in 2008 and 2007,
respectively. SG&A expenses decreased approximately $477,000 as
compared to 2007 due primarily to additional staff reductions, lower rent
expense, lower legal, accounting and other professional fees and generally lower
expense levels overall due to the reduced level of business activities in
2008. The overall decrease in SG&A expense levels in 2008
was somewhat offset by merger related legal and accounting fees incurred in
2008.
Other Income (Expense). Cellegy recognized interest
and other income of approximately $59,000, in 2008 and $93,000, in
2007. Included in 2008 is interest income of approximately
$44,000 recorded in connection with the note receivable issued to
Adamis. Included in 2007 is a gain on forgiveness of debt of
approximately $5,000. The overall decrease in interest income
is due to the lower level of invested cash in 2008.
Cellegy
recognized interest and other expense of approximately $271,000 in 2008 and
$198,000 in 2007. Interest expense recorded in each year related
primarily to interest accreted in connection with the Ben Franklin
note.
Liquidity
and Capital Resources
Our cash
and cash equivalents were approximately $129,000 and $1,800,000 at
December 31, 2008 and 2007, respectively. Cash and cash equivalents
decreased approximately $1.7 million during 2008 as compared to 2007 due
primarily to operating expenses incurred in connection with Cellegy’s present
level of operations and merger expenses.
Net cash
used in operating activities for 2008 and 2007 were approximately $1.2 million
and $1.9 million, respectively, due primarily to Cellegy’s current level of
operations and merger and acquisition costs. The Company expects net
cash used in operating activities to increase going forward following the merger
transaction with Adamis as it completes product development, launches new
products, engages in additional product research and development activities and
pursues additional expansion of its sales base and other business
activities.
Net cash
used in investing activities was $500,000 for 2008, which related to the
promissory note issued to Adamis in connection the merger
agreement.
Net cash
used in financing activities was $40,000 in 2007, which related to the
settlement and repayment of a promissory note with MPI, Inc.
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 funds to Adamis during
the pendency of the merger transaction. Any principal outstanding
under the promissory note accrues interest at 10% per annum. On April
1, 2009, Cellegy completed the merger transaction with Adamis. In
connection with the closing of the merger transaction, the promissory note
converted into shares of Adamis stock, and these shares were immediately
cancelled.
49
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.
Before
the effectiveness of the merger transaction with Adamis, Cellegy’s operations
related primarily to the management of intellectual property rights of its
Biosyn subsidiary and the administration of the clinical and regulatory affairs
of its Savvy Phase 3 contraception and trial. The Savvy Phase 3
contraception trial in the United States has been completed and the analysis of
the results is expected to be completed by the end
of 2009. It is uncertain as to whether Savvy will be
commercialized or whether Cellegy will ever realize revenues
therefrom.
Following
completion of the Adamis merger transaction, we expect future cash flows to be
derived primarily from sales of Adamis’ products.
The
Company will require additional cash resources to continue operations at
substantially their current level during 2009, assuming no unexpected
expenses. The Company expects to finance future cash needs primarily
through proceeds from equity or debt financings, loans, and/or collaborative
agreements with corporate partners. Even if development and marketing
efforts are successful for the Company’s new products, substantial time may pass
before significant revenues will be realized, and during this period the Company
will require additional funds, the availability of which cannot be
assured. Consequently, the Company is subject to the risks associated
with early stage companies, including the need for additional financings; the
uncertainty of research and development efforts resulting in successful
commercial products, as well as the marketing and customer acceptance of such
products; competition from larger organizations; reliance on the proprietary
technology of others; dependence on key personnel; uncertain patent protection;
and dependence on corporate partners and collaborators. To achieve
successful operations, the Company will require additional capital to continue
research and development and marketing efforts. No assurance can be
given as to the timing or ultimate success of obtaining
future funding.
Additional
financing will be required to satisfy existing obligations, liabilities and
future working capital needs, to build working capital reserves to support
product development and marketing efforts for the Adamis Labs products, continue
product research and development on vaccine technology, and fund any product or
company acquisition opportunities, and cash flow from the Adamis Labs’
operations are not expected to provide sufficient cash to fund the Company’s
overall cash requirements for the foreseeable future. The Company’s
future capital requirements will also depend upon numerous factors, including
the following:
·
|
the
progress and costs of development
programs;
|
·
|
the
commercial success of new products that are
introduced;
|
·
|
patient
recruitment and enrollment in future clinical
trials;
|
·
|
the
scope, timing and results of pre-clinical testing and clinical
trials;
|
·
|
the
costs involved in seeking regulatory approvals for product
candidates;
|
·
|
the
costs involved in filing and pursuing patent applications and enforcing
patent claims;
|
·
|
the
establishment of collaborations and strategic
alliances;
|
·
|
the
cost of manufacturing and commercialization
activities;
|
·
|
the
results of operations;
|
·
|
the
cost, timing and outcome of regulatory
reviews;
|
50
·
|
the
rate of technological advances;
|
·
|
ongoing
determinations of the potential commercial success of products under
development;
|
·
|
the
level of resources devoted to sales and marketing capabilities;
and
|
·
|
the
activities of competitors.
|
To obtain additional capital when
needed, the Company will evaluate alternative financing sources, including, but
not limited to, the issuance of equity or debt securities, corporate alliances,
joint ventures and licensing agreements; however, there can be no assurance that
funding will be available on favorable terms, if at all. There are no
assurances that the Company will be able to successfully develop its products
under development or that its products, if successfully developed, will generate
revenues sufficient to enable it to earn a profit. If the Company is
unable to obtain additional capital, management may be required to explore
alternatives to reduce cash used by operating activities, including the
termination of development efforts that may appear to be promising to the
Company, the sale of certain assets and the reduction in overall operating
activities. If
adequate funding is not obtained, the board of directors might also be required
to explore other alternatives for the Company’s business and
assets. These alternatives might include seeking the dissolution and
liquidation of the Company, seeking to merge or combine with another company,
selling or licensing some of the Company’s intellectual property, or initiating
bankruptcy proceedings. There can be no assurance that any third
party will be interested in merging with the Company or would agree to a price
and other terms that the Company would deem adequate. If the Company
filed for bankruptcy protection, the Company would most likely not be able to
raise any type of funding from any source. In that event, the
creditors of the Company would have first claim on the value of the assets of
the Company which, other than remaining cash, would most likely be liquidated in
a bankruptcy sale. The Company can give no assurance as to the
magnitude of the net proceeds of such sale and whether such proceeds would be
sufficient to satisfy the Company’s obligations to its creditors, let alone to
permit any distribution to its equity holders.
Cellegy
has incurred recurring losses from operations and has negative working capital,
liabilities that exceed its assets and recurring cash flow
deficiencies. All of the above factors, among others, raise
substantial doubt about our ability to continue as a going
concern. The condensed 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.
Off
Balance Sheet Arrangements
At December
31, 2008, the Company did not have any off balance sheet
arrangements.
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.
51
In
February 2008, the FASB issued FSP SFAS No. 157-1, "Application of FASB
Statement No. 157 to FASB Statement No. 13 and Its Related
Interpretive Accounting Pronouncements That Address Leasing Transactions," and
FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157." FSP
SFAS No. 157-1 removes leasing from the scope of SFAS No. 157. FSP
SFAS No. 157-2 delays the effective date of SFAS No. 157 for the
Company from its fiscal 2009 to its fiscal 2010 year for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
The Company does not expect its adoption of the provisions of FSP SFAS
No. 157-1 and FSP SFAS No. 157-2 will have a material effect on its
financial condition, results of operations or cash flows.
In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” Under SFAS No. 159, a company
may elect to measure at fair value various eligible items that are not currently
required to be so measured. Eligible items include, but are not limited to,
accounts receivable, available-for-sale securities, equity method investments,
accounts payable and firm commitments. SFAS No. 159 is effective in fiscal
years beginning after November 15, 2007 and is required to be adopted by
the Company in the first quarter of its fiscal 2009 year.
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;
|
|
·
|
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.
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.
52
In June
2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities.” EITF 07-3 requires non-refundable
advance payments for goods and services to be used in future research and
development activities to be recorded as an asset and expensing the payments
when the research and development activities are
performed. EITF 07-3 applies prospectively for new contractual
arrangements entered into in fiscal years beginning after December 15,
2007. The Company currently recognizes these non-refundable advanced payments as
an asset upon payment, and expenses costs as goods are used and services are
provided. There was no effect on the Company’s financial statement
from the adoption of this pronouncement.
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of SFAS No. 109, Accounting for Income Taxes,”
(“FIN 48”) which clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet and the
measurement attribute for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. The Company adopted FIN 48
effective on January 1, 2007 , and there was no material effect on its results
of operations or financial position.
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-18 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-7 |
ITEM
9:
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
|
None.
ITEM
9A(T):
|
CONTROLS
AND PROCEDURES
|
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.
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 the Company 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.
53
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, 2008.
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 Company’s fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, Cellegy’s internal controls over
financial reporting.
ITEM 9B:
|
OTHER
INFORMATION
|
None.
PART III
ITEM 10:
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
Directors
As of
December 31, 2008, the board of directors of Cellegy consisted of five persons:
Richard C. Williams; Tobi B. Klar, M.D.; John Q. Adamis, Sr.; Robert B.
Rothermel; and Thomas M. Steinberg. In connection with the closing of
the merger of Cellegy and Adamis, effective April 1, 2009, Ms. Klar and Mr.
Steinberg resigned from the board of directors and Dennis J. Carlo, Richard L.
Aloi and David J. Marguglio, all of whom were directors and officers of Adamis,
were appointed directors of the Company. Directors serve until the
next meeting of stockholders of the Company or until their respective successors
are elected and qualified or until the death, resignation or removal of the
director.
The following table set forth certain
information concerning the current directors of the Company:
Name
|
Age
|
Principal Occupation
|
Director
Since
|
|||
Richard
C. Williams
|
65
|
President,
Conner-Thoele Ltd.; Chairman of the Board of Directors
|
2003
|
|||
John
Q. Adams, Sr .(1)(2)(3)
|
71
|
President,
J.Q. Enterprises
|
2003
|
|||
Richard
L. Aloi
|
54
|
President,
Adamis Laboratories
|
2009
|
|||
Dennis
J. Carlo
|
65
|
Chief
Executive Officer, Adamis Pharmaceuticals
|
2009
|
|||
David
J. Marguglio
|
38
|
Vice
President of Business Development and Investor Relations,
Adamis
|
2009
|
|||
Robert
B. Rothermel(1)
|
65
|
Partner,
CroBern Management Partnership
|
2004
|
__________________________________________
(1) Member
of Audit Committee.
