As filed with the Securities and
Exchange Commission on January 12, 2009
Registration
333-155322
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CELLEGY PHARMACEUTICALS,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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8731
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82-0429727
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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128 Grandview Rd.
Boyertown, PA
19512
(215) 529-6084
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Richard
C.Williams
Interim Chief Executive
Officer
Cellegy Pharmaceuticals,
Inc.
128 Grandview
Road
Boyertown, PA
19512
(215) 529-6084
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies to:
C. Kevin Kelso, Esq.
Weintraub Genshlea Chediak
400 Capitol Mall, Eleventh Floor
Sacramento, California 95814
(916) 558-6000
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Richard C. Williams
Interim Chief Executive Officer
Cellegy Pharmaceuticals, Inc.
P.O. Box 695
Boyertown, PA 19512
(215) 529-6084
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Dennis J. Carlo, Ph.D.
President and Chief Executive Officer
Adamis Pharmaceuticals Corporation
2658 Del Mar Heights Road, #555
Del Mar, CA 92014
(858) 401-3984
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Approximate date of commencement
of proposed sale to the public:
As soon
as practicable after this Registration Statement becomes effective.
If the
securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box.
o
If this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
CALCULATION OF REGISTRATION
FEE
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Title of each class of
securities to be registered
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Amount to be
registered(1)
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Proposed maximum
offering price per share
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Proposed maximum
aggregate offering price(2)
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Amount of
registration fee(2)
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Common
Stock, $0.0001 par value per share
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50,000,000
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N/A
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$
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1,668
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$
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1.00(3)
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(1)
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Relates
to common stock, $0.0001 par value per share, of Cellegy
Pharmaceuticals, Inc., or Cellegy, issuable to holders of common
stock, $0.0001 par value per share, of Adamis
Pharmaceuticals Corporation, or Adamis, in the proposed merger of
Cellegy Holdings, Inc., a wholly-owned subsidiary of Cellegy, with
and into Adamis. The amount of Cellegy common stock to be registered is
based on the estimated maximum number of shares of Cellegy common stock
that may be issued pursuant to the merger, assuming an exchange ratio of
one share of Cellegy common stock for each outstanding share of Adamis
common stock, after giving effect to the reverse stock split described in
the next sentence. Cellegy anticipates that before the completion of the
distribution of the securities covered by this registration statement, all
outstanding shares of Cellegy common stock will be combined by a reverse
stock split into a lesser number of shares of Cellegy common stock. The
number of shares covered by this registration statement reflects
post-reverse stock split shares. The actual number of shares issued
pursuant to the merger transaction may be less than the number of shares
being registered.
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(2)
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Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(f)(2) of the Securities Act of 1933, as amended;
as Adamis has an accumulated capital deficit, based upon one-third of the
aggregate par value, which is $0.001 per share, of up to 50,000,000 shares
of Adamis stock that may be cancelled in the merger computed as of June
30, 2008, the latest practicable date before the date of initial filing of
this registration statement. Adamis is a private company and no trading
market exists for its securities.
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(3)
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Previously
Paid.
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The registrant hereby amends this
Registration Statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED
JANUARY 12, 2009
The information in this prospectus is
not complete and may be changed. Cellegy may not issue the securities being
offered by use of this prospectus until the registration statement filed with
the Securities and Exchange Commission, of which this prospectus is a part, is
effective. This prospectus is not an offer to sell these securities, nor is it
soliciting offers to buy these securities, in any jurisdiction where the offer
or sale is not permitted.
To the
stockholders of Cellegy Pharmaceuticals, Inc. and Adamis Pharmaceuticals
Corporation:
The
boards of directors of Cellegy Pharmaceuticals, Inc., referred to herein as
Cellegy, and Adamis Pharmaceuticals Corporation, referred to herein as Adamis,
have each unanimously approved the merger agreement between Cellegy, Adamis and
Cellegy Holdings, Inc., referred to herein as Cellegy Holdings, a direct
wholly-owned subsidiary of Cellegy, pursuant to which Cellegy Holdings will
merge with and into Adamis and Adamis will survive the merger as a wholly-owned
subsidiary of Cellegy.
If the
merger is consummated, each Adamis stockholder will receive, in exchange for
each share of Adamis common stock held or deemed to be held by such stockholder
immediately before the closing of the merger, one (post-reverse split) share of
Cellegy common stock, giving effect to the reverse stock split of Cellegy common
stock described in the next sentence (excluding in all cases Adamis dissenting
shares). Before the closing of the merger, there would be reverse split of the
outstanding Cellegy common stock, so that Cellegy stockholders would,
immediately after the closing of the merger, have a total number of shares equal
to the sum of (i) 3,000,000, plus (ii) the amount of Cellegy’s net working
capital as of the last day of the month immediately preceding the month in which
the closing of the merger occurs divided by 0.50.
The
merger agreement further provides that each outstanding stock option, warrant,
convertible security and other right to purchase or acquire the capital stock of
Adamis will be assumed by Cellegy and will become an option, warrant,
convertible security or other right to purchase or acquire shares of common
stock of Cellegy, with the number of shares and exercise prices proportionately
adjusted based on the exchange ratio in the merger.
Cellegy’s
common stock is quoted on the Over-The-Counter Bulletin Board, maintained by the
National Association of Securities Dealers. On
[ ],
2009, the last trading day before the date of this joint proxy
statement/prospectus, the closing price of the Cellegy common stock was
$[ ] per share. Adamis is a
privately-held company, and there is currently no public market for its
securities.
This
joint proxy statement/prospectus provides you with detailed information
concerning Cellegy, Adamis and the merger transaction. Please give all the
information contained in this joint proxy statement/prospectus your careful
attention.
In particular, you should carefully
consider the discussion in the section entitled “Risk Factors” beginning on
page 21 of this joint proxy statement/prospectus.
Richard C.
Williams
Interim Chief Executive Officer
Cellegy
Pharmaceuticals, Inc.
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Dennis J. Carlo,
Ph.D.
President and Chief Executive
Officer
Adamis Pharmacuticals
Corporation
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Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
the shares to be issued under this proxy statement/prospectus or passed upon the
adequacy or accuracy of this proxy statement/prospectus. Any representation to
the contrary is a criminal offense.
This
joint proxy statement/prospectus is dated
[ ],
2009 and was first mailed to stockholders of Cellegy and Adamis on or about
[ ],
2009.
REFERENCES TO ADDITIONAL
INFORMATION
This
joint proxy statement/prospectus incorporates important business and financial
information about Cellegy and Adamis that is not included in or delivered with
this joint proxy statement/prospectus. This information is available to you
without charge upon your written or oral request. You may obtain documents
related to Cellegy and Adamis, without charge, by requesting them in writing or
by telephone from the appropriate company.
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Requests for documents relating to Cellegy
should be directed to:
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Requests for documents relating to Adamis
should be
directed to:
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Robert
J. Caso
Chief
Financial Officer
Cellegy
Pharmaceuticals, Inc.
P.O.
Box 695
Boyertown,
PA 19512
(215)
529-6084
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Dennis
J. Carlo
Chief
Executive Officer
Adamis
Pharmaceuticals Corporation
2658
Del Mar Heights Road, #555
Del
Mar, CA 92014
Phone:
(858) 401-3984
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In order to receive timely
delivery of requested documents in advance of the stockholder meetings, Adamis
stockholders should make their requests no later than ______, 2009 and Cellegy
stockholders should make their requests no later than _______,
2009.
Cellegy
Pharmaceuticals, Inc.
128 Grandview
Road
Boyertown, PA
19512
(215) 529-6084
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
TO BE HELD ON ______,
2009
TO THE CELLEGY
STOCKHOLDERS:
NOTICE
IS HEREBY GIVEN that Cellegy Pharmaceuticals, Inc. will hold an annual meeting
of its stockholders on _____, 2009 at ____ a.m., Eastern Standard Time, at
the offices of ____________, for the following purposes:
1.
To
consider and vote upon a proposal to approve the issuance of Cellegy common
stock to the stockholders of Adamis Pharmaceuticals Corporation pursuant to the
Agreement and Plan of Reorganization dated as of February 12, 2008, by and among
Cellegy, Cellegy Holdings, Inc. and Adamis Pharmaceuticals Corporation, a copy
of which is attached as
Annex A
to the
accompanying joint proxy statement/prospectus, pursuant to which Cellegy
Holdings will merge with and into Adamis, with Adamis surviving the merger as a
wholly-owned subsidiary of Cellegy, and pursuant to which Cellegy would issue
shares of common stock to the stockholders of Adamis, resulting in a change of
control of Cellegy.
2.
To consider and act upon a proposal to approve an amendment to our
restated certificate of incorporation to effect a reverse split of the issued
and outstanding shares of Cellegy common stock, to occur immediately before the
closing of the proposed merger transaction with Adamis, at a ratio based on the
formula described in the merger agreement and currently anticipated to be
approximately 1:9.9, with the final ratio to be determined before the merger as
provided in the merger agreement, as described in the accompanying joint proxy
statement/prospectus.
3. To
consider and act upon a proposal to approve an amendment, which would become
effective in connection with or immediately following the closing of the
proposed merger transaction with Adamis, to our restated certificate of
incorporation to change our name from “Cellegy Pharmaceuticals, Inc.” to “Adamis
Pharmaceuticals Corporation,” as well as to approve our amended and restated
certificate of incorporation to become effective following the closing of the
proposed merger transaction with Adamis, as described in the accompanying joint
proxy statement/prospectus.
4. To
consider and act upon a proposal to approve an amendment, which would become
effective in connection with or immediately following the closing of the
proposed merger transaction with Adamis, to our restated certificate of
incorporation to increase the authorized number of shares of our common stock
from 50,000,000 to 175,000,000 and our preferred stock from 5,000,000 to
10,000,000, as described in the accompanying joint proxy
statement/prospectus.
5. To
consider and act upon a proposal to approve a new 2009 Equity Incentive Plan, to
become effective upon the closing of the proposed merger transaction with
Adamis.
6.
To consider and act upon a proposal to elect five nominees, all of
whom are currently directors of Cellegy, to the Cellegy board of directors;
provided, however, that if the proposed merger transaction with Adamis is
consummated, two Cellegy directors will resign and three additional persons,
each of whom is currently a director of Adamis, will be appointed as directors
of Cellegy, 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.
7.
To consider and act upon a proposal to approve, if necessary, an
adjournment of the Cellegy annual meeting to solicit additional proxies in favor
of the proposals outlined above.
8.
To consider and act upon such other business and matters or
proposals as may properly come before the annual meeting or any adjournments or
postponements thereof.
The
board of directors of Cellegy has fixed ______, 2009 as the record date for
determining which stockholders have the right to receive notice of and to vote
at the Cellegy annual meeting or any adjournments or postponements thereof. Only
holders of record of shares of Cellegy common stock at the close of business on
the record date have the right to receive notice of and to vote at the Cellegy
annual meeting. At the close of business on the record date, Cellegy had
29,834,796 shares of common stock outstanding and entitled to
vote.
Your
vote is important. The affirmative vote of the holders of a majority of the
outstanding shares of Cellegy common stock having voting power on the record
date for the Cellegy annual meeting is required for approval of Cellegy Proposal
Nos. 2, 3 and 4. The affirmative vote of the holders of a majority of the
shares of Cellegy common stock having voting power present in person or
represented by proxy at the Cellegy annual meeting is required for approval of
Cellegy Proposal Nos. 1, 5, 7, and 8. For Cellegy Proposal No. 6, the election
of directors, the six named nominees receiving the most “FOR” votes from the
shares having voting power present in person or represented by proxy at the
Cellegy annual meeting will be elected.
Whether
or not you plan to attend the Cellegy annual meeting, please complete, sign and
date the enclosed proxy and return it promptly in the enclosed postage-paid
return envelope. You may revoke the proxy at any time before its exercise in the
manner described in the accompanying joint proxy statement/prospectus. Any
stockholder present at the Cellegy annual meeting, including any adjournment or
postponement of the meeting, may revoke such stockholder’s proxy and vote
personally on the matters to be considered at the Cellegy annual meeting.
Executed proxies with no instructions indicated thereon will be voted “FOR” each
of the proposals outlined above.
THE CELLEGY BOARD OF DIRECTORS HAS
DETERMINED THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO AND IN THE
BEST INTERESTS OF CELLEGY AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH
PROPOSAL. THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY
STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL AND “FOR” THE NAMED NOMINEES TO THE
CELLEGY BOARD OF DIRECTORS.
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BY ORDER OF THE BOARD OF
DIRECTORS
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Robert J.
Caso,
Corporate
Secretary
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Boyertown,
Pennsylvania
[ ],
2009
Adamis Pharmaceuticals
Corporation
2658 Del Mar Heights Rd.,
#555
Del Mar, California
92014
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD ON ______,
200
9
TO THE ADAMIS
STOCKHOLDERS:
NOTICE
IS HEREBY GIVEN that Adamis Pharmaceuticals Corporation will hold a special
meeting of its stockholders on _____, 2009 at 10:00 a.m., Pacific Time, at the
offices of __________________________, for the following
purposes:
1.
To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization, dated February 12, 2008, by and among
Cellegy Pharmaceuticals, Inc., Cellegy Holdings, Inc. and Adamis, a copy of
which is attached as
Annex A
to the
accompanying joint proxy statement/prospectus, pursuant to which Cellegy
Holdings will merge with and into Adamis, with Adamis surviving the merger as a
wholly-owned subsidiary of Cellegy.
2.
To consider and act upon a proposal to approve, if necessary, an
adjournment of the Adamis special meeting to solicit additional proxies in favor
of the proposals outlined above.
3.
To consider and act upon such other business and matters or
proposals as may properly come before the special meeting or any adjournments or
postponements thereof.
The
board of directors of Adamis has fixed the close of business on _____, 2009 as
the record date for determining which stockholders have the right to receive
notice of and to vote at the Adamis special meeting or any adjournments or
postponements thereof. Only holders of record of shares of Adamis capital stock
at the close of business on the record date have the right to receive notice of
and to vote at the Adamis special meeting. At the close of business on the
record date, Adamis had ________ shares of common stock outstanding and entitled
to vote.
Your vote
is important. The affirmative vote of the holders of a majority of the
outstanding shares of Adamis common stock on the record date for the Adamis
special meeting is required for approval of Adamis Proposal No. 1. The
affirmative vote of the holders of a majority of the outstanding shares of
Adamis common stock having voting power present in person or represented by
proxy at the Adamis special meeting is required for approval of Adamis Proposal
Nos. 2 and 3.
Under the
Delaware General Corporation Law, which is referred to in the accompanying joint
proxy statement/prospectus as the DGCL, holders of Adamis common stock who do
not vote in favor of the adoption of the merger agreement will have the right to
seek appraisal of the fair value of their shares as determined by the Delaware
Court of Chancery if the merger is completed, but only if they submit a written
demand for an appraisal before the vote on the adoption of the merger agreement
and they comply with the other procedures under the DGCL explained in the
accompanying joint proxy statement/prospectus. Please see the section entitled
“The Merger—Appraisal Rights” in the accompanying joint proxy
statement/prospectus.
Whether
or not you plan to attend the Adamis special meeting, please complete, sign and
date the enclosed proxy and return it promptly in the enclosed postage-paid
return envelope. You may revoke the proxy at any time before its exercise in the
manner described in the accompanying joint proxy statement/prospectus. Any
stockholder present at the Adamis special meeting, including any adjournment or
postponement of the meeting, may revoke such stockholder’s proxy and vote
personally on the matters to be considered at the Adamis special meeting.
Executed proxies with no instructions indicated thereon will be voted “FOR” the
proposals outlined above.
THE ADAMIS BOARD OF DIRECTORS HAS
DETERMINED THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO AND IN THE
BEST INTERESTS OF ADAMIS AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH
PROPOSAL. THE ADAMIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ADAMIS
STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.
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BY ORDER OF THE BOARD OF
DIRECTORS
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/s/ Dennis J. Carlo
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Dennis J.
Carlo,
President and Chief
Executive Officer
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Del Mar,
California
[ ],
2009
TABLE OF CONTENTS
QUESTIONS
AND ANSWERS ABOUT THE MERGER
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13
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SUMMARY
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15
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The
Companies
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15
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The
Merger
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16
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Consideration
to be Received in the Merger by Adamis Stockholders
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16
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Treatment
of Adamis Options, Warrants and Convertible Securities
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16
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Reasons
for the Merger
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17
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Overview
of the Merger Agreement
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17
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Voting
Agreements
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18
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Management
of the Combined Company Following the Merger
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18
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Interests
of Certain Persons in the Merger
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18
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Regulatory
Approvals
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19
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Accounting
Treatment
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19
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Material
U.S. Federal Income Tax Consequences
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19
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Comparison
of Stockholder Rights
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19
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Appraisal
Rights in Connection with the Merger
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19
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Risks
Associated with the Merger
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20
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MARKET
PRICE DATA AND DIVIDEND INFORMATION
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20
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RISK
FACTORS
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21
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Risks
Related to the Merger
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21
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Risks
Related to Cellegy
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24
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Risks
Related to The Business and Operations of Adamis, as the
Combined
Company, After the Merger
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26
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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38
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THE
ANNUAL MEETING OF CELLEGY STOCKHOLDERS
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40
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Date,
Time and Place
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40
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Purposes
of the Cellegy Annual Meeting
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40
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Recommendation
of Cellegy’s Board of Directors
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40
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Record
Date and Voting Power
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41
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Voting
and Revocation of Proxies
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41
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Required
Vote
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42
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Solicitation
of Proxies
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43
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Other
Matters
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43
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THE
SPECIAL MEETING OF ADAMIS STOCKHOLDERS
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43
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Date,
Time and Place
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43
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Purposes
of the Adamis Special Meeting
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43
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Recommendation
of Adamis’ Board of Directors
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43
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Record
Date and Voting Power
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44
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Voting
and Revocation of Proxies
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44
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Required
Vote
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44
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Solicitation
of Proxies
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45
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Other
Matters
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45
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THE
MERGER
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45
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Background
of the Merger
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45
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Reasons
for the Merger
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52
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Adamis’
Reasons for the Merger
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55
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Interests
of Cellegy’s Directors and Executive Officers in the
Merger
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58
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Ownership
Interests
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58
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Interests
of Adamis’ Directors and Executive Officers in the Merger
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58
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Effective
Time of the Merger
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58
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Regulatory
Approvals
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58
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Tax
Treatment of the Merger
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59
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Material
United States Federal Income Tax Consequences of the
Merger
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59
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Anticipated
Accounting Treatment
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61
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Appraisal
Rights
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61
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THE
MERGER AGREEMENT
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63
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The
Merger and Effective Time of the Merger
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64
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Merger
Consideration
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64
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Board
of Directors and Officers of the Combined Company
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65
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Representations
and Warranties
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65
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Covenants;
Conduct of Business Pending the Merger
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67
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Additional
Agreements
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68
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No
Solicitation
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68
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Meetings
of Stockholders and Proxy Statement
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70
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Indemnification
and Insurance of Directors and Officers
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70
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Conditions
to Completion of the Merger
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71
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Termination
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73
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Fees
and Expenses
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73
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Agreements
Related to the Merger Agreement
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77
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MATTERS
TO BE PRESENTED TO THE ADAMIS STOCKHOLDERS
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74
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ADAMIS
PROPOSAL NO. 1
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74
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Vote
Required; Recommendation of Board of Directors
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74
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ADAMIS
PROPOSAL NO. 2
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74
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Vote
Required; Recommendation of Board of Directors
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75
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ADAMIS’
BUSINESS
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75
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Company
Overview
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75
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Sources
and Availability of Raw Materials
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90
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Sales
and Marketing
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90
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Governmental
Regulation
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90
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Competition
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99
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Product
Liability Insurance
|
99
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Patents
and Proprietary Technologies
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99
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Employees
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100
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Properties
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100
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Legal
Proceedings
|
100
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Management
and Board of Directors
|
101
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ADAMIS’
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
101
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Recent
Events
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101
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General
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101
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Critical
Accounting Policies and Estimates
|
102
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Results
of Operations
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105
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Liquidity
and Capital Resources
|
107
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Off
Balance Sheet Arrangements
|
110
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Recent
Accounting Pronouncements
|
110
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MANAGEMENT
OF THE COMBINED COMPANY
|
111
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Executive
Officers and Directors of the Combined Company Following the
Merger
|
111
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Directors
|
111
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Executive
Officers
|
112
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UNAUDITED
PRO FORMA COMBINED CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
|
113
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Introduction
|
113
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Notes
to the Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements
|
117
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Basis
of Presentation
|
117
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Pro
forma adjustments
|
118
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PRINCIPAL
STOCKHOLDERS OF ADAMIS
|
119
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Stock
Repurchase Agreements
|
120
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PRINCIPAL
STOCKHOLDERS OF CELLEGY
|
120
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PRINCIPAL
STOCKHOLDERS OF THE COMBINED COMPANY
|
122
|
DESCRIPTION
OF CELLEGY SECURITIES
|
123
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Common
Stock
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123
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Preferred
Stock
|
123
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Anti-Takeover
Provisions
|
124
|
Applicability
of Provisions of California Corporate Law
|
125
|
COMPARISON
OF RIGHTS OF HOLDERS OF CELLEGY STOCK AND ADAMIS
STOCK
|
126
|
MATTERS
TO BE PRESENTED TO THE CELLEGY STOCKHOLDERS
|
133
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CELLEGY
PROPOSAL NO. 1
|
133
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APPROVAL
OF THE ISSUANCE OF COMMON STOCK TO ADAMIS STOCKHOLDERS IN THE
MERGER
|
133
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Vote
Required; Recommendation of Board of Directors
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133
|
CELLEGY
PROPOSAL NO. 2
|
134
|
APPROVAL
OF PROPOSAL TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
|
134
|
Reasons
for the Reverse Stock Split
|
136
|
Principal
Effects of the Reverse Stock Split
|
136
|
Procedure
for Effecting Reverse Stock Split and Exchange of Stock
Certificates
|
136
|
Fractional
Shares
|
137
|
Accounting
Matters
|
137
|
Potential
Anti-Takeover Effect
|
137
|
No
Dissenters’ Rights
|
137
|
Certain
Federal Income Tax Considerations
|
137
|
Vote
Required; Recommendation of Board of Directors
|
138
|
CELLEGY
PROPOSAL NO. 3
|
138
|
APPROVAL
OF PROPOSAL TO AMEND CELLEGY’S AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION TO EFFECT A NAME CHANGE
|
138
|
Name
Change
|
138
|
Reasons
for the Amendment
|
139
|
Effect
of the Amendment
|
|
Amended
and Restated Certificate of Incorporation
|
139
|
Vote
Required; Recommendation of Board of Directors
|
139
|
CELLEGY
PROPOSAL NO. 4
|
139
|
APPROVAL
OF PROPOSAL TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED CAPITAL STOCK
|
139
|
Increase
in Authorized Capital Stock
|
139
|
Reasons
for the Amendment
|
139
|
Effect
of the Amendment
|
140
|
Amended
and Restated Certificate of Incorporation
|
140
|
Vote
Required; Recommendation of Board of Directors
|
141
|
CELLEGY
PROPOSAL NO. 5
|
141
|
2009 Equity
Incentive Plan
|
141
|
APPROVAL
OF
2009
EQUITY INCENTIVE PLAN
|
141
|
U.S.
Federal Income Tax Consequences
|
145
|
New
Plan Benefits
|
147
|
Vote
Required; Recommendation of Board of Directors
|
148
|
CELLEGY
PROPOSAL NO. 6
|
148
|
ELECTION
OF DIRECTORS
|
148
|
Directors
and Nominees
|
148
|
Nominees
for Election of Directors
|
148
|
Executive
Officers
|
150
|
Board
of Directors Meeting Attendance and Committees
|
150
|
Audit
Committee
|
150
|
Compensation
Committee
|
150
|
Nominating
and Governance Committee
|
151
|
Director
Nomination Process
|
151
|
Stockholder
Communication Policy
|
152
|
Director
Compensation
|
152
|
Section
16(a) Beneficial Ownership Reporting Compliance
|
154
|
Code
of Business Conduct and Ethics
|
154
|
Report
of the Audit Committee of Cellegy’s Board of Directors
|
154
|
Audit
Fees and Services
|
155
|
Executive
Compensation
|
156
|
CELLEGY
PROPOSAL NO. 7
|
160
|
APPROVAL
OF POSSIBLE ADJOURNMENT OF THE CELLEGY ANNUAL MEETING
|
160
|
Vote
Required; Recommendation of Board of Directors
|
160
|
CELLEGY’S
BUSINESS
|
160
|
Summary
of Certain Other Developments
|
161
|
Products
|
162
|
Patents
and Trade Secrets
|
163
|
License
Agreements and Other Obligations
|
163
|
Government
Regulation
|
164
|
Competition
|
166
|
Employees
|
166
|
Available
Information
|
167
|
CELLEGY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
167
|
General
|
167
|
Summary
of Certain Developments During 2006 and 2007
|
167
|
Critical
Accounting Policies and Estimates
|
169
|
Results
of Operations
|
170
|
Liquidity
and Capital Resources
|
172
|
Recent
Accounting Pronouncements
|
174
|
LEGAL
MATTERS
|
175
|
EXPERTS
|
175
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
175
|
OTHER
MATTERS
|
176
|
Stockholder
Proposals
|
176
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
|
Agreement
and Plan of Reorganization dated February 12, 2008
|
Annex
B
|
Section
262 of Delaware General Corporation Law
|
Annex
C
|
Proposed
Certificate of Amendment of Cellegy's Restated Certificate of
Incorporation Regarding Reverse Stock Split
|
Annex
D
|
Proposed
Certificate of Amendment of Cellegy's Restated Certificate of
Incorporation Regarding Change of Corporate Name
|
Annex
E
|
Proposed
Certificate of Amendment of Cellegy's Restated Certificate of
Incorporation Regarding Increase in Authorized Shares
|
Annex
F
|
Proposed
Amended and Restated Certificate of Incorporation of
Cellegy
|
Annex
G
|
Cellegy
Audit Committee Charter
|
|
Cellegy
Compensation Committee Charter
|
Annex
I
|
Cellegy
Nominating and Governance Committee
Charter
|
QUESTIONS AND ANSWERS ABOUT THE
MERGER
Q:
|
What is the
transaction?
|
A:
|
The
transaction is the merger of Cellegy Holdings with and into Adamis, with
Adamis surviving the merger as a wholly-owned subsidiary of Cellegy. As a
result, Adamis stockholders will have their shares of Adamis capital stock
converted into shares of Cellegy common
stock.
|
Q:
|
What do I need to do
now?
|
A:
|
After
you have carefully read and considered this joint proxy
statement/prospectus, please indicate on your proxy card how you want your
shares to be voted, then sign, date and mail the proxy card in the
enclosed prepaid return envelope as soon as possible so that your shares
may be represented and voted at the Cellegy annual meeting or the Adamis
special meeting. Cellegy stockholders may also attend the Cellegy annual
meeting and Adamis stockholders may also attend the Adamis special meeting
and, in either case, vote in
person.
|
Q:
|
Why is my vote
important?
|
A:
|
If
you do not return your proxy card at or before the appropriate stockholder
meeting, it will be more difficult for Cellegy and Adamis to obtain the
necessary quorum to hold their stockholder meetings. In addition, if you
fail to vote, by proxy or in person, it will have the same effect as a
vote against certain of the proposals that are required to implement the
merger.
|
Q:
|
If my shares are held in
“street name” by my broker, will my broker vote my shares for
me?
|
A:
|
No.
Your broker cannot vote your shares without instructions from you. If your
shares are held in street name, you should instruct your broker as to how
to vote your shares, following the instructions contained in the voting
instructions card that your broker provides to you. Without instructions,
your shares will not be voted, which will have the same effect as if you
voted against approval of the merger and any related
proposals.
|
Q:
|
What happens if I do not return
a proxy card or otherwise provide proxy
instructions?
|
A:
|
If
you are a Cellegy stockholder, the failure to return your proxy card will
have the same effect as voting against the proposals outlined in your
annual meeting notice and your shares will not be counted for purposes of
determining whether a quorum is present at the Cellegy annual meeting.
Executed proxies without instructions will be voted for the proposals
outlined in your annual meeting notice. If you are an Adamis stockholder,
the failure to return your proxy card will have the same effect as voting
against the proposals outlined in your special meeting notice and your
shares will not be counted for purposes of determining whether a quorum is
present at the Adamis special meeting. Executed proxies without
instructions will be voted for the proposals outlined in your meeting
notice.
|
Q:
|
Can I change my vote after I
have mailed my signed proxy
card?
|
A:
|
Yes.
If you have not voted through your broker, there are three ways for you to
revoke your proxy and change your vote. First, you may send a written
notice to the corporate secretary of your company stating that you would
like to revoke your proxy. Second, you may complete and submit a new proxy
card, but it must bear a later date than the original proxy. Third, you
may vote in person at your company’s stockholder meeting. If you have
instructed a broker to vote your shares, you must follow the directions
you receive from your broker to change your vote. Your last vote will be
the vote that is counted.
|
Q:
|
Should I send in my stock
certificates now?
|
A:
|
No.
If you are an Adamis stockholder, after the merger is consummated, you
will receive written instructions from the exchange agent for exchanging
your certificates representing shares of Adamis capital stock for
certificates representing shares of Cellegy common stock. If Cellegy
Proposal No. 2 is approved and the reverse stock split of Cellegy common
stock is effected, record owners of Cellegy common stock will receive
written instructions from Cellegy’s transfer agent for exchanging their
certificates representing pre-reverse stock split shares of Cellegy common
stock.
|
Q:
|
Who is paying for this proxy
solicitation?
|
A:
|
Cellegy
is conducting this proxy solicitation and will bear the cost of printing
and filing of this joint proxy statement/prospectus and the proxy card.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who are record holders of Cellegy common stock
for the forwarding of solicitation materials to the beneficial owners of
Cellegy common stock. Cellegy may also reimburse these brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses they incur in connection with the forwarding of solicitation
materials.
|
Q:
|
What stockholder approvals are
needed for the merger?
|
A:
|
The
issuance of Cellegy common stock to Adamis stockholders in connection with
the merger must be approved by an affirmative vote of the holders of a
majority of the shares of Cellegy common stock having voting power present
in person or represented by proxy at the Cellegy annual
meeting.
|
Q:
|
What happens to Cellegy if the
merger is not ultimately
completed?
|
A:
|
Cellegy
will have very limited cash resources, and if no such alternate
transaction can be negotiated and completed within a short period of time
it will likely be forced to file for federal bankruptcy protection. In
that event, the creditors of Cellegy would have first claim on the value
of the assets of Cellegy which, other than remaining cash, would most
likely be liquidated in a Chapter 11 bankruptcy sale. Cellegy can give no
assurance as to the magnitude of the net proceeds of such a sale and
whether such proceeds would be sufficient to satisfy Cellegy’s obligations
to its creditors, let alone to permit any distribution to its equity
holders.
|
Q:
|
When do Cellegy and Adamis
expect to complete the
merger?
|
A:
|
Cellegy
and Adamis are working to complete the merger during the fourth quarter of
2008 or the first quarter of 2009, or as soon thereafter as reasonably
possible. We must first obtain the necessary approvals, including, but not
limited to, the approval of each company’s stockholders, and satisfy the
closing conditions described in the merger agreement. We cannot assure you
as to if or whether all the conditions to the merger will be met nor can
we predict the exact timing of the closing of the merger. It is possible
we will not complete the merger.
|
Q:
|
Where
can I find more
information?
|
A:
|
You
may obtain more information from various sources, as set forth under the
section entitled “Where You Can Find More Information” in this joint proxy
statement/prospectus. If you are a Cellegy stockholder and have any
questions about the merger, or would like copies of any of the documents
we refer to in this information statement/prospectus, please call Cellegy
at (215) 529-6084. If you are an Adamis stockholder and have any questions
about the merger, or would like copies of any of the documents we refer to
in this information statement/prospectus, please call Adamis at (858)
401-3984.
|
The following summary highlights
selected information from this joint proxy statement/prospectus and may not
contain all of the information that is important to you. To better understand
the merger and the other proposals being considered at the Cellegy annual
meeting and the Adamis special meeting, you should carefully read this entire
joint proxy statement/prospectus, including the merger agreement attached as
Annex A to this joint proxy statement/prospectus, and the other documents to
which you are referred in this joint proxy statement/prospectus. For purposes of
this joint proxy statement/prospectus, the term “merger agreement” will refer to
the merger agreement, as the same may be amended.
