UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: June 30, 2007

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                  

Commission File Number: 001-32325

CALLISTO PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

13-3894575

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

420 Lexington Avenue, Suite 1609, New York, New York 10170

(Address of principal executive offices) (Zip Code)

(212) 297-0010

(Registrant’s telephone number)

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

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  x   No  o

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  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

The number of the registrant’s shares of common stock outstanding was 40,930,161 as of August 9, 2007.

 




CALLISTO PHARMACEUTICALS, INC.
FORM 10-Q
CONTENTS

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Condensed Consolidated Financial Statements

1

 

 

Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006

1

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2007 and 2006 (unaudited) and the period June 5, 1996 (Inception) to June 30, 2007 (unaudited)

2

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Deficit) for the period June 5, 1996 (Inception) to June 30, 2007 (unaudited)

3

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2007 and 2006 (unaudited) and for the period June 5, 1996 (Inception) to
June 30, 2007 (unaudited)

10

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

11

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results
of Operations

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

 

Controls and Procedures

33

PART II—OTHER INFORMATION

 

Item 1A.

 

Risk Factors

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 6.

 

Exhibits

35

Signatures

36

 

i




INTRODUCTORY NOTE

This Report on Form 10-Q for Callisto Pharmaceuticals, Inc. (“Callisto” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements.

ii




PART I—FINANCIAL INFORMATION

Item 1.                        Condensed Consolidated Financial Statements

CALLISTO PHARMACEUTICALS, INC.
(A development stage company)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30, 2007

 

December 31, 2006

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

689,415

 

 

$

3,904,232

 

 

Prepaid expenses and other

 

113,484

 

 

66,741

 

 

 

 

802,899

 

 

3,970,973

 

 

Property and equipment—net

 

5,017

 

 

6,451

 

 

Security deposits

 

73,716

 

 

73,716

 

 

 

 

$

881,632

 

 

$

4,051,140

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,864,633

 

 

$

1,843,422

 

 

Accrued expenses

 

1,567,867

 

 

1,357,600

 

 

 

 

3,432,500

 

 

3,201,022

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Series A convertible preferred stock, par value $0.0001, 700,000
shares authorized, 579,125 shares outstanding at June 30, 2007
with a liquidation preference of $5,791,250 and 586,125 shares outstanding at December 31, 2006 with a liquidation preference
of $5,861,250

 

58

 

 

58

 

 

Common stock, par value $.0001, 150,000,000 and 100,000,000
shares authorized and 39,741,661 and 39,194,996 shares
outstanding at June 30, 2007 and December 31, 2006, respectively

 

3,974

 

 

3,919

 

 

Additional paid-in capital

 

61,885,367

 

 

61,290,509

 

 

Deficit accumulated during development stage

 

(64,440,267

)

 

(60,444,368

)

 

 

 

(2,550,868

)

 

850,118

 

 

 

 

$

881,632

 

 

$

4,051,140

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1




CALLISTO PHARMACEUTICALS, INC.

(A development stage company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

June 5, 1996
(Inception) to

 

 

 

2007

 

2006

 

2007

 

2006

 

June 30, 2007

 

Revenues

 

$

 

$

 

$

 

$

 

$

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,119,036

 

1,565,591

 

2,077,718

 

3,759,430

 

24,115,533

 

Government grants

 

(59,113

)

(201,155

)

(103,069

)

(255,422

)

(947,534

)

Purchased in process research and development

 

 

 

 

 

6,944,553

 

General and administrative

 

973,496

 

1,457,120

 

1,933,156

 

3,211,210

 

22,686,896

 

Stock based compensation—non employees

 

16,601

 

456,201

 

(2,877

)

960,248

 

9,695,684

 

Loss from operations

 

(2,050,020

)

(3,277,757

)

(3,904,928

)

(7,675,466

)

(62,495,132

)

Interest and investment income

 

3,743

 

19,021

 

28,714

 

42,101

 

732,330

 

Other expense, net

 

 

(157,435

)

 

(157,435

)

(173,295

)

Net loss

 

(2,046,277

)

(3,416,171

)

(3,876,214

)

(7,790,800

)

(61,936,097

)

Series A Preferred stock beneficial conversion feature accreted as a dividend

 

 

 

(119,685

)

 

(2,504,170

)

Net loss available to common stockholders

 

$

(2,046,277

)

$

(3,416,171

)

$

(3,995,899

)

$

(7,790,800

)

$

(64,440,267

)

Weighted average shares outstanding:
basic and diluted

 

39,633,090

 

38,216,561

 

39,412,846

 

37,103,474

 

 

 

Net loss per common share:
basic and diluted

 

$

(0.05

)

$

(0.09

)

$

($0.10

)

$

(0.21

)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

2




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

Preferred
Shares

 

Preferred
Stock,
Par Value

 

Common
Shares

 

Common
Stock,
Par Value

 

Additional
Paid in Capital

 

Balance at inception, June 5, 1996

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of founder shares

 

 

 

 

 

2,642,500

 

 

264

 

 

 

528

 

 

Common stock issued

 

 

 

 

 

1,356,194

 

 

136

 

 

 

272

 

 

Common stock issued via private placement

 

 

 

 

 

1,366,667

 

 

137

 

 

 

1,024,863

 

 

Balance, December 31, 1996

 

 

 

 

 

5,365,361

 

 

537

 

 

 

1,025,663

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued via private placement

 

 

 

 

 

1,442,666

 

 

144

 

 

 

1,081,855

 

 

Balance, December 31, 1997

 

 

 

 

 

6,808,027

 

 

681

 

 

 

2,107,518

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Stock based Compensation

 

 

 

 

 

 

 

 

 

 

52,778

 

 

Common stock issued via private placement

 

 

 

 

 

1,416,667

 

 

142

 

 

 

1,062,358

 

 

Common stock issued for services

 

 

 

 

 

788,889

 

 

79

 

 

 