(2) Member
of Compensation Committee.
(3) Member
of Nominating and Governance Committee.
54
Following the merger transaction
between Cellegy and Adamis, the board of directors (the “Board”) of the Company
intends to review the composition of the committees of the Board and appoint
additional members of the current board to various committees. Until
additional members are appointed to these committees, the functions of the
compensation committee and the nominating and governance committee will be
performed by the Board with the directors who are also employees of the Company
not participating in voting with respect to matters relating to such
functions.
Richard C.
Williams. Mr. Williams became Chairman and Interim Chief
Executive Officer in January 2005. He first joined the Company
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 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.
John Q. Adams,
Sr. Mr. Adams became a director of the Company 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.
Richard L. Aloi. Mr. Aloi
became an officer and a director of the Company in April 2009 in connection with
the closing of the merger transaction between Cellegy and Adamis. He
is President of Adamis Laboratories. He joined Adamis in connection
with Adamis’ acquisition of Adamis Labs in April 2007. He founded
Aero Pharmaceuticals in 1997 and served as its President from 1997 to
2007. He developed Aero into a distributor of allergen extracts and
related products, and managed Aero’s transition to a specialty pharmaceutical
provider. From 1979 to 1997, before founding Aero, Mr. Aloi was
Director of Sales and Marketing at Center Laboratories (a division of E. Merck),
a manufacturer of allergenic extracts and prescription respiratory products,
including the market leading epinephrine auto-injector. At Center
Laboratories, Mr. Aloi oversaw a 50-person marketing group which included over
35 field sales representatives. His earlier positions within Center
Laboratories included Sales Representative, Regional Manager, and National Sales
Manager. Mr. Aloi has served in leadership and advisory roles for
industry groups, including the Allergen Product Manufacturers Association, the
American College of Allergy Asthma & Immunology, and the American Academy of
Allergy Asthma & Immunology. Mr. Aloi received a B.A. in
Political Science from Boston College in 1976.
Dennis J. Carlo, Ph.D
. Dr. Carlo became Chief Executive Officer and a director of the
Company in April 2009 in connection with the closing of the merger transaction
between Cellegy and Adamis. He has been Adamis’ President Chief
Executive officer since October 2006. From 1982 to 1987, he served as
Vice President of Research and Development and Therapeutic Manufacturing at
Hybritech Inc., which was acquired by Eli Lilly & Co in
1985. After the sale to Lilly, Dr. Carlo, along with Dr. Jonas Salk,
James Glavin and Kevin Kimberland, founded Immune Response Corporation, a
public company, where he served as its President and Chief Executive Officer
from 1994 to 2002. He served as president of Telos Pharmaceuticals, a
private biotechnology company, from 2003 to 2006. Dr. Carlo has extensive
experience in the development of vaccines and biologics. Early in his
career, as Director of developmental and basic cellular immunology and Director
of bacterial vaccines and immunology at Merck & Co., he oversaw research and
product development for PNEUMOVAX (14-valent polysaccharide vaccine), MENINGOVAX
A, MENINGOVAX C, MENINGOVAX A-C, and H. influenza type b, and also
directed a multi-disciplinary task force whose goal was the development of novel
adjuvants. At Hybritech, he managed a successful program to carry out
research and development in the area of monoclonal antibody and cancer
therapy. At Immune Response Corporation, he established a program for
an AIDS therapeutic vaccine and led the product development in clinical
trials. Dr. Carlo received a B.S. degree in microbiology from Ohio
State University and has a Ph.D. in Immunology and Medical Microbiology from
Ohio State University.
55
David J. Marguglio . Mr.
Marguglio became Vice President of Business Development and Investor Relations
and a director of the Company in April 2009 in connection with the closing of
the merger transaction between Cellegy and Adamis. He has been
Adamis’ Vice President of Business Development and Investor Relations since its
inception in June 2006. From 1996 to 2006, he has held various
positions of Vice President with Citigroup Global Markets, Smith Barney and
Merrill Lynch. Before entering the financial industry, from 1994 to
1996, he founded and ran two different startup companies, the latter of which
was eventually acquired by a Fortune 100 company. From 1993 to 1994, he
served as financial counsel for the commercial litigation division of a national
law firm. Mr. Marguglio is a licensed securities representative,
securities agent, and investment advisor. He received a degree in
finance and business management from the Hankamer School of Business at Baylor
University.
Robert
B. Rothermel. Mr. Rothermel became a director of
the Company 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. Mr. Rothermel holds a
B.S. degree in business administration from Bowling Green State
University.
Board
Composition
The board
of directors, sometimes referred to as the Board, and the Nominating and
Governance Committee of the Board, have each determined that
Messrs. Adams and Rothermel and, during 2008 and the period in 2009
during which they served as directors, Mr. Steinberg and Ms.
Klar qualify as independent directors in accordance with the listing
requirements of the NASDAQ Stock Market, or NASDAQ, based on representations
from each director that they meet the relevant NASDAQ and SEC definitions and a
review of any relevant transactions or relationships between each director, any
member of his or her family, and the Company, its senior management and its
independent registered public accounting firm. 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, the board and the
committee made a subjective determination as to each independent director that
no relationship exists that, in the opinion of the board or the committee, would
interfere with the director’s exercise of independent judgment in carrying out
the responsibilities of a director. In making these determinations,
the Company’s directors reviewed and discussed information provided by the
directors and the Company with regard to each director’s business and personal
activities as they may relate to the Company and its management.
Executive
Officers
In
connection with the closing of the merger transaction between Cellegy and
Adamis, Richard C. Williams resigned as interim chief executive officer of the
Company and Robert J. Caso resigned as vice president and chief financial
officer of the Company.
Cellegy’s
current executive officers include the following persons:
Name
|
Age
|
Position
|
||
Dennis
J. Carlo, Ph.D.
|
65
|
President
and Chief Executive Officer
|
||
Richard
L. Aloi
|
54
|
President,
Adamis Laboratories
|
||
Robert
O. Hopkins
|
48
|
Vice
President, Finance and Chief Financial Officer
|
||
David
J. Marguglio
|
38
|
Vice
President of Business Development and Investor
Relations
|
Information
concerning Messrs. Carlo, Aloi and Marguglio appears above under the heading,
“Directors.”
Robert O.
Hopkins. Mr. Hopkins became Vice President, Finance and Chief
Financial Officer of the Company in connection with the closing of the merger
transaction between Cellegy and Adamis. He joined Adamis in April
2007 as Vice President, Finance and Chief Financial Officer. From
2000 to 2004, he was an Executive Vice President and the Chief Financial Officer
of Chatham Capital Corp. In that position he managed financial
operations for a corporation that held several hospitals, an extensive life
sciences operation and a number of other business units within its
portfolio. Mr. Hopkins served as Chief Financial Officer of Veritel
Corp from 1999 and 2000, a biometric software company. He has also
served as Chief Operating Officer for Circle Trust Company from 2004 to 2005,
during which time he was responsible for corporate reorganization after
acquiring a troubled trust company. From 2005 until Mr. Hopkins
joined Adamis in April 2007, he consulted for Acumen Enterprises providing
analysis and business plans for the various projects with which the company was
involved. From 1997 to 1999, Mr. Hopkins was Senior Vice President
for Finance for the Mariner Post-Acute Network, Atlanta, Georgia. In
this position he was responsible for financial management of a division
consisting of 12 long-term, acute care hospitals. Among his previous
medical-related experience, he has served as Assistant Administrator of Finance
for Kindred Hospitals; President and Chief Executive Officer of Doctors Hospital
of Hyde Park; and Vice President of Accounting for Cancer Treatment Centers of
America. Mr. Hopkins received a B.S. degree in Finance from Indiana
State University and an M.B.A. from Lake Forest Graduate School of Management.
56
Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with Cellegy.
Board
of Directors Meeting Attendance and Committees
During
the fiscal year ended December 31, 2008, the board held two
meetings. Except for Ms. Klar, each person who was a director during
fiscal 2008 participated in at least 75% or more of the aggregate number of the
meetings of the Board held during the time that such person was a director and
any committee on which he or she served.
Standing
committees of the Board include an Audit Committee, a Nominating and Governance
Committee and a Compensation Committee.
Audit
Committee
Messrs.
Adams, Rothermel and Steinberg were the members of the Audit Committee during
2008. The current members of the committee are Mr. Adams and Mr.
Rothermel. During 2008 Mr. Rothermel was the chair of the
committee. During fiscal 2008 the Audit Committee held four
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 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 was filed as an exhibit to the Proxy
Statement.
Compensation
Committee
Messrs.
Adams and Steinberg were the members of the Compensation Committee during 2008
and 2009 until the merger transaction with Adamis when Mr. Steinberg resigned as
director. The Board has determined that each member of the
Compensation Committee during 2008 is “independent” as defined in the applicable
NASDAQ Listing Standards. The Compensation Committee did not meet
during 2008. The compensation committee has adopted a written
charter, a copy of which was filed as an exhibit to the Proxy
Statement. Our compensation committee assists the Board in reviewing
compensation arrangements for executive officers. Principal functions
of the compensation committee include: (i) reviewing and recommending approval
of compensation arrangements (including severance provisions) of our chief
executive officer and our other executive officers; (ii) to the extent the Board
delegates such authority to the committee, administering our equity incentive
plans and agreements; (iii) reviewing and making recommendations to the Board
with respect to incentive compensation and equity plans; and (iv) performing
other duties regarding compensation for employees and consultants as the Board
may from time to time delegate to the committee. Subject to
provisions of any applicable employment agreements, the compensation committee
typically reviews base salary levels and total compensation for executive
officers at least annually. With respect to equity compensation, the
compensation committee or the Board grants stock options or other equity awards,
often after receiving a recommendation from our chief executive officer (except
in the case of awards to the chief executive officer). The
compensation committee has authority to retain its own compensation consultants
and to obtain advice and assistance from internal or external legal, accounting
or other advisors. The committee did not retain any compensation
consultants in connection with establishing compensation levels for officers for
2008. Management plays a role in the compensation-setting
process. The most significant aspects of management’s role are to
evaluate employee performance and recommend salary levels and equity
compensation awards. Our chief executive officer usually makes
recommendations to the compensation committee and the Board concerning
compensation for other executive officers. Our chief executive
officer is a member of the Board but does not participate in Board decisions
regarding any aspect of his own compensation. The compensation
committee administers the Company’s incentive and equity plans, including the
1995 Equity Incentive Plan, 1995 Directors’ Stock Option Plan, the 2005 Equity
Incentive Plan and the 2009 Equity Incentive Plan.