Cellegy
Pharmaceuticals, Inc.
128 Grandview
Road
Boyertown, PA
19512
(215) 529-6084
Cellegy
Pharmaceuticals, Inc., including its subsidiary Biosyn, Inc., is a specialty
pharmaceuticals company. Cellegy has intellectual property relating to a
portfolio of proprietary product candidates known as microbicides. The product
candidates, which include both contraceptive and non-contraceptive microbicides,
are used intravaginally. Cellegy’s product candidates include Savvy®, which was
the subject of Phase 3 clinical trials in Ghana and Nigeria for reduction in the
transmission of Human Immunodeficiency Virus (HIV)/ Acquired Immunodeficiency
Disease (AIDS), both of which were suspended in 2005 and 2006 and terminated
before completion, and which is currently in a Phase 3 contraception trial in
the United States.
Cellegy
does not currently have any commercially available
products.
Cellegy’s
operations currently relate primarily to the
intellectual
property
rights relating to the Savvy product candidate. 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. Cellegy
monitors the progress of the Savvy Phase 3 contraception trial in the United
States
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 prepares and files any
adverse event reports, annual reports and any other required reports with the
FDA and other applicable regulatory agencies concerning
both the current
contraception trial and the suspended HIV trials.
Cellegy’s
common stock is quoted on the Over-The-Counter Bulletin Board, or the OTC
Bulletin Board, maintained by the National Association of Securities Dealers,
Inc., or the NASD, under the symbol “CLGY.OB.”
Adamis Pharmaceuticals
Corporation
2685 Del Mar Heights Road,
#555
Del Mar, California
92014
(858) 401-3984
Adamis
was founded in June 2006. Adamis is a privately held specialty pharmaceuticals
company that is engaged in the research, development and commercialization of
products for the prevention and treatment of viral infections. Adamis has two
wholly-owned subsidiaries: Adamis Viral Therapies, Inc. (biotechnology), or
Adamis Viral; and Adamis Laboratories, Inc. (specialty pharmaceuticals), or
Adamis Labs.
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. Adamis believes that avian flu is a
good initial clinical application because there is a large potential demand for
a vaccine or other therapeutic product.
Adamis
intends to initiate a clinical “proof of concept” trial, currently anticipated
to be outside of the United States, for an avian flu vaccine product candidate
in the first half of 2009. If the results of the initial trial are
successful, Adamis intends to file an Investigative New Drug application with
the U.S. Food and Drug Administration, or FDA, and begin clinical trials in the
United States in 2010, assuming adequate funding and no unexpected
delays.
Adamis
Labs is a specialty pharmaceutical company. Adamis Labs has a line of
prescription products in the allergy and respiratory field that are sold through
its own sales force.
These
products include Prelone®, indicated for various conditions including asthma;
AeroOtic™ ear drops, indicated for relief of symptoms related to otitis media
and to control itching and swimmer’s ear; and AeroHist™, AeroHist Plus™ and
AeroKid™, all of which are indicated for allergic disease symptoms and
cough/cold symptoms.
These products generated revenues of approximately
$622,000 for the fiscal year ended March 31, 2008. Adamis Labs has two new
product candidates currently in development. The first new product is a
pre-filled epinephrine syringe used in the emergency treatment of extreme acute
allergic reactions, or anaphylactic shock. Adamis’ goal is to commence
commercial sales of this product in the first quarter of calendar year 2009.
Product
development has been substantially completed and stability batches are being
produced in anticipation of product launch.
Adamis plans to develop a
second product candidate, an aerosolized inhaled nasal steroid for the treatment
of seasonal and perennial allergic rhinitis. Adamis has requested a pre-IND
meeting with the FDA to discuss the clinical trials that will be required in
order to submit an application for regulatory approval of the product once
developed. Adamis’ goal is to commence a commercial launch of this product
candidate by the fourth quarter of calendar year 2010.
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.
Adamis’
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.
Cellegy
Holdings, Inc.
128 Grandview Road
Boyertown, PA
19512
(215) 529-6084
Cellegy
Holdings is a Delaware corporation and a direct wholly-owned subsidiary of
Cellegy. Cellegy Holdings does not conduct any business. In the merger, Cellegy
Holdings will merge with and into Adamis, with Adamis surviving the merger as a
wholly-owned subsidiary of Cellegy.
A copy of the merger agreement is
attached as Annex A to this joint proxy statement/prospectus. Cellegy and Adamis
encourage you to read the entire merger agreement carefully because it is the
principal document governing the merger.
Consideration to be Received in
the Merger by Adamis Stockholders
(see page
65)
If the
merger is completed, Cellegy Holdings will merge with and into Adamis, and
Adamis will survive the merger as a wholly-owned subsidiary of Cellegy. Each
Adamis stockholder will receive, in exchange for each share of Adamis common
stock held by such stockholder immediately before the closing of the merger, a
number of shares of Cellegy common stock equal to one share of Cellegy common
stock (excluding in all cases Adamis dissenting shares), giving effect to the
reverse stock split of Cellegy common stock described in the next sentence.
Immediately before the effective time of the merger, Cellegy will effect a
reverse stock split of its outstanding shares of common stock in such a ratio so
that Cellegy stockholders would, immediately after the closing for the merger,
have a total number of shares equal to the sum of (i) 3,000,000, plus (ii) the
amount of Cellegy’s net working capital at the end of the month immediately
preceding the month in which the closing of the merger occurs divided by 0.50.
As a result, immediately after the merger Cellegy stockholders are expected to
own between approximately 6% and 7% of the outstanding shares immediately after
the merger, without taking into account any outstanding Cellegy or Adamis
options, warrants, convertible securities or other rights to acquire shares of
common stock, or any increase in the number of outstanding Adamis shares between
the date of this joint proxy statement/prospectus and the closing of the
merger.
For a
more complete description of the merger consideration to be issued by Cellegy,
please see the section entitled “The Merger Agreement” in this joint proxy
statement/prospectus.
Treatment of Adamis Options,
Warrants and Convertible Securities
(see page
65)
In
connection with the merger, each outstanding stock option, warrant, convertible
security and other right to purchase or acquire the capital stock of Adamis will
be assumed by Cellegy and will become an option, warrant, convertible security
or other right to purchase or acquire shares of common stock of Cellegy, 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 is
one-for-one, the exercise prices and numbers of shares covered by outstanding
Adamis options, warrants and convertible securities that Cellegy will assume in
the merger will remain the same after the merger. As of the date of this joint
proxy statement/prospectus, there were outstanding options, warrants,
convertible securities or other rights to purchase or acquire approximately
1,000,000 shares of Adamis common stock.
For a
more complete description of the treatment of Adamis options, warrants, purchase
rights, and convertible securities, please see the section entitled “The Merger
Agreement” in this joint proxy statement/prospectus.
Cellegy
and Adamis anticipate that the combined company resulting from the merger will
be a specialty pharmaceutical company with several existing products and product
candidates. Cellegy and Adamis believe that the combined company will have the
following potential advantages:
|
·
|
Existing Sales and Product
Line.
The
combined company will have an existing line of prescription products that
are promoted and sold to physicians who specialize in allergy, respiratory
disease and pediatric medicine.
|
|
·
|
Additional Product
Candidates
.
The combined company will have a number of additional product candidates
in the allergy and respiratory field, including the epinephrine syringe
product and the nasal steroid product.
|
|
·
|
Intellectual Property Rights
for Additional Product Candidates
.
The combined company will have a portfolio of intellectual property rights
that may lead to product candidates targeted at prevention and treatment
of certain viral diseases, which if successfully developed are expected to
address significant markets.
|
|
·
|
Management
Team
.
The combined company will be led by experienced senior management from
Adamis and a board of directors with representation from each of Cellegy
and Adamis.
|
For a
more complete description of the factors on which the Cellegy board of directors
based its decision to approve the issuance of Cellegy common stock to Adamis
stockholders in connection with the merger and the other Cellegy proposals
discussed in this joint proxy statement/prospectus, please see the section
entitled “The Merger—Cellegy’s Reasons for the Merger” in this joint proxy
statement/prospectus. For a more complete description of the factors on which
the Adamis board of directors based its decision to approve the merger and the
other Adamis proposals discussed in this joint proxy statement/prospectus,
please see the section entitled “The Merger—Adamis’ Reasons for the Merger” in
this joint proxy statement/prospectus.
Conditions to Completion of the
Merger
Cellegy
and Adamis are required to complete the merger only if certain customary
conditions are satisfied or waived, including:
|
·
|
approval
of Cellegy Proposal Nos 1, 2, 3, 4, 5 and 6 of the Cellegy
stockholders and Adamis Proposal No. 1 by the Adamis
stockholders;
|
|
·
|
the
filing and effectiveness of a registration statement under the Securities
Act of 1933, as amended, referred to as the Securities Act, in connection
with the issuance of Cellegy common stock in the
merger;
|
|
·
|
accuracy
of the respective representations and warranties of Cellegy and Adamis,
subject to exceptions that would not have a material adverse effect on the
business of Cellegy and Adamis, considered together;
|
|
·
|
all
of the directors and officers of Cellegy and Cellegy Holdings that Adamis
has requested to resign their positions shall have resigned their
positions with Cellegy or Cellegy Holdings on or before the closing date
of the merger; and
|
|
·
|
compliance
in all material respects by Cellegy and Adamis with their respective
covenants and obligations in the merger agreement, except where
noncompliance would not have a material adverse effect on the combined
company.
|
Other
than the conditions regarding effectiveness of the registration statement of
which this joint proxy statement/prospectus is part, the condition regarding
having obtained required stockholder approvals for the proposals described in
the joint proxy statement/prospectus, and the conditions regarding having
obtained any required governmental authorization and no restraining order or
injunction having been issued or government proceeding pending preventing or
seeking to prevent the consummation of the merger, satisfaction of each of the
conditions to the merger is permitted by law to be waived in the discretion of
the board of directors of Cellegy or Adamis, as applicable. Many of
the other closing conditions, such as the representations and warranties of the
parties in the merger agreement being true and correct as of the closing date
and the parties having performed all obligations under the merger agreement that
they are required to perform, are qualified by the requirement that the failure
of the condition must have a material adverse effect on the combined
company. The failure of certain other closing conditions to be true,
such as the requirement that Cellegy have taken required actions to cause the
board of directors and officers of the combined company to be as described in
the joint proxy statement/prospectus or the requirement that Cellegy have timely
filed with the SEC all reports or other documents required to be filed under the
Securities Act or Exchange Act, might or might not have a material adverse
effect on the combined company.
Termination of the Merger
Agreement (see page 74)
The
merger agreement may be terminated at any time before the completion of the
merger by the mutual consent of Cellegy and Adamis. Under certain circumstances
specified in the merger agreement, either Cellegy or Adamis may terminate the
merger agreement, including if:
|
·
|
the
merger is not completed on or before March 31, 2009, unless the failure is
due to the party seeking to terminate the
merger;
|
|
·
|
the
Adamis stockholders fail to approve the merger and the merger
agreement;
|
|
·
|
the
Cellegy stockholders fail to approve the issuance of shares in the merger
and related proposals;
|
|
·
|
the
other party breaches its representations, warranties, covenants or
agreements contained in the merger agreement and the breach could
reasonably be expected to have a material adverse effect on the combined
company; or
|
|
·
|
the
Cellegy board of directors has withdrawn or changed its recommendation of
the merger or recommended or entered into an agreement with respect to an
alternative acquisition proposal with another
party.
|
SJ
Strategic Investments, LLC, Thomas J. Tisch, Andrew H. Tisch, Daniel R. Tisch,
James S. Tisch and certain trust entities related to such stockholders, and
Richard C. Williams, all of whom will sometimes be referred to collectively in
this joint proxy statement/prospectus as the Principal Cellegy Stockholders,
have entered into voting agreements with Adamis pursuant to which, among other
things, each such stockholder agreed, solely in the capacity as a Cellegy
stockholder, to vote all of the shares of Cellegy common stock held by the
stockholder in favor of the approval of the merger, including the issuance of
Cellegy common stock to Adamis stockholders in connection with the merger, the
reverse stock split and other amendments to Cellegy’s restated certificate of
incorporation, and the other Cellegy proposals described in this joint proxy
statement/prospectus, and against any matter that would result in a breach of
the merger agreement by Cellegy and any proposal made in opposition to, or in
competition with, the consummation of the merger and the other transactions
contemplated by the merger agreement. As of December 31, 2008, such Principal
Cellegy Stockholders beneficially owned an aggregate of approximately 12,165,236
shares of Cellegy common stock, representing approximately 41% of the
outstanding shares of Cellegy common stock.
Management of the Combined Company
Following the Merger
(see page
112)
Effective
as of the closing of the merger, the combined company’s officers are expected to
include Dennis J. Carlo, Ph.D., as president and chief executive officer, Robert
O. Hopkins as chief financial officer, Richard L. Aloi, who is president of
Adamis Labs, and David J. Marguglio as vice president of business development
and investor relations, each of whom currently holds the same position at
Adamis. The combined company will initially have a six member board of
directors, comprised of three individuals from Adamis’ current board of
directors, Messrs. Carlo, Aloi and Marguglio, and three individuals from
Cellegy’s current board of directors, Richard C. Williams, John Q. Adams, Sr.
and Robert B. Rothermel.
Interests of Certain Persons in the
Merger
In
considering the recommendation of the Cellegy board of directors with respect to
approving the issuance of shares of Cellegy common stock to Adamis stockholders
in connection with the merger and the other matters to be acted upon by Cellegy
stockholders at the Cellegy annual meeting, Cellegy stockholders should be aware
that certain members of the board of directors, the current interim executive
officer of Cellegy, Richard C. Williams, and have interests in the merger that
may be different from, or in addition to, interests they have as Cellegy
stockholders. Mr. Williams, Robert B. Rothermel and John Q. Adams, Sr., who
currently are Cellegy directors, are expected to continue after the closing of
the merger as directors of the combined company, and therefore they have a
different interest in the transaction than the interests of other directors and
officers of Cellegy. Moreover, if the 2009 Equity Incentive Plan is approved as
described elsewhere in this joint proxy statement/prospectus, each non-employee
director of the combined company, including Messrs. Williams, Rothermel and
Adams, will be granted a stock option on the closing of the merger covering
50,000 shares for each such non-employee director and will be eligible to
receive cash director fees pursuant to the policies of the combined company.
Cellegy’s
directors, executive officers and their affiliates hold less than one percent of
the shares of Cellegy common stock that are outstanding on the date of this
prospectus.
In
considering the recommendation of the Adamis board of directors with respect to
approving the merger, Adamis stockholders should be aware that certain members
of the board of directors and executive officers of Adamis have interests in the
merger that may be different from, or in addition to, interests they have as
Adamis stockholders. Following the consummation of the merger, the persons
who currently constitute the Adamis board of directors will continue to serve on
the board of directors of the combined company and the existing executive
officers of Adamis will continue to serve in their respective positions with the
combined company.
Adamis’
directors, executive officers and their affiliates hold approximately 46% of the
shares of Adamis common stock that are outstanding on the date of this
prospectus.
Cellegy
must comply with applicable federal and state securities laws in connection with
the issuance of shares of Cellegy common stock to Adamis stockholders and the
filing of this joint proxy statement/prospectus with the Securities and Exchange
Commission, or the SEC. As of the date hereof, the registration statement of
which this joint proxy statement/prospectus is a part has not become
effective.
Please
see the section entitled “Regulatory Approvals” in this joint proxy
statement/prospectus.
Adamis
stockholders will own, after the merger, approximately 93% of the outstanding
shares of the combined company. Further, Adamis directors will constitute at
least one-half of the combined company’s board of directors and all members of
the executive management of the combined company will be from Adamis. Therefore,
Adamis will be deemed to be the acquiring company for accounting purposes, and
the merger will be accounted for as a reverse merger and a
recapitalization.
The
unaudited pro forma combined condensed consolidated financial statements
included in this joint proxy statement/ prospectus have been prepared to give
effect to the proposed merger of Adamis and Cellegy as a reverse acquisition of
assets and a recapitalization in accordance with accounting principles generally
accepted in the United States. For accounting purposes, Adamis is considered to
be acquiring Cellegy in the merger and it is assumed that Cellegy does not meet
the definition of a business in accordance with Statement of Financial
Accounting Standards No. 141, or SFAS No. 141,
Business
Combinations
, and
Emerging Issue Task Force 98-3, or EITF 98-3,
Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a
Business
, because
of Cellegy’s current efforts to sell or otherwise dispose of its operating
assets and liabilities.
Each of
Cellegy and Adamis expects, and Weintraub Genshlea Chediak, a professional
corporation, has opined, that the merger will qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, sometimes referred to herein as the Code or the IRC. Adamis
stockholders generally will not recognize gain or loss for United States federal
income tax purposes upon the exchange of shares of Adamis capital stock for
shares of Cellegy common stock, except for Adamis stockholders who exercise
their appraisal rights with respect to the merger.
Tax matters are very complicated, and
the tax consequences of the merger to a particular stockholder will depend in
part on such stockholder’s circumstances. Accordingly, you are urged to consult
your own tax advisor for a full understanding of the tax consequences of the
merger to you, including the applicability and effect of federal, state, local
and foreign income and other tax laws. For more information on the federal
income tax effect of the merger, see the section entitled “Material Federal
Income Tax Consequences of the Merger.”
If
Cellegy and Adamis successfully complete the merger, holders of Adamis capital
stock will become Cellegy stockholders, and their rights as stockholders will be
governed by Cellegy’s amended and restated certificate of incorporation and
bylaws, as amended. There are differences between the certificates of
incorporation and bylaws of Cellegy and Adamis. Since Adamis and Cellegy are
both Delaware corporations, the rights of Adamis stockholders will continue to
be governed by Delaware law after the completion of the merger. See “Comparison
of Rights of Holders of Cellegy Stock and Adamis Stock’’ in this joint proxy
statement/prospectus for more information.
Under
Delaware law, Adamis stockholders are entitled to appraisal rights in connection
with the merger. Holders of Cellegy common stock are not entitled to appraisal
rights in connection with the merger. For more information about appraisal
rights, see the provisions of Section 262 of the Delaware General
Corporation Law, or the DGCL, attached as
Annex B
to this
joint proxy statement/prospectus, and the section entitled “The Merger—Appraisal
Rights” in this joint proxy statement/prospectus.
Both
Cellegy and Adamis are subject to various risks associated with their businesses
and industries. In addition, the merger poses a number of risks to each company
and its respective stockholders, including, but not limited to, the following:
|
·
|
failure
to complete the merger may result in Cellegy or Adamis paying a
termination fee or expenses to the other party and could harm Cellegy’s
and Adamis’ future business and
operations;
|
|
·
|
the
combined company may not be able to obtain required financing after the
closing of the merger;
|
|
·
|
the
market price of Cellegy’s or the combined company's common stock may
decline as a result of the merger;
|
|
·
|
Cellegy
and Adamis stockholders may not realize a benefit from the merger
commensurate with the ownership dilution they will experience in
connection with the merger;
|
|
·
|
during
the pendency of the merger, Cellegy and Adamis may not be able to enter
into a business combination with another party at a favorable price
because of restrictions in the merger agreement, which could adversely
affect their respective businesses;
and
|
|
·
|
certain
provisions of the merger agreement may discourage third parties from
submitting alternative takeover proposals, including proposals that may be
superior to the arrangements contemplated by the merger
agreement.
|
These
risks are discussed in greater detail under the section entitled “Risk Factors”
in this joint proxy statement/prospectus. Cellegy and Adamis encourage you to
read and consider all of these risks carefully.
MARKET PRICE DATA AND DIVIDEND
INFORMATION
Cellegy’s
common stock currently trades on the OTC Bulletin Board, sometimes referred to
as the OTCBB, under the symbol “CLGY.OB”. The following table sets forth the
range of high and low closing sales prices for the common stock as reported on
The NASDAQ Small Cap Market and OTCBB for the periods indicated below. Adamis is
a privately-held company and there is no established public trading market for
its securities.
|
|
High
|
|
Low
|
|
2006
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.93
|
|
$
|
0.42
|
|
Second
Quarter
|
|
$
|
0.90
|
|
$
|
0.37
|
|
Third
Quarter
|
|
$
|
0.65
|
|
$
|
0.07
|
|
Fourth
Quarter
|
|
$
|
0.18
|
|
$
|
0.05
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.10
|
|
$
|
0.03
|
|
Second
Quarter
|
|
$
|
0.11
|
|
$
|
0.09
|
|
Third
Quarter
|
|
$
|
0.09
|
|
$
|
0.06
|
|
Fourth
Quarter
|
|
$
|
0.08
|
|
$
|
0.04
|
|
2008
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.10
|
|
$
|
0.02
|
|
Second
Quarter
|
|
$
|
0.10
|
|
$
|
0.04
|
|
Third
Quarter
|
|
$
|
0.09
|
|
$
|
0.04
|
|
Fourth
Quarter
|
|
$
|
0.06
|
|
$
|
0.02
|
|
On
February 12, 2008, the last full trading day immediately preceding the public
announcement of the signing of the merger agreement and on December 31, 2008,
the last sales price reported on the OTC Bulletin Board for Cellegy common stock
was $0.07 per share and $0.02 per share, respectively. As of _____, 2009, the
record date for the Cellegy annual meeting, there were approximately 29,834,796
shares of Cellegy common stock outstanding and approximately _____ holders of
record of Cellegy common stock. As of _____, 2009, the record date for the
Adamis special meeting, there were approximately ____ shares of Adamis common
stock outstanding and approximately ___ holders of record of Adamis common
stock.
The
following table sets forth information concerning the beneficial ownership of
(i) any person known to Cellegy to be the beneficial owner of more than five
percent of Cellegy’s outstanding common stock, (ii) each current Cellegy
director and each nominee, including persons who are expected to become
directors of the combined company following the closing of the proposed merger
with Adamis, and (iii) all current Cellegy directors and officers as a group,
before the proposed merger and immediately following the closing of the proposed
merger. The share numbers and percentages in the table below for the
period after the closing of the merger give effect to an assumed 1:9.945 reverse
split of the Cellegy common stock before the closing of the
merger. The table is based on 29,834,796 Cellegy shares outstanding
before the merger and 45,978,067 shares of common stock of the combined company
outstanding upon the consummation of the merger. Other than
commitments under the merger agreement described in this joint proxy
statement/prospectus and commitments to issue shares upon the exercise of stock
options, Cellegy does not have any commitments to any such persons with respect
to the issuance of shares of its common stock.
Name
|
|
Shares
Owned
Before
Merger
|
|
|
Percent
|
|
|
Shares
Owned
After
Merger
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SJ
Strategic Investments, LLC(2)(7)
|
|
|
7,343,993
|
|
|
|
24.6
|
%
|
|
|
738,461
|
|
|
|
1.6
|
%
|
Andrew
H. Tisch(3)
|
|
|
1,104,886
|
|
|
|
3.7
|
%
|
|
|
111,100
|
|
|
|
*
|
|
David
R. Tisch(3)
|
|
|
1,104,886
|
|
|
|
3.7
|
%
|
|
|
111,100
|
|
|
|
*
|
|
James
S. Tisch(3)
|
|
|
1,104,886
|
|
|
|
3.7
|
%
|
|
|
111,100
|
|
|
|
*
|
|
Thomas
J. Tisch(3)
|
|
|
1,104,886
|
|
|
|
3.7
|
%
|
|
|
111,100
|
|
|
|
*
|
|
Richard
C. Williams(4)(7)
|
|
|
8,363,993
|
|
|
|
28.0
|
%
|
|
|
841,025
|
|
|
|
1.8
|
%
|
Tobi
B. Klar, M.D.(5)
|
|
|
100,944
|
|
|
|
*
|
|
|
|
10,150
|
|
|
|
*
|
|
John
Q. Adams (6)
|
|
|
54,000
|
|
|
|
*
|
|
|
|
5,430
|
|
|
|
*
|
|
Robert
B. Rothermel (6)
|
|
|
54,000
|
|
|
|
*
|
|
|
|
5,430
|
|
|
|
*
|
|
Thomas
M. Steinberg (6)
|
|
|
54,000
|
|
|
|
*
|
|
|
|
5,430
|
|
|
|
*
|
|
Dennis
J. Carlo(9)
|
|
|
--
|
|
|
|
--
|
|
|
|
8,368,000
|
|
|
|
18.2
|
%
|
Richard
J. Aloi(10)
|
|
|
--
|
|
|
|
--
|
|
|
|
3,593,039
|
|
|
|
7.8
|
%
|
David
J. Marguglio(11)
|
|
|
--
|
|
|
|
--
|
|
|
|
3,439,904
|
|
|
|
7.5
|
%
|
All
Cellegy directors and officers (6 persons)
|
|
|
8,626,937
|
(8)
|
|
|
28.9
|
%
|
|
|
16,252,828
|
(12)
|
|
|
35.3
|
%
|
* 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 Cellegy
Pharmaceuticals, Inc., 128 Grandview Road, Boyertown, PA
19512.
|
(2)
|
Based
on filings by SJ Strategic Investments, LLC. with the SEC. Includes
290,000 shares subject to warrants. While SJ Strategic Investments, LLC.
believes it possesses sole voting and investment power over such shares,
John M. Gregory may be deemed to also have voting and investment
power over such shares due to his position as Managing Member and Chief
Manager of SJ Strategic Investments, LLC., pursuant to the entity’s
Operating Agreement. While SJ Strategic Investments, LLC disclaims the
existence of a group, due to the indirect beneficial ownership of its
members, such members may be deemed to constitute a
group.
|
(3)
|
Based
on filings on Schedule 13D with the SEC by Andrew H. Tisch, Daniel R.
Tisch, James S. Tisch, Thomas J. Tisch, Jessica S. Tisch,
Benjamin Tisch, Merryl H. Tisch and Thomas M. Steinberg
(the “Reporting Persons”). The Schedule 13D, as amended through the date
of this report, covered a total of 5,525,168 shares, or approximately 18%
of the outstanding shares. According to information furnished by the
Reporting Persons, 1,104,886 shares are beneficially owned by each of
Andrew H. Tisch, Daniel R. Tisch and James S. Tisch;
1,152,586 shares are beneficially owned by Thomas J. Tisch;
6,400 shares are beneficially owned by each of Jessica S. Tisch and
Benjamin Tisch and by Merryl H. Tisch as custodian for Samuel
Tisch; and 17,125 shares are beneficially owned by Thomas M.
Steinberg. Each of the Reporting Persons has disclaimed beneficial
ownership of any shares owned by any other Reporting Person, except to the
extent that beneficial ownership has been expressly reported in filings
with the Securities and Exchange Commission. The address of Andrew H.
Tisch, James S. Tisch, Thomas J. Tisch and Thomas M.
Steinberg is 667 Madison Avenue, New York, N.Y. 10021, of
Daniel R. Tisch is c/o Tower View LLC, 500 Park Avenue, New York,
N.Y. 10022, and of Benjamin Tisch, Jessica S. Tisch and
Merryl H. Tisch is c/o Tisch Financial Management, 655 Madison
Avenue, 19th Floor, New York,
N.Y. 10021.
|
(4)
|
Includes
1,000,000 shares issuable upon the exercise of stock
options. See also note 9 below.
|
(5)
|
Includes
74,944 shares issuable upon the exercise of stock
options.
|
(6)
|
Includes
54,000 shares issuable upon the exercise of stock
options.
|
(7)
|
Pursuant
to an agreement entered into on November 11, 2008, between SJ Strategic
Investments, LLC, or SJ, and Richard C. Williams, at any time after the
date of the agreement until February 28, 2009, SJ has the right to require
Mr. Willliams to purchase all shares and warrants held by SJ, for an
aggregate purchase price of $1,000. The number of shares shown
as beneficially owned by Mr. Williams includes the 7,343,993 shares
beneficially owned by SJ, 1,000,000 shares subject to an option held by
Mr. Williams, and 30,000 shares beneficially owned by Mr.
Williams. Mr. Williams has entered into a voting agreement with
Adamis that is identical in all material respects to the voting agreement
executed by SJ. The number of shares shown in the table as
beneficially owned by all directors and officers as a group includes the
7,343,993 shares beneficially owned by SJ that are subject to the
agreement with Mr. Williams.
|
(8)
|
Includes
1,362,944 shares issuable upon the exercise of stock
options.
|
(9)
|
Approximately
6,368,000 of these shares are subject to repurchase
rights.
|
(10)
|
Approximately
2,645,097 of these shares are subject to repurchase
rights.
|
(11)
|
Approximately
2,537,019 of these shares are subject to repurchase
rights.
|
(12)
|
Includes
1,000,000 shares issuable upon the exercise of stock options, and
approximately 11,550,116 shares subject to repurchase
rights.
|
Cellegy
has never declared or paid any cash dividends on its common stock nor does it
intend to do so in the foreseeable future.
Accordingly,
the stockholders of the combined company will not receive a return on their
investment unless the value of the combined company’s shares increases, which
may or may not occur.
Any future determination to pay cash dividends will
be at the discretion of Cellegy’s board of directors and will depend upon its
financial condition, operating results, capital requirements, any applicable
contractual restrictions and such other factors as Cellegy’s board of directors
deems relevant.
Adamis
has never declared or paid any cash dividends on its capital stock nor does it
intend to do so in the foreseeable future.
Cellegy and Adamis stockholders
should carefully consider the following factors, in addition to the other
information contained in this joint proxy statement/prospectus, before deciding
how to vote their shares of capital stock. The risk factors relating to Adamis
will also apply to the combined company going forward because the business of
the combined company will primarily be Adamis’ business.
Risks Related to the
Merger
Some of Cellegy’s and Adamis’
officers and directors may have conflicts of interests in recommending that you
vote in favor of the merger that may influence them to support or approve the
merger without regard to your interests.
Certain
officers and directors of Cellegy and Adamis participate in arrangements that
provide them with interests in the merger that are different from other
stockholders of Cellegy and Adamis, including the continued service as an
officer or director of the combined company. These interests may influence the
officers and directors of Cellegy and Adamis to support or approve the merger.
Richard
C. Williams, Robert B. Rothermel and John Q. Adams, Sr., who currently are
directors of Cellegy, are expected to continue to serve on the board of
directors of the combined company following the consummation of the merger and
upon the closing of the merger will each receive new outside director stock
option grants to purchase 50,000 shares of common stock. Following
the merger, they will be eligible to receive cash outside director fee
compensation pursuant to the combined company’s director compensation
policies. Following the consummation of the merger, Dennis Carlo,
Richard Aloi and David Marguglio, who are the current directors of Adamis, will
continue to serve on the board of directors of the combined company, and the
existing executive officers of Adamis will continue to serve in their respective
positions with the combined company.