591,588

 

 

Common stock repurchased and cancelled

 

 

 

 

 

(836,792

)

 

(84

)

 

 

(96,916

)

 

Balance, December 31, 1998

 

 

 

 

 

8,176,791

 

 

818

 

 

 

3,717,326

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Compensation—stock options

 

 

 

 

 

 

 

 

 

 

9,946

 

 

Amortization of Stock based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

 

 

 

 

 

 

 

 

 

3,168,832

 

 

Common stock issued via private placement

 

 

 

 

 

346,667

 

 

34

 

 

 

259,966

 

 

Balance, December 31, 1999

 

 

 

 

 

8,523,458

 

 

852

 

 

 

7,156,070

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Stock based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued

 

 

 

 

 

4,560,237

 

 

455

 

 

 

250,889

 

 

Other

 

 

 

 

 

 

 

 

 

 

432

 

 

Preferred shares issued

 

3,485,299

 

 

348

 

 

 

 

 

 

 

5,986,302

 

 

Preferred stock issued for services

 

750,000

 

 

75

 

 

 

 

 

 

 

1,124,925

 

 

Balance, December 31, 2000

 

4,235,299

 

 

423

 

 

13,083,695

 

 

1,307

 

 

 

14,518,618

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Compensation—stock Options

 

 

 

 

 

 

 

 

 

 

20,000

 

 

Amortization of Stock based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

4,235,299

 

 

423

 

 

13,083,695

 

 

1,307

 

 

 

14,538,618

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Stock based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

4,235,299

 

 

423

 

 

13,083,695

 

 

1,307

 

 

 

14,538,618

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

3




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

Unamortized
Deferred
Stock Based
Compensation

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity

 

Balance at inception, June 5, 1996

 

 

 

 

 

 

 

 

Net loss for the year

 

 

 

 

 

(404,005

)

 

(404,005

)

 

Issuance of founder shares

 

 

 

 

 

 

792

 

 

Common stock issued

 

 

 

 

 

 

408

 

 

Common stock issued via private placement

 

 

 

 

 

 

1,025,000

 

 

Balance, December 31, 1996

 

 

 

 

(404,005

)

 

622,195

 

 

Net loss for the year

 

 

 

 

(894,505

)

 

(894,505

)

 

Common stock issued via private placement

 

 

 

 

 

 

1,081,999

 

 

Balance, December 31, 1997

 

 

 

 

(1,298,510

)

 

809,689

 

 

Net loss for the year

 

 

 

 

(1,484,438

)

 

(1,484,438

)

 

Amortization of Stock based Compensation

 

 

 

 

 

 

52,778

 

 

Common stock issued

 

 

 

 

 

 

 

 

1,062,500

 

 

Common stock issued for services

 

 

 

 

 

 

591,667

 

 

Common Stock repurchased and cancelled

 

 

 

 

 

 

(97,000

)

 

Balance, December 31, 1998

 

 

 

 

(2,782,948

)

 

935,196

 

 

Net loss for the year

 

 

 

 

(4,195,263

)

 

(4,195,263

)

 

Deferred Compensation—stock options

 

 

(9,946

)

 

 

 

 

 

Amortization of Stock based Compensation

 

 

3,262

 

 

 

 

3,262

 

 

Common stock issued for services

 

 

 

 

 

 

3,168,832

 

 

Common stock issued via private placement

 

 

 

 

 

 

260,000

 

 

Balance, December 31, 1999

 

 

(6,684

)

 

(6,978,211

)

 

172,027

 

 

Net loss for the year

 

 

 

 

 

(2,616,261

)

 

(2,616,261

)

 

Amortization of Stock based Compensation

 

 

4,197

 

 

 

 

 

4,197

 

 

Common stock issue

 

 

 

 

 

 

251,344

 

 

Other

 

 

 

 

 

 

432

 

 

Preferred shares issued

 

 

 

 

 

 

5,986,650

 

 

Preferred stock issued for services

 

 

 

 

 

 

1,125,000

 

 

Balance, December 31, 2000

 

 

(2,487

)

 

(9,594,472

)

 

4,923,389

 

 

Net loss for the year

 

 

 

 

(1,432,046

)

 

(1,432,046

)

 

Deferred Compensation—stock options

 

 

(20,000

)

 

 

 

 

 

Amortization of Stock based Compensation

 

 

22,155

 

 

 

 

22,155

 

 

Balance, December 31, 2001

 

 

(332

)

 

(11,026,518

)

 

3,513,498

 

 

Net loss for the year

 

 

 

 

(1,684,965

)

 

(1,684,965

)

 

Amortization of Stock based Compensation

 

 

332

 

 

 

 

332

 

 

Balance, December 31, 2002

 

 

 

 

(12,711,483

)

 

1,828,865

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

4




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

Preferred
Stock

 

Preferred
Stock
Par
Value

 

Common
Stock

 

Common
Stock
Par
Value

 

Additional
Paid in
Capital

 

Unamortized
Deferred
Stock Based
Compensation

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity

 

Balance December 31, 2002

 

4,235,299

 

 

423

 

 

13,083,695

 

 

1,307

 

 

 

14,538,618

 

 

 

 

 

 

(12,711,483

)

 

 

1,828,865

 

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,106,247

)

 

 

(13,106,247

)

 

Conversion of preferred
stock in connection with
the Merger

 

(4,235,299

)

 

(423

)

 

4,235,299

 

 

423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued to former Synergy
stockholders

 

 

 

 

 

 

4,329,927

 

 

432

 

 

 

6,494,458

 

 

 

 

 

 

 

 

 

6,494,890

 

 

Common stock issued in exchange for Webtronics common stock

 

 

 

 

 

 

1,503,173

 

 

150

 

 

 

(150

)

 

 

 

 

 

 

 

 

 

 

Deferred Compensation—stock options

 

 

 

 

 

 

 

 

 

 

 

9,313,953

 

 