57
Compensation
Committee Interlocks and Insider Participation
None of
the members of the Compensation Committee during 2008 served during 2008 on the
compensation committee (or equivalent), or the board of directors, of another
entity whose executive officer(s) served on our Compensation Committee or board
of directors.
Nominating
and Governance Committee
Messrs.
Adams and Steinberg and Dr. Klar were the members of the Nominating and
Governance Committee during 2008 and 2009 until the merger transaction with
Adamis when Mr. Steinberg resigned as director. Dr. Klar was the chair of the
committee during that time. The Board has determined that the members of the
committee during 2008, were “independent” as defined in the applicable NASDAQ
Listing Standards. The committee did not meet during
2008. Subject to an approved charter, the general functions of the
Nominating and Governance Committee are (i) to recruit, evaluate and nominate
candidates to be presented for appointment or election to serve as members of
the Board, (ii) to recommend nominees for Board committees, (iii) to recommend
corporate governance guidelines applicable to the Company, and (iv) to review
the Board’s performance. The nominating and governance committee has
adopted a written charter, a copy of which was filed as an exhibit to the Proxy
Statement.
Director
Nomination Process
The
Nominating and Governance Committee will consider director candidates
recommended by stockholders. Stockholders who wish to recommend to
the committee candidates for election to the Board of Directors must do so in
writing. The recommendation should be sent to the Secretary of the
Company, 2658 Del Mar Heights Road, Del Mar, CA 92014, who will, in turn,
forward the recommendation to the Nominating and Governance
Committee. The recommendation must set forth (i) the name and address
as they appear on the Company’s books of the stockholder making the
recommendation and the class and number of shares of capital stock of the
Company beneficially owned by such stockholder and (ii) the name of the
candidate and all information relating to the candidate that is required to be
disclosed in solicitations of proxies for election of directors under the
federal proxy rules. The recommendation must be accompanied by the
candidate’s written consent to being named in the Company’s proxy statement as a
nominee for election to the Board and to serving as a director, if
elected. Stockholders must also comply with all requirements of the
Company’s bylaws with respect to nomination of persons for election to the Board
of Directors. The Company may also require any proposed nominee to
furnish such other information as the Company or the committee may reasonably
require to determine the eligibility and qualifications of the nominee to serve
as a director. In performing its evaluation and review, the committee
generally does not differentiate between candidates proposed by stockholders and
other proposed nominees, except that the committee may consider, as one of the
factors in its evaluation of stockholder recommended candidates, the size and
duration of the interest of the recommending stockholder or stockholder group in
the equity of the Company.
The
Nominating and Governance Committee believes that persons nominated for election
to the board of directors should possess sufficient business or financial
experience and a willingness to devote the time and effort necessary to
discharge the responsibilities of a director. This experience can
include, but is not limited to, service on other boards of directors or active
involvement with other boards of directors and experience in the industry in
which the Company conducts its business. In addition to the above
criteria (which may be modified from time to time), the committee may consider
such other factors as it deems in the best interests of the company and its
stockholders or that it believes may enhance the effectiveness and
responsiveness of the Board and its committees. The committee
believes that the qualifications and strengths of an individual in totality,
rather than any specific factor, should be primary, with a view to nominating
persons for the election to the Board of Directors whose backgrounds, integrity,
and personal characteristics indicate that they will make a contribution to the
Board of Directors. The Company is generally of the view that the
continuing service of qualified incumbents promotes stability and continuity in
the board room, giving the Company the benefit of the familiarity and insight
into the Company’s affairs that its directors have accumulated during their
tenure, while contributing to the Board’s ability to work as a collective
body. Accordingly, it is the general policy of the committee, absent
special circumstances, to nominate qualified incumbent directors who continue to
satisfy the committee’s criteria for membership on the Board, whom the committee
believes will continue to make important contributions to the Board and who
consent to stand for reelection and, if reelected, to continue their service on
the Board. The committee will review and evaluate each candidate who
it believes merits serious consideration, taking into account all available
information concerning the candidate, the qualifications for Board membership
established by the committee, the existing composition and mix of talent and
expertise on the Board and other factors that it deems relevant. In
conducting its review and evaluation, the committee may solicit the views of
management and other members of the Board and may, if deemed helpful, conduct
interviews of proposed candidates.
58
The
Nominating and Governance Committee intends to identify candidates for election
to the Board of Directors through the personal knowledge and experience of the
members of the committee and third-party recommendations. To date,
the committee has not retained or paid any third party to identify or evaluate,
or assist in identifying or evaluating, potential director nominees, although it
reserves the right to do so. New candidates will be evaluated based
upon their backgrounds and/or interviews with members of the
committee. The Nominating and Corporate Governance Committee may
request references and additional information from the candidate prior to
reaching a conclusion. Once a candidate has been identified, the
committee reviews the individual’s experience and background, and may discuss
the proposed nominee with the source of the recommendation. The
committee is under no obligation to formally respond to recommendations,
although as a matter of practice, it will attempt to do so.
The Company did not receive any
recommended nominations from stockholders in connection with the Company’s
annual meeting of stockholders held on March 23, 2009.
Stockholder Communication
Policy
Stockholders
may send communications to the Board of Directors or individual members of the
Board of Directors by writing to them, care of Secretary, Adamis Pharmaceuticals
Corporation, 2658 Del Mar Heights Rd., #555, Del Mar, CA 92014, who will forward
the communication to the intended director or directors. If the
stockholder wishes the communication to be confidential, then the communication
should be provided in a form that will maintain confidentiality.
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.
Based
solely on our review of these reports or written representations from certain
reporting persons, we believe that during 2008, 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 the company. The company will provide any
person, without charge, a copy of the Code. Requests for a copy of
the Code may be made by writing to the Company at Adamis Pharmaceuticals
Corporation, 2658 Del Mar Heights Rd., #555, Del Mar, CA Attention: Chief
Financial Officer. The Company intends to disclose any amendment to,
or a waiver from, a provision of its code of business conduct and ethics that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions and that relates to any element of its code of business conduct and
ethics by posting such information on its website, which is expected to be www.adamispharmaceueticals.com.
ITEM
11: EXECTIVE COMPENSATION
Summary
Compensation Table
All
share, per share and exercise price numbers and amounts in this Item have been
adjusted to reflect the 1:9.929060333 reverse split of the Company’s outstanding
common stock effected on April 1, 2009 in connection with the closing of the
merger transaction between Cellegy and Adamis.
The
following table sets forth all compensation awarded, earned or paid for services
rendered in all capacities to Cellegy during fiscal year 2008 and 2007 to (i)
each person who served as Cellegy’s chief executive officer during 2008, or
“CEO,” (ii) each person who served as Cellegy’s principal financial officer, or
CFO, during 2008, (iii) the three most highly compensated officers other than
the chief executive officer and principal financial officer who were serving as
executive officers at the end of 2008 and whose total compensation for such year
exceeded $100,000 (of which there were no such persons), and (iv) up to two
additional individuals for whom disclosures would have been provided in this
table, but for the fact that such persons were not serving as executive officers
as of the end of 2008 (collectively with the CEO and CFO, referred to as the
“Named Officers”).
59
Name and Principal Position
|
Year
|
Salary($)
|
Bonus($)
|
Option
Awards($)(1)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||
Richard
C. Williams
Chairman
and Interim
Chief
Executive Officer
|
2008
|
$ | 273,770 | $ | $ | $ | $ | 273,770 | |||||||||||||
2007
|
294,022 | — | — | — | 294,022 | ||||||||||||||||
|
|||||||||||||||||||||
Robert
J. Caso
Vice
President, Chief Financial
Officer
|
2008
|
182,103 | 100,000 | (2) | 282,103 | ||||||||||||||||
2007
|
200,000 | 29,207 | — | 229,207 |
(1)
|
The
amounts in this column represent amounts recognized for financial
reporting purposes in 2008 and 2007 in accordance with SFAS
123(R). Mr. Caso has an option to purchase 10,072 shares of
common stock at an exercise price of $17.38 per share. The option is
fully vested.
|
(2)
|
Includes
a retention payment made to Mr. Caso in July 2008 of
$100,000.
|
In 2008,
the following actions were taken concerning the compensation of our Named
Officers:
|
·
|
We did not pay any bonuses in
2009 with respect to the 2008 year, and we did not pay any bonuses to any
Named Officer with respect to the 2008 year. In order to induce
Mr. Caso to remain with Cellegy, in November 2007, we entered into a
retention arrangement and made a retention payment of $100,000 to Mr. Caso
in July 2008.
|
|
·
|
We did not make any option or
other equity awards to any of the Named Officers during 2007, or
2008.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information as of December 31, 2008 regarding
unexercised stock options held by each of our Named Officers.
Option Awards
|
||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
||||||
Richard C. Williams
|
60,429
|
—
|
$
|
$49.65
|
11/06/2013
|
|||||
40,286
|
—
|
28.70
|
11/06/2013
|
|||||||
Robert
J. Caso
|
6,715
|
(1)
|
3,357
|
17.38
|
03/30/2015
|
(1)
|
The
shares of common stock underlying this option vest in three equal annual
installments beginning March 30, 2006. The option is currently
fully vested.
|
Potential
Payments Upon Termination or Change in Control
Cellegy
had an employment agreement with Robert J. Caso, who became our Chief Financial
Officer in March 2005 and who resigned effective April 1, 2009 in connection
with the merger transaction between Cellegy and Adamis. On November
14, 2007, Cellegy and Mr. Caso entered into a retention
agreement. 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 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), such period
referred to as 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) to
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 payment that Mr. Caso would have been entitled
to receive under any Company retention or severance plan, and was conditioned
upon Mr. Caso executing, at the time of his termination of employment, a general
release of claims. The retention amount was paid in July
2008.
60
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. The option became fully vested
in connection with the merger of Cellegy and Adamis. However, the
exercise price of the option was $1.75 per share on a pre-reverse split basis,
and as of December 31, 2008, the market price of our common stock was $0.04 per
share, and as a result no compensation would be payable if a change of control
event had occurred as of that date, except for the retention payment described
in the preceding paragraph. Other than that noted above, there is no
other contract, agreement, plan or arrangement with Mr. Caso 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 as described above, we do not have any contract, agreement, plan or
arrangement with either such 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. Accordingly, there are no Named Officers employed by us
as of December 31, 2008, who were entitled to receive any severance payments on
the date upon termination of employment.