Failure to complete the merger may
result in Cellegy or Adamis paying a termination fee to the other party and
could harm Cellegy’s and Adamis’ future business and
operations.
If the
merger is not completed, Cellegy and Adamis are subject to the following risks,
among others:
|
·
|
Cellegy
will be required to pay Adamis a non-refundable fee in the amount of
$150,000 in the event the merger agreement is terminated by Adamis because
of (i) a material change in the Cellegy board’s recommendations concerning
the merger, (ii) Cellegy’s failure to hold a stockholder meeting to vote
on the merger transaction within 60 days after the registration statement
is declared effective by the SEC, (iii) Cellegy’s notice to Adamis of a
superior proposal, (iv) Cellegy’s failure to comply with its
non-solicitation obligations or (v) the failure of Cellegy’s stockholders
to approve the merger agreement;
|
|
|
|
|
·
|
Adamis
will be required to pay Cellegy a non-refundable fee in the amount of
$150,000 in the event Cellegy terminates the merger agreement because
Adamis failed to comply with its non-solicitation obligations, Adamis
changed its board recommendation concerning the merger or Adamis failed to
convene a meeting of the Adamis stockholders (or obtain Adamis stockholder
approval by written consent);
|
|
|
|
|
·
|
the
market price of Cellegy common stock may decline;
and
|
|
·
|
significant
costs related to the merger, such as legal, accounting, financial advisory
and other costs must be paid by Cellegy and Adamis, respectively, even if
the merger is not completed.
|
In
addition, if the merger agreement is terminated and Cellegy’s and Adamis’ boards
of directors determine to seek another business combination, there can be no
assurance that they will be able to find a partner willing to provide equivalent
or more attractive consideration than the consideration to be provided by each
party in the merger. Moreover, Cellegy would likely have very limited funds to
continue operations for more than a short period of time.
The market price of the combined
company’s common stock may decline as a result of the
merger.
The
market price of the combined company’s common stock may decline as a result of
the merger for a number of reasons, including the following:
|
·
|
the
combined company does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by Cellegy, Adamis or financial or
industry analysts;
|
|
·
|
the
combined company is unable to obtain required financing;
|
|
·
|
the
effect of the merger on the combined company’s business and prospects is
not consistent with the expectations of Cellegy, Adamis or financial or
industry analysts;
|
|
·
|
revenues
and net income from sales of Adamis’ products are less than investors’
expectations; or
|
|
·
|
Adamis’
product research and development efforts do not meet investors’
expectations.
|
Cellegy and Adamis stockholders may
not realize a benefit from the merger commensurate with the ownership dilution
they will experience in connection with the merger.
If the
combined company is unable to realize the strategic and financial benefits
currently anticipated from the merger, Cellegy stockholders will have
experienced an approximately 93% or greater dilution of their ownership
interests in Cellegy, and Adamis stockholders will have experienced an
approximately 7% dilution of their ownership interests in Adamis without
receiving any commensurate benefit.
During the pendency of the merger,
Cellegy and Adamis may not be able to enter into certain transactions with
another party because of restrictions in the merger agreement, which could
adversely affect their respective businesses.
Covenants
in the merger agreement impede the ability of Cellegy and Adamis to complete
certain transactions that are not in the ordinary course of business, such as
the sale or licensing by Cellegy of capital assets or any transaction
inconsistent with the merger, pending completion of the merger. As a result, if
the merger is not completed, the parties may be at a disadvantage to their
competitors because the parties will have been prevented from entering into
arrangements with possible financial and or other benefits to them. In addition,
any such transactions could be favorable to such party’s
stockholders.
Certain provisions of the merger
agreement may discourage third parties from submitting alternative takeover
proposals, including proposals that may be superior to the arrangements
contemplated by the merger agreement.
The terms
of the merger agreement prohibit each of Cellegy and Adamis from soliciting
alternative takeover proposals or cooperating with persons making unsolicited
takeover proposals, except, in the case of Cellegy, in limited circumstances
when Cellegy’s board of directors determines in their good faith judgment after
consultation with outside counsel, that an unsolicited alternative takeover
proposal is or is reasonably likely to lead to a superior takeover proposal and
that failure to cooperate with the proponent of the proposal would result in a
breach of the board’s fiduciary duties. In addition, under certain circumstances
Cellegy or Adamis would be required to pay a termination fee of $150,000 to the
other party, including upon termination of the merger agreement by a party’s
board of directors if it decides to recommend an alternative proposal. This
termination fee may discourage third parties from submitting alternative
takeover proposals to Cellegy and Adamis or their stockholders, and may cause
the respective boards of directors to be less likely to recommend an alternative
proposal.
Because the lack of a public market
for the Adamis shares makes it difficult to evaluate the fairness of the merger,
the stockholders of Adamis or Cellegy may receive consideration in the merger
that is greater than or less than the fair market value of their
shares.
The
outstanding capital stock of Adamis is privately held and is not traded in any
public market. The lack of a public market makes it challenging to determine the
fair market value of Adamis. Because the exchange ratios of the merger and the
reverse stock split were determined based on negotiations between the parties,
it is possible that the value of the Cellegy common stock to be issued in
connection with the merger will be greater than the fair market value of Adamis,
and that the market value represented by the number of shares that the Cellegy
stockholders will hold after the merger will be less in the aggregate than the
current aggregate market value of all outstanding Cellegy shares. Alternatively,
it is possible that the value of the shares of Cellegy common stock to be issued
in connection with the merger will be less than the fair market value of
Adamis.
If the conditions to the merger are
not met, the merger may not occur.
Even if
the merger is approved by the stockholders of Cellegy and Adamis, specified
conditions must be satisfied or waived in order to complete the merger,
including, among others:
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the
representations and warranties of the other party set forth in the merger
agreement being true and correct as of the date of the agreement and the
date the merger occurs, except for breaches or inaccuracies which would
not have a material adverse effect on the combined company;
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·
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there
shall not have been any material adverse change in the business, assets or
financial condition of the other party that would have a material adverse
effect on the combined company;
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the
effectiveness of the registration statement of which this joint proxy
statement/prospectus is a part;
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stockholders
of Cellegy must have approved the issuance of shares pursuant to the
merger agreement, the reverse split of Cellegy common stock and the
amendments to Cellegy’s restated certificate of incorporation to change
the company’s name and increase the number of authorized shares of stock,
and approved the 2008 Equity Incentive Plan, as described elsewhere in the
joint proxy statement/prospectus;
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stockholders
of Adamis must have adopted the merger agreement and approved the merger;
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the
reverse split of the issued and outstanding shares of Cellegy common stock
shall have occurred; and
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all
of the directors and officers of Cellegy or Cellegy Holdings that Adamis
has requested to resign their positions shall have resigned their
positions with Cellegy or Cellegy Holdings on or before the closing date
of the merger.
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Other
than the conditions regarding effectiveness of the registration statement of
which this joint proxy statement/prospectus is part, the condition regarding
having obtained required stockholder approvals for the proposals described in
the joint proxy statement/prospectus, and the conditions regarding having
obtained any required governmental authorization and no restraining order or
injunction having been issued or government proceeding pending preventing or
seeking to prevent the consummation of the merger, satisfaction of each of the
conditions to the merger is permitted by law to be waived in the discretion of
the board of directors of Cellegy or Adamis, as applicable. Many of
the other closing conditions, such as the representations and warranties of the
parties in the merger agreement being true and correct as of the closing date
and the parties having performed all obligations under the merger agreement that
they are required to perform, are qualified by the requirement that the failure
of the condition must have a material adverse effect on the combined
company. The failure of certain other closing conditions to be true,
such as the requirement that Cellegy have taken required actions to cause the
board of directors and officers of the combined company to be as described in
the joint proxy statement/prospectus or the requirement that Cellegy have timely
filed with the SEC all reports or other documents required to be filed under the
Securities Act or Exchange Act, might or might not have a material adverse
effect on the combined company.
These and other conditions
are described in detail in the merger agreement, a copy of which is attached
as
Annex
A
to this joint proxy
statement/prospectus. Cellegy and Adamis cannot assure you that all of the
conditions to the merger will be satisfied. If the conditions to the merger are
not satisfied or waived, the merger may not occur or may be delayed, and
Cellegy and Adamis each may lose some or all of the intended benefits of the
merger.
The number of shares that Cellegy
stockholders will be entitled to receive at closing of the merger will depend in
part upon the net amount of Cellegy’s net working capital.
The
number of shares that persons who are Cellegy stockholders immediately before
closing of the merger will hold after the closing of the merger depends on the
ratio of the reverse stock split contemplated by the merger agreement. Under the
terms of the merger agreement, the outstanding Cellegy shares will be combined
into a number of shares equal to (i) 3,000,000 plus (ii) the amount of Cellegy’s
net working capital at the end of the month immediately preceding the month in
which the closing of the merger occurs divided by .50.
The
amount of Cellegy’s working capital at the end of such month will depend
primarily on when the Cellegy and Adamis stockholder meetings are held and how
long it takes to satisfy the other closing conditions in the merger agreement,
the extent of Cellegy’s working capital needs until the closing and the extent
of unexpected expenses or cash needs that may arise before the closing.
The following table sets forth the approximate percentage ownership of
the outstanding shares of the combined company that Adamis stockholders and
current Cellegy stockholders would be expected to hold immediately following the
closing of the merger, assuming that there are 42,980,000 outstanding
Adamis shares at the closing date and assuming Cellegy net working capital at
the end of the month immediately preceding the month in which the closing of the
merger occurs of $400,000, $300,000, $200,000, $100,000 and $0.
Cellegy’s Net
Working Capital
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Cellegy Stockholders’ Approximate
Ownership Percentage in the Combined
Company at Closing
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Adamis Stockholders’ Approximate
Ownership Percentage in the Combined
Company at Closing
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$400,000
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8.12
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%
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91.88
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%
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$300,000
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7.73
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%
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92.27
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%
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$200,000
|
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7.33
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%
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92.67
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%
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$100,000
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6.93
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%
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93.07
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%
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$0
|
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6.52
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%
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93.48
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%
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Cellegy and Adamis may not achieve
the benefits they expect from the merger, which may have a material adverse
effect on the combined 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 combined 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 combined company and potentially greater
access to capital;
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retaining
the management and employees of
Adamis;
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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
combined company.
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If the
combined 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
combined company’s operating results and the market price of the combined
company’s common stock may be adversely affected.
If the merger does not qualify as a
tax-free reorganization for U.S. federal income tax purposes, Adamis
stockholders will recognize gain or loss on the exchange of their shares of
Adamis common stock.
Although
the U.S. Internal Revenue Service, referred to in this proxy
statement/prospectus as the IRS, has not provided a ruling on the merger,
Cellegy and Adamis intend, and believe, that the merger will qualify as a
tax-free reorganization under Section 368(a) of the Code. If the merger
fails to qualify as a tax-free reorganization, Adamis stockholders would
generally recognize gain or loss on each share of Adamis common stock
surrendered in the merger in the amount of the difference between their basis in
such share and the fair market value of the shares of Cellegy common stock they
receive in exchange for each share of Adamis common stock. Adamis stockholders
should consult with their own tax advisor regarding the proper reporting of the
amount and timing of such gain or loss.
Cellegy’s cash resources are
dwindling. If the merger with Adamis is not completed, Cellegy will need to
explore other alternatives and may file for bankruptcy
protection.
Cellegy
estimates that it has enough cash resources to continue operations at
substantially their current level until approximately the end of January 2009,
assuming no significant unexpected expenses. Cellegy and Adamis are engaged in
discussions concerning an agreement for Adamis to provide sufficient funding to
permit the merger to be completed, although there are no assurances that such
funding will be available. If the merger with Adamis is not completed, Cellegy’s
board of directors will be required to explore alternatives for Cellegy’s
business and assets. These alternatives might include seeking the dissolution
and liquidation of Cellegy, seeking to merge or combine with another company, or
initiating bankruptcy proceedings. There can be no assurance that any third
party will be interested in merging with Cellegy or would agree to a price and
other terms that Cellegy would deem adequate. Although Cellegy may try to pursue
an alternative transaction, it will likely have very limited cash resources, and
will likely be forced to file for federal bankruptcy protection. If Cellegy
files for bankruptcy protection, Cellegy will most likely not be able to raise
any type of funding from any source. In that event, the creditors of Cellegy
would have first claim on the value of the assets of Cellegy which, other than
remaining cash, would most likely be liquidated in a bankruptcy sale. Cellegy
can give no assurance as to the magnitude of the net proceeds of such sale and
whether such proceeds would be sufficient to satisfy Cellegy’s obligations to
its creditors, let alone to permit any distribution to its equity holders.
Cellegy has a history of losses, and
substantial doubt exists about Cellegy’s ability to continue as a going concern.
Cellegy has received a “going concern” opinion from its independent registered
public accounting firm, which may negatively impact its
business.
Cellegy’s
audit opinions from its independent registered public accounting firm regarding
the consolidated financial statements for the years ended December 31, 2007 and
2006 include an explanatory paragraph indicating that there is substantial doubt
about Cellegy’s ability to continue as a going concern. Cellegy has incurred
accumulated losses since its inception and accumulated negative cash flows from
operations that raise substantial doubt about its ability to continue as a going
concern. Cellegy expects negative cash flows to continue for the foreseeable
future. Cellegy believes that it has enough financial resources to continue
operations at substantially their current level until approximately the end
of January 2009, assuming no significant unexpected expenses; however, it
does not have the technological or the financial assets necessary to fund the
expenditures that would be required to conduct the future clinical and
regulatory work necessary to commercialize Savvy or other product candidates
without additional funding. Without additional funds from a financing, sales of
assets, intellectual property or technologies, or from a business combination or
a similar transaction, Cellegy will exhaust its resources and will be unable to
continue operations. These factors raise substantial doubt about Cellegy’s
ability to continue as a going concern.
The type and scope of the patent
coverage Cellegy has may limit the commercial success of its
products.
Cellegy’s
success depends, in part, on its ability to obtain patent protection for its
products and methods. No assurance can be given that any additional patents will
be issued to Cellegy, that the protection of any patents that may be issued in
the future will be significant, or that current or future patents will be held
valid if subsequently challenged.
The
patent position of companies engaged in businesses such as Cellegy’s business
generally is uncertain and involves complex, legal and factual questions. There
is a substantial backlog of patent applications at the United States Patent and
Trademark Office. Patents in the United States are issued to the party that is
first to invent the claimed invention. There can be no assurance that any patent
applications relating to Cellegy’s products or methods will be issued as
patents, or, if issued, that the patents will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide a competitive
advantage.
In
addition, many other organizations are engaged in research and product
development efforts that may overlap with Cellegy’s products.
For
example, 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 Cellegy. These rights may prevent Cellegy from
commercializing technology, or may require Cellegy to obtain a license from the
organizations to use the technology. Cellegy may not be able to obtain any such
licenses that may be required on reasonable financial terms, if at all, and
cannot be sure that the patents underlying any such licenses will be valid or
enforceable. As with other companies in the pharmaceutical industry, Cellegy is
subject to the risk that persons located in other countries will engage in
development, marketing or sales activities of products that would infringe
Cellegy’s patent rights if such activities were conducted in the United
States.
Cellegy has very limited staffing and
will continue to be dependent upon key personnel.
Cellegy’s
success is dependent upon the efforts of a small management team and staff,
including Richard C. Williams, its interim chief executive officer, and Robert
J. Caso, its chief financial officer.
Cellegy
has an employment agreement with Robert J. Caso, its chief financial
officer. The employment of Richard C. Williams, Cellegy’s interim
Chief Executive Officer, and Mr. Caso may be terminated at any time by either
Cellegy or such officer upon notice to the other party.
Cellegy does not
have key man life insurance policies covering any of its executive officers or
key employees. If key individuals leave Cellegy, Cellegy 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 Cellegy’s business.
Other
than in connection with the closing of the merger transaction, where Cellegy’s
executive officers will resign and the management team of the combined company
is expected to be composed of the management team of Adamis, none of Cellegy’s
key personnel have expressed any plan to retire or leave Cellegy in the near
future.
Cellegy’s corporate compliance
programs cannot guarantee that Cellegy is in compliance with all potentially
applicable regulations.
The
development, manufacturing, pricing, sales, and reimbursement of pharmaceutical
products, together with Cellegy’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. Cellegy is a small company and
it relies on third parties to conduct certain important functions.
Cellegy
relies on a third party clinical regulatory organization 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,
Cellegy also has
significantly fewer employees than many other companies that have the same or
fewer product candidates in clinical development. If Cellegy fails to comply
with any of these regulations, Cellegy 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 Cellegy is subject to significant
regulations, including the Sarbanes-Oxley Act of 2002. While Cellegy has
developed and instituted a corporate compliance program and continues to update
the program in response to newly implemented or changing regulatory
requirements, Cellegy 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 Cellegy’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.
Cellegy’s stock price could be
volatile
.
Cellegy’s
stock price has from time to time experienced significant price and volume
fluctuations. Since becoming a public company, Cellegy’s stock price has
fluctuated due to overall market conditions and due to matters or events more
specific to Cellegy.
For
example, the closing prices for Cellegy’s common stock during 2008 has
fluctuated from a high of $0.10 to a low of $0.02.
Events or
announcements that could significantly impact Cellegy’s stock price
include:
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publicity
or announcements regarding regulatory developments relating to Cellegy’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 Cellegy’s
products;
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·
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period-to-period
fluctuations in Cellegy’s financial results, including Cellegy’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 Cellegy’s larger
stockholders, officers or
directors;
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·
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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
Cellegy’s filings by the SEC, changes in accounting treatment or
restatement of previously reported financial results or delays in
Cellegy’s filings with the SEC.
|
Adamis’ limited operating history
may make it difficult to evaluate its business to date and the combined
company’s future viability.
Adamis
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,
having just commenced operations in 2006. Moreover, Adamis acquired Adamis Labs
during calendar year 2007, and integrating those businesses with Adamis’ other
business activities could be challenging. Adamis 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 Adamis’ business and prospects. The combined
company may not succeed given the technological, marketing, strategic and
competitive challenges it will face. The likelihood of Adamis’ 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 Adamis operates or may choose to
operate in the future.
The combined company will require
additional financing after the consummation of the merger.
As of
September 30, 2008, Adamis and its subsidiaries together had cash and cash
equivalents of approximately $706,000, and Cellegy had cash and cash equivalents
of approximately $361,000. On July 18, 2008, Adamis completed the sale of its
International Laboratories, Inc. subsidiary, or INL, which it acquired on
December 31, 2007. Net cash proceeds to Adamis, including repayment of loans
from INL to Adamis, were approximately $6.8 million, with up to an additional
$500,000 potentially payable to Adamis after the expiration of a six-month
escrow/holdback period, with the precise amount depending on whether
indemnity claims are asserted during that period by the purchaser of INL. At or
shortly after the closing of the INL sale, Adamis used approximately $3.8
million of the net proceeds to repay existing outstanding Adamis debt
obligations.
Adamis
estimates that its capital needs during calendar year 2009 will include
approximately $3.3 million for product development and approximately $2.3
million for ongoing sales, general and administrative activities and
expenses. These funds will be needed at various times commencing in
the first quarter of calendar 2009 and continuing throughout the first half of
the year.
The
new capital will be used to fund a number of projects, which may include the
following:
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develop
and market the Adamis Labs epinephrine syringe product and the generic
nasal steroid product candidate;
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|
pursue
the development of other product
candidates;
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fund
clinical trials and seek regulatory
approvals;
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expand
the combined company’s research and development
activities;
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access
manufacturing and commercialization
capabilities;
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implement
additional internal systems and
infrastructure;
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maintain,
defend and expand the scope of the combined company’s intellectual
property portfolio; and
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hire
additional management, sales, research, development and clinical
personnel.
|
Statements
in this joint proxy statement/prospectus, including in the section entitled
“Adamis’ Business,” concerning Adamis’ 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 Adamis will
have sufficient funding to support the timely introduction of products and the
conduct of clinical trials. Failure to have sufficient funding could require
Adamis 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.
Adamis
has financed its operations to date primarily through the sale of equity and
debt securities.
At
September 30, 2008, Adamis had current liabilities of approximately $1,737,000,
including accounts payable of approximately $710,000 including general operating
expenses, and approximately $527,000 including accrued expenses related to
legal, accounting and payroll items
and
$500,000 representing Adamis’ promissory note to Cellegy
.
Until
the combined company can generate a sufficient amount of revenue to finance its
cash requirements, which the combined company may never do, the combined 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 combined company. The combined company does not know
whether additional financing will be available on acceptable terms, or at all.
If the combined company is not able to secure additional equity or debt
financing when needed on acceptable terms, the combined company may have to sell
some of its assets or enter into a strategic collaboration for one or more of
the combined 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 combined company. In addition, the combined
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.
Adamis has incurred losses since
inception and anticipates that the combined company will continue to incur
losses. The combined company may never achieve or sustain profitability.
Adamis
incurred net losses of $561,298 and $9,723,127 for its fiscal years ended March
31, 2007 and 2008, respectively, and it incurred a net loss from continuing
operations of approximately $2,932,000 for the six month period ended
September 30, 2008.
Even after the merger is concluded, Adamis expects to
continue to incur losses. These losses may increase as Adamis 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 combined company’s stockholders’ equity and working
capital to decrease. The future earnings and cash flow from operations of
Adamis’ 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 Adamis
will grow and be profitable. Adamis’ 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. There can
be no assurance that Adamis will be able to generate sufficient product revenue
to become profitable at all or on a sustained basis. Adamis 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 Adamis product candidates fail in clinical trials or do not
gain regulatory approval, or if the combined company’s products do not achieve
market acceptance, the combined company may never become profitable. The
combined 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 combined company does achieve profitability, it may not be
able to sustain or increase profitability on a quarterly or annual basis.
Adamis’ 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
Adamis might undertake will be successful. Adamis’ 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 Adamis 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 combined company to achieve its financial goals.
Adamis is subject to substantial
government regulation, which could materially adversely affect Adamis’ business.
The
production and marketing of Adamis’ 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 Adamis 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 Adamis’ potential products to
market, and Adamis 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 Adamis
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 Adamis’ 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 Adamis 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 Adamis from broadening the
uses of Adamis’ current or potential products for different applications. In
addition, Adamis may not receive FDA approval to export Adamis’ potential
products in the future, and countries to which potential products are to be
exported may not approve them for import.
Manufacturing
facilities for Adamis’ 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 Adamis decides to manufacture its own products, a governmental authority
may challenge Adamis’ compliance with applicable federal, state and foreign
regulations. In addition, any discovery of previously unknown problems with one
of Adamis’ potential products or facilities may result in restrictions on the
potential product or the facility. If Adamis decides to outsource the commercial
production of its products, any challenge by a regulatory authority of the
compliance of the manufacturer could hinder Adamis’ ability to bring its
products to market.
Adamis intends to rely, and the
combined company will 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 combined company may be unable to obtain, or may
experience delays in obtaining, regulatory approval, or may not be successful in
commercializing the combined company’s planned and future products.
Like many
companies its size, Adamis 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.
Adamis
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.
Adamis’
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 Adamis’ clinical protocols or for other reasons,
Adamis’ clinical trials may be extended, delayed or terminated. If these third
parties do not successfully carry out their contractual duties or meet expected
deadlines, Adamis may be required to replace them. Although Adamis 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, Adamis 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 Adamis’ product candidates could result in
increased costs to Adamis and delay its ability to generate significant
revenues.
Delays in
the commencement or completion of clinical testing could significantly impact
Adamis’ product development costs. Adamis 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:
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obtaining
regulatory approval to commence a clinical trial;
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reaching
agreement on acceptable terms with prospective contract research
organizations and clinical trial sites;
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obtaining
sufficient quantities of clinical trial materials for any or all product
candidates;
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obtaining
institutional review board approval to conduct a clinical trial at a
prospective site; and
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recruiting
participants for a clinical trial.
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In
addition, once a clinical trial has begun, it may be suspended or terminated by
Adamis or the FDA or other regulatory authorities due to a number of factors,
including:
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failure
to conduct the clinical trial in accordance with regulatory requirements;
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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;
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failure
to achieve certain efficacy and/or safety standards;
or
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lack
of adequate funding to continue the clinical trial.
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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 Adamis’ clinical trials and competing trials. Delays in enrollment
can result in increased costs and longer development times. Adamis’ 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
Adamis 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,
Adamis 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.
Adamis,
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.
Adamis 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.
Adamis
currently maintains liability insurance coverage of
$5,000,000. However, as Adamis conducts additional clinical trials
and introduces products into the United States market, the risk of adverse
events increases and Adamis’ requirements for liability insurance coverage are
likely to increase.
Adamis 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 Adamis will
be able to obtain or maintain insurance on acceptable terms, particularly in
overseas locations, for clinical and commercial activities or that any insurance
obtained will provide adequate protection against potential liabilities.
Moreover, Adamis’ current and future coverages may not be adequate to protect
Adamis from all of the liabilities that it may incur. If losses from liability
claims exceed Adamis’ insurance coverage, Adamis may incur substantial
liabilities that exceed its financial resources. In addition, a product or
clinical trial liability action against Adamis would be expensive and
time-consuming to defend, even if Adamis ultimately prevailed. If Adamis is
required to pay a claim, Adamis may not have sufficient financial resources and
its business and results of operations may be harmed.
Adamis does not have
commercial-scale manufacturing capability, and it lacks commercial manufacturing
experience. The combined company will likely rely on third parties to
manufacture and supply its product candidates.
Adamis
does not, and the combined company is unlikely to, own or operate manufacturing
facilities for clinical or commercial production of product candidates. The
combined company will not have any experience in drug formulation or
manufacturing, and it will lack the resources and the capability to manufacture
any of the combined company’s product candidates on a clinical or commercial
scale. Accordingly, Adamis expects to depend on third-party contract
manufacturers for the foreseeable future. Any performance failure on the part of
Adamis’ contract manufacturers could delay clinical development, regulatory
approval or commercialization of the combined company’s current or future
product candidates, depriving the combined company of potential product revenue
and resulting in additional losses.
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
Adamis’ third-party contract manufacturers were to encounter any of these
difficulties or otherwise fail to comply with their obligations or under
applicable regulations, Adamis’ 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
combined company’s clinical trials, increase the costs associated with
maintaining the combined company’s clinical trial programs and, depending upon
the period of delay, require the combined company to commence new trials at
significant additional expense or terminate the trials completely.
Adamis’
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, Adamis 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 Adamis products would have a material adverse effect on
the combined entity’s business, financial condition, and results of
operations.
If Adamis 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 Adamis that plan to offer various products in the United States and
other countries in the future. Adamis’ 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, Adamis’
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 Adamis’ products, its ability to
commercialize its products would be adversely affected. There can be no
assurance that Adamis’ 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 combined 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 combined 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 combined 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.
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 combined 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 combined company’s business. Further, federal and state proposals are
likely. The adoption of these proposals and pending proposals may affect the
combined company’s ability to raise capital, obtain additional collaborators or
profitably market its products. Such proposals may reduce the combined company’s
revenues, increase its expenses or limit the markets for its products. In
particular, the combined 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.
Adamis has limited sales, marketing
and distribution experience.
Adamis
has limited experience in the sales, marketing, and distribution of
pharmaceutical products. There can be no assurance that the combined 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 combined 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 combined company or, even if available, divert
the attention of its management and key personnel, and have a negative impact on
further product development efforts.
Adamis may seek to enter into
collaborative arrangements to develop and commercialize its products. These
collaborations, if secured, may not be successful.
Adamis
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 Adamis 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
combined 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 combined company’s control. There can be no assurance that
such parties will perform their obligations as expected. There can be no
assurance that the combined company’s collaborators will devote adequate
resources to its products.
Even if the combined 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 combined 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 combined company, or future collaborators, may
not be able to generate material product revenues and the combined company may
not become profitable. The degree of market acceptance of any of the combined
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
combined company’s products, potentially at lower prices (which, in turn,
will depend on the strength of the combined 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 combined 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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If Adamis is not successful in
acquiring or licensing additional product candidates on acceptable terms, if at
all, Adamis’ business may be adversely affected.
As part
of its strategy, Adamis may acquire or license additional product candidates
that it believes have growth potential. There are no assurances that Adamis will
be able to identify promising product candidates. Even if Adamis is successful
in identifying promising product candidates, Adamis 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.
Adamis
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 Adamis for the
in-licensing or acquisition of product candidates and approved products. Adamis
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, Adamis’ ability to grow its business or increase its profits
could be severely limited.
If Adamis’ competitors develop and
market products that are more effective than Adamis’ product candidates or
obtain regulatory and marketing approval for similar products before Adamis
does, Adamis’ 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 combined company will face competition from numerous
sources, including major biotechnology and pharmaceutical companies worldwide.
Many of the combined company’s competitors have substantially greater financial
and technical resources, and development, production and marketing capabilities
than Adamis does. In addition, many of these companies have more experience than
Adamis in pre-clinical testing, clinical trials and manufacturing of compounds,
as well as in obtaining FDA and foreign regulatory approvals. The combined
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
combined company will develop a more effective product for the same indications
for which the combined company is developing a product or, alternatively, bring
a similar product to market before the combined company can do so. Failure of
the combined company to successfully compete will adversely impact the ability
to raise additional capital and ultimately achieve profitable operations.
The combined company faces intense
competition from larger companies and may not have the resources required to
develop innovative products. The combined company’s product candidates are
subject to competition from existing products
.
The
pharmaceutical industry is subject to rapid and significant technological
change. Cellegy and Adamis are 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 combined company’s competitors may succeed in developing
technologies and products that are safer and more effective than any product or
product candidates that the combined 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 combined company will likely be subject to
competition from existing products. As a result, any future products of the
combined company may never be able to compete successfully with existing
products or with innovative products under development by other
organizations.
If Adamis 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 Adamis’ 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.
Adamis’ 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
combined 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 Adamis’ existing patent
portfolio are either owned by Adamis or licensed to Adamis. The combined
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
combined company’s ability to obtain and enforce patents is uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved.
The
combined company may not be able to obtain patent rights on products, treatment
methods or manufacturing processes that it may develop or to which the combined
company may obtain license or other rights. Even if the combined company does
obtain patents, rights under any issued patents may not provide it with
sufficient protection for the combined company’s product candidates or provide
sufficient protection to afford the combined 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 combined company or licensed to the combined company.
Others may challenge, seek to invalidate, infringe or circumvent any patents the
combined company owns or licenses. Alternatively, the combined 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 combined company. Any adverse outcome could subject
the combined company to significant liabilities, require the company to license
disputed rights from others, or require the combined company to cease selling
its future products.
The
combined company’s patents also may not afford protection against competitors
with similar technology. Adamis may not have identified all patents, published
applications or published literature that affect its business either by blocking
the combined 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 combined 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 combined company
or its licensors might not have been the first to invent, or the first to file,
patent applications on the combined 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 combined company encounters such difficulties or
is otherwise precluded from effectively protecting its intellectual property
rights in either the United States or foreign jurisdictions, the combined
company’s business prospects could be substantially harmed.
If the combined company is unable to
retain its management, research, development, and clinical teams and scientific
advisors or to attract additional qualified personnel, the combined company’s
product operations and development efforts may be seriously jeopardized.
The loss
of the services of any principal member of Adamis’ management and research,
development and clinical teams could significantly delay or prevent the
achievement of the combined 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 combined company’s success. The combined company
may be unable to attract and retain key personnel on acceptable terms, if at
all. Adamis does not maintain “key person” life insurance on any of its
officers, employees or consultants.