 

(9,313,953

)

 

 

 

 

 

 

 

Amortization of deferred Stock based
Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,833,946

 

 

 

 

 

 

3,833,946

 

 

Private placement of
common stock, net

 

 

 

 

 

2,776,666

 

 

278

 

 

 

3,803,096

 

 

 

 

 

 

 

 

 

3,803,374

 

 

Balance, December 31, 2003

 

 

 

 

 

25,928,760

 

 

2,590

 

 

 

34,149,975

 

 

 

(5,480,007

)

 

 

(25,817,730

)

 

 

2,854,828

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

5




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

Preferred
Stock

 

Preferred
Stock
Par
Value

 

Common
Stock

 

Common
Stock
Par
Value

 

Additional
Paid in
Capital

 

Unamortized
Deferred
Stock Based
Compensation

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity

 

Balance, December 31, 2003

 

 

 

 

 

 

 

25,928,760

 

 

2,590

 

 

 

34,149,975

 

 

 

(5,480,007

)

 

 

(25,817,730

)

 

 

2,854,828

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,543,467

)

 

 

(7,543,467

)

 

Amortization of deferred Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,084,473

 

 

 

 

 

 

3,084,473

 

 

Variable accounting for stock options

 

 

 

 

 

 

 

 

 

 

 

 

(816,865

)

 

 

 

 

 

 

 

 

(816,865

)

 

Stock-based compensation net of forfeitures

 

 

 

 

 

 

 

 

 

 

 

 

240,572

 

 

 

93,000

 

 

 

 

 

 

333,572

 

 

Common stock issued via private placements, net

 

 

 

 

 

 

 

3,311,342

 

 

331

 

 

 

6,098,681

 

 

 

 

 

 

 

 

 

6,099,012

 

 

Warrant and
stock-based compensation for services in connection with the Merger

 

 

 

 

 

 

 

 

 

 

 

 

269,826

 

 

 

 

 

 

 

 

 

269,826

 

 

Common stock returned from former Synergy stockholders

 

 

 

 

 

 

 

(90,000

)

 

(9

)

 

 

(159,083

)

 

 

 

 

 

 

 

 

(159,092

)

 

Stock issued for patent rights

 

 

 

 

 

 

 

25,000

 

 

3

 

 

 

56,247

 

 

 

 

 

 

 

 

 

56,250

 

 

Common stock issued for services

 

 

 

 

 

 

 

44,000

 

 

7

 

 

 

70,833

 

 

 

 

 

 

 

 

 

70,840

 

 

Balance, December 31, 2004

 

 

 

 

 

 

 

29,219,102

 

 

2,922

 

 

 

39,910,187

 

 

 

(2,302,534

)

 

 

(33,361,197

)

 

 

4,249,378

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

6




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

Common
Stock

 

Common
Stock
Par
Value

 

Additional
Paid in
Capital

 

Unamortized
Deferred
Stock Based
Compensation

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity (Deficit)

 

Balance, December 31, 2004

 

29,219,102

 

 

$

2,922

 

 

$

39,910,187

 

 

$

(2,302,534

)

 

$

(33,361,197

)

$

4,249,378

 

Net loss for the year

 

 

 

 

 

 

 

 

 

(11,779,457

)

(11,779,457

)

Deferred stock-based compensation—new grants

 

 

 

 

 

1,571,772

 

 

(1,571,772

)

 

 

 

Amortization of
deferred stock-based compensation

 

 

 

 

 

 

 

2,290,843

 

 

 

2,290,843

 

Variable accounting for stock options

 

 

 

 

 

75,109

 

 

 

 

 

75,109

 

Common stock issued
via private placement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 2005

 

1,985,791

 

 

198

 

 

3,018,203

 

 

 

 

 

3,018,401

 

August 2005

 

1,869,203

 

 

187

 

 

1,812,940

 

 

 

 

 

1,813,127

 

Finders fees and
expenses

 

 

 

 

 

(176,250

)

 

 

 

 

(176,250

)

Exercise of common stock warrant

 

125,000

 

 

13

 

 

128,737

 

 

 

 

 

128,750

 

Common stock issued
for services

 

34,000

 

 

3

 

 

47,177

 

 

 

 

 

47,180

 

Balance, December 31, 2005

 

33,233,096

 

 

$

3,323

 

 

$

46,387,875

 

 

$

(1,583,463

)

 

$

(45,140,654

)

$

(332,919

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements

7




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

                                               

 

 

Series A
Convertible
Preferred
Shares

 

Convertible
Preferred
Stock

 

Common
Stock

 

Common
Stock
Par
Value

 

Additional
Paid in
Capital

 

Unamortized
Deferred
Stock Based
Compensation

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity

 

Balance, December 31, 2005

 

 

 

 

 

 

 

33,233,096

 

 

$

3,323

 

 

$

46,387,875

 

 

$

(1,583,463

)

 

 

$

(45,140,654

)

 

 

$

(332,919

)

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,919,229

)

 

 

(12,919,229

)

 

Reclassification of deferred unamortized stock-based compensation upon adoption of FAS 123R

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,583,463

)

 

1,583,463

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,579,431

 

 

 

 

 

 

 

 

 

 

2,579,431

 

 

Common stock issued via private placement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 2006

 

 

 

 

 

 

 

 

 

4,283,668

 

 

428

 

 

5,139,782

 

 

 

 

 

 

 

 

 

 

5,140,210

 

 

Finders fees and
expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(561,808

)

 

 

 

 

 

 

 

 

 

(561,808

)

 

April 2006

 

 

 

 

 

 

 

 

 

666,667

 

 

67

 

 

799,933

 

 

 

 

 

 

 

 

 

 

800,000

 

 

Finders fees and
expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,000

)

 

 

 

 

 

 

 

 

 

(41,000

)

 

Waiver and Lock-up Agreement

 

 

 

 

 

 

 

 

 

740,065

 

 