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.
Employment
Agreements and Change of Control Arrangements
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 100,714 shares of common
stock, with 40,286 shares at an exercise price of $28.69 per share, which was
the closing market price of the common stock on the grant date, and 60,428
shares at an exercise price of $49.64 per share. The option is vested
and exercisable in full immediately, although a portion of the option, covering
up to 60,428 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 January 2007, at Mr. Williams’ suggestion, we reduced
the rate of base compensation payable to Mr. Williams from $40,000 per month to
$25,000 per month.
Cellegy
had an employment agreement with Robert J. Caso, who became Cellegy’s
Chief Financial Officer in March 2005. The agreement provided for
compensation at an annual rate of $200,000 per annum. The agreement
also provided for the grant of a stock option to purchase up to 10,071 shares of
common stock at an exercise price equal to the fair market value of the common
stock on the date of grant. Mr. Caso also became a participant in
Cellegy’s Retention and Severance Plan, which has been terminated, and entered
into the Company’s standard indemnity agreement for officers of the
Company. On November 14, 2007, Cellegy and Mr. Caso, entered into a
retention agreement, the terms of which are described above under the heading
“Potential Payments Upon Termination or Change in Control.”
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.
61
Other
The
Compensation Committee, as plan administrator of Cellegy’s stock option 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, referred to as 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 2005 Plan 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 Incentive Revenue Code wherein the
stockholders 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).
Under the
Company’s 2009 Equity Incentive Plan, the administrator of the plan may, in the
written agreements relating to an award made under the plan, provide that an
award may be subject to acceleration of vesting and exercisability upon or after
a Change in Control, as defined in the plan. Under the plan, a Change
in Control means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events: (i) any person
(with certain exceptions) becomes the owner, directly or indirectly, of
securities of the Company representing more than 50% of the combined voting
power of the Company's then outstanding securities other than by virtue of a
merger, consolidation or similar transaction, other than in connection with
equity financing transactions; (ii) there is consummated a merger,
consolidation or similar transaction involving (directly or indirectly) the
Company and, immediately after the consummation of such transaction, the
stockholders of the Company immediately prior thereto do not own, directly or
indirectly, either (A) outstanding voting securities representing more than
50% of the combined outstanding voting power of the surviving entity in such
transaction or (B) more than 50% of the combined outstanding voting power
of the parent of the surviving entity in such transaction, in each case in
substantially the same proportions relative to each other as their ownership of
the outstanding voting securities of the Company immediately before such
transaction; (iii) the stockholders of the Company approve or the Board approves
a plan of complete dissolution or liquidation of the Company, or a complete
dissolution or liquidation of the Company shall otherwise occur, except for a
liquidation into a parent corporation; (iv) there is consummated a sale,
lease, exclusive license or other disposition of all or substantially all of the
consolidated assets of the Company and its subsidiaries, other than a sale,
lease, license or other disposition of all or substantially all of the
consolidated assets of the Company and its Subsidiaries to an entity, more than
50% of the combined voting power of the voting securities of which are owned by
stockholders of the Company in substantially the same proportions relative to
each other as their ownership of the outstanding voting securities of the
Company immediately before such sale, lease, license or other disposition; or
(v) the members of the Board immediately after the closing of the merger
transaction between Cellegy and Adamis, referred to as the Incumbent Board,
cease for any reason to constitute at least a majority of the members of the
Board, provided, however, that if the appointment or
election (or nomination for election) of any new Board member was approved or
recommended by a majority vote of the members of the board then still in office,
such new member shall, for purposes of the plan, be considered as a member of
the Incumbent Board. Notwithstanding the foregoing, the definition of
Change in Control (or any analogous term) in an individual written agreement
between the Company and the plan participant will supersede the foregoing
definition with respect to awards subject to such agreement. The
Board may, in its sole discretion and without participant consent, amend the
definition of "Change in Control" to conform to the definition of "Change of
Control" under Section 409A of the Internal Revenue Code of 1986, as
amended, and related Department of Treasury guidance.
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 $1,000,000 paid to in any taxable year to any of the
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 2008 for any individual was not
$1,000,000, and Cellegy does not expect cash compensation for fiscal 2009 to be
$1,000,000. We manage our compensation programs in light of
applicable tax provisions, including 162(m), and may revise compensation plans
from time to time to maximize deductibility. However, the
compensation committee and the Board has the right to approve compensation that
does not qualify for deduction when and if it deems it to be in the best
interests of Cellegy to do so.
62
Director
Compensation
The
following Director Compensation Table sets forth summary information concerning
the compensation paid to our non-employee directors in 2008 for services to the
Company. There were no option grants or other equity awards to
outside directors during 2008.
Name
|
Fees earned or
paid in cash
($)
|
Option Awards ($)
|
All Other
Compensation ($)(5)
|
Total ($)
|
||||||||||||
John Q. Adams,
Sr.(1)
|
$ | — | $ | — | $ | 2,176 | $ | 2,176 | ||||||||
Tobi
B. Klar, M.D.(2)
|
— | — | 2,176 | 2,176 | ||||||||||||
Robert
B. Rothermel(3)
|
— | — | 2,176 | 2,176 | ||||||||||||
Thomas
M. Steinberg(4)
|
— | — | 3,319 | 3,319 | ||||||||||||
Total
|
$ | — | $ | — | $ | 9,847 | $ | 9,847 |
(1)
|
Includes
options to purchase a total of 5,439 post reverse split shares outstanding
as of December 31, 2008, of which all were exercisable as of December 31,
2008.
|
(2)
|
A
total of 10,072 options were outstanding as of December 31, 2008, of which
all were exercisable as of December 31, 2008.
|
(3)
|
A
total of 5,439 options were outstanding as of December 31, 2008, of which
all were exercisable as of December 31, 2008.
|
(4)
|
Includes
options to purchase a total of 5,439 post reverse split shares outstanding
as of December 31, 2008, of which all were exercisable as of December 31,
2008.
|
(5)
|
The
amounts in this column reflect the compensation expense recognized for
2008 financial statement reporting purposes related to stock options in
accordance with FAS 123R.
|
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.
During
2008, the Board did not receive annual retainers for service on the Board and
committees of the Board.
Director Compensation For the
Company Following the Merger
In
connection with the merger transaction between Cellegy and Adamis, the
stockholders approved a new 2009 Equity Incentive Plan. Pursuant to
that plan, each director of the Company who is not an employee after the
effective time of the Merger, including Messrs. Williams, Rothermel
and Adams, and any person who thereafter becomes a non-employee director, will
automatically receive an initial grant of a non-statutory option to purchase
50,000 shares of common stock upon such person’s election or
appointment. These initial grants will vest 50% on the grant date,
with the balance vesting in equal monthly installments over a period of three
years from the grant date. In addition, any person who is a
non-employee director immediately after the annual meeting of our stockholders
automatically will be granted, on the annual meeting date, beginning with the
first annual meeting of stockholders after the closing of the merger, a
non-statutory option to purchase 25,000 shares of common stock, or the annual
grant, subject to adjustment by the board of directors from time to
time. These annual grants will vest in equal monthly installments
over three years from the grant date. In the event of certain
corporate transactions, including change in control transactions, the vesting of
options held by non-employee directors who services has not terminated generally
will be accelerated in full, and if the director ceases to serve as a director
as a result of the transaction, the director will have 12 months from the date
of cessation of service within which to exercise the option.
Consistent
with the foregoing provisions, Richard C. Williams, Robert B. Rothermel and John
Q. Adams, Sr., who were directors of Old Cellegy and who continued as directors
of the Company, each were granted a new non-employee director stock option to
purchase 50,000 post-reverse split shares of common stock, effective immediately
after the effective time of the Merger. The exercise price of these
options was equal to $0.60 per share, which was the closing price of the common
stock on a pre-reverse split basis on the date of grant, multiplied by the ratio
of the reverse stock split (and rounded up to the nearest cent). The
options vest and become exercisable as to 50% of the total shares subject to the
option on the date of grant, with the balance vesting in equal monthly
installments over a period of three years from the grant date, so long as the
non-employee director continuously remains a director, consultant or employee of
the company. In addition, following the Merger, outside directors
will be eligible to receive cash outside director fee compensation pursuant to
the Company’s director compensation policies.
63
In
addition, non-employee directors will also be entitled to receive cash directors
fees, as follows: each non-employee director will receive an annual fee of
$25,000 per year, paid quarterly; the Chair of the Audit Committee will receive
$10,000 per year; the Chair of the Compensation Committee and the Nominating and
Governance Committee will each receive $5,000 per year; each non-employee
director will receive $1,500 for each meeting attended; and the Chair of the
Board will receive an annual fee of $125,000, which will be in lieu of any other
annual, committee or meeting fees.
ITEM
12:
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Principal
Stockholders of Cellegy
The
following tables set forth information as of April 15, 2009, concerning the
beneficial ownership of (i) any person known to the Company to be the beneficial
owner of more than five percent of the Company’s outstanding common stock, (ii)
each current director of the Company, (iii) each executive officer and (iv) all
current directors and officers as a group. Unless indicated otherwise
below, the address of each officer or director list below is Adamis
Pharmaceuticals Corporation, 2658 Del Mar Heights Road, Suite #555, Del Mar, CA
19512.
The share
numbers and percentages in the table below give effect to the merger between
Cellegy and Adamis and to a 1:9.929060333 reverse split of the Cellegy common
stock effected April 1, 2009 in connection with the close of the merger between
Adamis and Cellegy. The table is based on 46,146,106 post-reverse
split shares of common stock of the Company outstanding.
Name
|
Share
Beneficially
Owned(1)
|
Percent
|
||||||
Dennis
J. Carlo(6)
|
8,368,000
|
18.2
|
%
|
|||||
Rand
P. Mulford (2)
|
3,775,000
|
8.2
|
|
|||||
Richard
J. Aloi (8)
|
3,593,039
|
7.8
|
||||||
David
J. Marguglio(9)
|
3,439,904
|
7.5
|
|
|||||
Thomas
Parker (3)
|
3,305,000
|
7.2
|
|
|||||
Robert
O. Hopkins(7)
|
870,750
|
1.9
|
|
|||||
John
Q. Adams (5)
|
55,439
|
*
|
|
|||||
Robert
B. Rothermel (5)
|
55,439
|
*
|
|
|||||
Richard
C. Williams(4)
|
150,715
|
*
|
|
|||||
All
Cellegy directors and officers (7 persons)(10)
|
16,533,286
|
35.8
|
|
* Less
than one percent.