Adamis
has relationships with consultants and scientific advisors who will continue to
assist the combined company in formulating and executing its research,
development, regulatory and clinical strategies. These consultants and
scientific advisors are not Adamis employees and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to the combined company. The combined 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
combined company’s activities. Adamis also relies on these consultants to
evaluate potential compounds and products, which may be important in developing
a long-term product pipeline for the combined company. Consultants also assist
Adamis in preparing and submitting regulatory filings. Adamis’ 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 combined 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 combined
company’s products.
The combined 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 combined company’s common stock could 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 combined company’s common stock to fluctuate
include:
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the
results of the combined 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 combined 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
combined 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 combined company’s intellectual property
rights;
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failure
of any of the combined company’s product candidates, if approved, to
achieve commercial success;
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general
and industry-specific economic conditions that may affect the combined
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 combined company’s product
candidates;
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issues
in manufacturing the combined 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 combined
company;
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changes
in estimates or recommendations by securities analysts, if any, who cover
the combined company’s common
stock;
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future
sales of the combined company’s common stock;
and
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period-to-period
fluctuations in the combined company’s financial
results.
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Following
the merger, stockholders of Adamis may sell a significant number of shares of
Cellegy common stock they will receive in the merger. Such holders have 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 combined 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
combined 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 combined company’s profitability and
reputation.
The combined 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.
Following
the merger, Adamis and Cellegy expect that the combined company’s common stock
will be reported on the OTC Bulletin Board. Because the combined 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 those 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 combined 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 combined company’s ability to raise additional capital
may be limited. The combined 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.
The combined 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 combined company’s common stock.
Cellegy’s
common stock is currently traded on the OTC Bulletin Board. If at some future
date the combined 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 combined 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
combined company fails to achieve listing of its common stock on a national
securities exchange, the combined 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 combined 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 combined 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 combined 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 combined company’s common
shares could impair its ability to achieve a national securities exchange
listing or to obtain financing in the future.
Adamis’ principal stockholders will
have significant influence over the combined company, and your interests may
conflict with the interests of those persons.
Based on
the number of outstanding shares held by Adamis stockholders as of the date of
this joint proxy statement/prospectus, Adamis’ five largest stockholders
beneficially own approximately 52% of the outstanding Adamis common stock. As a
result, those stockholders will be able to exert a significant degree of
influence or actual control over the combined 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 combined company’s assets, and any other significant corporate
transaction. The interests of these persons may not always coincide with the
interests of the combined company or its other stockholders. For example, such
persons could delay or prevent a change of control of the combined company even
if such a change of control would benefit the combined company’s other
stockholders. The significant concentration of stock ownership may adversely
affect the trading price of the combined company’s common stock due to
investors’ perception that conflicts of interest may exist or arise.
Adamis is a private company and has
not been subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of
the SEC or other corporate governance requirements. As a result, the combined
company will incur substantial costs in order to comply with these requirements.
Adamis is
a private company and has not been subject to the Sarbanes-Oxley Act of 2002,
the rules and regulations of the SEC, or other corporate governance requirements
to which public reporting companies may be subject. As a result, the combined
company may incur significant legal, accounting and other expenses to ensure
that Adamis’ business operations meet these requirements. Implementing the
controls and procedures required to comply with the various applicable laws and
regulations may place a significant burden on the combined company’s management
and internal resources.
Adamis, as a private company, has
not been subject to the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002. If the combined company is unable to favorably assess the
effectiveness of its internal controls over financial reporting, or if the
combined company’s independent registered public accounting firm is unable to
provide an unqualified attestation report on the combined company’s assessment,
the price of the combined company’s common stock could be adversely affected.
Following
the merger, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the
combined company’s management will be 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 combined company’s
independent auditor will be required to attest to the effectiveness of the
combined company’s internal control over financial reporting, for the fiscal
year ending March 31, 2010. Adamis, as a private company, has not been subject
to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Adamis has
begun the process of analyzing its internal controls and preparing for the
evaluation needed to comply with Section 404, and Adamis believes that it
will be in compliance in all material respects with the Sarbanes-Oxley Act at
the time it becomes subject to that act. During this process, if management
identifies one or more material weaknesses in Adamis’ internal control over
financial reporting that are not remediated, the combined 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 combined company’s
financial reports, which could lead to a substantial price decline in the
combined company’s common stock.
In
addition, although Cellegy believes that it currently has adequate finance and
accounting systems, procedures and controls for its business on a standalone
basis, following the merger the combined 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 combined company will be
successful in implementing them. If the combined company is unable to complete
any required modifications to its internal control reporting or if the combined
company’s independent registered public accounting firm is unable to provide the
combined 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 combined company’s internal control over financial
reporting, which could lead to a substantial price decline in the combined
company’s common stock.
Neither Cellegy nor Adamis has ever
paid cash dividends on its common stock, and neither company anticipates that
the combined company will pay any cash dividends on its common stock in the
foreseeable future.
Neither
Cellegy nor Adamis has ever declared or paid cash dividends on its common stock.
Cellegy and Adamis do not anticipate that the combined company will pay any cash
dividends on its common stock in the foreseeable future. The combined 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 combined company will not receive a return on their
investment unless the value of the combined company’s shares increases, which
may or may not occur.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This
joint proxy statement/prospectus contains “forward-looking statements” of
Cellegy within the meaning of the Private Securities Litigation Reform Act of
1995, which is applicable to Cellegy because Cellegy is a public company subject
to the reporting requirements of the Exchange Act, but is not applicable to
Adamis because Adamis is not a public company and is not currently subject to
the reporting requirements of the Exchange Act. These forward-looking statements
include:
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the
potential value created by the proposed merger for Cellegy’s and Adamis’
stockholders;
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the
efficacy, safety and intended utilization of Adamis’ products and product
candidates;
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the
conduct and results of Adamis’ research, discovery and preclinical efforts
and clinical trials;
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anticipated
timelines for product development
efforts;
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the
amount of time required to obtain regulatory approvals for Adamis’ or the
combined company’s product
candidates;
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Adamis’
plans regarding future research, discovery and preclinical efforts and
clinical activities, and Cellegy’s and Adamis’ collaborative, intellectual
property and regulatory
activities;
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the
amount of cash and cash equivalents that Cellegy anticipates it will hold
on the closing date of the
merger;
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information
concerning possible future or assumed results of the combined
company;
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the
period in which Cellegy and Adamis expect cash will be available to fund
their current operating plans, both before and after giving effect to the
merger;
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future
required funding needs;
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the
amount of common stock Cellegy expects to issue in the merger;
and
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each
of Cellegy’s and Adamis’ results of operations, financial condition and
businesses, and products and drug candidates under development and the
expected impact of the proposed merger on the combined company’s financial
and operating performance.
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Words
such as “anticipates,” “believes,” “forecast,” “potential,” “contemplates,”
“expects,” “intends,” “plans,” “seeks,” “estimates,” “could,” “would,” “will,”
“may,” “can” and similar expressions identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements,
including the following:
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Cellegy
and Adamis may not be able to complete the proposed merger;
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Cellegy’s
net working capital at closing may be lower than currently anticipated;
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Adamis’
product candidates that appear promising in early research and clinical
trials may not demonstrate safety and efficacy in subsequent clinical
trials;
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commercial
introduction of Adamis’ product candidates may be delayed beyond Cellegy’s
and Adamis’ currenct expectations;
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revenues
and income from Adamis Labs’ anticipated future products may not meet
expectations;
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the
combined company may not be able to obtain the equity or debt financing
necessary to support its anticipated level of operations;
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risks
associated with reliance on collaborative partners for further clinical
trials and other development activities; and
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risks
involved with development and commercialization of product candidates.
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Many of
the important factors that will determine these results and values are beyond
Cellegy’s and Adamis’ ability to control or predict. You are cautioned not to
put undue reliance on any forward-looking statements. Except as otherwise
required by law, Cellegy and Adamis do not assume any obligation to update any
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled “Risk
Factors” in this joint proxy statement/prospectus.
THE ANNUAL MEETING OF CELLEGY
STOCKHOLDERS
The
annual meeting of Cellegy stockholders will be held on _____, 2009, at the
offices of ________________________________, commencing at ____ a.m., ____
Time. Cellegy is sending this joint proxy statement/prospectus to its
stockholders in connection with the solicitation of proxies by the Cellegy board
of directors for use at the Cellegy annual meeting and any adjournments or
postponements of the annual meeting. This joint proxy statement/prospectus is
first being furnished to stockholders of Cellegy on or about
[ ],
2009.
Purposes of the Cellegy Annual
Meeting
The
purposes of the Cellegy annual meeting are:
1. To
consider and vote upon a proposal to approve the issuance of Cellegy common
stock to the stockholders of Adamis Pharmaceuticals Corporation pursuant to the
Agreement and Plan of Reorganization dated as of February 12, 2008, by and among
Cellegy, Cellegy Holdings, Inc. and Adamis Pharmaceuticals Corporation, a copy
of which is attached as
Annex A
to this
joint proxy statement/prospectus, pursuant to which Cellegy Holdings will merge
with and into Adamis, with Adamis surviving the merger as a wholly-owned
subsidiary of Cellegy, and pursuant to which Cellegy would issue shares of
common stock to the stockholders of Adamis, resulting in a change of control of
Cellegy.
2. To
consider and act upon a proposal to approve an amendment to our restated
certificate of incorporation to effect a reverse split of the issued and
outstanding shares of Cellegy common stock, to occur immediately before the
closing of the proposed merger transaction with Adamis, at a ratio based on the
formula described in the merger agreement and currently anticipated to
approximately 1:9.9, with the final ratio to be determined before the merger as
provided in the merger agreement, as described in the accompanying joint proxy
statement/prospectus.
3. To
consider and act upon a proposal to approve an amendment, which would become
effective in connection with or immediately following the closing of the
proposed merger transaction with Adamis, to our restated certificate of
incorporation to change our name from “Cellegy Pharmaceuticals, Inc.” to “Adamis
Pharmaceuticals Corporation,” as well as to approve our amended and restated
certificate of incorporation to become effective following the closing of the
proposed merger transaction with Adamis, as described in the accompanying joint
proxy statement/prospectus.
4. To
consider and act upon a proposal to approve an amendment, which would become
effective in connection with or immediately following the closing of the
proposed merger transaction with Adamis, to our restated certificate of
incorporation to increase the authorized number of shares of our common stock
from 50,000,000 to 175,000,000 and our preferred stock from 5,000,000 to
10,000,000, as described in the accompanying joint proxy
statement/prospectus.
5. To
consider and act upon a proposal to approve a new 2009 Equity Incentive Plan, to
become effective upon the closing of the proposed merger transaction with
Adamis.
6.
To consider and act upon a proposal to elect five nominees, all of
whom are currently directors of Cellegy, to the Cellegy board of directors;
provided, however, that if the proposed merger transaction with Adamis is
consummated, two Cellegy directors will resign and three additional persons,
each of whom is currently a director of Adamis, will be appointed as directors
of Cellegy, 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.
7.
To consider and act upon a proposal to approve, if necessary, an
adjournment of the Cellegy annual meeting to solicit additional proxies in favor
of the proposals outlined above.
8.
To consider and act upon such other business and matters or
proposals as may properly come before the annual meeting or any adjournments or
postponements thereof.
Recommendation of Cellegy’s Board of
Directors
THE CELLEGY BOARD OF DIRECTORS HAS
DETERMINED THAT THE ISSUANCE OF SHARES OF CELLEGY COMMON STOCK TO ADAMIS
STOCKHOLDERS, AND THE RESULTING CHANGE IN CONTROL OF CELLEGY PURSUANT TO THE
MERGER, AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, IS ADVISABLE AND
IN THE BEST INTERESTS OF CELLEGY AND ITS STOCKHOLDERS AND HAS APPROVED SUCH
PROPOSAL. THE CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY
STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL NO. 1 TO APPROVE THE ISSUANCE OF
SHARES OF CELLEGY COMMON STOCK TO ADAMIS STOCKHOLDERS PURSUANT TO THE MERGER.
THE CELLEGY BOARD OF DIRECTORS HAS
DETERMINED THAT IT IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND ITS
STOCKHOLDERS TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT, IN CONNECTION WITH AND
IMMEDIATELY BEFORE THE CLOSING OF THE MERGER WITH ADAMIS, AS DESCRIBED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR”
CELLEGY PROPOSAL NO. 2 TO AMEND ITS AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION.
THE
CELLEGY BOARD OF DIRECTORS HAS DETERMINED THAT IT IS ADVISABLE AND IN THE BEST
INTERESTS OF CELLEGY AND ITS STOCKHOLDERS TO AMEND CELLEGY’S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO CHANGE ITS CORPORATE NAME, IN
CONNECTION WITH THE CLOSING OF THE MERGER WITH ADAMIS, AS DESCRIBED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, AND HAS APPROVED SUCH PROPOSAL. THE
CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE
“FOR” CELLEGY PROPOSAL NO. 3 TO AMEND ITS AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION.
THE
CELLEGY BOARD OF DIRECTORS HAS DETERMINED THAT IT IS ADVISABLE AND IN THE BEST
INTERESTS OF CELLEGY AND ITS STOCKHOLDERS TO AMEND CELLEGY’S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK AND PREFERRED STOCK, IN CONNECTION WITH THE CLOSING OF
THE MERGER WITH ADAMIS, AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS,
AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR” CELLEGY
PROPOSAL NO. 4 TO AMEND ITS AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION.
THE CELLEGY BOARD OF DIRECTORS HAS
DETERMINED THAT IT IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND ITS
STOCKHOLDERS TO APPROVE THE 2009 EQUITY INCENTIVE PLAN, CONDITIONED UPON THE
CLOSING OF THE MERGER WITH ADAMIS, AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR”
CELLEGY PROPOSAL NO. 5 TO ADOPT THE 2009 EQUITY INCENTIVE PLAN, CONTINGENT
ON THE CLOSING OF THE ADAMIS MERGER TRANSACTION.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF EACH OF THE NAMED NOMINEES IN CELLEGY
PROPOSAL NO. 6, AS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE CELLEGY BOARD OF DIRECTORS HAS
DETERMINED THAT ADJOURNING THE CELLEGY ANNUAL MEETING, IF NECESSARY, TO SOLICIT
ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE CELLEGY
PROPOSALS OUTLINED ABOVE IS ADVISABLE AND IN THE BEST INTERESTS OF CELLEGY AND
ITS STOCKHOLDERS AND HAS APPROVED SUCH PROPOSAL. THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY STOCKHOLDERS VOTE “FOR” CELLEGY
PROPOSAL NO. 7 TO ADJOURN THE CELLEGY ANNUAL MEETING, IF NECESSARY, TO
SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE
CELLEGY PROPOSALS OUTLINED ABOVE.
Record Date and Voting Power
Only
holders of record of Cellegy common stock at the close of business on the record
date, ______, 2009, are entitled to notice of, and to vote at, the Cellegy
annual meeting or any adjournments or postponements thereof. At the close of
business on the record date, 29,834,796 shares of Cellegy common stock were
issued and outstanding and entitled to vote. Each share of Cellegy common stock
entitles the holder thereof to one vote on each matter submitted for stockholder
approval. See the section entitled “Principal Stockholders of Cellegy” in this
joint proxy statement/prospectus for information regarding persons known to the
management of Cellegy to be the principal stockholders of Cellegy.
Voting and Revocation of Proxies
The
Cellegy proxy accompanying this joint proxy statement/prospectus is solicited on
behalf of the board of directors of Cellegy for use at the Cellegy annual
meeting.
If you
are a stockholder of record of Cellegy as of the applicable record date referred
to above, you may vote in person at the Cellegy annual meeting or vote by proxy
using the enclosed proxy card. Whether or not you plan to attend the Cellegy
annual meeting, Cellegy urges you to vote by proxy to ensure your vote is
counted. You may still attend the Cellegy annual meeting and vote in person if
you have already voted by proxy.
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To
vote in person, come to the Cellegy annual meeting and Cellegy will give
you a ballot when you arrive.
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To
vote using the proxy card, simply mark, sign and date your proxy card and
return it promptly in the postage-paid envelope provided. If you return
your signed proxy card to Cellegy before the Cellegy annual meeting,
Cellegy will vote your shares as you direct.
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All
properly executed Cellegy proxies that are not revoked will be voted at the
Cellegy annual meeting and at any adjournments or postponements of the Cellegy
annual meeting in accordance with the instructions contained in the proxy. If a
holder of Cellegy common stock executes and returns a proxy and does not specify
otherwise, the shares represented by that proxy will be voted “FOR” Cellegy
Proposal No. 1 to approve the issuance of shares of Cellegy common stock to
Adamis stockholders pursuant to the merger, “FOR” Cellegy Proposal No. 2 to
effect the reverse stock split as described in this proxy statement/prospectus,
“FOR”
Cellegy Proposal No. 3 to amend Cellegy’s amended and restated certificate of
incorporation to change the corporate name effective upon the closing of the
merger with Adamis,
“FOR” Cellegy Proposal No. 4 to amend Cellegy’s
amended and restated certificate of incorporation to increase the number of
authorized shares of capital stock effective upon the closing of the merger with
Adamis, “FOR” Proposal No. 5 to approve the 2009 Equity Incentive Plan,
conditioned upon the closing of the Adamis merger, “FOR” Cellegy
Proposal No. 6 to elect the five nominees to the Cellegy board of
directors, and “FOR” Cellegy Proposal No. 7 to adjourn the Cellegy annual
meeting, if necessary, to solicit additional proxies if there are not sufficient
votes in favor of the Cellegy proposals outlined above in accordance with the
recommendation of the Cellegy board of directors.
A Cellegy
stockholder of record as of the applicable record date described above who has
submitted a proxy may revoke it at any time before it is voted at the Cellegy
annual meeting by executing and returning a proxy bearing a later date, filing
written notice of revocation with the Secretary of Cellegy stating that the
proxy is revoked or attending the Cellegy annual meeting and voting in person.
The
presence, in person or represented by proxy, at the Cellegy annual meeting of
the holders of a majority of the shares of Cellegy common stock outstanding and
entitled to vote at the Cellegy annual meeting is necessary to constitute a
quorum at the meeting. Abstentions and broker non-votes will be counted towards
a quorum. Approval of each of Cellegy Proposal Nos. 2 and 3 requires the
affirmative vote of holders of a majority of the Cellegy common stock having
voting power outstanding on the record date for the Cellegy annual meeting. For
Cellegy Proposal No. 6, the five named nominees receiving the most “FOR” votes
from the shares having voting power present in person or represented by proxy at
the Cellegy annual meeting will be elected. Approval of each of Cellegy
Proposal Nos. 1, 5 and 7 requires the affirmative vote of the
holders of a majority of the Cellegy common stock having voting power present in
person or represented by proxy at the Cellegy annual meeting.
Votes
will be counted by the inspector of election appointed for the meeting, who will
separately count “FOR”, “WITHHOLD,” and “AGAINST” votes, and abstentions and
broker non-votes. Broker non-votes and abstentions will have the same effect as
“AGAINST” votes for Cellegy Proposal Nos. 2, 3 and 4. For Cellegy Proposal Nos.
1, 5, 6 , and 7, broker non-votes will not be counted towards the vote total.
At the
record date for the Cellegy annual meeting, the directors and executive officers
of Cellegy held less than one percent of the outstanding shares of Cellegy
common stock entitled to vote at the Cellegy annual meeting. The Principal
Cellegy Shareholders, who collectively beneficially own approximately 12,165,236
shares, or 41% of the outstanding shares of Cellegy common stock, solely in
their capacities as Cellegy stockholders, are subject to voting agreements and
irrevocable proxies. Each such stockholder has agreed in his or her voting
agreement to vote all shares of Cellegy common stock that he or she beneficially
owned as of the date of the voting agreement, and that the stockholder
subsequently acquires, in favor of the merger, including the issuance of Cellegy
common stock to Adamis stockholders in connection with the merger, the reverse
stock split, the amendments to the amended and restated certificate of
incorporation, and approval of the 2009 Equity Incentive Plan, and against any
matter that would result in a breach of the merger agreement by Cellegy and
against any proposal made in opposition to, or in competition with, the
consummation of the merger and the other transactions contemplated by the merger
agreement. Each such stockholder also granted Adamis an irrevocable proxy to
vote his or her shares of Cellegy common stock in favor of the those proposals,
against any matter that would result in a breach of the merger agreement by
Cellegy and against any proposal made in opposition to, or in competition with,
the consummation of the merger and the other transactions contemplated by the
merger agreement. See the section entitled “The Merger Agreement—Voting
Agreements” in this joint proxy statement/prospectus.
In
addition to solicitation by mail, the directors, officers, employees and agents
of Cellegy may solicit proxies from Cellegy’s stockholders by personal
interview, telephone, telegram or otherwise.
As of the
date of this joint proxy statement/prospectus, the Cellegy board of directors
does not know of any business to be presented at the Cellegy annual meeting
other than as set forth in the notice accompanying this joint proxy
statement/prospectus. If any other matters should properly come before the
Cellegy annual meeting, it is intended that the shares represented by proxies
will be voted with respect to such matters in accordance with the judgment of
the persons voting the proxies.
The
special meeting of Adamis stockholders will be held on ____, 2009, at the
offices of ________________________________ commencing at 10:00 a.m.,
Pacific Time. Adamis is sending this joint proxy statement/prospectus to its
stockholders in connection with the solicitation of proxies by the Adamis board
of directors for use at the Adamis special meeting and any adjournments or
postponements of the annual meeting. This joint proxy statement/prospectus is
first being furnished to stockholders of Adamis on or about
[ ],
2009.
Purposes of the Adamis Special
Meeting
The
purposes of the Adamis special meeting are:
1.
To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization, dated as of February 12, 2008, by and
among Adamis, Cellegy Holdings, Inc. and Cellegy, a copy of which is attached as
Annex A
to this
joint proxy statement/prospectus.
2
To consider and act upon a proposal to approve, if necessary, an adjournment of
the Adamis special meeting to solicit additional proxies in favor of the
proposal outlined above.
3
To transact such other business as may properly come before the special meeting
or any adjournment or postponement thereof.
Recommendation of Adamis’ Board of
Directors
THE ADAMIS BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF ADAMIS AND
ITS STOCKHOLDERS AND HAS APPROVED THE MERGER AND THE MERGER AGREEMENT. THE
ADAMIS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ADAMIS STOCKHOLDERS VOTE
“FOR” ADAMIS PROPOSAL NO. 1 TO APPROVE AND ADOPT THE MERGER AGREEMENT.
THE ADAMIS BOARD OF DIRECTORS HAS
DETERMINED THAT ADJOURNING THE ADAMIS SPECIAL MEETING, IF NECESSARY, TO SOLICIT
ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE ADAMIS
PROPOSALS OUTLINED ABOVE IS ADVISABLE AND IN THE BEST INTERESTS OF ADAMIS AND
ITS STOCKHOLDERS AND HAS APPROVED AND ADOPTED THE PROPOSAL. THE ADAMIS BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT ADAMIS STOCKHOLDERS VOTE “FOR” ADAMIS
PROPOSAL NO. 2 TO ADJOURN THE ADAMIS SPECIAL MEETING, IF NECESSARY, TO
SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE
ADAMIS PROPOSALS OUTLINED ABOVE.
Record Date and Voting Power
Only
holders of record of Adamis capital stock at the close of business on the record
date, ____2009, are entitled to notice of, and to vote at, the Adamis special
meeting. There were ___ holders of record of Adamis common stock at the close of
business on the record date. At the close of business on the record date, _____
shares of Adamis common stock were issued and outstanding. Each share of Adamis
common stock entitles the holder thereof to one vote on each matter submitted
for stockholder approval. See the section entitled “Principal Stockholders of
Adamis” in this joint proxy statement/prospectus for information regarding
persons known to the management of Adamis to be the principal stockholders of
Adamis.
Voting and Revocation of Proxies
The
Adamis proxy accompanying this joint proxy statement/prospectus is solicited on
behalf of the board of directors of Adamis for use at the Adamis special
meeting.
If you
are a stockholder of record of Adamis as of the applicable record date referred
to above, you may vote in person at the Adamis special meeting or vote by proxy
using the enclosed proxy card. Whether or not you plan to attend the Adamis
special meeting, Adamis urges you to vote by proxy to ensure your vote is
counted. You may still attend the Adamis special meeting and vote in person if
you have already voted by proxy.
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To
vote in person, come to the Adamis special meeting and Adamis will give
you a ballot when you arrive.
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To
vote using the proxy card, simply mark, sign and date your proxy card and
return it promptly in the postage-paid envelope provided. If you return
your signed proxy card to Adamis before the Adamis special meeting, Adamis
will vote your shares as you direct.
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All
properly executed Adamis proxies that are not revoked will be voted at the
Adamis special meeting and at any adjournments or postponements of the Adamis
special meeting in accordance with the instructions contained in the proxy. If a
holder of Adamis capital stock executes and returns a proxy and does not specify
otherwise, the shares represented by that proxy will be voted “FOR” Adamis
Proposal No. 1 to approve the merger agreement and the merger and “FOR”
Adamis Proposal No. 2 to adjourn the Adamis special meeting, if necessary,
to solicit additional proxies if there are not sufficient votes in favor of the
Adamis proposals outlined above in accordance with the recommendation of the
Adamis board of directors.
An Adamis
stockholder of record as of the applicable record date described above who has
submitted a proxy may revoke it at any time before it is voted at the Adamis
special meeting by executing and returning a proxy bearing a later date, filing
written notice of revocation with the Secretary of Adamis stating that the proxy
is revoked or attending the Adamis special meeting and voting in person.
The
presence, in person or represented by proxy, at the Adamis special meeting of
the holders of a majority of the shares of Adamis capital stock outstanding and
entitled to vote at the Adamis special meeting is necessary to constitute a
quorum at the meeting (except in the case of Proposal No. 2). Abstentions and
broker non-votes will be counted towards a quorum. Approval of Adamis
Proposal No. 1 requires the affirmative vote of holders of a majority of
the Adamis common stock having voting power outstanding on the record date for
the Adamis special meeting. Approval of Adamis Proposal No. 2 requires the
affirmative vote of the holders of a majority of the Adamis common stock and
present in person or represented by proxy at the Adamis special
meeting.
Votes
will be counted by the inspector of election appointed for the meeting, who will
separately count “
FOR”
and
“
AGAINST”
votes,
abstentions and broker non-votes. Abstentions will be counted towards the vote
total for each proposal and will have the same effect as “
AGAINST”
votes.
Broker non-votes will have the same effect as “
AGAINST”
votes
for Adamis Proposal No. 1. For Adamis Proposal No. 2, broker non-votes will have
no effect and will not be counted towards the vote total.
At the
record date for the Adamis special meeting, the directors and executive officers
of Adamis owned approximately 38% of the outstanding shares of Adamis capital
stock entitled to vote at the Adamis special meeting.
In
addition to solicitation by mail, the directors, officers, employees and agents
of Adamis may solicit proxies from Adamis’ stockholders by personal interview,
telephone, telegram or otherwise.
As of the
date of this joint proxy statement/prospectus, the Adamis board of directors
does not know of any business to be presented at the Adamis special meeting
other than as set forth in the notice accompanying this joint proxy
statement/prospectus. If any other matters should properly come before the
Adamis special meeting, it is intended that the shares represented by proxies
will be voted with respect to such matters in accordance with the judgment of
the persons voting the proxies.
This
section and the section entitled “The Merger Agreement” in this joint proxy
statement/prospectus describe the material aspects of the merger, including the
merger agreement. While Cellegy and Adamis believe that this description covers
the material terms of the merger and the merger agreement, it may not contain
all of the information that is important to you. You should read carefully this
entire joint proxy statement/prospectus for a more complete understanding of the
merger and the merger agreement, including the merger agreement attached as
Annex A
to this
joint proxy statement/prospectus.
Cellegy
Following
the sale by Cellegy on November 28, 2006, to ProStrakan Group Limited of several
Cellegy products and related intellectual property and other assets, including
its Cellegesic, Fortigel, Rectogesic, Tostrex and Tostrelle products and product
candidates, for a price of approximately $9 million, commencing in early 2007
Cellegy’s management reviewed several options in individual discussions with
members of the board regarding the future direction of the company. Management
contacted several parties regarding a possible purchase of, or other arrangement
relating to, the Savvy product candidate and other women’s health care product
candidates of the company. The Contraceptive Research and Development
Organization, or CONRAD, expressed interest in taking over the management of
some of these trials, with Cellegy retaining a residual carried position in
these products. The other parties contacted subsequently declined to pursue
further discussions concerning a transaction. The board determined that, in
parallel, the company should explore the possibility of a merger partner as an
alternative for maximizing stockholder value. A strategic alternative involving
the sale of substantially all of Cellegy’s assets was not considered as
favorable as a merger since a sale of assets would involve retention by Cellegy
of liabilities and would generally not provide Cellegy’s stockholders with an
opportunity to participate in long-term appreciation of the merged business.
Management
contacted
three companies and gave substantive review to three additional companies
concerning their interest in discussions regarding a merger transaction or sale
of assets transaction. Possible candidates with businesses in different
industries were reviewed, although the board’s preference was a transaction with
a privately-held biopharmaceutical or healthcare company having a modest
valuation, as the board believed this would provide a better fit with
Cellegy’s existing business and would provide Cellegy’s existing
stockholders a better opportunity for future appreciation and to obtain a higher
percentage ownership interest in the combined company.
The
companies that Cellegy contacted were in the pharmaceutical or healthcare
business.
Management
was aware of these companies through its general knowledge of the pharmaceutical
and healthcare industries.
Management did not have specific size
criteria. Based on the healthcare industry’s dynamics, management
believed that strategic fit was an important factor in realizing value for the
stockholders. Also significant, but of less importance, was that a candidate
have some existing sales and was not just in the research and development stage.
The board believed that the most attractive merger candidate would have
revenues from an existing product line as well as products in development, as
this would increase the likelihood of securing additional funding for continued
product development after completion of the merger. One candidate contacted was
a private company with business activities in the healthcare area. The company
had several products in the marketplace generating approximately $12 million of
revenues as well as a drug product candidate relating to Type II diabetes that
was in a late stage clinical trial. Mr. Williams met with the chief executive
officer of the candidate on March 6, 2007 to discuss the candidate’s business
and the possibility of a merger transaction. At a meeting of the board of
directors held on March 13, 2007, management and the board reviewed the
candidate’s business. The board also discussed general strategic alternatives
for Cellegy, including continuing as an independent company and seeking
additional funding, sale of other assets of the company, seeking to license to
third parties portions of those assets to reduce overhead, liquidation of the
company, filing for bankruptcy, and pursuing a business combination transaction.
The board believed that a merger transaction was the preferred alternative
, since a
merger would involve the acquisition of both the assets and liabilities of the
company, would avoid possible time, expense, and uncertainty and delays in
resolving any outstanding claims, liabilities or obligations, that would
be involved in a bankruptcy or a liquidation of the company
following an asset sale, and would give the stockholders the opportunity to
participate as stockholders in the business of an acquiring
company.
The board authorized management to pursue the
candidate in more depth. The parties held several telephonic conference calls
and individual calls during March through June 2007 with the candidate regarding
a possible merger transaction
involving
all stock an no cash consideration and with the Cellegy stockholders owning a
small percentage of the combined company, and which would have required a need
for substantial additional capital after the closing to support current and
future business activities.