74

 

 

579,622

 

 

 

 

 

 

 

 

 

 

579,696

 

 

Common stock issued for services

 

 

 

 

 

 

 

 

 

87,000

 

 

9

 

 

121,101

 

 

 

 

 

 

 

 

 

 

121,110

 

 

Exercise of common stock warrants

 

 

 

 

 

 

 

 

 

184,500

 

 

18

 

 

190,017

 

 

 

 

 

 

 

 

 

 

190,035

 

 

Series A convertible
preferred stock issued via private placement:

 

 

574,350

 

 

 

57

 

 

 

 

 

 

 

 

5,743,443

 

 

 

 

 

 

 

 

 

 

5,743,500

 

 

Finders fees and expenses

 

 

11,775

 

 

 

1

 

 

 

 

 

 

 

 

(448,909

)

 

 

 

 

 

 

 

 

 

(448,908

)

 

Detachable warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,384,485

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature accreted as a dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,384,485

)

 

 

 

 

Balance, December 31, 2006

 

 

586,125

 

 

 

$

58

 

 

39,194,996

 

 

$

3,919

 

 

$

61,290,509

 

 

$

 

 

 

$

(60,444,368

)

 

 

$

850,118

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

8




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

Series A
Convertible
Preferred
Shares

 

Series A
Convertible
Preferred
Stock

 

Common
Stock

 

Common
Stock
Par
Value

 

Additional
Paid in
Capital

 

Deficit
Accumulated
during the
Development
Stage

 

Total
Stockholders’
Equity (Deficit)

 

Balance, December 31, 2006

 

 

586,125

 

 

 

$

58

 

 

39,194,996

 

 

$

3,919

 

 

$

61,290,509

 

$

(60,444,368

)

 

$

850,118

 

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

(3,876,214

)

 

(3,876,214

)

 

Stock based
compensation
expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194,828

 

 

 

 

194,828

 

 

Common stock issued
for services

 

 

 

 

 

 

 

 

 

80,000

 

 

8

 

 

36,792

 

 

 

 

36,800

 

 

Series A convertible preferred stock
issued via private placement

 

 

28,000

 

 

 

3

 

 

 

 

 

 

 

 

279,997

 

 

 

 

280,000

 

 

Finders fees and
expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,400

)

 

 

 

(36,400

)

 

Conversion of Series A preferred stock to common stock

 

 

(35,000

)

 

 

(3

)

 

466,665

 

 

47

 

 

(44

)

 

 

 

 

 

 

Detachable warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119,685

 

 

 

 

 

 

Beneficial conversion feature accreted as a dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

(119,685

)

 

 

 

Balance, June 30, 2007

 

 

579,125

 

 

 

$

58

 

 

39,741,661

 

 

$

3,974

 

 

$

61,885,367

 

$

(64,440,267

)

 

$

(2,550,868

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

9




CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six months Ended June 30,

 

Period from
June 5, 1996
(inception) to

 

 

 

2007

 

2006

 

June 30, 2007

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(3,876,214

)

$

(7,790,800

)

$

(61,936,097

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

1,434

 

717

 

88,222

 

Stock based compensation expense

 

231,628

 

1,911,021

 

16,749,074

 

Purchased in-process research and development non-cash portion

 

 

 

6,841,053

 

Liquidated damages non-cash

 

 

 

579,696

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses

 

(46,743

)

(8,261

)

(113,484

)

Rent deposits

 

 

8,480

 

(73,716

)

Accounts payable and accrued expenses

 

231,478

 

(331,963

)

3,140,071

 

Total adjustments

 

417,797

 

1,579,994

 

27,210,916

 

Net cash used in operating activities

 

(3,458,417

)

(6,210,806

)

(34,725,181

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition of equipment

 

 

(8,602

)

(93,239

)

Net cash used in investing activities

 

 

(8,602

)

(93,239

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of common and preferred stock, net of repurchases

 

280,000

 

5,940,210

 

37,249,173

 

Finders’ fees and expenses

 

(36,400

)

(602,808

)

(2,060,123

)

Exercise of common stock warrants

 

 

190,035

 

318,785

 

Net cash provided by financing activities

 

243,600

 

5,527,437

 

35,507,835

 

Net (decrease) increase in cash and cash equivalents

 

(3,214,817

)

(691,971

)

689,415

 

Cash and cash equivalents at beginning of period

 

3,904,232

 

1,420,510

 

 

Cash and cash equivalents at end of period

 

$

689,415

 

$

728,539

 

$

689,415

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for taxes

 

$

2,441

 

$

7,984

 

$

125,928

 

Cash paid for interest

 

$

 

$

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Accretion of fair value of beneficial conversion feature as a dividend to Series A Preferred stockholders

 

$

119,685

 

$

 

$

2,504,170

 

Stock options, warrants and common stock issued for services

 

$

231,628

 

$

1,911,021

 

$

16,749,074

 

Stock-based liquidated damages

 

$

 

$

 

$

579,676

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

10




CALLISTO PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.                 Business overview:

Callisto Pharmaceuticals, Inc. (“Callisto”) is a development stage biopharmaceutical company, whose primary focus is on biopharmaceutical product development. Since inception in June of 1996 Callisto’s efforts have been principally devoted to research and development, securing and protecting patents and raising capital. From inception through June 30, 2007, Callisto has sustained cumulative net losses available to common stock holders of $64,440,267. Callisto’s losses have resulted primarily from expenditures incurred in connection with research and development activities, application and filing for regulatory approval of proposed products, stock based compensation expense, patent filing and maintenance expenses, purchase of in-process research and development, outside accounting and legal services and regulatory, scientific and financial consulting fees. From inception through June 30, 2007, Callisto has not generated any revenue from operations, expects to incur additional losses to perform further research and development activities and does not currently have any commercial biopharmaceutical products, and does not expect to have such for several years, if at all.