(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 Adamis
Pharmaceuticals Corporation, 2658 Del Mar Heights Road, Suite #555, Del
Mar, CA 19512.
|
(2)
|
Approximately
1,575,000 of these shares are subject to repurchase rights, as described
below.
|
(3)
|
Approximately
2,357,058 of these shares are subject to repurchase rights, as described
below.
|
(4)
|
Represents
options to purchase a total of 150,715 shares of which 127,104 are
exercisable within 60 days of the date of the table.
|
(5)
|
Represents
options to purchase a total of 55,439 shares of which 31,827 are
exercisable within 60 days of the date of the table.
|
(6)
|
Approximately
6,368,000 of these shares are subject to repurchase
rights.
|
(7)
|
All
of these shares are subject to repurchase
rights.
|
64
(8)
|
Approximately
2,645,097 of these shares are subject to repurchase
rights.
|
(9)
|
Approximately
2,537,019 of these shares are subject to repurchase
rights.
|
(10)
|
Includes
approximately 150,000 shares issuable upon the exercise of stock options,
and approximately 11,550,116 shares subject to repurchase
rights.
|
Stock
Repurchase Agreements
Approximately
17,807,000 of the outstanding share of common stock of the Company are subject
to some form of restriction agreements and may be repurchased or cancelled by
the Company. The resale of all of the stock listed below is
restricted, and the Company has the right of first refusal in the event of that
the holder thereof proposes to sell the stock.
Shareholder
Group
|
Restricted
Shares
(000,000)
|
Description
|
||
Officers
and Directors
D.
Carlo
R.
Aloi
D.
Marguglio
T.
Parker
R.
Hopkins
Total:
|
6,368,000
2,645,097
2,537,019
2,357,058
870,750
14,777,924
|
These
shares were issued by Adamis before the merger with Cellegy to certain
executive officers of the Company. These shares are subject to
repurchase by the Company at $0.001 per share if certain value or
performance targets are not met, or if the shareholder ceases to be
employed at any time before dates ranging from July 2009 to September
2010, depending on the date of first employment of the officer with the
time-based vesting restrictions lapsing with respect to one-third of the
shares originally issued subject to these arrangements on each anniversary
of the date of first employment which range from July 2006 to September
2007.
|
||
Current
Employees and Consultants
|
473,500
|
These
shares are subject to repurchase by the Company at $0.001 if the
shareholder ceases to be employed at any time before dates ranging from
September 2009 to October 2011, with the time-based vesting restrictions
lapsing with respect to one-third of the shares originally issued subject
to these arrangements on each anniversary of the date of first employment
which range from September 2006 to October 2008.
|
||
Former
Officers and
Former
HVG Shareholder
R.
Mulford
R.
Frost
Aero
Pharmaceuticals
Total:
|
1,575,000
719,019
261,111
2,555,130
|
These
shares are subject to repurchase by the Company at $0.001 per share if
certain value or performance targets are not met.
|
||
Total
|
|
17,806,554
|
|
65
Equity
Compensation Plan Information
The
following table sets forth, as of December 31, 2008, 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. The share and amounts
have been adjusted to give effect to the reverse stock split effected on April
1, 2009 in connection with the closing of the merger transaction between Cellegy
and Adamis.
Plan Category
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
|
Weighted
average exercise
price of
outstanding
options,
warrants and
rights
(b)
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
|
||||
Equity
compensation plans approved by security holders
|
134,650
|
(1) |
$
|
38.10
|
—
|
||
Equity
compensation plans not approved by security holders
|
431
|
(2) |
2.90
|
—
|
|||
—
|
|||||||
Total
|
135,081
|
$
|
37.99
|
—
|
(1)
|
Represents
shares subject to outstanding options and are fully vested with exercise
prices ranging from $13.20 to $64.54 per share and expire between the
years 2009 and 2014.
|
(2)
|
Represents
shares subject to outstanding options and are fully vested with exercise
prices $2.90 per share and expire the year
2014.
|
ITEM
13:
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
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 and 2008, 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 the lower of (i) $120,000 or (ii) one percent of the average of
Cellegy’s total assets at the end of 2006 and 2007, and in which any current
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 the payment made to Mr. Caso in July 2008 as described
above under the heading, “Potential Payments Upon Termination or Change in
Control.” 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.
66
ITEM
14:
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit Fees and
Services
The
following table presents fees for professional services rendered by Mayer,
Hoffman, McCann P.C., or MHM, for the audit of our annual financial statements
for the year ended December 31, 2008, and fees billed for audit-related
services, tax services and all other services rendered to us by MHM for
2008.
Fees
|
2008
|
2007
|
||||||
Audit
fees and expenses
|
$ | 71,416 | $ | 110,811 | ||||
Audit-related
fees and expenses
|
46,917 | 992 | ||||||
Tax
fees
|
– | – | ||||||
All
other fees
|
– | – | ||||||
Total
|
$ | 118,333 | $ | 111,803 |
Audit fees and
expenses. Audit fees relate to services related to the audit
of Cellegy’s financial statements and review of 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 financial statements and are not included under “Audit
Fees,” and include fees for consultations concerning financial accounting and
reporting matters and merger related services.
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 and Tax fees for 2008 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.
Audit
Committee Disclosure
The Audit Committee of the Cellegy
board of directors is responsible for overseeing Cellegy’s accounting and
financial reporting processes, the appointment, compensation, retention and
oversight of Cellegy’s independent registered public accounting firm, and for
overseeing audits of Cellegy’s financial statements. The Audit
Committee pre-approves the engagement with Cellegy’s independent registered
public accounting firm, reviews the independence and the quality control
procedures of Cellegy’s independent registered public accounting firm, and meets
with Cellegy’s management and its independent registered public accounting firm
and separately with that firm regarding the audits of Cellegy’s financial
statements. The registered independent public accounting firm reports
directly to the Audit Committee. The Audit Committee has the
authority to obtain advice and assistance from outside legal, accounting or
other advisors as the Audit Committee deems necessary to carry out its duties
and to receive appropriate funding, as determined by the Audit Committee, from
Cellegy for such advice
and assistance.
Cellegy’s
management is responsible for preparing Cellegy’s financial statements and for
its financial reporting process, accounting policies, systems of internal
controls and disclosure controls and procedures. Cellegy’s
independent registered public accounting firm is responsible for performing an
independent audit and expressing an opinion on the conformity of Cellegy’s
audited financial statements with accounting principles generally accepted in
the United States of America.
67
In this
context, the Audit Committee hereby reports as follows:
|
1.
|
The Audit Committee has reviewed
and discussed Cellegy’s audited financial statements for the fiscal year
ended December 31, 2008, with Cellegy’s
management.
|
|
2.
|
The Audit Committee has discussed
with Mayer, Hoffman, McCann, P.C. the matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards, AU
§380), SAS 99 (Consideration of Fraud in a Financial Statement Audit) and
Securities and Exchange Commission
rules.
|
|
3.
|
The Audit Committee has received
the written disclosures and the letter from Mayer, Hoffman, McCann,
P.C. required by Independence Standards Board Standard
No. 1 (Independence Standards Board Standard No. 1,
“Independence Discussions with Audit Committee”) and has discussed with
Mayer, Hoffman, McCann, P.C. their
independence.
|
|
4.
|
Based on the review and
discussions referred to in paragraphs (1) through (3) above, the
Audit Committee recommended to the Cellegy’s board of directors that the
audited financial statements be included in Cellegy’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, for filing
with the Securities and Exchange
Commission.
|
The
foregoing report is provided by the undersigned members of the Audit
Committee.
AUDIT
COMMITTEE
Robert
B. Rothermel, Chair
John
Q. Adams, Sr.
ITEM
15:
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Exhibits
The
following exhibits are attached hereto or incorporated herein by
reference.
EXHIBIT
INDEX
Incorporated
by
|
||||||||
Reference
|
||||||||
Exhibit
|
Filed
|
|||||||
Number
|
Exhibit Description
|
Herewith
|
Form/File No.
|
Date
|
||||
2.1
|
Agreement
and Plan of Reorganization dated as of February 12, 2008, by and among
Cellegy, Cellegy Holdings, Inc. and Adamis Pharmaceuticals Corporation
(the “Merger
Agreement”).
|
8-K
|
2/13/08
|
|||||
2.2
|
Agreement
dated November 11, 2008, between the Company and Adamis amending the
Merger Agreement.
|
8-K
|
11/13/08
|
|||||
2.3
|
Agreement
dated January 8, 2009, between the Company and Adamis amending the Merger
Agreement.
|
8-K
|
1/8/09
|
|||||
2.4
|
Agreement
and Plan of Share Exchange dated as of October 7, 2004, by and
between the Company and Biosyn, Inc.
|
8-K
|
10/26/04
|
|||||
3.1
|
Certificate
of Amendment to Amended and Restated Certificate of
Incorporation.
|
8-K
|
4/3/09
|
|||||
3.2
|
Amended
and Restated Certificate of Incorporation of the
Registrant
|
8-K
|
4/3/09
|
|||||
3.3
|
Amended
and Restated Bylaws of the Company
|
S-4/A
333-155322
|
1/12/09
|
68
4.1
|
Specimen
stock certificate for common stock.
|
8-K
|
4/3/09
|
|||||
10.1
|
2005
Equity Incentive Plan
|
10-K
|
3/31/06
|
|||||
10.2
|
Form
of Option Agreement under the 2005 Equity Incentive Plan.
|
10-K
|
3/31/06
|
|||||
*10.3
|
1995
Equity Incentive Plan
|
10-Q
|
8/13/02
|
|||||
*10.4
|
1995
Directors’ Stock Option Plan.
|
10-Q
|
8/13/02
|
|||||
*10.5
|
Form of
Option Agreement under the 1995 Directors’ Stock Option
Plan.
|
S-8
333-91588
|
9/7/04
|
|||||
*10.6
|
Employment
Agreement, effective January 1, 2003, between Cellegy and
K. Michael Forrest.
|
10-K
|
4/6/04
|
|||||
10.7
|
Exclusive
License Agreement dated as of December 31, 2002, by and between
Cellegy and PDI, Inc.
|
10-K
|
3/21/03
|
|||||
*10.8
|
Retention
and Severance Plan and Form of Agreement of Plan Participation under
Retention and Severance Plan.
|
10-Q
|
5/8/03
|
|||||
*10.9
|
Letter
agreement dated November 5, 2003, between Cellegy and Richard C.