Management informally apprised the board of
progress and the discussions held. Counsel for Cellegy and counsel for the
candidate had a number of communications in April and May 2007 regarding
possible transaction structures and various legal issues concerning a possible
transaction. Cellegy management undertook due diligence review of the candidate
concerning its business, and Cellegy’s chief financial officer conducted an
on-site visit in the second half of May 2007. In mid-June 2007, the third
party’s management ceased communications with Cellegy and efforts to restart
discussions were not successful. Cellegy subsequently learned that the principal
shareholders of the third party candidate company had decided to d
issolve
their relationship, and that the remaining principal shareholder had
decided
to fund and operate the candidate as a private
company.
Another
private pharmaceutical company that expressed an interest in
acquiring Cellegy’s women’s healthcare products was contacted in June 2007
to determine if the third party continued to have interest and whether or not
such party had access to funds to complete a transaction. The party expressed
interest in discussing an all-stock merger transaction with Cellegy and
indicated that it was in the process of arranging financing to purchase a
prescription drug product line from a third party company that would complement
Cellegy’s remaining programs. Following discussions between Mr. Williams and the
chief executive officer of the third party in June and early July 2007
concerning due diligence and possible legal and accounting issues relating to a
merger transaction, at a meeting of the Cellegy board held on July 9, 2007, the
board authorized management to continue discussions with the third party, as
well as to continue consideration of other alternatives. In the second half of
July, the third party indicated to Mr. Williams that financing was not feasible
without terms relating to the post-merger combined company that Cellegy’s
management deemed unacceptable, including use of Cellegy’s cash as security for
a debt financing, discontinuance of any clinical trials on Savvy and various
strict default conditions. The board, which had been informed of discussions and
progress with the party, concurred that the party was not an ideal candidate.
Discussions were terminated in the second half of July 2007.
In the
next two weeks, discussions were begun with Adamis. Adamis was introduced to Mr.
Williams by one of the company’s directors, John Q. Adams, Sr., who knew of
Adamis through his other business activities including serving as a director of
or consultant to various private companies. During July 2007, Mr. Williams held
several conversations with
Dr.
Dennis Carlo, the chief executive officer of Adamis, David Marguglio, a vice
president of Adamis, and Rand Mulford, who at the time was a vice president of
Adamis, Rob Caso held conversations with Rob Hopkins, the chief financial
officer of Adamis, and Rand Mulford,
and other preliminary due
diligence efforts were undertaken. At a meeting of the audit committee of the
board held on July 30, 2007 at which all directors were present except for Dr.
Klar, Mr. Williams updated the board concerning the business and intended
business of Adamis and discussions with Adamis regarding a possible merger
transaction.
Mr.
Williams apprised Dr. Klar by telephone after the meeting of the update and
discussion.
Management informed the directors that Adamis was in the
process of negotiating a transaction to acquire International Laboratories Inc.,
referred to as International Labs or INL, an independent contract packager of
pharmaceutical products located in Florida providing thermoform packaging,
bottling and packaging services, and that reaching agreement on that transaction
was expected to proceed in parallel with discussions concerning the possible
merger transaction with Cellegy. The board again reviewed options for the
company and directed management to continue discussions concerning the merger
alternative. Cellegy’s board authorized management to proceed with discussions
with Adamis because, among other things, Adamis had existing pharmaceutical
products being sold in the marketplace and intellectual property relating to a
number of potential product candidates in significant markets. Cellegy and
Adamis also believed that the acquisition of INL, while not part of the core
business of Adamis, had the potential to generate a revenue stream to help
support future operating expenses and development efforts.
On
August 3, 2007, Adamis delivered a draft of a term sheet to
Cellegy describing a framework for discussions regarding a possible
merger transaction, and the parties held a conference call to discuss the term
sheet.
The term
sheet contemplated a merger transaction and a reverse stock split of the Cellegy
common stock in which Cellegy equity holders, on a fully-diluted basis, would
hold approximately 10% of the fully-diluted equity of the combined company, and
that before the closing Adamis would acquire INL. Adamis also
delivered to Cellegy certain due diligence background materials including a
confidential private placement memorandum dated August 2006 that included
information concerning Adamis’ business, products and product candidates and
estimates concerning certain possible future product sales and financial
performance outcomes, and internal management estimates of
possible future financial measures including revenues and profitability
outcomes. This material was provided for due diligence purposes,
was not audited or reviewed by Adamis’ auditors, had not been updated
since the date of its preparation, and was not prepared for the purpose of
disclosure to Cellegy.
The parties exchanged drafts of terms sheets
concerning a possible merger transaction through early August 2007, the terms of
which were consistent in material respects with the initial term sheet. The
parties continued discussions in the first half of August concerning issues
relating to the structure, valuation, timing and terms of a possible
transaction, and due diligence continued.
On
August 10, 2007,
Weintraub
Genshlea Chediak, Cellegy’s regular outside counsel for several years,
distributed a first draft of a merger agreement to counsel for
Adamis
, Cooley
Godward Kronish LLP, which was Adamis’ regular outside counsel and had been
retained in December 2007
. On August 16, 2007, the parties held a
telephone call with counsel for both companies present to discuss the draft
agreement and business, accounting and legal issues relating to a possible
transaction
. Mr.
Williams and Mr. Caso participated in the call for Cellegy and Dr. Carlo, Mr.
Marguglio, Mr. Mulford and Mr. Hopkins participated in the call for
Adamis. The terms of a possible merger transaction that were
discussed on the call were consistent in all material respects with the terms
outlined in the initial term sheet. Following the call,
Cellegy management updated the board concerning the status of discussions and
issues relating to a merger transaction,
including
the intent to structure a transaction so as to be tax-free to the shareholders
of both companies, the filing of a registration statement and proxy statement
with the SEC concerning the transaction, the need for Adamis to complete the
audit of its financial statements before a registration statement was filed, and
the mechanics of the reverse stock split contemplated by the
transaction.
Throughout
August and September 2007, legal counsel for Cellegy and Adamis periodically
communicated concerning due diligence and transaction issues, Mr. Caso and Mr.
Hopkins held telephone conversations and exchanged documents to discuss various
accounting and financial reporting aspects of a possible transaction, and
revised drafts of the merger agreement were exchanged.
The
parties and counsel had another conference call on September 8, 2007 to discuss
the draft of the merger agreement and related accounting and legal issues.
Mr.
Williams and Mr. Caso participated in the call for Cellegy and Dr. Carlo, Mr.
Marguglio, Mr. Mulford and Mr. Hopkins participated in the call for
Adamis. The parties discussed the status of due diligence, the status
of Adamis’ discussions concerning the acquisition of INL, and certain issues
concerning the draft of the merger agreement including whether the number of
shares that Cellegy stockholders would hold after the transaction would be
subject to reduction depending on the amount of cash that Cellegy held at or
near the closing date of the merger, and whether Adamis’ obligation to close the
merger would be subject to Adamis having adequate financing as of the closing
date. Mr. Williams indicated that Cellegy did not favor a financing
closing condition. Discussions between Mr. Williams, Dr. Carlo, Mr. Marguglio
and Mr. Mulford, and between Mr. Caso and Mr. Hopkins,
continued
throughout September, and Mr. Williams updated the board informally concerning
the
fact that
due diligence was progressing, that the transaction appeared to be moving
forward, the discussions with Adamis concerning a financing closing condition
and possible reduction in the number of shares to be held by Cellegy
stockholders based on Cellegy’s cash at the closing date, and that Adamis
appeared to be moving forward in its acquisition of
INL.
On
September 10, 2007, Robert Caso, Cellegy’s chief financial officer, visited the
International Laboratories facility in Tampa, Florida and discussed business and
financial issues relating to a possible transaction and to International
Laboratories’ future business plans with
Mr. Aloi
and Mr. Hopkins.
Mr. Caso also toured the plant and current packing
operations and discussed expansion plans. On September 18, 2007, David
Marguglio, a vice president of Adamis, visited Cellegy’s offices in Quakertown,
Pennsylvania, met with Mr. Caso and reviewed business and legal due diligence
issues
and
various company agreements and due diligence materials.
Discussions
continued during September 2007 concerning finance, due diligence and accounting
issues relating to a possible transaction and concerning the proposed
International Laboratories acquisition transaction. In the last week of
September, Dr. Carlo informed Mr. Williams that certain issues had
arisen concerning the International Laboratories acquisition transaction,
including the need to obtain the consent from a creditor of International
Laboratories that held a secured promissory note in the principal amount of
approximately $500,000. The notes were secured by collateral consisting of most
of the outstanding shares of International Laboratories. Adamis indicated to
Cellegy that it was negotiating with the creditor concerning the circumstances
under which the creditor would be willing to release its security interest in
the shares so as to permit Adamis to acquire International Laboratories. Adamis
indicated that it did not presently have the funds to pay the note in full in
connection acquisition of International Laboratories and to fund likely
short-term capital needs of International Labs. Cellegy management discussed
with Adamis the possibility that Cellegy would buy the note from its current
holder for cash. Adamis indicated that it was engaged in discussions with two
potential investors that had expressed an interest in injecting funds into
Adamis by a debt instrument or direct equity, but that due diligence would take
several weeks. Adamis indicated that an investment from one of these two
potential investors was preferable to Cellegy’s assumption of the International
Labs note.
During
the later part of November 2007, several discussions were held between Dr. Carlo
of Adamis and Mr. Williams regarding the percentage of the combined company that
Cellegy stockholders would hold post-merger. Adamis had earlier indicated that
it would consider an ownership range for Cellegy stockholders of between 5% and
10%. A revised proposal was submitted by Dr. Carlo to Mr. Williams on November
30, 2007, proposing in part that Cellegy lend $1 million to Adamis. After
consultation with directors and reviewing the cash needs of Cellegy during the
time before completion of the proposed merger, Cellegy concluded that a loan of
$1 million would leave Cellegy with insufficient cash to address unforeseen
delays in completion of the transaction or other unforeseen expenses. On
December 3, 2007, Mr. Williams responded to Adamis and proposed a secured loan
of $500,000 at the time of signing the merger agreement, with repayment if the
merger did not take place by a specific date. The loan would be converted into a
number of shares equal to approximately 5% of the then-outstanding equity of
Adamis, effective at the closing of the merger, and Cellegy stockholders would
be entitled to receive additional shares based upon the amount of Cellegy’s net
current assets, determined based on dividing the amount of net current assets by
$0.50. In subsequent negotiations held in December 2007, Adamis proposed that
the note would not be secured, that the note would convert into shares of Adamis
stock at the closing of the merger (which would be cancelled), and that the
ratio of the reverse stock split would provide that the Cellegy shareholders
would hold 2,500,000 shares of common stock, plus possible additional amounts
depending on the amount of Cellegy’s net current assets.
Effective
December 31, 2007, Adamis completed the acquisition of International
Laboratories. Beginning the week of January 14, 2008, the parties discussed
several principal transaction issues and negotiated concerning the merger
agreement and ancillary documents.
Following
negotiations, Adamis agreed that there would not be a closing condition based on
its having adequate funding, and the parties agreed that, as reflected in the
terms of the final merger agreement, the number of shares that Cellegy
stockholders would hold following the merger and reverse stock split would
depend in part on the amount of Cellegy’s net working capital.
In
connection with negotiations concerning several transaction issues and terms,
Adamis agreed that the base number of shares to be held by the Cellegy
stockholders immediately after the merger, which would be determined by the
ratio of the reverse stock split of the Cellegy common stock, would be increased
to 3,000,000 shares. In early February 2008, revised drafts of the principal
transaction documents
,
reflecting the material terms of the transaction,
were exchanged between
the parties.
Cellegy
and Adamis determined the merger consideration according to their respective
views concerning the relative valuations of the two companies at the time of the
merger negotiations. For example, the merger consideration was based in part
upon Cellegy’s public company valuation at the time, the range of net working
capital that Cellegy could reasonably be expected to have at the closing, the
value to Adamis of a merger with an already-public company and Cellegy’s and
Adamis’ estimated valuation of Adamis at the time, which estimate accounted
for Adamis’ future prospects. Because neither Cellegy nor Adamis had performed a
formal valuation during the negotiations, such valuation could only be
estimated, with an understanding by both Cellegy and Adamis that their
respective valuations, whether estimated or otherwise, could be subject to
change. Following the negotiations described above, Cellegy and Adamis
ultimately agreed on the terms for the merger described in this joint proxy
statement/prospectus.
February
12, 2008 Board Meeting
On
February 12, 2008, the Cellegy board held a meeting, with Cellegy’s legal
counsel present. In connection with that meeting, drafts of the merger agreement
and principal ancillary agreements, including the voting agreements and the
unsecured promissory note relating to the $500,000 loan to Adamis, were
circulated to the directors. Mr. Caso and Mr. Williams summarized Cellegy’s
current and expected cash position and the status of consideration of various
alternatives. Mr. Williams updated the board on negotiations with Adamis,
including acquisition of International Labs and the terms of the recent Adamis
debt financing relating to that acquisition. Mr. Williams and outside counsel
for Cellegy summarized the proposed terms of the transaction with Adamis,
including the percentage ownership of the combined company that Cellegy
stockholders would own, the proposed reverse stock split of the Cellegy common
stock before the merger and the determination of the reverse stock split ratio,
the representations, warranties, covenants, closing conditions and indemnity
provisions of the merger agreement and other material terms. Mr. Williams and
Mr. Caso presented financial information and analysis regarding Adamis
,
including a summary, based on information provided by Adamis, of estimated
future revenues, expenses and income; an excerpt from a private placement
memorandum of Adamis
, which
had been updated in certain respects from the memorandum previously provided to
Cellegy,
providing an overview of Adamis’ current and anticipated
business; a summary of the proposed transaction prepared by Mr. Caso
; and a
summary of the financial analysis described below
.
The board
discussed the terms of the proposed transaction, various strategic alternatives
to the merger transaction
and
management’s financial analysis of the transaction.
Following review, the
board approved the merger agreement and related proposals and transactions.
Financial Analysis.
In
connection with the meeting of Cellegy’s board of directors on February 12,
2008, Cellegy management performed and delivered to the board an analysis of
Adamis in connection with its consideration of whether to recommend that the
board of directors approve the merger transaction with Adamis. The analysis was
based primarily on the relative valuation and share ownership of the combined
company attributable to the stockholders of Cellegy. The analysis was also based
upon and incorporated information provided by Adamis management, which Cellegy
assumed to be accurate in all material aspects.
Cellegy
did not retain an investment banker or financial advisor in connection with its
consideration of the proposed merger and did not seek or obtain a fairness
opinion from an investment bank or other firm that the consideration to be paid
to Adamis stockholders in the merger, or the consideration to be held by Cellegy
stockholders immediately after the merger, is fair from a financial point of
view to Cellegy’s stockholders. Cellegy examined a number of strategic
transactions over an extended period of time and had discussions with third
party entities concerning a number of potential alternative transactions.
Cellegy management contacted many companies concerning possible transactions and
followed up with those companies that continued to express an interest in
discussions. Of those persons and entities, only Adamis expressed a continued
willingness to pursue a business combination transaction with Cellegy on terms
that management and the board of directors regarded as acceptable. The board of
directors concluded that it had thoroughly examined Cellegy's alternatives and
determined that, under the circumstances, an investment banking firm would not
likely identify third parties with an interest in merging with Cellegy on terms
superior to those proposed by Adamis, and that the merger was in the best
interests of Cellegy’s stockholders. The board of directors also concluded that
the costs of obtaining a fairness opinion from a third party would likely be
disproportionately higher than any corresponding benefits that would be realized
by obtaining such an opinion, particularly in light of Cellegy’s cash position
and prospects, Cellegy’s market capitalization, and the history or negotiations
with Adamis regarding the transaction, would not materially assist Cellegy in
discussions with Adamis or other third parties, and would increase the amount of
transaction costs, reducing the proceeds to Cellegy’s stockholders from the
transaction. The board also determined that the financial analysis presented to
the board by Cellegy’s management regarding Adamis provided a sufficient basis
for concluding that the percentage ownership of the combined company provided
for the Cellegy stockholders in the merger agreement was fair to Cellegy’s
stockholders.
Cellegy
did not obtain any independent appraisal of the assets or liabilities
(contingent or otherwise) of Cellegy or Adamis. Cellegy assumed that the merger
would be completed in a timely manner and in accordance with the terms of the
merger agreement without any limitations, restrictions, conditions, amendments
or modifications, regulatory or otherwise, that collectively would have a
material effect on Cellegy or Adamis. Cellegy management relied upon the
representations of Adamis in the merger agreement and assumed, without
independent verification, that financial statements and financial information
provided to Cellegy were reasonably prepared, and that there was no material
change in the assets, financial condition and business prospects of Cellegy and
Adamis since the date of the most recent Adamis financial information made
available to Cellegy.
In
connection with its analysis, Cellegy management made such reviews, analyses and
inquiries, as it deemed necessary and appropriate under the circumstances. Among
other things, Cellegy:
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reviewed
non-public internal financial information and other data prepared by the
management of Adamis;
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discussed
with members of the senior management of Adamis the business, operations,
financial condition, future prospects and performance of Adamis, on a
stand-alone basis and on a combined basis following the merger;
and
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reviewed
publicly available financial information and stock market data with
respect to certain other pharmaceutical and biotechnology companies.
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The
following is a summary of the material aspects of the financial analyses
presented by Cellegy management to the board of directors. The analysis involved
various determinations as to appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances.
Accordingly, Cellegy believes that its analyses must be considered as a whole
and that selecting portions of the analyses and factors considered without
considering all such analyses and factors, or attempting to ascribe relative
weights to some or all such analyses and factors, could create an incomplete
view of the evaluation process. The order in which these analyses are presented
below, and the results of those analyses, should not be taken as any indication
of the relative importance or weight given to these analyses by Cellegy’s
management or board of directors.
Cellegy Enterprise Value and Equity
Value; Recent Investments in Adamis
. The
prices for the Cellegy common stock for the two weeks preceding the date of the
February 12, 2008, board meeting ranged from a high of $0.08 to a low of $0.06
per share. The closing price of the common stock on the day before the board
meeting was $0.07 which, based on approximately 29,800,000 outstanding Cellegy
shares, implied an enterprise value for Cellegy of $2,086,000. Utilizing that
price range and a range of possible reverse stock split ratios of between 1:7.5
to approximately 1:9.9, on a post-reverse stock split basis and assuming a
proportionate adjustment in the market price of the Cellegy common stock giving
effect to the reverse stock split but not taking into account the closing of the
merger or the impact of the merger on the market price of the common stock, the
implied post-reverse stock split trading prices were between $0.37 and $0.57 per
share. Based on Cellegy’s cash and cash equivalents of $1.8 million as of
December 31, 2007 and 29.8 million shares outstanding, Cellegy’s equity value on
that date was approximately $0.06 per share, which would result in a
post-reverse stock split price range of between $0.45 to $0.57 applying the
above reverse split ratios. Cellegy concluded that, not taking into account the
closing of the merger or the impact of the merger on the market price of the
common stock, both Cellegy’s enterprise value and its equity value at the
estimated closing date of the merger would be reduced as a result of the use of
cash to fund operations and pay transaction expenses between the date of the
merger agreement and the closing of the merger, and a resulting reduction in the
market price of the common stock.
Cellegy
also took into account the value of Adamis common stock as reflected in recent
Adamis equity and debt financing transactions. Between August 2006 and December
2007, Adamis had issued approximately 7.7 million shares of its common stock for
an aggregate amount of approximately $3.9 million at a price of $0.50 per share,
to a limited number of third party accredited investors. In addition, during
that time, approximately $315,000 of principal and interest of previously issued
convertible notes held by investors converted into shares of Adamis common stock
at a conversion price of $0.50 per share. Utilizing a price of $0.50 per Adamis
share and an assumed range of between 50,000,000 and 60,000,000 Adamis shares
outstanding implied an enterprise value for Adamis, based on outstanding shares,
of between $25 million and $30 million. The $0.50 per share value was within the
price range of the implied post-reverse stock split values for the Cellegy
shares based on enterprise value and equity value, as described in the preceding
paragraph. In addition, based on the range of reverse stock split ratios
described above, the estimated number of shares of common stock to be held by
persons who were Cellegy stockholders immediately before the closing of the
merger was between 3,000,000 and 4,000,000 shares. Applying the $0.50 per share
amount to this range would result in values of between $1,500,000 and $2,000,000
for the Cellegy stockholders, which was within the range of the estimated
Cellegy enterprise value and equity values for the time period within which the
closing of the merger was expected to occur.
Enterprise Value Compared to
Historical Revenues
. Cellegy
also reviewed publicly available information contained in
a survey
previously prepared and distributed by Scott-Macon Ltd., an investment banking
firm, and distributed to clients and other third parties to which it chose to
distribute the survey,
regarding approximately 60 public pharmaceutical
companies and approximately 60 biotechnology companies, including market
capitalization as of the third quarter of 2007 and enterprise value as a
multiple of revenues for the preceding 12-month period. Nearly all of these
companies were significantly larger and more mature than Cellegy and Adamis.
Cellegy
used the information in the survey to determine a range of industry ratios of
enterprise value divided by preceding 12-month revenues, in order to determine a
ratio to be applied to historical Adamis revenues and then estimate enterprise
value for Adamis.
The mean and median multiples of enterprise value
divided by the preceding 12-month revenues were 3.6x and 3.4x, respectively, for
the pharmaceutical companies and 5.3x and 4.6x for the biotechnology companies.
The combined revenues for Adamis, Adamis Labs and INL, which Adamis acquired on
December 31, 2007, for the twelve month period ending December 31, 2007 were
approximately $10.1 million. Because of the earlier maturity stage of Cellegy
and Adamis, Cellegy believed it was appropriate to apply a lower multiple, and
applied a multiple of 3.0 to those revenues, resulting in an enterprise value of
approximately $30.3 million. Based on an assumed range of between 63,000,000 and
64,000,000 outstanding shares immediately after the closing, the implied per
share price was between $0.47 and $0.48. This analysis was based only on
historical revenues for Adamis, Adamis Labs and International Labs and did not
take into account any future increase in Adamis revenues for 2008 or future
years.
Discounted Cash Flow Analysis.
Cellegy
performed a discounted cash flow, or DCF, analysis as part of its valuation of
Adamis. Historical and projected financial results are based upon information
provided by Adamis’ management.
The
discounted cash flow analysis relates the value of an asset or business to the
present value of expected future cash flows to be generated by that asset or
business. Discounted cash flow has two components: (1) the present value of
the projected after-tax cash flows after payment of any associated expenses and
capital requirements necessary to generate the related cash flows, which Cellegy
refers to as after-tax free cash flows, for a determined period and (2) the
present value of the terminal value of the asset or business at the end of the
period. In the discounted cash flow analysis, the projected after-tax free cash
flows exclude the impact of interest income and interest expense. The terminal
revenue multiple methodology is utilized to calculate a terminal value by
applying a multiple to the revenue of the asset or business in the last year of
the relevant projections. The terminal value calculated is an estimate for the
value of the annual free cash flow of the asset or business beyond the terminal
year projected into perpetuity.
Cellegy
performed a discounted cash flow analysis assuming a range of discount rates of
12% to 15% and a range of terminal revenue multiples (based on estimated 2011
revenue) of 3.0x to 5.0x. The discount rate reflects the relative risk of
achieving the expected future cash flows. Cellegy selected a range that it
believed approximated the relative risk for companies at similar stages of
development as Adamis. The discount rates used in the DCF differed according to
the risk level of the particular component of the combined business being
discounted, which in the case of Adamis included the packaging business, the
existing allergy and respiratory products being sold by Adamis Labs and the
viral therapy products in the research and development stage. The rates used in
the calculation were therefore determined starting with the prevailing risk free
rate, which is the prevailing treasury bill rate, as a base and then making
additions to this rate based on overall business risk, risks peculiar to the
pharmaceutical industry, including research risk and product risk, risks
pertaining to operating a pharmaceutical packaging firm, and the risks related
to the probability of achieving the company’s overall financial and qualitative
objectives. Additionally, the discount rates used were compared to the risk
profile of Cellegy and its cost of capital adjusted by its risk. The result was
that the Cellegy cost of capital, risk adjusted was estimated at from 3-5%. The
analysis of Adamis was completed using a discount rate that was higher than, and
a multiple of, Cellegy’s rate to accommodate the difference in risk profiles of
Adamis. The higher discount rate used for Adamis related to a risk profile that
included execution of product launches which have more uncertainty than
Cellegy’s profile. The analysis yielded a range of estimated enterprise values
for Adamis between $25.0 million and $30.0 million or, assuming 60,000,000
outstanding Adamis shares immediately before the closing, between $0.42 and
$0.50 per Adamis share or, assuming between 63,000,000 and 64,000,000
outstanding shares of the combined company immediately after the closing, of the
merger between $0.39 and $0.47 per Adamis share.
Following
the board meeting, the merger agreement and ancillary documents were finalized.
The changes made to the merger agreement and other ancillary agreements during
this time were not substantive and did not alter the consideration to be
received by Cellegy stockholders or any other material term from the version of
the merger agreement, voting agreement and promissory note circulated to the
Cellegy directors in connection with the February 12, 2008, meeting of the board
of directors. The merger agreement and ancillary documents were executed and
delivered by the parties on February 12, 2008, and Cellegy announced the
execution of the merger agreement that same day.
Adamis
Adamis
was introduced to Cellegy by one of Cellegy’s directors, who knew of Adamis
through other business contacts. Mr. Williams and Dr. Carlo held several
conversations during July 2007, and other officers of Adamis and Cellegy held
conversations during July 2007, concerning a possible transaction. Part of
Adamis’ long-term business strategy was to engage in a transaction that would
result in Adamis becoming a public reporting company.
.
On August
3, 2007, Adamis delivered a draft of a term sheet to Cellegy proposing certain
terms of a possible merger transaction, and the parties held a conference call
to discuss the term sheet. The parties exchanged drafts of terms sheets
concerning a possible merger transaction through early August 2007. The parties
continued discussions in the first half of August concerning issues relating to
the structure, valuation, timing and terms of a possible transaction, and due
diligence continued.
Discussions
and negotiations between Adamis and Cellegy, and their respective counsel,
during the period from September 2007 through January 2008 are described above
under the heading “Background of the Merger – Cellegy.” During this time, the
members of management who were involved in the discussions with Cellegy also
constituted the Adamis board of directors.
Effective
December 31, 2007, Adamis completed the acquisition of International
Laboratories. Beginning the week of January 14, 2008, the parties discussed
several principal transaction issues and negotiated regarding the merger
agreement and ancillary documents.
On
February 12, 2008, the Adamis board held a meeting, with its legal counsel
present. In connection with that meeting, drafts of the merger agreement and
principal ancillary agreements, including the voting agreements and the
unsecured promissory note relating to the $500,000 loan from Cellegy to Adamis,
were circulated to the directors. Dr. Carlo updated the board on negotiations
with Cellegy and summarized the proposed terms of the transaction with Cellegy,
including the percentage ownership of the combined company that Adamis
stockholders would own, the proposed reverse stock split of the Cellegy common
stock before the merger and the determination of the reverse stock split ratio,
the representations, warranties, covenants, closing conditions and indemnity
provisions of the merger agreement and other material terms. The board discussed
the terms of the proposed transaction and various strategic alternatives to the
merger transaction. Following review, the board approved the merger agreement
and related proposals and transactions.
Following
the board meeting, the merger agreement and ancillary documents were finalized.
The changes made to the merger agreement and other ancillary agreements during
this time were not substantive and did not alter the consideration to be
received by Adamis stockholders or any other material term from the version of
the merger agreement, voting agreement and promissory note circulated to the
Adamis directors in connection with the February 12, 2008, meeting of the board
of directors. The merger agreement and ancillary documents were executed and
delivered by the parties on February 12, 2008.
Developments After the Date of the
Merger Agreement Regarding International Laboratories
In
early April 2008, Adamis decided to dispose of the International Labs
subsidiary. Historically, INL’s largest customers were generic drug
manufacturers that produce drugs in bulk and rely on independent contractors to
package the products, usually in blister packs or bottles, for delivery to their
customers. In mid-April 2008, a third party entity contacted Adamis and
indicated its interest in pursuing discussions to acquire International Labs.
After negotiations between Adamis and the third party during April through July
2008, the parties entered into a definitive purchase agreement and on July 18,
2008, Adamis sold all of the outstanding shares of INL to the third party, for a
purchase price of approximately $2.7 million, of which $500,000 was held in
escrow as described below. In addition, the purchaser agreed to pay
approximately $10.5 million of liabilities of INL, including approximately $4.3
million payable to Adamis. Proceeds to Adamis, including repayment to Adamis by
INL of amounts previously advanced by Adamis to INL, were approximately $6.8
million. At or shortly after the closing of the transaction, Adamis used
approximately $3.8 million of the proceeds to pay certain Adamis obligations,
including approximately $2.2 million of Adamis debt incurred in connection with
its original purchase of INL. Up to $500,000 is potentially payable to
Adamis after the expiration of a six-month escrow/holdback period, with the
precise amount depending on whether any indemnity claims are asserted during
that period by the purchaser of INL and how any such claims are resolved. Adamis
agreed to indemnify the purchaser against losses arising out of breaches or
inaccuracies of representations and warranties made by Adamis or INL in the
purchase agreement, failure of INL or Adamis to perform their covenants or
agreements set forth in the purchase agreement, and liabilities of INL relating
to periods before the closing date of the transaction. Adamis’ indemnification
obligations expire as follows: 18 months after the closing date for most
representations and warranties; and 15 days after the expiration of the relevant
statute of limitations in the case of Adamis’ representation concerning INL’s
compliance, to Adamis’ knowledge, in all material respects with applicable laws,
The purchase agreement does not include any specific time period within which
claims for indemnity must be asserted for breaches of certain basic
representations concerning due organization of INL, capitalization of INL,
authorization for INL to enter into the purchase agreement and enforceability of
the purchase agreement against INL and Adamis, and Adamis’ title to the shares
sold to the purchaser. In connection with the transaction, the former
stockholders of INL from whom Adamis had acquired the business agreed to return
to Adamis eight million of the shares of Adamis common stock that Adamis
previously issued to them and held in escrow as part of the purchase price paid
by Adamis to acquire INL. In deciding to sell INL, Adamis’ management and board
of directors took into account several factors, including (i) the significant
amounts of additional cash that would be necessary to invest in INL in order to
purchase additional machinery and equipment and to prepare to perform its
obligations under its various agreements with third parties as well as prepare
for future growth in its business, (ii) uncertainties surrounding INL’s ability
to purchase the machinery necessary to support its anticipated increased level
of operations, (iii) the limited cash resources that Adamis had available to
invest in the INL operations, (iv) the uncertainties surrounding INL’s levels of
future revenues and profitability, (v) the benefits to Adamis from receipt of
the net cash proceeds from sale of INL and the elimination of liabilities and
obligations relating to INL, and (vi) the benefit to Adamis and its stockholders
from the reduction in the number of outstanding Adamis shares resulting from the
return of eight million of the Adamis shares from the former stockholders of
INL.
During
the discussions between Adamis and the third party, Adamis kept Cellegy informed
concerning the discussions and the terms of the proposed sale, and Cellegy
concurred in the proposed sale. Cellegy’s management and board of directors
concluded that the sale of INL on the terms agreed to by Adamis did not
materially alter Cellegy’s analysis of the potential benefits of the transaction
to Cellegy’s stockholders.
Cellegy
management and board reviewed an analysis of the proposed sale by Adamis of INL,
and concluded that the sale of INL was not likely to materially impact the
relative valuations of Cellegy and Adamis or the board’s conclusions regarding
the relative percentage share ownership in the post-merger combined company of
the respective Cellegy and Adamis stockholders.