Callisto’s product development efforts are in their early stages and Callisto cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical trial protocols, the extended regulatory approval and review cycles, the nature and timing of costs and competing technologies being developed by organizations with significantly greater resources.

2.                 Basis of presentation and going concern:

The accompanying unaudited condensed consolidated financial statements of Callisto, which include its wholly owned subsidiaries: (1) Callisto Research Labs, LLC (including its wholly owned but inactive subsidiary, Callisto Pharma, GmbH (Germany)) and (2) Synergy Pharmaceuticals Inc. (“Synergy” , including its wholly owned but inactive subsidiary IgX, Ltd (Ireland)), have been prepared in accordance with (i) accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and (ii) the rules of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q. The results of operations of Synergy are included in the condensed consolidated financial statements since May 1, 2003. All intercompany balances and transactions have been eliminated and certain expense items in prior periods have been reclassified to conform to current financial statement presentation. These condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. These statements should be read in conjunction with Callisto’s audited financial statements and notes thereto for the year ended December 31, 2006, included in Form 10-K filed with the SEC on April 17, 2007. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, primarily consisting of normal adjustments, necessary for the fair presentation of the balance sheet and results of operations for the interim periods. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2007.

Callisto’s consolidated financial statements as of June 30, 2007 and December 31, 2006 have been prepared under the assumption that Callisto will continue as a going concern for the twelve months ending December 31, 2007. Callisto’s independent registered public accounting firm has issued a report dated

11




April 13, 2007 that included an explanatory paragraph referring to Callisto’s recurring losses from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Callisto’s ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Callisto will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels.

To date, Callisto’s sources of cash have been primarily limited to the sale of equity securities. Net cash provided by financing activities for the six months ended June 30, 2007 and 2006 and for the period from June 5, 1995 (inception) to June 30, 2007 was approximately $244,000, $5.5 million and $35.5 million, respectively. Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Callisto can raise additional funds by issuing equity securities, Callisto’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact Callisto’s ability to conduct its business. If Callisto is unable to raise additional capital when required or on acceptable terms, it may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of Callisto’s product candidates. Callisto also may be required to  seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and relinquish licenses or otherwise dispose of rights to technologies, product candidates or products.

On August 2, 2007, Callisto closed a private placement of 1,124,550 shares of Series B Convertible Preferred Stock and 22,491,000 warrants to certain investors for aggregate gross proceeds of approximately $11.2 million. The Warrants are immediately exercisable at $0.70 per share and are exercisable at any time within three years from the date of issuance. (see Note 7. Subsequent Events). If the Put Option associated with the Series B Preferred Stock is exercised under the conditions discussed in Note 7 we will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at our current cash expenditure levels.

3.                 Accounting for share-based payments

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004), Share-Based Payments (“SFAS 123R”). SFAS 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS 123R was effective as of the beginning of the first interim or annual reporting period that began after December 15, 2005 and accordingly Callisto adopted SFAS 123R on January 1, 2006.

SFAS 123R provides for two transition methods. The “modified prospective” method requires that share-based compensation expense be recorded for any employee options granted after the adoption date and for the unvested portion of any employee options outstanding as of the adoption date. The “modified retrospective” method requires that, beginning in the first quarter of 2006, all prior periods presented be restated to reflect the impact of share-based compensation expense consistent with the proforma disclosures previously required under SFAS 123. Callisto has elected to use the “modified prospective” method in adopting this standard.

Prior to January 1, 2006, Callisto had adopted SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). As provided for by SFAS 123, Callisto had elected to continue to account for stock-based compensation according to the provisions of Accounting Principles Board Opinion No. 25,

12




“Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, compensation expense had been recognized to the extent of employee or director services rendered based on the intrinsic value of stock options granted. Callisto accounts for common stock, stock options, and warrants granted to non-employees based on the fair value of the instrument, using the Black-Scholes option pricing model based on assumptions for expected stock price volatility, term of the option, risk-free interest rate and expected dividend yield at the grant date.

For all awards granted prior to January 1, 2006, stock based compensation expense is being recognized on a straight line basis over the remaining requisite service period, which ranged from nine months to three years at the date of adoption. The adoption of SFAS 123R increased net loss for the three and six months ended June 30, 2007 and 2006 by $118,860 and $460,770, and $234,505 and $950,773, respectively, for stock based compensation cost related to employee stock options.

The unrecognized compensation cost related to non-vested share-based compensation arrangements for all employee stock options outstanding at June 30, 2007 and 2006 was $547,148 and $1,089,829, respectively, to be recognized over a weighted average vesting period of 1.37 and 1.83 years, respectively.

Effective with the adoption of SFAS 123R stock-based compensation expense related to Callisto’s share-based compensation arrangements attributable to employees is being recorded as a component of general and administrative expense and research and development expense in accordance with the guidance of Staff Accounting Bulletin 107, Topic 14, paragraph F . Classification of Compensation Expense Associated with Share-Based Payment Arrangements (“SAB 107”). Total stock based compensation expense related to employee and non-employee stock options recognized in operating results was as follow:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

June 5, 1996
(Inception) to

 

Stock based compensation expense

 

 

 

        2007        

 

        2006        

 

2007

 

2006

 

June 30, 2007

 

Employees—included in research and development

 

 

$

14,698

 

 

 

$

141,008

 

 

$

32,544

 

$

289,604

 

$

2,585,088

 

Employees—included in general and administrative

 

 

104,162

 

 

 

319,762

 

 

201,961

 

661,169

 

4,468,301

 

Subtotal employee stock option grants

 

 

118,860

 

 

 

460,770

 

 

234,505

 

950,773

 

7,053,389

 

Non-employee—research and development

 

 

 

 

 

102,750

 

 

 

102,750

 

102,750

 

Non-employee—general and administrative

 

 

16,601

 

 

 

353,451

 

 

(2,877

)

857,498

 

9,592,935

 

Subtotal non-employee stock option grants

 

 

16,601

 