Williams.
|
10-K
|
4/6/04
|
|||||
*10.10
|
Stock
option agreement dated November 5, 2003, between Cellegy and Richard
C. Williams.
|
10-K
|
4/6/04
|
|||||
*10.11
|
Form of
Indemnity Agreement between Cellegy and its directors and executive
officers.
|
Proxy
Statement
|
4/28/04
|
|||||
10.12
|
Registration
Rights Agreement dated as of October 7, 2004, between Cellegy and
certain former stockholders of Biosyn, Inc.
|
8-K
|
10/26/04
|
|||||
10.13
|
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)
|
10-K
|
3/31/05
|
|||||
10.14
|
Patent
License Agreement by and among Biosyn, Inc., and certain agencies of
the United States Public Health Service.
|
10-K
|
3/31/05
|
|||||
10.15
|
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.)
|
10-K
|
3/31/05
|
|||||
10.16
|
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.)
|
10-K
|
4/02/07
|
|||||
*10.17
|
Retention
Letter Agreement dated November 14, 2007, between Cellegy and Robert
J. Caso.
|
8-K
|
11/14/2007
|
|||||
*10.18
|
2009
Equity Incentive Plan.
|
8-K
|
4/3/2009
|
|||||
*10.19
|
Form
of Option Agreement under 2009 Equity Incentive Plan.
|
8-K
|
4/3/2009
|
69
10.20
|
Convertible
Promissory Note dated February 12, 2008 between the Registrant and Adamis
Pharmaceuticals Corporation.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.21
|
Amendment
to License Agreement dated as of March 15, 2006, by and between Crompton
Corporation and Biosyn, Inc.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.22
|
Funding
Agreement dated October 12, 1992, by and between Ben Franklin Technology
Center of Southeaster Pennsylvania and Biosyn, Inc.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.23
|
License
Agreement dated July 28, 2006, by and between Nevagen, LLC and Adamis
Pharmaceuticals Corporation.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.24
|
Amendment
to License Agreement dated December 29, 2008, by and between Nevagen, LLC
and Adamis Pharmaceuticals Corporation.
|
S-4/A
333-155322
|
1/12/09
|
|||||
*10.25
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Richard Aloi
and Adamis Pharmaceuticals Corporation.
|
S-4/A
333-155322
|
1/12/09
|
|||||
*10.26
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Dennis
J. Carlo and Adamis Pharmaceuticals Corporation
|
S-4/A
333-155322
|
1/12/09
|
|||||
*10.27
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Robert Hopkins
and Adamis Pharmaceuticals Corporation
|
S-4/A
333-155322
|
1/12/09
|
|||||
*10.28
|
Stock
Repurchase Agreement dated November 3, 2008, by and between David
J. Marguglio and Adamis Pharmaceuticals
Corporation.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.29
|
Amendment
to License Agreement dated October 18, 2007, by and between CONRAD,
Eastern Virginia Medical School, and Biosyn, Inc.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.30
|
Lease
Agreement dated January 1, 2007, by and between HRM II Ltd and Healthcare
Ventures Group.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.31
|
Amendment
to Lease Agreement dated October 30, 2007, by and between HRM II Ltd and
Healthcare Ventures Group.
|
S-4/A
333-155322
|
1/12/09
|
|||||
10.32
|
Clinical
Trial Agreement between Biosyn, Inc. and the National Institute of Child
Health and Human Development.
|
S-4/A
333-155322
|
1/12/09
|
|||||
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)
|
|||||||
* Represents
a compensatory plan or arrangement.
70
SIGNATURES
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 Del
Mar, State of California.
ADAMIS
PHARAMCEUTICALS CORPORATION
|
||
By:
|
/s/ DENNIS J.
CARLO
|
|
Dennis
J. Carlo
Chief
Executive Officer
|
||
Dated: May
12, 2009
|
71
Power
of Attorney
Each
person whose signature appears below constitutes and appoints each of Dennis J.
Carlo and Robert O. Hopkins, 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/
DENNIS J. CARLO
|
Chief
Executive Officer
|
May
12, 2009
|
||
Dennis
J. Carlo
|
and
Director
|
|||
Principal
Financial Officer
|
||||
and
Principal Accounting Officer:
|
||||
/s/
ROBERT O. HOPKINS
|
Vice
President, Finance, Chief Financial
|
May
12, 2009
|
||
Robert
O. Hopkins
|
Officer
and Secretary
|
|||
Directors:
|
||||
/s/ RICHARD C. WILLIAMS
|
Chairman
of the Board
|
May
12, 2009
|
||
Richard
C. Williams
|
||||
/s/
JOHN Q. ADAMS
|
Director
|
May
12, 2009
|
||
John
Q. Adams, Sr.
|
||||
/s/
ROBERT B. ROTHERMEL
|
Director
|
May
12, 2009
|
||
Robert
B. Rothermel
|
||||
/s/ DAVID J. MARGUGLIO
|
Director
|
May
12, 2009
|
||
David
J. Marguglio
|
||||
/s/
RICHARD L. ALOI
|
Director
|
May
12, 2009
|
||
Richard
L. Aloi
|
72
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)
|
F-5 | |||
Consolidated
Statements of Cash Flows
|
F-6 | |||
Notes
to Consolidated Financial Statements
|
F-7 |
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 (the “Company”) as of December 31, 2008 and 2007, and
the related consolidated statements of operations and changes in stockholders’
equity (deficit) 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 (United States). 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, 2008 and 2007, and
the results of its operations and its cash flows for each of the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
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 negative working capital, liabilities that exceed its
assets and significant recurring cash flow deficiencies. 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 2008 and 2007 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
May 12,
2009
F-2
Cellegy
Pharmaceuticals, Inc.
Consolidated
Balance Sheets
December 31,
|
||||||||
2008
|
2007
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 129,124 | $ | 1,826,614 | ||||
Prepaid
expenses and other current assets
|
34,304 | 267,478 | ||||||
Total
assets
|
$ | 163,428 | $ | 2,094,092 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 71,804 | $ | - | ||||
Accrued
expenses and other current liabilities
|
184,805 | 397,277 | ||||||
Total
current liabilities
|
256,609 | 397,277 | ||||||
Note
payable
|
777,902 | 507,067 | ||||||
Total
liabilities
|
1,034,511 | 904,344 | ||||||
Stockholders'
equity (deficit):
|
||||||||
Preferred
Stock, no par value; 5,000,000 shares authorized;
|
||||||||
no
shares issued and outstanding at December 31, 2008 and
2007
|
||||||||
Common
stock, par value $.0001; 50,000,000 shares authorized;
|
||||||||
29,834,796
shares issued and outstanding at December 31, 2008 and
2007
|
2,984 | 2,984 | ||||||
Additional
paid-in capital
|
125,770,169 | 125,753,019 | ||||||
Accumulated
deficit
|
(126,100,126 | ) | (124,566,255 | ) | ||||
Less:
Note receivable, including $44,110 of accrued interest
|
(544,110 | ) | - | |||||
Total
stockholders' equity (deficit)
|
(871,083 | ) | 1,189,748 | |||||
Total
liabilities and stockholders' equity (deficit)
|
$ | 163,428 | $ | 2,094,092 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
Cellegy
Pharmaceuticals, Inc.
Consolidated
Statements of Operations
Years Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Costs
and expenses:
|
||||||||
Research
and development
|
$ | - | $ | 23,022 | ||||
Selling,
general and administrative
|
1,322,124 | 1,798,626 | ||||||
Total
costs and expenses
|
1,322,124 | 1,821,648 | ||||||
Operating
loss
|
(1,322,124 | ) | (1,821,648 | ) | ||||
Other
income (expenses):
|
||||||||
Interest
and other income
|
59,088 | 92,832 | ||||||
Interest
and other expense
|
(270,835 | ) | (198,245 | ) | ||||
Total
other income (expenses)
|
(211,747 | ) | (105,413 | ) | ||||
Net
loss applicable to common stockholders
|
$ | (1,533,871 | ) | $ | (1,927,061 | ) | ||
Basic
and diluted net loss per common share:
|
$ | (0.05 | ) | $ | (0.06 | ) | ||
Weighted
average number of common shares used in per share
|
||||||||
calculations:
|
||||||||
Basic
and diluted
|
29,834,796 | 29,834,796 |
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)
Note
|
||||||||||||||||||||||||
Receivable
|
Total
|
|||||||||||||||||||||||
Additional
|
Due from
|
Stockholders'
|
||||||||||||||||||||||
Common Stock
|
Paid-in-
|
Accumulated
|
Adamis
|
Equity
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Note 12
|
(Deficit)
|
|||||||||||||||||||
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
loss
|
- | - | - | (1,927,061 | ) | - | (1,927,061 | ) | ||||||||||||||||
Balances
at December 31, 2007
|
29,834,796 | 2,984 | 125,753,019 | (124,566,255 | ) | - | 1,189,748 | |||||||||||||||||
Noncash
compensation expense related to stock options
|
- | - | 17,150 | - | - | 17,150 | ||||||||||||||||||
Net
loss
|
- | - | - | (1,533,871 | ) | - | (1,533,871 | ) | ||||||||||||||||
Note
receivable due from Adamis’ – Note 12
|
- | - | - | - | (544,110 | ) | (544,110 | ) | ||||||||||||||||
Balances
at December 31, 2008
|
29,834,796 | $ | 2,984 | $ | 125,770,169 | $ | (126,100,126 | ) | $ | (544,110 | ) | $ | (871,083 | ) |
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,
|
||||||||
2008
|
2007
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (1,533,871 | ) | $ | (1,927,061 | ) | ||
Adjustments
to reconcile net loss from continuing
|
||||||||
operations
to net cash used in operating activities:
|
||||||||
Equity
compensation expense
|
17,150 | 53,874 | ||||||
Interest
accretion on notes payable
|
270,835 | 184,942 | ||||||
Accrued
interest on note receivable
|
(44,110 | ) | - | |||||
Gain
on settlement of debt obligation
|
- | (4,700 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Prepaid
expenses and other current assets
|
233,174 | 11,262 | ||||||
Accounts
receivable
|
- | 62,605 | ||||||
Accounts
payable
|
71,804 | (174,839 | ) | |||||
Accrued
expenses and other current liabilities
|
(212,472 | ) | (143,301 | ) | ||||
Net
cash used in operating activities
|
(1,197,490 | ) | (1,937,218 | ) | ||||
Investing
activities:
|
||||||||
Issuance
of note receivable
|
(500,000 | ) | - | |||||
Net
cash used in investing activities
|
(500,000 | ) | - | |||||
Financing
activities:
|
||||||||
Repayment
of note payable
|
- | (40,000 | ) | |||||
Net
cash used in financing activities
|
- | (40,000 | ) | |||||
Net
decrease in cash and cash equivalents
|
(1,697,490 | ) | (1,977,218 | ) | ||||
Cash
and cash equivalents, beginning of year
|
1,826,614 | 3,803,832 | ||||||
Cash
and cash equivalents, end of year
|
$ | 129,124 | $ | 1,826,614 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
Cellegy
Pharmaceuticals, Inc.