The
analysis assumed that the sale of INL would result in gross proceeds of
approximately $13.0 million to Adamis and approximately $3.0 to $4.0 million in
proceeds net of Adamis obligations. The analysis assumed that revenues from sale
of Adamis Labs products for the fiscal year ended March 31, 2008 would be
approximately $1.0 million. Applying the multiple described above of 3.0 to the
estimated annual revenues of Adamis Labs resulted in a value of $3.0 million for
the Adamis Labs portion of Adamis and an estimated $6.0 to $7.0 million value
including the cash portion from the sale of INL, with additional potential
significant value attributable to the proposed Adamis Labs syringe and inhaled
nasal steroid product pipeline and Adamis Viral’s intellectual property and
potential vaccine product candidates. At March 31, 2008 and April 30, 2008,
Cellegy’s cash and cash equivalents were approximately $913,000 and $750,000,
respectively, resulting in a per share equity value of $0.03 and $0.025 per
share, respectively, based on 29.8 million shares outstanding. The analysis
assumed a return of approximately eight million Adamis shares in connection with
the sale of INL, which reduced the assumed number of outstanding Adamis shares
from approximately 53.0 million to approximately 45.0 million. The merger
agreement provides that Cellegy shareholders will hold at least approximately
3.0 million shares at the closing of the merger, plus additional shares based on
the amount of Cellegy net working capital at the end of the month before the
month in which the closing occurs. Assuming no net working capital, Cellegy
stockholders would hold approximately 5.7% of the combined company’s shares,
assuming approximately 50.0 million outstanding Adamis shares; and estimated
Cellegy additional net working capital would result in ownership percentages
between approximately 6%-7%. Applying the assumptions described above under the
heading “Discounted Cash Flow Analysis,” and giving effect to the sale of INL,
the analysis yielded a range of estimated net present values for Adamis, without
the packaging business, of between $16.9 million and $19.7 million. Cellegy
estimated that the range of cash that Cellegy would have on the closing date of
the merger, added to the value of its business, the value of being a public
company in the same line of business and the contribution to the combined
company’s business of certain Cellegy directors continuing as directors of the
combined company, was in the range of approximately $1.1 million, or
approximately 5.3% - 6.1% of the combined company’s estimated value. Thus, the
range of estimated share ownership percentages for Cellegy’s stockholders in the
combined company was comparable in material respects with the range of relative
contributions of Adamis and Cellegy to the combined company’s value. Cellegy’s
board of directors again reviewed the financial analysis after the completion of
the INL sale on July 18, 2008 and concluded that the allocation of share
ownership reflected in the original merger agreement between the Adamis
stockholders and the Cellegy stockholders continued to be appropriate in light
of, among other factors, the external environment and Cellegy’s position and
prospects.
In
addition to the above analysis, the board took into account the following actual
and potential benefits to Adamis and the combined company resulting from the
sale of INL:
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sale
of INL would provide Adamis and the combined company with funds to help
support operations and would make Adamis less dependent on raising
additional significant funding in the immediate future that would
otherwise have been required to support INL’s
operations;
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elimination
of the risks, uncertainties and costs associated with obtaining additional
packing machines and related equipment necessary to support INL’s
obligations under its supply agreements and other
commitments;
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elimination
of the risk of INL not being able to perform its obligations under its
contracts, resulting in potential
liabilities;
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elimination
of risk of fluctuations in future levels of product orders and sales and
price pressures on INL’s business;
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reduction
in the combined company’s operating, financial and information systems
needs and ongoing federal securities law compliance
costs;
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reduction
in the number of Adamis shares outstanding, resulting in a potentially
greater ownership percentage of the combined company for the Cellegy
stockholders; and
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the
reduction in Adamis’ debt as reflected on its balance sheet relating to
INL’s operations, which would be paid from the proceeds of the INL sale
transaction.
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The
following discussion of the parties’ reasons for the merger contains a number of
forward-looking statements that reflect the currents views of Cellegy and/or
Adamis with respect to future events that may have an effect on their future
financial performance. Forward-looking statements are subject to risks and
uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Cautionary
statements that identify important factors that could cause or contribute to
differences in results and outcomes include those discussed in the sections
entitled “Risk Factors” and “Forward-Looking Statements” in this joint proxy
statement/prospectus.
Mutual Reasons for the
Merger
In
reaching the decision to adopt the merger agreement and recommend the merger for
approval by the respective stockholders of Cellegy and Adamis, each board of
directors consulted with its respective management as well as legal advisors. As
discussed in greater detail below, these consultations included discussions
regarding Adamis’ and Cellegy’s strategic business plan, the costs and risks of
executing that business plan as an independent company, past and current
business operations and financial condition, future prospects, the strategic
rationale for the potential transaction, and the terms and conditions of the
merger agreement.
Cellegy
and Adamis believe that the combined company will have the following potential
advantages:
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Existing Sales and Product
Line
.
The combined company will have an existing line of prescription products
that are promoted and sold to physicians who specialized in allergy,
respiratory disease and pediatric medicine.
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Product
Candidates
.
The combined company will have a number of additional product candidates
in the allergy and respiratory field, some of which are expected to be
commercially introduced in the relatively near future.
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Intellectual Property Rights
and Additional Product Candidates
. The combined company will have a
portfolio of intellectual property rights that may lead to product
candidates targeted at prevention and treatment of certain viral diseases,
including avian influenza, which if successfully developed will address
significant markets.
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Management
Team
.
The combined company will be led by experienced senior management from
Adamis and a board of directors with representation from each of Cellegy
and Adamis.
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Cellegy’s Reasons for the
Merger
In
addition to considering the factors outlined above, the Cellegy board of
directors considered the following factors in reaching its conclusion to approve
the merger and to recommend that the Cellegy stockholders approve the issuance
of shares of Cellegy common stock in the merger and the resulting change of
control of Cellegy, and the related transactions, all of which it viewed as
supporting its decision to approve the business combination with
Adamis:
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results
of the due diligence review of Adamis’ business and operations by
Cellegy’s management, which confirmed, among other things, that Adamis met
the criteria set by Cellegy’s board for a potential merger candidate and
that the assets and liabilities of Adamis were substantially as
represented by Adamis management;
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the
fact that the transaction would be submitted to the Cellegy stockholders
for approval;
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the
fact that Cellegy would not be able to continue to operate for an extended
period of time without additional funding, and efforts to obtain
additional funding had not been successful to
date;
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the
current and recent market prices for the Cellegy common
stock;
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the
results of efforts made by Cellegy management to solicit indications of
interest from third parties regarding a potential business combination or
other alternative transactions;
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the
future prospects for Cellegy’s business, and the costs of attempting to
continue as an independent company;
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the
terms and conditions of the merger agreement, including the following
related factors:
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the
percentage of the combined company that the Cellegy stockholders will
receive in the transaction
,
which was expected to be in the range of about 7%, or somewhat higher or
lower than 7%, of the outstanding shares of the combined company, which
the Cellegy board believed was consistent in material respects with the
valuation analysis of the two companies that was presented to the
board;
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the
limited number and nature of the conditions to Adamis’ obligation to
consummate the merger;
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Cellegy’s
rights under the merger agreement to consider certain unsolicited
acquisition proposals under certain circumstances should Cellegy receive a
superior proposal;
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the
conclusion of Cellegy’s board of directors that the potential termination
fee of $150,000, and the circumstances when such fee may be payable, were
reasonable;
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the
no-solicitation provisions governing Adamis’ ability to engage in
negotiations with, provide any confidential information or data to, and
otherwise have discussions with, any person relating to an alternative
acquisition proposal; and
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the
belief that the terms of the merger agreement, including the parties’
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable under the
circumstances;
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Cellegy’s
understanding of Adamis’ business, including its product candidates,
Adamis’ experienced management team, and the prospects for value creation
for Cellegy stockholders in connection with the
merger;
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the
likelihood that the merger would be consummated, including the likelihood
that the merger will receive all necessary
approvals;
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the
opportunity for Cellegy’s stockholders to participate in the long-term
value of Adamis’ product candidate development programs as a result of the
merger;
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the
possibility that the combined entity would be able to take advantage of
the potential benefits resulting from the combination of Cellegy’s public
company infrastructure and Adamis’ experienced management team;
and
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the
Cellegy board of directors’ consideration of strategic alternatives to the
merger, including engaging in a merger transaction with another company or
undertaking a bankruptcy or liquidation of
Cellegy.
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In
the
course of its deliberations, Cellegy’s board of directors also considered a
variety of risks and other countervailing factors related to entering into the
merger agreement, including:
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the
risks related to Adamis and the combined company as described in the risk
factors section set forth elsewhere in this joint proxy
statement/prospectus, including the risk that the combined company will
not be successful in developing commercial products, the risk that the
combined company will not be able to secure funding for such development
on commercially reasonable terms or at all, and the risk that revenues
from Adamis’ future products and services will be less than
expected;
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the
$150,000 termination fee payable to Adamis upon the occurrence of certain
events and the potential effect of such termination fee in deterring other
potential acquirers from proposing an alternative transaction that may be
more advantageous to Cellegy
stockholders;
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the
risks, challenges and costs inherent in combining the operations of the
two companies and the substantial expenses to be incurred in connection
with the merger, including the possibility that delays or difficulties
could adversely affect the combined company’s operating results and
preclude the achievement of some of the benefits anticipated from the
merger;
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the
possible volatility of the trading price of Cellegy’s common stock
resulting from the merger
announcement;
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the
risk that the merger might not be consummated in a timely manner or at
all;
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the
fact that Cellegy’s stockholders would experience material dilution by
virtue of the reverse stock split and the exchange ratio in the merger
transaction;
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the
risk to Cellegy’s business, operations and financial results in the event
that the merger is not
consummated;
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the
fact that the prospects for the Adamis’ products and product candidates
involve uncertainty;
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the
$500,000 loan from Cellegy to Adamis would reduce Cellegy’s available cash
during the pendency of the merger transaction, and Cellegy would be
subject to the risk of nonpayment by Adamis of the Adamis note upon the
maturity date of the Adamis note if the merger was not completed;
and
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various
other risks associated with the combined company and the merger, including
those described in the section entitled “Risk Factors” in this joint proxy
statement/prospectus
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The board
also discussed potential alternatives to the transaction, including attempting
to remain as an independent company and secure additional funding, attempting to
secure a strategic partner, pursuing a voluntary bankruptcy filing, pursuing a
voluntary dissolution proceeding, and continuing to pursue an alternative
business combination transaction with a third party other than Adamis. The board
noted that no third party had expressed a willingness to continue funding the
company as an independent company, and that no third party entity had expressed
an interest in a strategic partner relationship. The board concluded that
Cellegy could not be viable as an independent entity without obtaining
significant additional funding, which was not likely to be available.
The board
reviewed the issues likely to be involved with pursuing a voluntary dissolution
or bankruptcy and concluded that those alternatives would not be in the best
interests of the stockholders and were not likely to provide superior value. The
board concluded that a voluntary bankruptcy filing would likely result in less
value to Cellegy’s stockholders, and potentially to creditors, than the proposed
transaction with Adamis in light of, among other factors, the significant legal
and other costs involved in preparing and pursuing a bankruptcy filing, the
uncertainty concerning the ability to fund Cellegy’s operations during a
bankruptcy proceeding, the ongoing operating and legal expenses during the
pendency of a bankruptcy proceeding, the adverse effect that a bankruptcy filing
could have on Cellegy’s stock price, the possible assertion of contingent claims
in the proceeding and the possible delay in resolving those claims, the
uncertain outcome of resolution of issues with creditors and stockholders in
those proceedings, the likelihood that any party seeking to acquire Cellegy as
part of a bankruptcy proceeding would offer less than the consideration proposed
to be paid by Adamis, the possible time periods involved in winding up Cellegy’s
operations as part of a bankruptcy proceeding and delay in distribution of any
remaining funds to Cellegy’s stockholders, the range of amounts likely to be
available to stockholders upon completion of such proceedings, the fact that one
or more current employees might terminate their employment, making it more
difficult to operate during the bankruptcy proceeding, and other factors. The
board concluded that it was unlikely to attract a superior merger offer than the
proposed transaction with Adamis, and that attempting to continue looking for
other transactions would involve additional time and expense with no reasonable
prospect of a superior result for the stockholders. The board noted that Cellegy
had engaged in discussions with a number of potential business combination
partners, that a business combination with Adamis presented an attractive
opportunity for the Cellegy stockholders to benefit from the anticipated
appreciation in the value of the combined company’s business, that third parties
with whom Cellegy previously had discussions had elected not to pursue further
discussions concerning a merger transaction, and that Cellegy’s declining cash
balances made further pursuit of a different business combination transaction an
unattractive alternative compared to the opportunity with Adamis.
After
evaluating the proposed transaction with Adamis and taking into account all of
the factors previously discussed and considered by the board, the board
unanimously approved the merger transaction with Adamis and authorized
management to negotiate and enter into definitive agreements on terms consistent
in material respects with the terms presented to the board. In making its
determination, the board considered the percentage of the combined company that
would be held by Cellegy stockholders, the existing business and future business
prospects of Adamis, the overall structure of the transaction, the fact that a
merger transaction would result in Adamis assuming all existing obligations of
Cellegy as opposed to an asset sale structure where Cellegy would remain
responsible for obligations after the closing, the terms of the merger agreement
and the factors and considerations described above.
The
foregoing information and factors considered by Cellegy’s board of directors are
not intended to be exhaustive but are believed to include all of the material
factors considered by Cellegy’s board of directors. The Cellegy board of
directors viewed its recommendation to approve the merger transaction as being
based upon its business judgment in light of Cellegy’s financial position and
the totality of the information presented and considered, and the overall effect
of the transaction on the stockholders of Cellegy compared to other
alternatives.
In view
of the wide variety of factors considered in connection with its evaluation of
the merger and the complexity of these matters, Cellegy’s board of directors did
not find it useful, and did not attempt, to quantify, rank or otherwise assign
relative weights to these factors. In considering the factors described above,
individual members of Cellegy’s board of directors may have given different
weight to different factors. Cellegy’s board of directors conducted an overall
analysis of the factors described above, including discussions with, and
questioning of, Cellegy’s management and Cellegy’s legal advisors, and
considered the factors overall to be favorable to, and to support, its
determination.
Interests of Cellegy’s Board of
Directors and Executive Officers in the Proposed Transaction
.
The
Cellegy board was aware that certain of Cellegy’s directors and executive
officers may have interests in the proposed transaction that are different from,
or in addition to, the interests of Cellegy’s stockholders generally, and that
these interests may present them with actual or potential conflicts of interest.
Richard
C. Williams, Robert B. Rothermel and John Q. Adams, Sr., who currently are
directors of Cellegy, are expected to continue to serve on the board of
directors of the combined company following the consummation of the merger and
upon the closing of the merger will each receive new outside director stock
option grants to purchase 50,000 shares of common stock. Following
the merger, they will be eligible to receive cash outside director fee
compensation pursuant to the combined company’s director compensation
policies. Cellegy will not be required to pay severance, change in
control or similar payments to any director or executive officer in connection
with the proposed merger transaction.
Adamis’ Reasons for the
Merger
The
Adamis board of directors has determined that the terms of the proposed merger
are fair and in the best interests of Adamis and its stockholders. Accordingly,
the board of directors approved the merger agreement and the merger contemplated
thereby, and recommended that Adamis’ stockholders vote
FOR
approval
of the merger agreement and the merger contemplated thereby.
The
Adamis board considered a number of factors in reaching its decision, without
assigning any specific or relative weight to such factors. The material factors
considered included:
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information
concerning the business, operations, net worth, liabilities, cash assets
and needs, and future business prospects of Adamis and Cellegy, both
individually and on a combined
basis;
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the
belief that by combining operations, the combined company would have
better opportunities for future growth than Adamis would have on its
own;
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the
current and prospective economic and competitive environments facing
Adamis as a stand-alone company;
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the
fact that the holders of Adamis capital stock would own a substantial
majority of the outstanding capital stock of the combined
company;
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the
belief that the merger would provide Adamis with additional management and
financial resources, including immediate
cash;
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the
opportunity for Adamis’ stockholders to benefit from potential
appreciation in the value of the combined company’s common
stock;
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the
potential impact of the merger and becoming a public company on Adamis’
ability to raise additional capital;
and
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the
expectation that the merger would be accomplished on a tax-free basis for
United States federal income tax purposes for United States taxpayers,
except for taxes payable on cash received by Adamis stockholders in lieu
of fractional shares.
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In
addition to considering the factors outlined above, the Adamis board of
directors considered the following factors in reaching its conclusion to approve
the merger and to recommend that the Adamis stockholders approve the merger
agreement, all of which it viewed as supporting its decision to approve the
business combination with Cellegy:
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the
results of the due diligence review of Cellegy’s business and operations
by Adamis’ management confirmed that the assets and liabilities of Cellegy
were substantially as represented by Cellegy
management;
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the
terms and conditions of the merger agreement, including the following
related factors:
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the
number of the shares of the combined company that the Adamis stockholders
will receive in the transaction;
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the
nature of the conditions to Cellegy’s obligation to consummate the merger
and the limited risk of non-satisfaction of such
conditions;
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the
limited number and nature of the conditions to Adamis’ obligation to
consummate the merger;
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the
conclusion of Adamis’ board of directors that the potential termination
fee of $150,000, and the circumstances in which such fee may be payable,
were reasonable;
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the
no-solicitation provisions governing Cellegy’s ability to engage in
negotiations with, provide any confidential information or data to, and
otherwise have discussions with, any person relating to an alternative
acquisition proposal; and
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the
belief that the terms of the merger agreement, including the parties’
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable under the
circumstances;
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the
voting agreements entered into by stockholders of Cellegy holding
approximately 41% of the outstanding capital stock of Cellegy as of
February 12, 2008, pursuant to which those stockholders agreed, solely in
their capacities as Cellegy stockholders, to vote all of their shares of
Cellegy capital stock in favor of the merger
transaction;
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the
likelihood that the merger will be consummated, including the likelihood
that the merger will receive all necessary
approvals;
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the
possibility that the combined entity would be able to take advantage of
the potential benefits resulting from the combination of Cellegy’s public
company infrastructure and Adamis’ management team;
and
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the
Adamis board of directors’ consideration of strategic alternatives to the
merger, including engaging in a business transaction with another
company.
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The
Adamis board also considered a number of risks and potentially negative factors
in its deliberations concerning the merger, including the risk factors described
elsewhere in this joint proxy statement/prospectus, and in
particular:
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the
fact that Adamis’ stockholders will not receive the full benefit of any
future growth in the value of their equity that Adamis may have achieved
as an independent company;
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the
risks associated with the existing operations of
Cellegy;
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the
limitations on Adamis, as set forth in the merger agreement, from engaging
in discussions and negotiations with any party other than Cellegy
concerning a business combination involving
Adamis;
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the
possibility that Adamis will be required to pay the termination fee
provided for in the merger
agreement;
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the
possibility that Cellegy might have less than expected net working capital
at the closing of the merger;
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the
risk that the potential benefits of the merger may not be
realized;
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the
risks, challenges and costs inherent in combining the operations of the
two companies and the substantial expenses to be incurred in connection
with the merger, including the possibility that delays or difficulties
could adversely affect the combined company’s operating results and
preclude the achievement of some of the benefits anticipated from the
merger;
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the
possible volatility, at least in the short term, of the trading price of
Cellegy’s common stock following the
merger;
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the
risk of diverting management’s attention from other strategic priorities
to implement merger integration
efforts;
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the
risk that the merger might not be consummated in a timely manner or at all
and the potential adverse effect of the public announcement of the merger
on Adamis’ reputation;
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the
risk to Adamis’ business, operations and financial results in the event
that the merger is not consummated;
and
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various
other risks associated with the combined company and the merger, including
those described in the section entitled “Risk Factors” in this joint proxy
statement/prospectus.
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The board
of directors of Adamis determined that the merger is preferable to the other
alternatives that might be available to Adamis, such as remain independent and
attempting to grow internally through equity or debt financings, or engaging in
a transaction with another party. The Adamis board made that determination
because it believes that the merger will unite two companies with complementary
needs, assets and board members, thereby creating a combined company with
greater capital strength and profitability potential than Adamis possesses on a
stand-alone basis.
For the
reasons set forth above, the board of directors of Adamis recommended that
holders of Adamis capital stock vote to approve the merger agreement, the merger
contemplated thereby, and the related transactions.
Interests of Cellegy’s Directors and
Executive Officers in the Merger
In
considering the recommendation of the Cellegy board of directors with respect to
approving the issuance of shares to Adamis stockholders pursuant to the merger
agreement and the other matters to be acted upon by Cellegy’s stockholders at
the Cellegy annual meeting, Cellegy’s stockholders should be aware that certain
members of the board of directors and executive officers of Cellegy have
interests in the merger that may be different from, or in addition to, the
interests of Cellegy’s stockholders. These interests relate to or arise from the
following matters:
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Richard
C. Williams, Robert B. Rothermel and John Q. Adams, Sr., who currently are
directors of Cellegy, are expected to continue to serve on the board of
directors of the combined company following the consummation of the merger
and upon the closing of the merger will each receive new outside director
stock option grants to purchase 50,000 shares of common stock.
The
initial grants are expected to have an exercise price equal to the fair
market value of the common stock on the date of grant. They are
expected to 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. Each
non-employee director is also expected to receive an annual stock option
grant after each annual meeting of stockholders, covering 25,000 shares,
subject to adjustment of the board of directors from time to
time. These annual grants are expected to 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 whose
service 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.
In addition, following the
merger, they will be eligible to receive cash outside director fee
compensation pursuant to the combined company’s director compensation
policies.
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Cellegy’s
board of directors was aware of these potential conflicts of interest and
considered them in reaching its decision to approve the transactions
contemplated by the merger agreement and to recommend that their respective
stockholders approve the Cellegy proposals contemplated by this joint proxy
statement/prospectus.
None of
Cellegy’s officers or directors have severance or change of control agreements
providing for severance or other benefits upon termination of employment or upon
a change of control of Cellegy.
Ownership
Interests
As of
June 30, 2008, certain of the major stockholders of Cellegy, sometimes referred
to as the Principal Cellegy Stockholders, holding approximately 12,165,236
shares, or approximately 41% of the outstanding shares of Cellegy common stock,
solely in their capacity as Cellegy stockholders, have entered into voting
agreements and irrevocable proxies with Adamis in connection with the merger.
For a more detailed discussion of the voting agreements see the section entitled
“Agreements Related to the Merger—Voting Agreements” in this joint proxy
statement/prospectus. As of October 1, 2008, the directors and executive
officers of Cellegy held approximately 20,000 shares, or less than one percent
of the outstanding shares of Cellegy common stock.
Interests of Adamis’ Directors and
Executive Officers in the Merger
In
considering the recommendation of the Adamis board of directors with respect to
adopting the merger agreement, Adamis stockholders should be aware that certain
members of the board of directors and executive officers of Adamis have
interests in the merger that may be different from, or in addition to, interests
they may have as Adamis stockholders.
These
interests relate to or arise from the following matters:
following the
consummation of the merger, Messrs. Aloi, Carlo and Marguglio, who are the
directors of Adamis, will continue to serve on the board of directors of the
combined company, and the existing executive officers of Adamis will continue to
serve in their respective positions with the combined company.
Adamis’
board of directors was aware of these potential conflicts of interest and
considered them, among other matters, in reaching its decision to approve the
merger agreement and the merger and to recommend that its stockholders approve
the Adamis proposals contemplated by this joint proxy
statement/prospectus.
Effective Time of the
Merger
The
merger agreement requires the parties to consummate the merger after all of the
conditions to the consummation of the merger contained in the merger agreement
are satisfied or waived, including the approval of the merger by the
stockholders of Cellegy and Adamis. The merger will become effective upon the
filing of a certificate of merger with the Secretary of State of the State of
Delaware or at such later time as is agreed by Cellegy and Adamis and specified
in the certificate of merger. Neither Cellegy nor Adamis can predict the exact
timing of the consummation of the merger.
Cellegy
must comply with applicable federal and state securities laws in connection with
the issuance of shares of Cellegy common stock in the merger and the filing of
this joint proxy statement/prospectus with the SEC.
Tax Treatment of the
Merger
Cellegy
and Adamis intend the merger to qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, or
the Code. Each of Cellegy and Adamis will use its commercially reasonable best
efforts to cause the merger to qualify as a reorganization within the meaning of
Section 368(a) of the Code, and not to permit or cause any affiliate
or any subsidiary of Cellegy or Adamis to take any action or cause any action to
be taken which would cause the merger to fail to qualify as a reorganization
under Section 368(a) of the Code. For a description of the material
United States federal tax consequences of the merger, see the section entitled
“Material United States Federal Income Tax Consequences of the Merger”
below.
Material United States Federal Income
Tax Consequences of the Merger
General
The
following general discussion summarizes the material United States federal
income tax consequences of the merger to Cellegy, Cellegy Holdings, Adamis, and
holders of Adamis capital stock who are “United States persons” (as defined in
Section 7701(a)(30) of the Code) and who hold their Adamis capital stock as
a capital asset within the meaning of Section 1221 of the Code. The term
“non-United States person” means a person or holder other than a “United States
person.” If a partnership or other flow-through entity is a beneficial owner of
Adamis capital stock, the tax treatment of a partner in the partnership or an
owner of the entity will depend upon the status of the partner or other owner
and the activities of the partnership or other entity.
This
section does not discuss all of the United States federal income tax
consequences that may be relevant to a particular stockholder in light of his or
her individual circumstances or to stockholders subject to special treatment
under the federal income tax laws, including, without limitation:
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brokers
or dealers in securities or foreign
currencies;
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stockholders
who are subject to the alternative minimum tax provisions of the
Code;
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tax-exempt
organizations;
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stockholders
who are “non-United States
persons”;
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stockholders
that have a functional currency other than the United States
dollar;
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banks,
financial institutions or insurance
companies;
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stockholders
who acquired Adamis stock in connection with stock option or stock
purchase plans or in other compensatory transactions;
or
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stockholders
who hold Adamis stock as part of an integrated investment, including a
straddle, hedge, or other risk reduction strategy, or as part of a
conversion transaction or constructive
sale.
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Assuming
the merger is completed according to the terms of the merger agreement and this
joint proxy statement/prospectus, and based upon customary assumptions and
certain representations as to factual matters by Cellegy and Adamis, it is the
opinion of
Weintraub
Genshlea Chediak, a law corporation,
that the merger will be treated
for United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. No ruling has been or will be
sought from the Internal Revenue Service, or the IRS, as to the United States
federal income tax consequences of the merger, and the following summary is not
binding on the IRS or the courts. This discussion is based upon the Code, laws,
regulations, rulings and decisions in effect as of the date of this proxy
statement/prospectus, all of which are subject to change, possibly with
retroactive effect. This summary does not address the tax consequences of the
merger under state, local and foreign laws or under United States federal tax
law other than income tax law. There can be no assurance that the IRS will not
challenge one or more of the tax consequences described herein.
Adamis stockholders are urged to
consult their own tax advisors as to the specific tax consequences to them of
the merger, including any applicable federal, state, local and foreign tax
consequences.
The
following summary sets forth the material federal income tax consequences for
the Adamis stockholders and the corporate parties to the merger assuming that
the merger will constitute a “reorganization” within the meaning of
Section 368(a) of the Code.
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stockholders
will not recognize any gain or loss upon the receipt of Cellegy common
stock in exchange for Adamis stock in connection with the merger (except
to the extent of cash received in lieu of a fractional share of Cellegy
common stock, as discussed
below).
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Cash
payments received by an Adamis stockholder for a fractional share of
Cellegy common stock will be treated as if such fractional share had been
issued in connection with the merger and then redeemed by Cellegy for
cash. Adamis stockholders will recognize capital gain or loss with respect
to such cash payment, measured by the difference, if any, between the
amount of cash received and the tax basis in such fractional
share.
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The
aggregate tax basis of the Cellegy common stock received by an Adamis
stockholder in connection with the merger will be the same as the
aggregate tax basis of the Adamis stock surrendered in exchange for
Cellegy common stock, reduced by any amount allocable to a fractional
share of Cellegy common stock for which cash is
received.
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The
holding period of the Cellegy common stock received by an Adamis
stockholder in connection with the merger will include the holding period
of the Adamis stock surrendered in connection with the
merger.
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A
dissenting stockholder who perfects appraisal rights will generally
recognize gain or loss with respect to his or her shares of the Adamis
stock equal to the difference between the amount of cash received and his
or her basis in such shares. Such gain or loss will generally be long term
capital gain or loss, provided the shares were held for more than one year
before the disposition of the shares. Interest, if any, awarded in an
appraisal proceeding by a court would be included in such stockholder’s
income as ordinary income.
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Cellegy,
Cellegy Holdings and Adamis will not recognize gain or loss solely as a
result of the merger.
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Backup
Withholding
If you
are a non-corporate holder of Adamis stock you may be subject to information
reporting and backup withholding on any cash payments received in lieu of a
fractional share interest in Cellegy common stock or cash payments for
perfecting appraisal rights. You will not be subject to backup withholding,
however, if you:
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furnish
a correct taxpayer identification number and certify that you are not
subject to backup withholding on the substitute Form W-9 or successor
form included in the letter of transmittal to be delivered to you
following the completion of the merger (or the appropriate Form W-8,
as applicable); or
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are
otherwise exempt from backup
withholding.
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Any
amounts withheld under the backup withholding rules will be allowed as a
refund or credit against
your
United States federal income tax liability, provided you furnish the required
information to the IRS.
Tax Return Reporting
Requirements
If you
receive Cellegy common stock as a result of the merger, you will be required to
retain records pertaining to the merger, and you will be required to file with
your United States federal income tax return for the year in which the merger
takes place a statement setting forth certain facts relating to the merger as
provided in Treasury Regulations Section 1.368-3(b).
Taxable
Acquisition
The
failure of the merger to qualify as a reorganization within the meaning of
Section 368(a) of the Code would result in an Adamis stockholder
recognizing gain or loss with respect to the shares of Adamis stock surrendered
by such stockholder equal to the difference between the stockholder’s basis in
the shares and the fair market value, as of the effective time of the merger, of
the Cellegy stock received in exchange for the Adamis stock (and the cash
received in lieu of a fractional share of Adamis stock). In such event, a
stockholder’s aggregate basis in the Cellegy common stock so received would
equal its fair market value, and such stockholder’s holding period would begin
the day after the merger. A dissenting stockholder who receives cash will be
required to recognize gain or loss in the same manner as described above (see
discussion of dissenters in a reorganization above).
The foregoing discussion is not
intended to be a complete analysis or description of all potential United States
federal income tax consequences of the merger. In addition, the discussion does
not address tax consequences which may vary with, or are contingent on, your
individual circumstances. Moreover, the discussion does not address any
non-income tax or any foreign, state or local tax consequences of the merger.
Accordingly, Adamis stockholders are urged to consult with their own tax advisor
to determine the particular United States federal, state, local or foreign
income or other tax consequences to them of the merger.
Anticipated Accounting
Treatment
Adamis
security holders will own, after the merger, approximately 93% of the
outstanding shares of the combined company. Further, Adamis directors will
constitute at least one-half of the combined company’s board of directors, and
all members of the executive management of the combined company will be from
Adamis. Therefore, Adamis will be deemed to be the acquiring company for
accounting purposes and the merger will be accounted for as a reverse merger and
a recapitalization.