 

 

456,201

 

 

(2,877

)

960,248

 

9,695,685

 

Total stock based compensation expense

 

 

$

135,462

 

 

 

$

916,971

 

 

$

231,628

 

$

1,911,021

 

$

16,749,074

 

 

13




The estimated fair value of each employee option award granted was determined in accordance with SFAS 123R on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for employee options granted during the three and six months ended June 30, 2007 and 2006:

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

       2007       

 

       2006       

 

    2007     

 

     2006     

 

Risk free interest rate

 

 

4.7

%

 

 

No grants

 

 

4.7

%

 

4.3

%

 

Dividend yield

 

 

0.0

%

 

 

No grants

 

 

0.0

%

 

0.0

%

 

Expected volatility

 

 

60

%

 

 

No grants

 

 

60

%

 

79

%

 

Expected term

 

 

5 years

 

 

 

No grants

 

 

5-6 years

 

 

7 years

 

 

 

Risk-free interest rate:   assumption is based upon observed interest rates appropriate for the expected term of Callisto’s employee stock options.

Dividend yield:   Callisto has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.

Expected volatility:   Is based on the historical volatility of Callisto’s stock.

Expected term:   based on expectations regarding future exercises of options which generally vest over 3 years and have a 10 year life. The expected term of the employee and non-employee director options is the estimated weighted-average period until exercise or cancellation of vested options (forfeited unvested options are not considered). SAB 107 guidance permits companies to use a “safe harbor” expected term assumption for grants up to December 31, 2007 based on the mid-point of the period between vesting date and contractual term, averaged on a tranche-by-tranche basis. Callisto used the SAB 107 safe harbor for its expected term assumption starting on January 1, 2007. Previously Callisto had estimated expected term based on a sampling of industry comparables for publicly traded companies. The expected term for consultant awards is the remaining period to contractual expiration.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Callisto estimated future unvested option forfeitures based on historical Company experience and has incorporated this rate in determining the fair value of employee option grants.

A summary of stock option activity and of changes in options outstanding under Callisto’s plans is presented below:

 

 

Number of
options

 

Exercise
Price
Per Share

 

Weighted
Average
Exercise
Price
Per Share

 

Balance, December 31, 2006

 

8,053,375

 

$

0.75 - 6.75

 

 

$

1.75

 

 

Granted

 

732,000

 

$

0.66 - 0.96

 

 

$

0.80

 

 

Forfeitures

 

(225,000

)

$

0.75 - 1.60

 

 

$

1.01

 

 

Balance, June 30, 2007

 

8,560,375

 

$

0.66 - 6.75

 

 

$

1.69

 

 

Exercisable as of June 30, 2007

 

5,344,046

 

$

0.75 - 6.75

 

 

$

1.67

 

 

 

The weighted average remaining term of all options outstanding at June 30, 2007 was 6.4 years as compared to 7.3 years at December 31, 2006.

SFAS 123R requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to Callisto’s accumulated deficit position, no tax benefits have been recognized in the cash flow statement.

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RECENT ACCOUNTING PRONOUNCEMENTS:

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No.159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment to SFAS 115” (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to measure all eligible items at fair value at specified election dates. A business entity shall report all unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. Callisto is currently evaluating the impact, if any, of the provisions of SFAS 159.

In December 2006, the FASB issued a FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP 00-19-2”) which addresses an issuer’s accounting for registration payment arrangements. FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No.5 “Accounting for Contingencies”. The guidance in FSP 00-19-2 amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No.150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and FASB Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” to include scope exceptions for registration payment arrangements. FSP 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issue of FSP 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP 00-19-2, this is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Callisto has analyzed the provisions of FSP 00-19-2 and adoption of this standard did not have a material effect on Callisto’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. Callisto is currently evaluating the impact, if any, of the provisions of SFAS 157.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109”) which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in the amount of income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

4.                 Net Loss per Share

Basic and diluted net loss per share is presented in conformity with SFAS No. 128, “Earnings per Share,” for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares since the inclusion of issuable shares pursuant to the exercise of stock options and warrants, would have been antidilutive. As of June 30, 2007 and 2006 there were 16,296,620 and 4,077,352

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warrants outstanding, respectively and 8,560,375 and 8,349,875 total options outstanding, respectively. In addition Callisto had 7,721,666 common shares issuable upon conversion of its Series A convertible preferred stock as of June 30, 2007 and no preferred stock was outstanding as of June 30, 2006.

5.                 Stockholders’ equity (deficit):

From October 23, 2006 until January 10, 2007, Callisto placed 602,350 shares of Series A Convertible Preferred Stock and 8,031,333 warrants to certain investors for aggregate gross proceeds of $6,023,500. As of December 31, 2006 Callisto had closed on 574,350 shares of such Series A Convertible Preferred Stock for aggregate gross proceeds of $5,743,500. The final traunche of this financing closed January 10, 2007 when Callisto placed 28,000 shares of such Series A Convertible Preferred Stock for aggregate gross proceeds of $280,000. The shares of Series A Convertible Preferred Stock are convertible into shares of common stock at a conversion price of $0.75 per share. The investors also are parties to a Registration Rights Agreement, dated as of October 23, 2006 pursuant to which Callisto agreed to file, within 60 days of closing, a registration statement with the SEC covering the resale of the shares of common stock underlying the Series A Convertible Preferred Stock and the warrants issued to the investors. The warrants are immediately exercisable at $0.75 per share, will expire five years from the date of issuance, and have certain antidilution rights for the twelve month period beginning on the effective date of the registration statement registering the shares of common stock underlying the warrants. (See note 7 Subsequent Events) Callisto (i) paid aggregate fees and expenses of $485,308 ($448,908 prior to December 31, 2006) in cash and (ii) issued an aggregate 11,775 shares of Series A Convertible Preferred Stock and 1,228,761 warrants to purchase common stock, to certain selling agents. The warrants are immediately exercisable at $0.75 per share, will expire five years after issuance and have the same anti-dilutive rights as the investor warrants. On January 12, 2007 Callisto filed a registration statement on Form S-3 registering the common stock issuable upon (i) the conversion of the all Series A Convertible Preferred Stock, (ii) the exercise of all related investor warrants and (iii) the exercise of all selling agent warrants. On February 15, 2007 Amendment No.1 to this registration statement was declared effective by the SEC.