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. Cellegy’s wholly owned
subsidiary, Biosyn, Inc., 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. Biosyn’s product candidates
include Savvy®, which underwent Phase 3 clinical trials in Ghana and Nigeria for
reduction in the transmission of Human Immunodeficiency Virus/Acquired
Immunodeficiency Disease, or HIV/AIDS, both of which were suspended in 2005 and
2006 and terminated before completion, and is the subject to a Phase 3
contraception trial in the United States.
Our cash
and cash equivalents were approximately $129,000 and $1,800,000 at
December 31, 2008 and 2007, 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.
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”). 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 funds to Adamis during the pendency of the merger
transaction. Any principal outstanding under the promissory note
accrues interest at 10% per annum. On April 1, 2009, Cellegy
completed the merger transaction with Adamis. In connection with the
closing of the merger transaction, the promissory note converted into shares of
Adamis stock, and these shares were immediately cancelled.
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 has been completed and the analysis of the results is expected to be
completed by the end of 2009, Cellegy is not directly involved with the conduct
and funding thereof, and the Company believes it is uncertain that it will
commercialize Savvy or that the Company will ever realize revenues
therefrom. The Company believes that its future cash flows will be
derived primarily from the sale of Adamis’ products.
The
Company has negative working capital, liabilities that exceed its assets and
significant cash flow deficiencies. Additionally, Adamis will need significant
funding for future operations and the expenditures that will be required to
conduct the clinical and regulatory work to develop the merged company’s product
candidates. Management is currently seeking additional funding to satisfy
existing obligations, liabilities and future working capital needs, to build
working capital reserves and to fund its research and development
projects. There is no assurance that Adamis will be successful
obtaining the necessary funding to meet its business
objectives.
F-7
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.
Research
and Development
Research
and development expenses include expenses associated with regulatory filings for
ongoing clinical trials and are charged to expense as they are
incurred.
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 short term money market funds.
The carrying value of cash and cash equivalents approximates fair value as of
December 31, 2008 and 2007. As of December 31, 2008, 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.
Concentration
of Credit Risk
As of
December 31, 2008, the Company had its cash in demand deposits and in money
market funds.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation 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
|
Stock-based
Compensation
For the
years ended December 31, 2008 and 2007, for stock options granted prior to the
adoption of SFAS No. 123R, Share-Based Payment (“SFAS
No. 123”), 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-8
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 2008 and 2007.
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.
Accounting
for Merger Related Costs
For the
year ended December 31, 2008, Cellegy incurred certain accounting, legal and
other filing costs in conjunction with its pending merger with
Adamis. These costs were expensed as incurred.
Basic
and Diluted Net Loss per Common Share
Basic net
loss per common share is computed using the weighted average number of common
shares outstanding during the period. Diluted net 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:
Pre-Reverse
Split – Note 12
|
|||||||||
Years
Ended December 31,
|
|||||||||
2008
|
2007
|
||||||||
Options
|
1,341,227 | 1,349,741 | |||||||
Warrants
|
2,114,593 | 2,114,593 | |||||||
Total
number of shares excluded
|
3,455,820 | 3,464,334 |
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, the 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.
In
February 2008, the FASB issued FSP SFAS No. 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions (“FSP SFAS
No. 157-1”) and FSP SFAS No. 157-2, Effective Date of FASB Statement
No. 157 (“FSP SFAS No. 157-2”). FSP SFAS No. 157-1 removes
leasing from the scope of SFAS No. 157. FSP SFAS No. 157-2 delays the
effective date of SFAS No. 157 for the Company from its fiscal 2009 to its
fiscal 2010 year for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company does not expect
its adoption of the provisions of FSP SFAS No. 157-1 and FSP SFAS
No. 157-2 will have a material effect on its financial condition, results
of operations or cash flows.
F-9
In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). Under SFAS
No. 159, a company may elect to measure at fair value various eligible
items that are not currently required to be so measured. Eligible items include,
but are not limited to, accounts receivable, available-for-sale securities,
equity method investments, accounts payable and firm commitments. SFAS
No. 159 is effective in fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of its fiscal
2009 year. The The Company does not expect its adoption of the
provisions of SFAS No. 159 will have a material effect on its financial
condition, results of operations or cash flows.
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;
|
|
·
|
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.
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.
In June
2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities (“EITF 07-10”). EITF 07-3 requires
non-refundable advance payments for goods and services to be used in future
research and development activities to be recorded as an asset and expensing the
payments when the research and development activities are
performed. EITF 07-3 applies prospectively for new contractual
arrangements entered into in fiscal years beginning after December 15,
2007. The Company currently recognizes these non-refundable advanced payments as
an asset upon payment, and expenses costs as goods are used and services are
provided. There was no effect on the Company’s financial statement
from the adoption of this pronouncement.
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.
F-10
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Reclassifications
Certain
reclassifications have been made to 2007 amounts to conform with 2008
presentation.
2. Prepaid Expenses and Other Current
Assets
At
December 31, 2008 and 2007, prepaid expenses and other current assets include
the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Prepaid
insurance
|
$ | 34,304 | $ | 134,248 | ||||
Security
deposits
|
- | 8,100 | ||||||
Accrued
retention compensation
|
- | 120,130 | ||||||
Other
|
- | 5,000 | ||||||
Total
prepaid expenses and other current assets
|
$ | 34,304 | $ | 267,478 |
Accrued
retention compensation of approximately $120,000 as of December 31, 2007
represents the unamortized portion of approximately $139,000 in retention
payments offered and accepted by employees in 2007. The retention payments were
to be paid if the employee maintained 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.
As of December 31, 2008, the retention periods have been
satisfied.
3. Property and Equipment,
Net
At
December 31, 2008 and 2007, property and equipment, net consist of the
following:
December
31,
|
|||||||||
2008
|
2007
|
||||||||
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 2008 and 2007.
4. 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, 2008 and 2007,
were as follows:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Accrued
legal fees
|
$ | - | $ | 29,317 | ||||
Accrued
compensation
|
103,016 | 29,739 | ||||||
Accrued
retention compensation
|
- | 139,370 | ||||||
Accrued
accounting and consulting fees
|
65,500 | 125,000 | ||||||
Accrued
insurance
|
- | 12,995 | ||||||
Other
|
16,289 | 60,856 | ||||||
Total
accrued expenses and other current liabilities
|
$ | 184,805 | $ | 397,277 |
F-11
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
5. 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 3.0% applied to future revenues of Biosyn, if any,
until the principal balance of $777,902 (face amount) 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 accreted
the discount of $572,902 against earnings using the interest rate method
(approximately 46%) 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, 2008 and 2007, the outstanding balance of the note was $777,902 and
$507,067, respectively.
SFAS 157
emphasizes market-based measurement through the use of valuation techniques that
maximize the use of observable or market-based inputs. The Ben
Franklin Note’s peculiar repayment terms outlined above affects the note’s
comparability with main stream market issues and also affects its
transferability. The value of the note would also be impacted by the
ability to estimate Biosyn’s expected future revenues which in turn hinge
largely upon the outcome of its ongoing Savvy contraception trial, the results
of which are currently under review and which are not known by the
Company. Given the above factors and therefore the lack of
market comparability, the Ben Franklin Note would be classified under SFAS #157
as a Level 3 input. As such, the Company’s management has therefore
determined that the carrying value of the Ben Franklin Note as of December 31,
2008 approximates its fair market value.
MPI
Note
In 2007,
Cellegy settled its obligation to MPI, Inc. of $44,700 for $40,000 and recorded
$4,700 in other income.
6. Commitments and
Contingencies
Operating
Leases
Until May
31, 2008, the Company leased its facility a month-to-month basis and has no
future minimum lease payments as of December 31, 2008. Operating
lease expense is recorded on a straight-line basis over the term of the
lease. Rent expense was approximately $13,500 and $32,400 for the
years ended December 31, 2008 and 2007, respectively.
7. License and Other
Agreements
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 1.0% 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.
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 common stock warrants, which in connection with Cellegy’s
acquisition of Biosyn in 2004 were assumed and became warrants to purchase
39,050 (pre-reverse split) shares of Cellegy common stock, 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.
F-12
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
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, 2008 and 2007. 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 agreements, Biosyn has been granted the right to
commercialize products 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.
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.
There
were no royalty payments made under any of the aforementioned agreements for the
years ended December 31, 2008 and 2007.
8. Stockholders’
Equity
Preferred
Stock
The
Company’s Restated Certificate of Incorporation in effect as of December 31,
2008 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 trades on the Over-the-Counter Bulletin Board (“OTCBB”) formerly
under the symbol: CLGY.OB. In connection with its merger with Adamis,
the Company’s common stock symbol was changed to ADMP in April,
2009.
Stock
Option Plans
2005
Equity Incentive Plan
The 2005
Equity Incentive Plan (the “2005 Plan”) replaced the 1995 Equity Incentive
Plan (the “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 Internal Revenue Code of
1986, as amended.