The
unaudited pro forma combined condensed consolidated financial statements
included in this joint prospectus/proxy have been prepared to give effect to the
proposed merger of Adamis and Cellegy as a reverse acquisition of assets and a
recapitalization in accordance with accounting principles generally accepted in
the United States. For accounting purposes, Adamis is considered to be acquiring
Cellegy in the merger and it is assumed that Cellegy does not meet the
definition of a business in accordance with Statement of Financial Accounting
Standards, or SFAS No. 141,
Business
Combinations
, and
Emerging Issue Task Force 98-3, or EITF 98-3,
Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a
Business
, because
of Cellegy’s current efforts to sell or otherwise dispose of its operating
assets and liabilities.
If the
merger is completed, holders of Adamis common stock are entitled to appraisal
rights under Section 262 of the DGCL, or Section 262, provided that
they comply with the conditions established by Section 262.
The
discussion below is a summary regarding an Adamis stockholder’s appraisal rights
under Delaware law but is not a complete statement of the law regarding
dissenters’ rights under Delaware law and is qualified in its entirety by
reference to the text of the relevant provisions of Delaware law, which are
attached to this joint proxy statement/prospectus as
Annex B.
Stockholders intending to exercise appraisal rights should carefully review
Annex B
. Failure
to follow precisely any of the statutory procedures set forth in
Annex B
may
result in a termination or waiver of these rights.
A record
holder of shares of Adamis capital stock who makes the demand described below
with respect to such shares, who continuously is the record holder of such
shares through the effective time of the merger, who otherwise complies with the
statutory requirements of Section 262 and who neither votes in favor of the
merger nor consents thereto in writing will be entitled to an appraisal by the
Delaware Court of Chancery, or the Delaware Court, of the fair value of his, her
or its shares of Adamis capital stock in lieu of the consideration that such
stockholder would otherwise be entitled to receive pursuant to the merger
agreement. All references in this summary of appraisal rights to a “stockholder”
or “holders of shares of Adamis capital stock” are to the record holder or
holders of shares of Adamis capital stock. Except as described herein,
stockholders of Adamis will not be entitled to appraisal rights in connection
with the merger.
Under
Section 262, where a merger is to be submitted for approval at a meeting of
stockholders, such as the Adamis special meeting, not fewer than 20 days
before the meeting, a constituent corporation must notify each of the holders of
its stock for whom appraisal rights are available that such appraisal rights are
available and include in each such notice a copy of Section 262. This joint
proxy statement/prospectus shall constitute such notice to the record holders of
Adamis capital stock.
Stockholders
who desire to exercise their appraisal rights must satisfy all of the conditions
of Section 262. Those conditions include the following:
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Stockholders
electing to exercise appraisal rights must not vote “for” the adoption of
the merger agreement. Voting “for” the adoption of the merger agreement
will result in the waiver of appraisal rights. Also, because a submitted
proxy not marked “against” or “abstain” will be voted “for” the proposal
to adopt the merger agreement, the submission of a proxy not marked
“against” or “abstain” will result in the waiver of appraisal
rights.
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A
written demand for appraisal of shares must be filed with Adamis before
the taking of the vote on the merger agreement at the special meeting. The
written demand for appraisal should specify the stockholder’s name and
mailing address, and that the stockholder is thereby demanding appraisal
of his, her or its Adamis capital stock. The written demand for appraisal
of shares is in addition to and separate from a vote against the merger
agreement or an abstention from such vote. That is, failure to return your
proxy, voting against, or abstaining from voting on, the merger will not
satisfy your obligation to make a written demand for
appraisal.
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A
demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder’s name appears on the stock
certificate. If the shares are owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, this demand must be executed
by or for the fiduciary. If the shares are owned by or for more than one
person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute the demand for appraisal
for a stockholder of record. However, the agent must identify the record
owner and expressly disclose the fact that, in exercising the demand, he
is acting as agent for the record owner. A person having a beneficial
interest in Adamis capital stock held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below in a timely manner to perfect
whatever appraisal rights the beneficial owners may
have.
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A
stockholder who elects to exercise appraisal rights should mail or deliver
his, her or its written demand to Adamis at 2658 Del Mar Heights Road,
#555 Del Mar, CA 92014, Attention: Chief Financial
Officer.
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Within
10 days after the effective time of the merger, Adamis, as the surviving
company, will provide notice of the effective time of the merger to all Adamis
stockholders who have complied with Section 262 and have not voted in favor
of the adoption of the merger agreement.
Within
120 days after the effective time of the merger, either Adamis or any
stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court, with a copy served on Adamis in
the case of a petition filed by a stockholder, demanding a determination of the
fair value of the shares of all stockholders seeking to exercise appraisal
rights. There is no present intent on the part of Adamis to file an appraisal
petition, and stockholders seeking to exercise appraisal rights should not
assume that Adamis will file such a petition or that Adamis will initiate any
negotiations with respect to the fair value of such shares. Accordingly, holders
of Adamis capital stock who desire to have their shares appraised should
initiate any petitions necessary for the perfection of their appraisal rights
within the time periods and in the manner prescribed in
Section 262.
Within
120 days after the effective time of the merger, any stockholder who has
satisfied the requirements of Section 262 will be entitled, upon written
request, to receive from Adamis a statement setting forth the aggregate number
of shares of Adamis common stock and Adamis preferred stock not voting in favor
of the adoption of the merger agreement and with respect to which demands for
appraisal were received by Adamis and the aggregate number of holders of such
shares. Such statement must be mailed within 10 days after the
stockholder’s request has been received by Adamis or within 10 days after
the expiration of the period for the delivery of demands as described above,
whichever is later.
If a
petition for an appraisal is timely filed and a copy thereof is served upon
Adamis, Adamis will then be obligated, within 20 days after service, to
file in the office of the Register in Chancery a duly verified list containing
the names and addresses of all stockholders who have demanded an appraisal of
their shares and with whom agreements as to the value of their shares have not
been reached. After notice to stockholders, as required by the Delaware Court,
at the hearing on such petition, the Delaware Court will determine which
stockholders are entitled to appraisal rights. The Delaware Court may require
the stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Delaware Court may dismiss the proceedings as to such stockholder. Where
proceedings are not dismissed, the Delaware Court will appraise the shares of
Adamis capital stock owned by such stockholders, determining the fair value of
such shares exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value.
Although
the board of directors of Adamis believes that the merger consideration is fair,
no representation is made as to the outcome of the appraisal of fair value as
determined by the Delaware Court, and stockholders should recognize that such an
appraisal could result in a determination of a value
higher or
lower than, or the same as, the consideration they would receive pursuant to the
merger agreement.
Moreover,
Adamis does not anticipate offering more than the nature of the merger
consideration to any stockholder exercising appraisal rights and reserves the
right to assert, in any appraisal proceeding, that, for purposes of
Section 262, the “fair value” of a share of Adamis capital stock is less
than the merger consideration. In determining “fair value,” the Delaware Court
is required to take into account all relevant factors. The cost of the appraisal
proceeding, which does not include attorneys’ or experts’ fees, may be
determined by the Delaware Court and taxed against the dissenting stockholder
and/or Adamis as the Delaware Court deems equitable under the circumstances.
Each dissenting stockholder is responsible for his or her attorneys’ and expert
witness expenses, although, upon application of a dissenting stockholder, the
Delaware Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including
without limitation, reasonable attorneys’ fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of stock entitled
to appraisal.
Any
stockholder who has duly demanded appraisal in compliance with Section 262
will not, after the effective time of the merger, be entitled to vote for any
purpose any shares subject to such demand or to receive payment of dividends or
other distributions on such shares, except for dividends or distributions
payable to stockholders of record at a date before the effective time of the
merger.
At any
time within 60 days after the effective time of the merger, any stockholder
will have the right to withdraw his, her or its demand for appraisal and to
accept the terms offered in the merger agreement. After this period, a
stockholder may withdraw his, her or its demand for appraisal and receive
payment for his, her or its shares as provided in the merger agreement only with
the consent of Adamis. If no petition for appraisal is filed with the court
within 120 days after the effective time of the merger, stockholders’
rights to appraisal, if available, will cease. Inasmuch as Adamis has no
obligation to file such a petition, any stockholder who desires a petition to be
filed is advised to file it on a timely basis. Any stockholder may withdraw such
stockholder’s demand for appraisal by delivering to Adamis a written withdrawal
of his, her or its demand for appraisal and acceptance of the merger
consideration, except (i) that any such attempt to withdraw made more than
60 days after the effective time of the merger will require written
approval of Adamis and (ii) that no appraisal proceeding in the Delaware
Court shall be dismissed as to any stockholder without the approval of the
Delaware Court, and such approval may be conditioned upon such terms as the
Delaware Court deems just.
Failure
by any Adamis stockholder to comply fully with the procedures described above
and set forth in
Annex B
to this
joint proxy statement/prospectus may result in termination of such stockholder’s
appraisal rights. In view of the complexity of exercising appraisal rights under
Delaware law, any Adamis stockholder considering exercising these rights should
consult with legal counsel.
The following is a summary of
selected provisions of the merger agreement. While Cellegy, Cellegy Holdings and
Adamis believe that this description covers the material terms of the merger
agreement, it may not contain all of the information that is important to you.
The merger agreement has been attached as Annex A to this joint proxy
statement/prospectus to provide you with information regarding its terms. It is
not intended to provide any other factual information about Cellegy, Adamis or
Cellegy Holdings. The following description does not purport to be complete and
is qualified in its entirety by reference to the merger agreement. You should
refer to the full text of the merger agreement for details of the merger and the
terms and conditions of the merger agreement.
The merger agreement contains
representations and warranties that Cellegy and Cellegy Holdings, on the one
hand, and Adamis, on the other hand, have made to one another as of specific
dates. These representations and warranties have been made for the benefit of
the other parties to the merger agreement and may be intended not as statements
of fact but rather as a way of allocating the risk to one of the parties if
those statements prove to be incorrect. In addition, the assertions embodied in
the representations and warranties are qualified by information in confidential
disclosure schedules exchanged by the parties in connection with signing the
merger agreement. While Cellegy and Cellegy Holdings do not believe that these
disclosure schedules contain information required to be publicly disclosed under
the applicable securities laws, other than information that has already been so
disclosed, the disclosure schedules do contain information that modifies,
qualifies and creates exceptions to the representations and warranties set forth
in the attached merger agreement. Accordingly, you should not rely on the
representations and warranties as current characterizations of factual
information about Cellegy or Adamis, because they were made as of specific
dates, may be intended merely as a risk allocation mechanism between Cellegy and
Cellegy Holdings and Adamis and are modified by the disclosure
schedules.
The Merger and Effective Time of the
Merger
The
merger agreement provides that Cellegy’s wholly-owned subsidiary, Cellegy
Holdings, will merge with and into Adamis. Adamis will survive the merger as
Cellegy’s wholly-owned subsidiary. The closing of the merger will occur at a
time as Cellegy and Adamis agree, but no later than the third business day after
the satisfication or waiver of the last to be satisified or waived of the
closing conditions set forth in the merger agreement, or at such other time,
date and place as Cellegy and Adamis mutally agree in writing. As soon as
practicable after the closing, Cellegy and Adamis will file a certificate of
merger with the Secretary of State of the State of Delaware. The merger will
become effective upon the filing of such certificate or at such later time as
may be specified in such certificate and as agreed by Cellegy and Adamis.
Cellegy currently expects that the closing of the merger will take place in the
fourth quarter of 2008 or the first quarter of 2009. However, because the merger
is subject to stockholder approvals and other conditions to closing, Cellegy
cannot predict exactly when the closing will occur.
Merger Consideration
Conversion of Securities, Exchange
Ratio
If the
merger is completed, each share of Adamis common stock outstanding immediately
before the merger, other than Adamis common stock held as treasury stock or held
or owned by Cellegy or any direct or indirect wholly-owned subsidiary of Adamis
or Cellegy, and any dissenting shares, automatically will be converted into the
right to receive one share of Cellegy common stock. If any shares of Adamis
common stock outstanding immediately before the merger are unvested or subject
to any repurchase option or risk of forfeiture under an agreement with Adamis,
then the shares of Cellegy’s common stock issued in exchange for such shares of
restricted Adamis common stock will to the same extent be unvested and subject
to the same repurchase option or risk of forfeiture. As further described
herein, Cellegy anticipates that immediately following completion of the merger,
the current holders of Adamis’s equity securities will own 93% of the
outstanding Cellegy common stock.
In
addition, if the merger is completed, each option, warrant, right or convertible
security to purchase Adamis common stock that is outstanding and unexercised
immediately before the merger will be converted into an option, warrant, right
or convertible security to purchase the same number of shares of Cellegy’s
common stock, at an exercise price per share equal to the same per share
exercise price of such option.
Fractional Shares
No
fractional shares of Cellegy common stock will be issued in exchange for shares
of Adamis capital stock at the closing of the merger. In lieu of fractional
shares, Cellegy will pay cash to each Adamis stockholder for any remaining
fraction equal to the product of (i) such fraction multiplied by (ii) the
applicable price per share which shall equal to the average closing price of
Cellegy common stock as reported on the OTCBB or, if the Cellegy common stock is
not traded on the OTCBB, then the pink sheets, on the five trading days
immediately before the effective time of the merger. Because the exchange ratio
in the merger is one share of Cellegy common stock for one share of Adamis
common stock, Cellegy does not anticipate that there will be fractional shares
issuable to Adamis stockholders.
Reverse Stock
Split
The
merger agreement provides that Cellegy’s stockholders must approve an amendment
to Cellegy’s amended and restated certificate of incorporation to effect the
reverse stock split of Cellegy common stock as described in this joint proxy
statement/prospectus. Upon the effectiveness of the amendment to Cellegy’s
amended and restated certificate of incorporation effecting the reverse stock
split, referred to herein as the split effective time, the total number of
outstanding Cellegy shares immediately before the split effective time will be
combined into a number of shares equal to (i) 3,000,000 plus (ii) the amount of
Cellegy net working capital at the end of the month immediately preceding the
month in which the closing of the merger occurs divided by .50; and the amount
of net working capital will not include the $500,000 that Cellegy previously
loaned to Adamis or Adamis’ obligation to repay that amount. The ratio of (i)
the number determined pursuant to the preceding sentence, to (ii) the number of
outstanding Cellegy shares immediately before the split effective time, will be
referred to as the reverse split ratio. For example, if there were 30,000,000
outstanding Cellegy shares and $0 net working capital at closing, then the
reverse split ratio would be 0.1, or 1:10. Accordingly, at the split effective
time, each outstanding pre-reverse split Cellegy share will be reclassified into
a fraction of a share equal to the reverse split ratio. All shares and fractions
thereof held by a particular holder will be aggregated into whole shares.
In lieu
of fractional shares, Cellegy stockholders who hold a number of shares not
evenly divisible immediately before the reverse split will be entitled to
receive a whole share of Cellegy common stock for any fractional share that
remains after aggregating all fractional shares held by the stockholder at no
additional cost. The number of shares of Cellegy common stock to be issued in
connection with rounding up such fractional interests is not expected by
management of Cellegy to be significant.
Exchange
Procedures
Promptly
after the effective time of the merger, Mellon Investor Services, or such other
exchange agent as Cellegy appoints, will provide appropriate transmittal
materials to holders of record of Adamis common stock (other than with respect
to any such shares held directly or indirectly by Cellegy, Adamis or dissenting
stockholders of Adamis), advising such holders of the procedure for surrendering
their stock to the exchange agent.
Upon the
surrender of the holder’s shares of Adamis common stock, along with a duly
executed letter of transmittal and any other required documents, the holder will
be entitled to receive in exchange therefor:
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a
certificate representing the number of whole shares of Cellegy common
stock that such holder is entitled to receive pursuant to the merger, as
described in the section entitled “Conversion of Adamis Securities,
Exchange Ratio” in this joint proxy statement/prospectus;
and
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a
check in the amount, after giving effect to any required tax withholdings,
of any cash payable in lieu of fractional shares plus any unpaid non-stock
dividends and any other dividends or other distributions that such holder
has the right to receive as described in the next
paragraph.
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Whenever
a dividend or other distribution is declared by Cellegy in respect of Cellegy
common stock, the record date for which is after the effective time of the
merger, that declaration will include dividends or other distributions in
respect of all shares issuable pursuant to the merger agreement. No dividends or
other distributions in respect of Cellegy common stock shall be paid to any
holder of any unsurrendered shares of Adamis common stock until the
unsurrendered shares of Adamis common stock are surrendered for exchange. No
holder of unsurrendered shares of Adamis common stock will be entitled to vote
after the effective time of the merger at any meeting of Cellegy stockholders
until such unsurrendered shares of Adamis common stock have been surrendered for
exchange.
Board of Directors and Officers of
the Combined Company
The
merger agreement provides that, immediately after the merger, Cellegy’s board of
directors will consist of a number of directors to be determined by Adamis.
Cellegy expects that the number of directors immediately following the merger
will be six directors, three of whom will be the current Adamis directors,
Dennis J. Carlo, Richard L. Aloi and David J. Marguglio, and three of whom will
be continuing Cellegy directors, Richard C. Williams, John Q. Adams, Sr. and
Robert B. Rothermel. On the date of the merger, Cellegy must deliver
resignations for all Cellegy directors with the exception of Cellegy directors
who will remain on the board.
If the
merger occurs, Cellegy and Adamis expect that Dennis J. Carlo, Ph.D., the Chief
Executive Officer and President of Adamis, will become the Chief Executive
Officer and President of the combined company, and that the other current
executive officers of Adamis will become executive officers of the combined
company.
Representations and Warranties
The
merger agreement contains generally similar representations and warranties of
Cellegy, Cellegy Holdings and Adamis as to, among other things:
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corporate
organization and existence;
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corporate
power and authority;
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capitalization
and related matters;
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except
with respect to Cellegy Holdings, availability, accuracy and compliance
with generally accepted accounting principles of financial
reports;
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no
conflict, required filings and governmental approvals required to complete
the merger, except as contemplated by the merger
agreement;
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no
broker, finder, agent or other intermediary
retained;
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full
disclosure of facts;
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compliance
with laws, contracts, certificate of incorporation and
bylaws;
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absence
of subsidiaries and interests in other entities or ventures except as
disclosed;
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compliance
with legal requirements of government
entities;
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no
pending legal proceedings;
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absence
of certain changes;
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validity
of, and the absence of defaults under, certain
contracts;
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transactions
with affiliates;
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employee
benefit matters;
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no
unlawful payment to governmental officers;
and
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completeness
of representations.
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In
addition, the merger agreement contains further representations and warranties
of Cellegy as to, among other things:
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filings
and material accuracy of SEC filings;
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formation
and operation of Cellegy Holdings;
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compliance
with listing and maintenance requirements of trading market or stock
quotation system on which Cellegy’s common stock is
listed;
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compliance
with federal drug, FDA and similar legal
requirements;
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no
recall of products; and
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absence
of any untrue statement of material fact to the FDA or other government
entity.
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Covenants; Conduct of Business
Pending the Merger
Adamis
agreed that it will preserve its organization and conduct its business in the
usual and ordinary course, except as otherwise permitted by the merger
agreement, in compliance with all applicable laws and regulations, and to take
other agreed-upon actions. Adamis also agreed that during the period before the
effective time of the merger it will:
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use
commercially reasonable efforts to conduct its business and operations in
compliance with all applicable legal requirements and the requirements of
all material Adamis contracts; and
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use
its commercially reasonable efforts to preserve intact its current
business organization, use commercially reasonable efforts to keep
available the services of its current key employees, officers and other
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, licensors, licensees, employees and other
persons having business relationships with Adamis or its subsidiaries.
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Adamis
also agreed to promptly notify Cellegy of (A) any notice or other communication
from any person alleging that the consent of such person is or may be required
in connection with the merger or any of the other contemplated transactions; and
(B) any event that would reasonably be expected to have a material adverse
effect on Adamis.
Cellegy
agreed that it will preserve its organization and conduct its business in the
usual and ordinary course, except as otherwise permitted by the merger
agreement, in compliance with all applicable laws and regulations, and to take
other agreed-upon actions. Cellegy also agreed that during the period before the
effective time of the merger it would:
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use
commercially reasonable efforts to conduct its business and operations in
compliance with all applicable legal requirements and the requirements of
all material Cellegy contracts; and
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use
its commercially reasonable efforts to preserve intact its current
business organization, use commercially reasonable efforts to keep
available the services of its current key employees, officers and other
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, licensors, licensees, employees and other
persons having business relationships with Adamis or its subsidiaries.
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Cellegy
also agreed that, subject to certain limited exceptions, without the consent of
Adamis in writing, it would not, during the period before the effective time of
the merger:
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enter
into any contract or commitment or engage in any transaction not in the
usual and ordinary course of business and consistent with its normal
business practices;
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do
any act or omit to do any act, or permit any act or omission to act, which
will cause a material breach of any contract, commitment or obligation of
Cellegy, which could have a material adverse effect on the business,
assets or financial condition of Cellegy, other than with respect to
discontinued operations;
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declare
or pay any dividends on, or make any other distributions in respect of any
shares of its capital stock;
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issue
any options, warrants or other rights to acquire shares of its capital
stock or any other instruments convertible into securities of Cellegy (but
excluding any shares of Cellegy capital stock issued upon the exercise of
options or warrants, or the conversion of convertible notes, outstanding
on the date of the merger
agreement);
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sell
or pledge, or agree to sell or pledge, any share of the capital stock of
Cellegy Holdings;
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modify
its certificate of incorporation or bylaws other than in connection with
the reverse stock split;
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effect
or become a party to any merger or consolidation, or acquire any stock of,
or, except in the ordinary course of business, acquire any assets or
property of any other business entity;
and
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sell,
lease, license or otherwise dispose of any asset other than in the
ordinary course of business.
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Cellegy
also agreed to promptly notify Adamis of (A) any notice or other communication
from any person alleging that the consent of such person is or may be required
in connection with the merger or any of the other contemplated transactions; and
(B) any event that would reasonably be expected to have a material adverse
effect on Cellegy.
Additional Agreements
Each of
Cellegy and Adamis has agreed to use its commercially reasonable efforts
to:
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take
all actions necessary to complete the
merger;
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coordinate
with the other party in preparing and exchanging information for purposes
of the registration statement filed with the SEC, compliance with state
and federal securities laws and
otherwise;
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obtain
all consents, in form and substance reasonably satisfactory to the other
party, required for the consummation of the transactions contemplated by
the merger agreement; and
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consult
and agree with each other about any public statement either will make
concerning the merger, subject to certain
exceptions.
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Cellegy
and Adamis further agreed that:
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each
party will, subject to limited exceptions, promptly take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
respective stockholders for the purposes of approving the issuance of
shares in the merger and the other transactions contemplated by the merger
agreement including, in the case of Cellegy, the reverse split and
amendments to its amended and restated certificate of incorporation and
the 2008 Equity Incentive Plan, and will recommend such approvals and use
its best efforts to obtain such
approvals;
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each
party will promptly notify the other of any development or change in
circumstances that does or could reasonably be expected
to:
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call
into question the validity of the merger agreement or any action taken or
to be taken pursuant to such
agreement;
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adversely
affect the ability of the parties to close the transactions contemplated
by the merger agreement;
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have
any material adverse effect on such
party; or
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make
any of the representations and warranties in the merger agreement untrue
or incorrect; and
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in
the case of Cellegy, use its commercially reasonable efforts to keep
current its filings with the SEC as required under Section 13 of the
Exchange Act.
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In the
merger agreement, Cellegy and Adamis have agreed that each party and their
respective subsidiaries will not, nor will either company authorize or permit
any of its directors, officers, investment bankers, attorneys, accountants or
other advisors or representatives to, directly or indirectly:
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knowingly
solicit, initiate, encourage, induce or facilitate the communication,
making or announcement of any acquisition proposal or acquisition inquiry
or take any action that could reasonably be expected to lead to an
acquisition proposal or acquisition inquiry;
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furnish
any information regarding such party to any person in connection with or
in response to an acquisition proposal or acquisition inquiry;
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engage
in discussions or negotiations with any person with respect to any
acquisition proposal or acquisition inquiry;
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approve,
endorse or recommend any acquisition proposal or, effect any material
change in the recommendation of the party’s board of directors; or
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execute
or enter into any letter of intent or similar document or any contract
relating to any acquisition transaction or enter into any agreement in
principle requiring such party to abandon, terminate or fail to consummate
the merger or breach its obligations under the merger agreement.
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In the
event that either party receives an offer, proposal or request of the type
discussed above, it has agreed to immediately notify the other party and provide
information as to the identity of the offeror and the specific terms of such
offer or proposal, and such other information related thereto as the other party
may reasonably request.
Notwithstanding
these restrictions, before obtaining stockholder approval, Cellegy may furnish
information and enter into discussions or negotiations in response to an
unsolicited, bona fide written acquisition proposal when Cellegy’s board of
directors determines in good faith that it constitutes, or is reasonably likely
to result in, a superior proposal (as defined in the merger agreement) and the
failure to take such action would result in a breach of the fiduciary duties of
the board of directors. To the extent Cellegy determines that such offer
constitutes a superior proposal (as defined in the merger agreement), Cellegy
has agreed to give Adamis a period of five business days to negotiate regarding
modifications to the merger agreement.
However,
the no-solicitation provisions do not restrict Cellegy from taking any of the
following activities:
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taking
and disclosing to its stockholders a position with respect to a tender or
exchange offer by a third party;
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making
any disclosure to its stockholders or furnishing information to a third
party which has made a bona fide acquisition proposal if, in the good
faith judgment of such party’s board of directors, after consultation with
outside counsel, failure to make such disclosures would be contrary to its
fiduciary obligations under applicable law; or
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furnishing
information to a third party which has made a bona fide acquisition
proposal that is reasonably likely to be a superior proposal, as defined
below.
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For
purposes of the merger agreement, an “acquisition proposal” means:
(a) any
merger, consolidation, amalgamation, share exchange, business combination,
issuance of securities, acquisition of securities, reorganization,
recapitalization, tender offer, exchange offer or other similar transaction in
which (i) a person or “group” (as defined in the Exchange Act and the rules
promulgated thereunder) of persons directly or indirectly acquires beneficial or
record ownership of securities representing more than 50% of the outstanding
securities of any class of voting securities of Cellegy or Adamis, sometimes
referred to as a Party, or any of their subsidiaries; or (ii) a Party or its
subsidiaries issues securities representing more than 50% of the outstanding
securities of any class of voting securities of such Party or any of its
subsidiaries (other than, solely with respect to Adamis, through any capital
raising transaction);
(b) any
sale, lease, exchange, transfer, license, acquisition or disposition of any
business or businesses or assets that constitute or account for: (i) 50% or more
of the consolidated book value of the assets of a Party and its subsidiaries,
taken as a whole; or (ii) 50% or more of the fair market value of the assets of
a Party and its subsidiaries, taken as a whole, excluding, solely with respect
to Adamis, any transfer or lien to a creditor of Adamis;
(c) any
liquidation or dissolution of a Party; or
(d) with
respect to Cellegy only, any acquisition or purchase by any person or “group”
(as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of a 10% or more interest in the total voting power of
Cellegy or any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any person or “group” (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder) beneficially
owning 10% or more of the total outstanding voting securities of Cellegy or any
of its subsidiaries.
A
“superior proposal” means an acquisition proposal that the board of directors of
a Party determines, in its reasonable judgment, to be more favorable to such
Party’s stockholders than the terms of the transactions contemplated by the
merger agreement.
Meetings of Stockholders and Proxy
Statement
Cellegy
is obligated under the merger agreement to take all actions necessary under
applicable law to hold and convene a meeting of its stockholders for purposes of
voting on the issuance of shares of Cellegy common stock in connection with the
merger and the resulting change of control, and the amendments to its
certificate of incorporation to increase the number of shares of its authorized
capital stock, to effect a reverse stock split and to change its corporate name
at the closing of the merger. Further, Cellegy is required to promptly
distribute a registration statement and proxy statement relating to such
stockholder approvals.
In the
merger agreement, Cellegy agreed to use its reasonable best efforts to have the
registration statement of which this joint proxy statement/prospectus is a part
declared effective under the Securities Act as promptly as practicable after
filing, and to obtain all regulatory approvals needed to ensure that the Cellegy
common stock will be registered or exempt from registration under the securities
laws of every state of the United States in which any registered holder of
Adamis common stock has an address of record.
Adamis is
obligated under the merger agreement to hold and convene a meeting of
stockholders for purposes of considering the approval of the merger and the
adoption of the merger agreement, and to hold the meeting as promptly as
reasonably practicable after the effectiveness of the registration statement of
which this joint proxy statement/prospectus is a part.
Indemnification and Insurance of
Directors and Officers
The
merger agreement provides that, for a period of three years following the
effective time of the merger, the combined company shall, to the fullest extent
permitted by Delaware law, indemnify and hold harmless all present and former
directors and officers of Cellegy and Adamis against all claims, losses,
liabilities, damages, judgments, fines and reasonable fees, costs and expenses,
including attorneys’ fees and disbursements, incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to the fact that
such person is or was a director or officer of Cellegy or Adamis, whether
asserted or claimed before, at or after the effective time of the merger. Each
indemnified director or officer of Cellegy or Adamis, as the case may be, will
be entitled to advancement of expenses incurred in the defense of any such
claims, action, suit proceeding or investigation from the combined company upon
receipt by the combined company from such indemnified person of a request
therefor provided that any person to whom expenses are advanced provides an
undertaking, to the extent required by Delaware law, to repay such advances if
it is ultimately determined that such person is not entitled to indemnification.
In
addition, for a period of six years following the effective time of the merger,
the certificate of incorporation and bylaws of each of Cellegy and Adamis (as
the surviving corporation of the merger) will contain provisions no less
favorable with respect to indemnification, advancement of expenses and
exculpation of present and former directors and officers of each of Cellegy and
Adamis than are presently set forth in the certificate of incorporation and
bylaws of Cellegy and Adamis, as applicable.
The
merger agreement also provides that Cellegy, at its election, may purchase
“tail” coverage for up to six years from the consummation of the merger relating
to the current directors’ and officers’ liability insurance policies maintained
by Cellegy or the combined company, respectively (provided that Cellegy may
substitute therefor policies of at least the same coverage containing terms and
conditions that are not materially less favorable) with respect to matters
occurring on or before the consummation of the merger.
Conditions to Completion of the
Merger
Each
party’s obligation to complete the merger is subject to the satisfaction or
waiver by each of the parties, at or before the merger, of various conditions,
which include the following:
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there
must not have been issued any restraining order, injunction or other order
by any court of competent jurisdiction, or other legal restraint or
prohibition preventing the consummation of the merger or other
transactions contemplated by the merger agreement, and there must not have
been any applicable legal requirement that has the effect of making the
consummation of the merger illegal;
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the
merger agreement and the merger must have been approved by the Adamis and
Cellegy stockholders;
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the
Adamis and Cellegy stockholders must have approved the amendments to
Cellegy’s restated certificate of incorporation to effect the reverse
stock split, increase the authorized capital and change the corporate
name;
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any
governmental authorization or consent required to be obtained under any
applicable antitrust or competitive law or regulation (of which the
parties believe there are none), or under any other applicable legal
requirement, shall have been obtained and remain in full force and
effect;
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there
must not be any legal proceeding pending or threatened by any governmental
entity in which the entity indicates that it intends to conduct any legal
proceeding or take any other action: (a) challenging or seeking to
restrain the consummation of the merger or any of the other contemplated
transactions; (b) relating to the merger and seeking to obtain from
Cellegy or Adamis any damages or other relief that would have a material
adverse effect on the combined company; (c) seeking to prohibit or limit
in any material and adverse respect a party’s ability to vote, transfer,
receive dividends with respect to or otherwise exercise ownership rights
with respect to the stock of Cellegy; (d) that could have a material
adverse effect on the ability of the combined company to own the assets or
operate the business of the combined company; or (e) seeking to compel
Adamis or Cellegy (or any subsidiary or either) to dispose of or hold
separate any assets that are material to the combined company as a result
of or following the merger or any of the contemplated transactions;
and
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the
registration statement on Form S-4, of which this joint proxy
statement/prospectus is a part, must have been declared effective by the
SEC in accordance with the Securities Act and must not be subject to any
stop order or proceeding, or any proceeding threatened by the SEC, seeking
a stop order.