The material terms of the Series A Preferred Stock consist of:

Dividends.   Holders of the Series A Convertible Preferred Stock shall not be entitled to receive dividends except as and if declared at Callisto’s sole election.

Voting Rights.   Shares of the Series A Convertible Preferred Stock shall have no voting rights. However, so long as any shares of Series A Convertible Preferred Stock are outstanding, Callisto shall not, without the affirmative vote of a majority in interest of the shares of Series A Convertible Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series A Convertible Preferred Stock, (b) authorize or create any class of stock senior or equal to the Series A Convertible Preferred Stock, (c) amend its articles of incorporation or other charter documents, so as to affect adversely any rights of the holders of Series A Convertible Preferred Stock or (d) increase the authorized number of shares of Series A Convertible Preferred Stock.

Liquidation.   Upon any liquidation, dissolution or winding-up of Callisto, the holders of the Series A Convertible Preferred Stock shall be entitled to receive an amount equal to the Stated Value per share, which is $10 per share plus any accrued and unpaid dividends.

Conversion Rights.   Each share of Series A Convertible Preferred Stock shall be convertible into that number of shares of common stock determined by dividing the Stated Value, currently $10 per share, by the conversion price, currently $0.75 per share. The conversion price is subject to adjustment for dilutive issuances.

Automatic conversion.   Beginning October 24, 2007, if the price of the common stock equals $1.50 per share for 20 consecutive trading days, and an average of 50,000 shares of common stock per day shall have been traded during the 20 trading days, Callisto shall have the right to deliver a notice to the holders of the Series A Convertible Preferred Stock, to convert any portion of the shares of Series A Convertible Preferred Stock into shares of Common Stock at the conversion price.

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As per Emerging Issues Task Force (“EITF”) Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, Company Stock”, Callisto has determined that the warrants should be treated as “permanent equity”.

As per  FSP No. 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP 00-19-2”) , issued in December 2006, which specifies that contingent obligations under a registration payment arrangement should be separately recognized and measured in accordance with FASB Statement No.5 “Accounting for Contingencies”, Callisto has determined that no liability needed to be recorded. On January 12, 2007 Callisto filed a registration statement on Form S-3 registering the common stock issuable upon (i) the conversion of the all Series A Convertible Preferred Stock, (ii) the exercise of all related investor warrants and (iii) the exercise of all selling agent warrants. On February 15, 2007 Amendment No.1 to this registration statement was declared effective by the SEC.

As per EITF 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” Callisto evaluated the preferred stock transaction and accordingly found that there was an embedded beneficial conversion feature. The fair value of the detachable warrants on the date of grant was $3,557,872 using Black Scholes assumptions of 60% volatility, a risk free interest rate of 4.57% to 4.84%, no dividend, an expected life of 5 years and a stock price on that dates of grant ranging from $0.88 to $ 0.75 per share. The conversion rights of the preferred stock contained a beneficial conversion feature totaling $2,504,170, using the “effective conversion price” method based on relative fair value of the preferred stock and the warrants. This beneficial conversion feature was immediately accreted to the preferred stock as a dividend because the preferred stock could be converted immediately upon issuance. The beneficial conversion feature associated with final traunche of 28,000 shares of Series A Convertible Preferred Stock placed on January 10, 2007 amounted to $119,685 and was recorded as a beneficial conversion feature accreted as a dividend in the quarter ended March 31, 2007.

6.                 Commitments and contingencies:

Employment and consulting agreements:

On January 25, 2007, Callisto entered into an Extension and Amendment Agreement with Mr. Cerrone. The agreement extends the term of the consulting agreement between us and Mr. Cerrone, dated as of December 27, 2004, to December 31, 2009. Among other things, the agreement increases Mr. Cerrone’s compensation from $205,000 to $275,000 per year. Additionally, pursuant to the agreement, in recognition of the services beyond that required by Mr. Cerrone during the period from July 1, 2006 to January 25, 2007, Callisto paid Mr. Cerrone a bonus of $75,000 on April 5, 2007. Mr. Cerrone shall be eligible to earn a cash bonus of up to 22.5% of his base compensation for each twelve month period during the term of the agreement based on meeting performance objectives and bonus criteria to be mutually identified by Mr. Cerrone and Callisto’s Board.

On January 25, 2007, in conjunction with the Extension and Amendment Agreement, Mr. Cerrone was granted 225,000 ten year non-qualified stock options at an exercise price of $0.96 per share of which 75,000 vest on each of December 31, 2007, 2008 and 2009. In accordance with EITF—Emerging Issues Task Force Issue 96-18: Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Service s (“EITF 96-18”), the measurement date will be the earliest of the third anniversary of the agreement (when “performance commitment is completed”) or the accelerated vesting date if Mr. Cerrone is terminated without cause or good reason. Accordingly the fair value of these options of $165,040 on the date of grant is being “marked to market” quarterly until the measurement date is determined. The fair value of these options as of June 30, 2007 was $88,569. Stock-based compensation expense, associated with these options, recorded during the six months ended June 30, 2007 was $12,618.

On February 16, 2007, Dr. Jacob entered into an Extension and Amendment Agreement with Callisto as approved by the Compensation Committee which extended the term under his employment agreement to June 30, 2009. In addition, pursuant to the agreement, Dr. Jacob was granted 225,000 ten year incentive

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stock options exercisable at $0.81 per share of which 75,000 vest on each of December 31, 2007, 2008 and 2009. His salary and other compensation were unchanged.