F-13
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
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. There
were 16,000 options vested under the 2005 Plan during 2008.Activity under
the 2005 Plan is summarized as follows:
Pre-Reverse Split – Note 12
|
||||||||
|
Weighted
|
|||||||
|
Shares Under
|
Average
|
||||||
|
Option
|
Exercise Price
|
||||||
Balance at December 31,
2007
|
48,000 | $ | 1.34 | |||||
Granted
|
- | - | ||||||
Canceled
|
- | - | ||||||
Exercised
|
- | - | ||||||
Balance at December 31,
2008
|
48,000 | 1.34 |
The
following table summarizes those stock options outstanding related to the 2005
Plan at December 31, 2008:
Pre-Reverse Split – Note 12
|
|||||||||||
Options Exercisable and Outstanding
|
|||||||||||
Weighted
|
|||||||||||
Weighted
|
Average
|
Weighted
|
|||||||||
Average
|
Remaining
|
Average
|
Aggregate
|
||||||||
Number
of
|
Contractual
|
Exercise
|
Intrinsic
|
||||||||
Options
|
Life
|
Price
|
Value
|
||||||||
48,000
|
7.00 Years
|
$ | 1.34 | $ | - |
The Prior
Plan will continue to govern the stock options previously granted thereunder,
however, no further stock options or other awards may be made pursuant to the
Prior Plan. There were 38,958 options vested under the Prior Plan
during 2008. Activity under the Prior Plan is summarized as
follows:
Pre-Reverse Split – Note 12
|
|||||
Weighted
|
|||||
Shares Under
|
Average
|
||||
Option
|
Exercise Price
|
||||
Balance
at December 31, 2007
|
204,944
|
$
|
2.66
|
||
Granted
|
-
|
-
|
|||
Canceled
|
-
|
-
|
|||
Exercised
|
-
|
-
|
|||
Balance
at December 31, 2008
|
204,944
|
2.66
|
The
following table summarizes those stock options outstanding and exercisable
related to the Prior Plan at December 31, 2008:
Pre-Reverse Split – Note 12
|
|||||||||||
Options Exercisable and Outstanding
|
|||||||||||
Weighted
|
Weighted
|
Weighted
|
|||||||||
Average
|
Average
|
Average
|
Aggregate
|
||||||||
Number of
|
Remaining
|
Exercise
|
Intrinsic
|
||||||||
Options
|
Contractual
Life
|
Price
|
Value
|
||||||||
204,944
|
5.42 Years |
$
|
2.66
|
$ |
-
|
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 replaced 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-14
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
Activity
under the Directors’ Plan is summarized as follows:
Pre-Reverse Split – Note 12
|
||||||
Weighted
|
||||||
Shares Under
|
Average
|
|||||
Option
|
Exercise Price
|
|||||
Balance
at December 31, 2007
|
92,000
|
$
|
4.45
|
|||
Granted
|
-
|
-
|
||||
Canceled
|
8,000
|
5.50
|
||||
Exercised
|
-
|
-
|
||||
Balance
at December 31, 2008
|
84,000
|
4.35
|
The
following table summarizes those stock options outstanding and exercisable
related to the Directors’ Plan at December 31, 2008:
Pre-Reverse Split – Note 12
|
||||||||||
Options Exercisable and Outstanding
|
||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||
Average
|
Average
|
Average
|
Aggregate
|
|||||||
Number of
|
Remaining
|
Exercise
|
Intrinsic
|
|||||||
Options
|
Contractual Life
|
Price
|
Value
|
|||||||
84,000
|
4.24
Years
|
$
|
4.35
|
$
|
-
|
There are
no options available for future grants under the Directors’ Plan.
Non-Plan
Options
In
November 2003, the Company granted an option to Mr. Richard Williams,
on his appointment to become Chairman of the Board, to purchase 1,000,000 shares
of common stock (pre-reverse split – see Note 12). A total of 400,000 of the
shares subject to the options have an exercise price of $2.89 per share and a
total 600,000 of the shares subject to the options have an exercise price of
$5.00 per share. The option was vested and exercisable in full on the grant date
and, as of December 31, 2008, 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. Activity relating to
Biosyn option grants is summarized as follows:
Pre-Reverse Split – Note 12
|
||||||||
Weighted
|
||||||||
Shares Under
|
Average
|
|||||||
Option
|
Exercise Price
|
|||||||
Balance
at December 31, 2007
|
4,797 | $ | 0.29 | |||||
Granted
|
- | - | ||||||
Canceled
|
(514 | ) | (0.29 | ) | ||||
Exercised
|
- | - | ||||||
Balance
at December 31, 2008
|
4,283 | 0.29 |
F-15
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,
2008:
Pre-Reverse Split – Note 12
|
||||||||||
Options Exercisable and Outstanding
|
||||||||||
Weighted
|
||||||||||
Weighted
|
Average
|
Weighted
|
||||||||
Average
|
Remaining
|
Average
|
Aggregate
|
|||||||
Number
of
|
Contractual
|
Exercise
|
Intrinsic
|
|||||||
Options
|
Life
|
Price
|
Value
|
|||||||
4,283
|
5.05
Years
|
$
|
0.29
|
$
|
-
|
Shares
Reserved
As of
December 31, 2008, the Company has reserved shares of common stock for
future issuance as follows:
Biosyn
options
|
4,283
|
|||
Director's
Plan
|
84,000
|
|||
Warrants
|
2,114,593
|
|||
Non-plan
options
|
1,000,000
|
|||
1995
Equity Incentive Plan
|
204,944
|
|||
2005
Equity Incentive Plan
|
1,000,000
|
|||
Total
shares reserved
|
4,407,820
|
Warrants
The
Company has the following warrants outstanding to purchase common stock as of
December 31, 2008:
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
|
2013
- 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
years ended December 31, 2008 and 2007, the Company recorded non-cash
compensation expense of $17,150 and $53,874, respectively, all of which was
charged to selling, general and administrative expenses.
9. Income Taxes
At
December 31, 2008, the Company had net operating loss carryforwards of
approximately $95.7 million and $24.0 million for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
through the year 2028. The state net operating loss carryforwards expire through
the year 2018. 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 through
the year 2027 and the state credits expire through the year 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.
Cellegy’s merger with Adamis as 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-16
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
2008 and 2007, not available to be recorded as a benefit due to the exercise of
nonqualified employee stock options are approximately $$559,000.
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,
if 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,
|
||||||||
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforward
|
$ | 33,000 | $ | 32,100 | ||||
Credit
carryforward
|
2,900 | 2,900 | ||||||
Capitalized
research and development
|
7,300 | 7,400 | ||||||
Depreciation
and amortization
|
1,400 | 1,000 | ||||||
Other,
net
|
300 | 300 | ||||||
Total
deferred tax assets
|
44,900 | 43,700 | ||||||
Valuation
allowance
|
(44,900 | ) | (43,700 | ) | ||||
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,
|
|||||||||||||
2008
|
2007
|
||||||||||||
Net
loss
|
$
|
(1,534
|
)
|
$
|
(1,927
|
)
|
|||||||
Tax
(benefit) at Federal statutory rate
|
$
|
(522
|
) |
34.00
|
%
|
$
|
(655
|
)
|
34.00
|
%
|
|||
Meals
and entertainment
|
-
|
-
|
1
|
(0.05
|
)
|
||||||||
Stock
compensation expense
|
6
|
(0.37
|
) |
24
|
(1.26
|
)
|
|||||||
Research
credits
|
-
|
-
|
6
|
(0.31
|
)
|
||||||||
Deferred
taxes not benefited
|
516
|
(33.63
|
) |
624
|
(32.38
|
)
|
|||||||
Provision
for taxes
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
The
valuation allowance for deferred tax assets for 2008 increased by approximately
$1.2 million and for 2007 decreased by approximately $3.5 million.
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 December 31, 2008,
the Company had no unrecognized tax benefits and has not accrued any tax
liabilities for unrecognized tax obligations.
The
Company does not believe the total amount of unrecognized benefits or
obligations as of December 31, 2008 will increase or decrease significantly in
the next twelve months. The Company’s Federal, California, and
Pennsylvania tax returns subsequent to 2004 are subject to examination by the
tax authorities.
F-17
Cellegy
Pharmaceuticals, Inc.
Notes
to Consolidated Financial Statements (Continued)
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. There were
no fees paid to board members in 2008, nor were any such fees owed as of
December 31, 2008. The total cash payments to board
members made in connection with these services during the year ended December
31, 2007 was $49,500.
11.
Note Receivable
In
connection with the signing of the Merger Agreement with Adamis on February 12,
2008, Cellegy issued to Adamis an unsecured convertible promissory note in the
amount of $500,000 (the “Promissory Note “)to provide additional funds to Adamis
during the pendency of the merger transaction. 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 not be repaid, but will convert into shares of Adamis
stock, and these shares will be immediately cancelled. Cellegy will
receive no additional shares. At December 31, 2008, the Company has
included the Promissory Note and its related interest income accrual in
stockholders’ equity. See Note 12 “Subsequent
Events”.
In
connection with the consummation of the merger and pursuant to the terms of the
Merger Agreement, the Company changed its name from Cellegy Pharmaceuticals,
Inc. to Adamis Pharmaceuticals Corporation, and Adamis changed its corporate
name to Adamis Corporation.
Pursuant
to the terms of the Merger Agreement, immediately before the consummation of the
merger Cellegy effected a reverse stock split of its common
stock. Pursuant to this reverse stock split, each 9.929060333 shares
of common stock of Cellegy that were issued and outstanding immediately before
the effective time of the merger was converted into one share of common stock
and any remaining fractional shares held by a stockholder (after the aggregating
fractional shares) were rounded up to the nearest whole share (the “Reverse
Split”).
As a
result, the total number of shares of Cellegy that were outstanding immediately
before the effective time of the merger were converted into approximately
3,000,000 shares of post-Reverse Split shares of common stock of the
Company. Pursuant to the terms of the Merger Agreement, at the
effective time of the merger, each share of Adamis common stock that was issued
and outstanding immediately before the effective time of the merger ceased to be
outstanding and was converted into the right to receive one share of common
stock of the Company. As a result, the Company expects to issue
approximately 42,978,067 post-reverse split shares of common stock to the
holders of the outstanding shares of common stock of Adamis before the effective
time of the merger.
During
2008, the Company’s common stock traded on the OTCBB under the symbol
“CLGY.OB.” In April, 2009, and following its merger with Adamis and
the change of Cellegy’s corporate name, the trading symbol for the common stock
changed to “ADMP”.
Also in
connection with the closing of the merger, Cellegy amended its certificate of
incorporation to increase the authorized number of shares of common stock from
50,000,000 to 175,000,000 and the authorized number of shares of preferred stock
from 5,000,000 to 10,000,000.
Cellegy’s
stockholders also approved a new 2009 Equity Incentive Plan (the “2009 Plan”),
which became effective upon the closing of the merger. The 2009 Plan
provides for the grant of incentive stock options, non-statutory stock options,
restricted stock awards, restricted stock unit awards, stock appreciation
rights, performance stock awards, and other forms of equity compensation
(collectively “stock awards”). In addition, the 2009 Plan provides
for the grant of performance cash awards. The aggregate number of
shares of common stock that may be issued initially pursuant to stock awards
under the 2009 Plan is 7,000,000 shares. The number of shares
reserved of common stock reserved for issuance will automatically increase on
January 1 of each calendar year, from January 1, 2010 through and including
January 1, 2019, by the lesser of (a) 5.0% of the total number of shares of
common stock outstanding on December 31 of the preceding calendar year or (b) a
lesser number of shares of common stock determined by the Company’s board of
directors before the start of a calendar year for which an increase
applies.
F-18