On April 24, 2007, Callisto entered into a services agreement with Barretto Pacific Corporation pursuant to which Barretto will provide beginning May 1, 2007, investor relations services. Callisto will pay Barretto a fee of $120,000 over a seven month period and 80,000 shares of restricted common stock. During the three months ended June 30, 2007 Callisto paid $20,000 of this fee and issued the 80,000 shares of common stock. The fair value of the common shares issued to Barretto was $55,200, of which $36,800 was accounted for as stock-based compensation expense during the three months ended June 30, 2007.

On June 8, 2007 Callisto filed a complaint against Donald Picker, its former Executive Vice President, Research & Development in the Supreme Court of the State of New York alleging that (i) Dr. Picker breached his written employment agreement with Callisto by accepting employment with Tapestry Pharmaceuticals, Inc. a manner not in accordance with his agreement, (ii) Dr. Picker acted fraudulently by failing to reveal to Callisto that he was negotiating employment with Tapestry while purportedly representing Callisto in negotiations with Tapestry pursuant to a confidential disclosure agreement between Tapestry and Callisto and (iii) Dr. Picker misappropriated confidential files and materials from Callisto's offices. Callisto is seeking $80 million in damages from Dr. Picker.

On June 18, 2007, Callisto received notice from the staff of the American Stock Exchange (“AMEX”) indicating that it is not in compliance with certain continued listing standards, specifically, Section 1003(a) (ii) of the Company Guide with shareholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three of its four most recent fiscal years.

On July 18, 2007 Callisto submitted a plan, advising AMEX of the actions it has taken, or will take, that would bring it into compliance with Section 1003(a)(ii) of the Company Guide by April 3, 2008. If AMEX accepts the Company’s plan, it may be able to continue its listing during the plan period of up to 18 months, during which time the Company will be subject to periodic review to determine if it is making progress consistent with the plan. If it is not in compliance with the continued listing standards at the end of the plan period, or it does not make progress consistent with the plan during the plan period, AMEX staff may initiate delisting proceedings. While the plan is under review by AMEX, Callisto expects that its common stock will continue to trade without interruption on AMEX.

7.                 Subsequent events:

On August 2, 2007, Callisto closed a private placement of 1,124,550 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and 22,491,000 warrants (the “Warrants”) to certain investors (the “Investors”) for aggregate gross proceeds of approximately $11.2 million pursuant to a Securities Purchase Agreement dated as of August 2, 2007 (the “SPA”). The Warrants are immediately exercisable at $0.70 per share and are exercisable at any time within three years from the date of issuance. Other than pursuant to certain issuances, for the twelve month period beginning on the effective date of the Registration Statement registering the resale of the shares of Common Stock underlying the Warrants by the Holder, if the Company at any time while the Warrants are outstanding, shall sell or grant any option to acquire shares of Common Stock, at an effective price lower than the then exercise price then, the exercise price shall be reduced to such lower price.

Subsequent to closing, $8,480,000 of the net proceeds were placed into escrow at the request of RAB Special Situations (Master) Fund Limited and Absolute Octane Master Fund Limited (collectively, the “Lead Investors”), each of which invested $5,000,000 in the private placement. Pursuant to a Put Option Agreement, the Lead Investors shall have the right until October 30, 2007 to require redemption by the Company of all of the Series B Convertible Preferred Stock and 85% of the Warrants purchased by them only upon the occurrence of any of the following events:

(i)            The Company shall have not received the approval of its common stockholders of the issuance of shares of Common Stock issuable upon the conversion of the Series B Convertible Preferred

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Stock or the exercise of the Warrants (the “Underlying Shares”) by 5:00 pm New York time on September 30, 2007; or

(ii)        The American Stock Exchange shall not have approved the Listing of Additional Securities application filed by the Company relating to the Underlying Shares by 5:00 pm New York time on September 30, 2007 (for a reason other than the Lead Investors failing to timely provide American Stock Exchange with information reasonably requested by Amex Listing Qualification as part of their review of the application); or

(iii)    The American Stock Exchange or the Company delists the Common Stock on or before 5:00 pm New York time on September 30, 2007. (See Note 6)

The net proceeds placed in escrow will be released to the Company on September 30, 2007 if the events (i), (ii) and (ii) above have not occurred. If the Put Option associated with the Series B Preferred Stock is exercised under the conditions discussed above we will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at our current cash expenditure levels.

In connection with this transaction the Company paid an aggregate $843,375 and issued warrants to purchase 2,473,900 shares of common stock at $0.50 per share and 2,473,900 shares of common stock at $0.70 per share to certain selling agents. The warrants will expire three years after issuance. If the Put Option associated with the Series B Preferred Stock is exercised under the conditions discussed above we will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates and to continue to fund operations at our current cash expenditure levels.

The Investors also are parties to a Registration Rights Agreement, dated as of August 2, 2007 pursuant to which the Company has agreed to file, within 45 days of closing, a registration statement covering the resale of the shares of common stock underlying the Series B Preferred Stock and Warrants issued to the Investors. Failure to file a registration statement and maintain its effectiveness as agreed will result in the Company being required to pay liquidated damages equal to 1% per month of the aggregate purchase price paid by the Investors, not to exceed an aggregate of 18%.

The Company is evaluating the accounting treatment of this transaction under relevant GAAP including but not limited to:

1.)           EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, Company Stock” to determine whether the warrants should be treated as “permanent equity” or a liability.

2.)           FSP No. 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP 00-19-2”) to determine if and how contingent obligations under a registration payment arrangement should be separately recognized and measured.

3.)           EITF 00-27  “Application of Issue 98-5 to Certain Convertible Instruments”, to determine whether the preferred stock had an embedded beneficial conversion feature.

4.)           Statements of Financial Accounting Standards No.150: Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, to determine the balance sheet classification the Preferred stock given mandatory redemption option.

The 579,125 shares of Series A Preferred Stock outstanding as of June&nbs