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In
addition, the obligation of Cellegy and Cellegy Holdings to complete the merger
is further subject to the satisfaction or waiver of the following
conditions:
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the
representations and warranties of Adamis contained in the merger agreement
shall have been true and correct as of the date of the merger agreement
and shall be true and correct on and as of the closing date of the merger
with the same force and effect as if made on the closing date except (A)
in each case, or in the aggregate, where the failure to be true and
correct would not reasonably be expected to have a material adverse effect
on the combined company, or (B) for those representations and warranties
which address matters only as of a particular date (which representations
shall have been true and correct, subject to the qualifications as set
forth in the preceding clause (A), as of such particular date);
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each
of the covenants and obligations in the merger agreement that Adamis is
required to comply with or to perform at or before the closing shall have
been complied with and performed by Adamis in all material respects,
except where the failure to perform such covenants or obligations would
not have a material adverse effect on the combined company;
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from
the date of the merger agreement through the effective time of the merger,
there shall not have occurred any material adverse effect on Adamis that
shall be continuing as of the effective time of the merger and that would
have a material adverse effect on the combined company;
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Cellegy
shall have received the following agreements and other documents, each of
which shall be in full force and effect:
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a
certificate of Adamis executed on its behalf by the chief executive
officer and chief financial officer of Adamis confirming that the
conditions set forth above have been duly satisfied;
and
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certificates
of good standing (or equivalent documentation) of Adamis in its
jurisdiction of incorporation and the various foreign jurisdictions in
which it is qualified (except where the failure to have obtained such
certificates would not result in a material adverse effect on the combined
company), certified charter documents, a certificate as to the incumbency
of officers and the adoption of resolutions of the board of directors of
Adamis authorizing the execution of the merger agreement and the
consummation of the contemplated transactions to be performed by Adamis
hereunder.
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In
addition, the obligation of Adamis to complete the merger is further subject to
the satisfaction or waiver of the following conditions:
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the
representations and warranties of Cellegy and Cellegy Holdings contained
in the merger agreement shall have been true and correct as of the date of
the merger agreement and shall be true and correct on and as of the
closing date with the same force and effect as if made on the closing date
except (A) in each case, or in the aggregate, where the failure to be true
and correct would not reasonably be expected to have a material adverse
effect on the combined company, or (B) for those representations and
warranties which address matters only as of a particular date (which
representations shall have been true and correct, subject to the
qualifications as set forth in the preceding clause (A), as of such
particular date);
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all
of the covenants and obligations in the merger agreement that Cellegy or
Cellegy Holdings is required to comply with or to perform at or before the
Closing shall have been complied with and performed in all material
respects, except where the failure to perform such covenants or
obligations would not have a material adverse effect on the combined
company;
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f
rom
the date of the merger agreement through the effective time of the merger,
there shall not have occurred any material adverse effect on Cellegy that
continues as of the effective time of the merger and that would have a
material adverse effect on the combined
company;
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Adamis
shall have received the following documents:
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a
certificate of Cellegy executed on its behalf by the chief executive
officer and chief financial officer of Cellegy confirming that the
conditions set forth above have been duly
satisfied;
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certificates
of good standing (or equivalent documentation) of each of Cellegy and
Cellegy Holdings in Delaware, Pennsylvania (for Cellegy only) and the
various foreign jurisdictions in which it is qualified (except where the
failure to have obtained such certificates would not result in a material
adverse effect on the combined company), certified charter documents, a
certificate as to the incumbency of officers and the adoption of
resolutions of the boards of directors of Cellegy and Cellegy Holdings
authorizing the execution of the merger agreement and the consummation of
the contemplated transactions to be performed by Cellegy and Cellegy
Holdings hereunder; and
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written
resignations in forms reasonably satisfactory to Adamis, dated as of the
closing date and effective as of the closing, executed by the directors
and officers of Cellegy who are not to continue as directors or officers
of Cellegy;
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neither
the principal executive officer nor the principal financial officer of
Cellegy shall have failed to provide, with respect to any Cellegy SEC
document filed (or required to be filed) with the SEC on or after the date
of the merger agreement, any necessary certification in the form required
under Rule 13a-14 under the Exchange Act and 18 U.S.C. §1350, which are
certifications required under the Sarbanes Oxley
Act;
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Cellegy
shall have caused the board of directors of Cellegy to be constituted as
set forth in the merger agreement;
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each
of the individuals identified by Adamis before the effective time of the
merger shall have been appointed officers of Cellegy as of the effective
time of the merger;
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the
amendments to the Cellegy restated certificate of incorporation, including
the increase in the number of authorized shares, the reverse stock split,
and the corporate name change, as contemplated by the merger agreement,
shall have become effective under the DGCL;
and
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Cellegy
shall have timely filed with the SEC and/or the OTC Bulletin Board all
reports and other documents required to be filed under the Securities Act
or Exchange Act and to maintain its OTC Bulletin Board
listing.
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Other
than the conditions regarding effectiveness of the registration statement of
which this joint proxy statement/prospectus is part, the condition regarding
having obtained required stockholder approvals for the proposals described in
the joint proxy statement/prospectus, and the conditions regarding having
obtained any required governmental authorization and no restraining order or
injunction having been issued or government proceeding pending preventing the
consummation of the merger, satisfaction of each of the conditions to the merger
is permitted by law to be waived in the discretion of the board of directors of
Cellegy or Adamis, as applicable. Many of the other closing
conditions, such as the representations and warranties of the parties in the
merger agreement being true and correct as of the closing date and the parties
having performed all obligations under the merger agreement that they are
required to perform, are qualified by the requirement that the failure of the
condition must have a material adverse effect on the combined
company. The failure of other closing conditions to be true,
including the requirement that Cellegy have taken required actions to cause the
board of directors and officers of the combined company to be as described in
the joint proxy statement/prospectus or the requirement that Cellegy have timely
filed with the SEC or the OTC Bulletin Board all reports or other documents
required to be filed under the Securities Act or Exchange Act and to maintain
its OTC Bulletin Board listing, the requirement that there be no governmental
proceeding pending challenging or seeking to restrain the consummation of the
merger or related transactions, or the requirement that neither Cellegy’s chief
executive officer or chief financial officer have failed to provide any required
certification under the Sarbanes-Oxley Act, might or might not have a material
adverse effect on the combined company.
The
merger agreement may be terminated at any time before the completion of the
merger, whether before or after the required stockholder approvals to complete
the merger have been obtained, as set forth below:
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by
mutual written consent duly authorized by the board of directors of each
of Cellegy and Adamis;
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by
Cellegy or Adamis if the merger has not been consummated by March 31,
2009, but this right to terminate the merger agreement will not be
available to any party whose failure to fulfill any material obligation of
the merger agreement or other material breach of the merger agreement has
been the cause of, or resulted in, the failure of the merger to be
completed by such date;
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by
Cellegy or Adamis if a court of competent jurisdiction or any governmental
entity having authority with respect thereto has issued a final and
nonappealable order, decree or ruling or taken any other action that
permanently restricts, restrains, enjoins or otherwise prohibits the
merger, and the parties shall have used commercially reasonable efforts to
resist, resolve or lift, as applicable, such judgment, injunction, order
or decree;
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by
Adamis if (i) there shall have occurred a change in the Cellegy board
recommendation regarding the merger transaction; (ii) Cellegy shall have
failed to hold the Cellegy stockholder meeting within 60 days after the
definitive proxy statement is filed with the SEC, (iii) Cellegy or any of
its subsidiaries or representatives shall have failed to comply with the
no-solicitation covenants in the merger agreement in any material respect,
or (iv) Cellegy shall have delivered a notice of superior proposal to
Adamis;
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by
Cellegy if (i) Adamis or any of its subsidiaries or representatives shall
have failed to comply with the no-solicitation covenants in the merger
agreement in any material respect, or (ii) Adamis or any of its
representatives changes the Adamis board recommendation regarding the
merger transaction
or
does not convene the Adamis stockholders meeting;
and
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by
Cellegy if Cellegy intends to substantially concurrently enter into an
agreement with respect to a superior proposal in compliance with its no
solicitation covenants described in the section above entitled “The Merger
Agreement—No Solicitation” and has paid the termination fee and expenses
as described below.
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Fees and Expenses
Generally,
each party will pay its own fees and expenses incurred in connection with the
merger agreement, whether or not the merger is completed. However, Cellegy is
required to pay Adamis a non-refundable fee in the amount of $150,000 in the
event the merger agreement is terminated by Adamis because of (i) a material
change in the Cellegy board’s recommendations concerning the merger, (ii)
Cellegy’s failure to hold a stockholder meeting to vote on the merger
transaction within 60 days after the registration statement is declared
effective by the SEC, (iii) Cellegy’s notice to Adamis of a superior proposal,
(iv) Cellegy’s failure to comply with its non-solicitation obligations or (v)
the failure of Cellegy’s stockholders to approve the merger agreement.
Additionally,
Cellegy is entitled to receive from Adamis a non-refundable fee in the amount of
$150,000 in the event Cellegy terminates the merger agreement because Adamis
failed to comply with its non-solicitation obligations, Adamis changed its board
recommendation concerning the merger or Adamis failed to convene a meeting of
the Adamis stockholders (or obtain Adamis stockholder approval by written
consent).
Agreements Related to the Merger
Agreement
Voting Agreements and Irrevocable
Proxies
SJ
Strategic Investments, LLC, Thomas J. Tisch, Andrew H. Tisch, Daniel R. Tisch,
James S. Tisch and certain trust entities related to such stockholders, and
Richard C. Williams, all of whom will sometimes be referred to collectively in
this joint proxy statement/prospectus as the Principal Cellegy Stockholders,
have entered into voting agreements with Adamis pursuant to which, among other
things, each such stockholder agreed, solely in the capacity as a Cellegy
stockholder, to vote all of the stockholder’s shares of Cellegy common stock in
favor of the issuance of Cellegy common stock to Adamis stockholders in
connection with the merger, the reverse stock split and other amendments to
Cellegy’s amended and restated certificate of incorporation, and the other
Cellegy proposals described in this joint proxy statement/prospectus, and
against any matter that would result in a breach of the merger agreement by
Cellegy and any proposal made in opposition to, or in competition with, the
consummation of the merger and the other transactions contemplated by the merger
agreement. As of December 31, 2008, the Principal Cellegy Stockholders
beneficially owned an aggregate of approximately 12,165,236 shares of Cellegy
common stock, representing approximately 41% of the outstanding shares of
Cellegy common stock.
MATTERS TO BE PRESENTED TO THE ADAMIS
STOCKHOLDERS
At the
Adamis special meeting, Adamis stockholders will be asked to approve the merger
agreement and the transactions contemplated thereby. Immediately following the
merger, Adamis stockholders will own approximately 93% of the outstanding shares
of the combined company, with existing Cellegy stockholders holding less than 7%
of the outstanding shares of the combined company.
The terms
of, reasons for and other aspects of the merger agreement, the merger, the
issuance of Cellegy common stock to Adamis stockholders pursuant to the merger
agreement, and the resulting change in control of Cellegy are described in
detail in other sections of this joint proxy statement/prospectus.
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Adamis common
stock outstanding on the record date for the Adamis special meeting and voting
is required for approval of Adamis Proposal No. 1.
THE ADAMIS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT ADAMIS’ STOCKHOLDERS VOTE “FOR” ADAMIS PROPOSAL NO.
1 TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
ADAMIS PROPOSAL NO.
2
APPROVAL OF POSSIBLE ADJOURNMENT OF
THE ADAMIS SPECIAL MEETING
If Adamis
fails to receive a sufficient number of votes to approve Adamis Proposal No. 1,
Adamis may propose to adjourn the Adamis special meeting, for a period of not
more than 30 days, for the purpose of soliciting additional proxies to approve
Adamis Proposal No. 1. Adamis currently does not intend to propose adjournment
at the Adamis special meeting if there are sufficient votes to approve Adamis
Proposal No. 1.
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Adamis common
stock having voting power present in person or represented by proxy at the
Adamis special meeting is required to approve the adjournment of the Adamis
special meeting for the purpose of soliciting additional proxies to approve
Adamis Proposal No. 1.
THE ADAMIS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT ADAMIS’ STOCKHOLDERS VOTE "FOR" ADAMIS PROPOSAL NO.
2 TO ADJOURN THE SPEICAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF
THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF ADAMIS PROPOSAL NOS. 1 AND
2.
ADAMIS’ BUSINESS
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 DataMonitor October 2007, referred to as the
DataMonitor 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. Adamis’ goal is to commence
commercial sales of the syringe product in the first quarter of calendar year
2009 and the nasal steroid product in the fourth quarter of 2010, assuming
adequate funding and no unexpected delays. B
ased on
Adamis’ 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,
Adamis 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. Adamis 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, see “Risk
Factors – Risks Relating to the Business and Operations of Adamis, as the
Combined Company, After the Merger.” Adamis hopes to initiate an initial
clinical trial in the first half of 2009, if the results are successful to
initiate clinical trials in the United States in 2010, and to be able to
commercialize the anti-viral technology 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.
Adamis’
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. Adamis believes that the potential for increased revenues will be
driven by two new products.
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Adamis’
goal is to commence commercial sales of a low-cost, epinephrine syringe in
the first 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.
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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 Adamis to be approximately $3 billion in
annual sales,
based
on the NDC Report
. Adamis currently believes that this product
could be introduced as early as the fourth calendar quarter of 2010,
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.
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To
achieve these goals, as well as to support the overall strategy, Adamis will
need to raise a substantial amount of funding and make substantial investments
in equipment, new product development and working capital. Adamis estimates that
approximately $1 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 $9-14 million or more must
be invested from the date of this joint proxy statement/prospectus 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
Adamis’ current expectations, following a period of initial commercial
introduction, Adamis 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 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 Adamis 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 Adamis 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:
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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.
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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.
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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.
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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.
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Allergy Extracts -
allergy
extracts, sterile vials, and diluents used in preparation of allergy
therapy.
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Prelone
®
(prednisolone
syrup, USP, 15 mg per 5 ml). Indicated in various diseases and disorders
including allergic states and respiratory
diseases.
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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 fiscal 2008, three customers
,
Cardinal Health, McKesson and AmerisourceBergin,
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. Adamis 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.
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 Adamis receives.
If adequate funding is obtained to develop and market the products, Adamis
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 first 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
fourth quarter of calendar year 2010, 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, Adamis 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 Adamis
believes is relatively high priced. Adamis 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,
Adamis 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.
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.
Adamis 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
)
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, Adamis 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.
Adamis
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. Adamis 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.
Adamis
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.
Adamis
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. Adamis believes that its new product can compete effectively against
EpiPen
®
based on
the following factors, among others:
|
·
|
Market
Knowledge.
Mr. Richard Aloi, President of Adamis Labs, is a U.S. leading authority on
the commercialization of epinephrine injectors. He had responsibility for
the worldwide introduction of EpiPen
®
and EpiPen
®
Jr. in 1982 and contributed to the subsequent growth of sales of the
product line.
|
|
·
|
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.
Adamis 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. Adamis 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 Adamis 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 Adamis 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. Adamis estimates that as of the date of this joint
proxy statement/prospectus it has completed more than 70% of the development
project for the 0.3mg syringe product and, with adequate funding, believes that
it can complete remaining product development to permit a commercial launch in
the first quarter of calendar 2009.
Adamis
believes that the market for emergency epinephrine injectors will grow, driven
by increasing awareness, lower cost alternatives, and promotion by new market
entrants. Adamis 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. Adamis 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. Adamis 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. Adamis believes that such a competing product might
have a comparable or lower price than the Adamis product. Adamis believes
that the syringe product has the potential to compete sucessfully 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. Adamis refers
to the product as Beclomethasone Aerosolized Nasal Steroid, or
BANS.
The
market for inhaled nasal steroids, or INS, as estimated by Adamis 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, Adamis 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.
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, Adamis
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)
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)
Adamis
Labs 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.
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
|
%
|
Adamis
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.
Adamis 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.
Adamis
Labs 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.
Adamis believe 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.
Adamis
expects BANS to be considered a “new” drug by the FDA, and accordingly Adamis
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 closing of the proposed merger
transaction with Cellegy, assuming sufficient funding and no unexpected delays.
The table below shows the estimated development timeline for the BANS product,
based on the number of months from the closing of the proposed merger
transaction with Cellegy.
Developmental Timeline for
BANS
(beclomethasone
diproprionate)
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, Adamis
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.
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. Adamis 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. Adamis
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 Adamis 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.).
|
Adamis
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 2009.
Preliminary discussions have been held with potential Thai partners regarding
the conduct of this trial. Adamis’ current plan is to test a small number of
human patients (approximately 80) to demonstrate that Adamis’ 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. Adamis would further seek to
demonstrate a dose-response relationship for the treatment. If the results of
the initial trial are successful, Adamis 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 Adamis’ assumptions
regarding the development process and sufficient funding are correct, Adamis
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 the Risk Factors section of
this joint proxy statement/prospectus, that could cause actual events to differ
from Adams’ expectations concerning the timeline for product development and the
regulatory approval process. Adamis 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 that Adamis 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.
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:
|
·
|
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.
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.
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
|
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.
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. T
he
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 September 30,
2008, 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. I
f 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.
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 Navagen’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:
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Technology
for the application of related intellectual property as a prophylactic or
therapeutic cancer vaccine; and
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Any
additional technology developed by the licensor related to the
IP.
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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 joint proxy statement/prospectus,
concerning anticipated future events concerning the development process of
Adamis’ 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
above under the heading “Risk Factors – Risks Relating to the Business and
Operations of Adamis, as the Combined Company, After the Merger.” There is no
guarantee that Adamis 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 Adamis’ interpretations of the FDA’s
position, Adamis has developed a plan for clinical development that includes
seeking to formally apply for marketing approval by mid-2012.
Preclinical
Development
.
Adamis
anticipates filing for an Investigational New Drug Application, or IND, based on
previously published data on this technology. Adamis 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. Adamis
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. Adamis estimates the total cost of the clinical trial to be
about $250,000.
After
completion of the anticipated Phase I/II trial, Adamis 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.
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 Adamis is able to raise and
requirements of the FDA. For planning purposes, Adamis 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. Adamis estimates that the cost of the trial will be approximately
$10.7 million.
Absent
unexpected developments, Adamis 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 Adamis 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 Adamis anticipates, and there can
be no assurances that the FDA will eventually approve Adamis’ influenza vaccine
product for marketing.
Cost Of
Development
Adamis
estimates that the total cost of clinical development for the avian influenza
vaccine is in the range of approximately $20-$25 million. Of this amount,
approximately $5-$10 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 Adamis
personnel; and Adamis estimates that about $15 million will be spent on
activities anticipated to be conducted by third parties, such as:
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Production
of the plasmid
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Phase
I/II clinical trials
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Phase
III clinical trials
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If
clinical trials for the influenza vaccine are progressing successfully,
depending on a number of factors, including the status of Adamis’ other business
activities and products, the amount of funds that Adamis has raised, and Adamis’
other capital needs, as well as the terms of any such partnership, Adamis
anticipates that it may seek to form a strategic partnership with a large,
international pharmaceutical company capable of commercializing Adamis’ product
in markets outside of the United States, in the U.S. markets, or worldwide. In
addition, Adamis has also considered an alliance with one or more
nongovernmental organizations, such as the Red Cross, as a viable method of
commercializing some of Adamis’ products domestically.
Sources and Availability of Raw
Materials
Adamis
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.
Adamis 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. Adamis’
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 Adamis’ aerosolized inhaled nasal steroid, Adamis has
identified the top prescribing markets in the U.S. by utilizing physician data
aligned with zip code alignment data. Adamis expects to expand to approximately
50 specialty field force sales representatives before introducing the
aerosolized nasal steroid product. Physician calls by Adamis’ 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.
Governmental
Regulation
The
production and marketing of Adamis’ 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 Adamis 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 Adamis’ potential products to market, and Adamis
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 Adamis
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 Adamis’ 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 Adamis 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 Adamis from broadening the
uses of Adamis’ current or potential products for different applications. In
addition, Adamis may not receive FDA approval to export Adamis’ potential
products in the future, and countries to which potential products are to be
exported may not approve them for import.
Manufacturing
facilities for Adamis’ 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 Adamis decides to manufacture its own products, a governmental authority
may challenge Adamis’ compliance with applicable federal, state and foreign
regulations. In addition, any discovery of previously unknown problems with one
of Adamis’ potential products or facilities may result in restrictions on the
potential product or the facility. If Adamis decides to outsource the commercial
production of its products, any challenge by a regulatory authority of the
compliance of the manufacturer could hinder Adamis’ ability to bring its
products to market.
To the
extent that Adamis 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. Adamis 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. Adamis 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
Adamis’ 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:
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the
FDA has not established guidelines concerning the scope of clinical trials
required for gene-based therapeutic and vaccine
products;
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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
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current
regulations and guidances are subject to substantial review by various
governmental agencies.
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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:
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impose
costly procedures;
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diminish
any competitive advantages; or
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negatively
affect results of operations and cash
flows.
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Adamis
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 Adamis must sponsor and file a
regulatory application for each proposed use. Adamis 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.
Adamis
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. Adamis
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 Adamis
products, 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 Adamis 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.
Adamis,
or its collaborative partners, are subject to numerous foreign regulatory
requirements governing the manufacturing and marketing of Adamis’ 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, Adamis 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.
Adamis can not predict whether any such regulations will be adopted or whether,
if adopted, such regulations will apply to its business, or whether Adamis would
be able to comply with any applicable regulations.
Even if
Adamis’ 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, Adamis may not successfully begin or complete clinical
trials in the time periods estimated, if at all. Moreover, if Adamis incurs
costs and delays in development programs or fails to successfully develop and
commercialize products based upon its technologies, Adamis 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. Adamis’ product
candidates include both biological drug products and drug products. The process
required by the FDA before Adamis’ drug and biological drug product candidates
may be marketed in the United States generally involves the following:
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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;
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submission
to the FDA of an IND, which must become effective before human clinical
trials may begin;
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performance
of adequate and well controlled human clinical trials to establish the
safety and efficacy of the product candidate for each proposed indication;
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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;
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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
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FDA
review and approval of the NDA or BLA prior to any commercial marketing,
sale or shipment of the drug or biological drug.
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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.
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, i
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
Adamis’ 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 Adamis 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.
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 penalities, 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.
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.
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, Adamis 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.
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.
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, Adamis 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,
Adamis 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 Adamis
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.
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
Adamis 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, Adamis 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 Adamis is not aware are also likely developing products
intended to address influenza and other indications targeted by
Adamis.
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 Adamis. 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, Adamis’ programs.
Product Liability
Insurance
The
manufacture and sale of human therapeutic products involve an inherent risk of
product liability claims and associated adverse publicity. Adamis currently has
only limited product liability insurance, and there can be no assurance that
Adamis 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 Adamis’ business. A
product liability claim brought against Adamis its insurance coverage, if any,
could have a material adverse effect upon its business, financial condition and
results of operations.
Patents and Proprietary
Technologies
Patents
and other proprietary rights are important to Adamis’ business. Adamis’ policy
is to file patent applications and protect inventions and improvements to
inventions that are commercially important to the development of its business.
Adamis 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. 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 Adamis’ 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:
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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.
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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.
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PCT
Patent Application US00/11372/ WO 00/64488 entitled SOMATIC TRANSGENE
IMMUNIZATION AND RELATED METHODS, filed April 27,
2000.
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European
Patent Application 009301284.7 entitled SOMATIC TRANSGENE IMMUNIZATION AND
RELATED METHODS, international filing date April 27,
2000.
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Canadian
Patent Application # 2,369, 616 entitled SOMATIC TRANSGENE IMMUNIZATION
AND RELATED METHODS, international filing date April 27,
2000.
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Japan
Patent Application #2000-613478 entitled SOMATIC TRANSGENE IMMUNIZATION
AND RELATED METHODS, international filing date April 27,
2000.
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US
Patent Application No. 10,030,003 entitled SOMATIC TRANSGENE IMMUNIZATION
AND RELATED METHODS, international filing date April 27,
2000.
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US
Patent Application No. 11,640,778, entitled SOMATIC TRANSGENE IMMUNIZATION
AND RELATED METHODS, filed December 16,
2006.
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Adamis’
failure to obtain patent protection or otherwise protect its proprietary
technology or proposed products may have a material adverse effect on Adamis’
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 Adamis’
technology.
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. Adamis 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 Adamis. Adamis 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 Adamis 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 Adamis, to protect trade secrets or know-how owned or licensed by
Adamis, or to determine the scope and validity of the proprietary rights of
third parties. Although no third party has asserted that Adamis 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
Adamis would prevail in any such litigation or that Adamis would be able to
obtain any necessary licenses on reasonable terms, if at all. Any such claims
against Adamis, with or without merit, as well as claims initiated by Adamis
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 Adamis,
it may have to participate in interference proceedings to determine priority of
invention which could result in substantial cost to Adamis even if the outcome
is favorable to Adamis. There can be no assurance that third parties will not
independently develop equivalent proprietary information or techniques, will not
gain access to Adamis’ trade secrets or disclose such technology to the public
or that Adamis can maintain and protect unpatented proprietary technology.
Adamis typically requires its employees, consultants, collaborators, advisors
and corporate partners to execute confidentiality agreements upon commencement
of employment or other relationships with Adamis. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for Adamis’ 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 Adamis’ trade secrets will not otherwise become known or be
discovered independently by its competitors.
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, Adamis will
need to expand managerial, operations, development, regulatory, sales,
commercialization, finance and other functions. None of Adamis’ employees are
represented by a labor union, and Adamis considers its employee relations to be
good.
Following
completion of the merger, Adamis 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.
A
damis 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.
Legal Proceedings
Adamis is
not currently a party to any material legal proceedings.
Management and Board of
Directors
Please
see the information for Messrs. Carlo, Marguglio, Hopkins, and Aloi, each of
whom is a director or officer of Adamis, under the heading “Management of
the Combined Company” below.
ADAMIS’ MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
This discussion of Adamis’
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 Adamis’ operations, development efforts and business
environment, the other risks and uncertainties described in the section entitled
“Risk Factors” in this joint proxy statement/prospectus and the other risks and
uncertainties described elsewhere in this joint proxy statement/prospectus. All
forward-looking statements included in this joint proxy statement/prospectus are
based on information available to Adamis 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, A
damis assumes no
obligation to update any such forward-looking statements.
Since
Adamis is not currently a reporting company, Adamis is not eligible for the safe
harbor for forward-looking statements under the Private Securities Litigation
Reform Act of 1995, and therefore the safe harbor protections of that Act do not
apply to forward-looking statements relating to
Adamis.
Recent Events
On
February 12, 2008, Adamis entered into a definitive merger agreement with
Cellegy, pursuant to which Adamis will merge with a wholly-owned subsidiary of
Cellegy and will be the surviving corporation and a subsidiary of Cellegy
post-merger. Assuming the completion of the merger, the current stockholders of
Adamis would own approximately 93% of Cellegy (subject to adjustment as set
forth in the merger agreement) and Adamis would be a wholly-owned subsidiary of
Cellegy. Because this transaction has not been completed, there are no
assurances that Adamis will successfully complete the merger with
Cellegy.
Adamis
acquired International Labs, or INL, a contract packager of pharmaceutical and
nutraceutical products located in St. Petersburg, Florida, on December 31, 2007,
in a stock-for-stock transaction. On July 18, 2008, Adamis sold all of the
shares of INL to a third party. Proceeds to Adamis, including repayment to
Adamis by INL of amounts previously advanced by Adamis to INL, were
approximately $6.8 million. At or shortly after the closing of the transaction,
Adamis used approximately $3.8 million of the proceeds to pay certain Adamis
obligations, including approximately $2.2 million of Adamis debt incurred in
connection with its original purchase of INL. Up to an additional $500,000
is payable to Adamis after the expiration of a six-month escrow/holdback
period, with the precise amount depending on whether any indemnity claims
are asserted during that period by the purchaser if INL and how any
such claims are resolved. In connection with the transaction, the former
stockholders of INL from whom Adamis acquired the business agreed to return to
Adamis eight million of the shares of Adamis common stock that Adamis previously
issued to them as part of the purchase price paid by Adamis to acquire INL.
General
Adamis
was founded in June 2006, as a Delaware corporation. Adamis has two wholly-owned
subsidiaries: Adamis Laboratories, Inc. (specialty pharmaceuticals), or Adamis
Labs; and Adamis Viral Therapies, Inc. (biotechnology), or Adamis Viral.
Adamis
Labs is a specialty pharmaceutical company. Adamis Labs currently has a line of
prescription products that it markets for a variety of allergy, respiratory
disease and pediatric conditions. Adamis acquired these products in April 2007
by acquiring all of the outstanding shares of Healthcare Ventures Group, a
private company that had previously acquired the products and related
intellectual property, assets and personnel from another corporation in April
2007, and subsequently renaming the company Adamis Labs. Additional product
candidates in its product pipeline include a pre-filled epinephrine syringe for
use in the emergency treatment of extreme acute allergic reactions, or
anaphylactic shock, and a generic inhaled nasal steroid for the treatment of
seasonal and perennial allergic rhinitis.
Adamis’s
goal is to commence commercial sales of the syringe product during the first
quarter of calendar 2009. Product development has been substantially
completed and stability batches are being produced in anticipation of product
launch. Adamis estimates that approximately $1 million will be
required to support the commercial launch of the epinephrine syringe
product. Adamis believes that the syringe product has the potential
to compete successfully and generate net cash inflows shortly after commercial
introduction, although there can be no assurances that this will be the
case. Adamis estimates that the time to develop the nasal steroid
product candidate will be approximately 24 months from the closing of the
proposed merger transaction with Cellegy, assuming sufficient funding and no
unexpected delays. Currently, neither manufacturing nor clinical
trials have comments for that product candidate. Adamis estimates
that approximately $9-14 million or more must be invested to support development
and commercial introduction of the nasal steroid product
candidate. Factors that could affect the actual launch date for the
nasal steroid 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. Significant delays in the
introduction of either the syringe product or the steroid product could reduce
revenues and income to Adamis and the combined company, require additional
funding from other sources, and potentially have an adverse effect on the
ability to fund the combined company’s research and development efforts for
avian influenza and other vaccine product candidates. As the avian
flu product candidate is at an earlier stage of development, Adamis cannot
estimate with any precision the amount that will be required to support
development, clinical trials and commercial introduction of a product, although
the amounts are likely to be larger than the amounts required to support the
nasal steroid product candidate. Factors that could affect the costs
of developing such a candidate include those described above for the steroid
product candidate.
From
inception, Adamis’ development efforts have been focused on development of its
vaccine technology, with the first product candidate expected to be a vaccine
for avian flu. Adamis formed Adamis Viral to focus on developing that vaccine
technology. Adamis Viral’s product candidates are in the preclinical stage, and
it has not generated any revenues to date. From June 6, 2006 (date of inception)
through September 30
, 2008,
Adamis has spent a total of approximately $159,000 to in-license and develop the
Adamis Viral vaccine technology. Research and development efforts will require
the conduct of both preclinical and clinical studies and significant additional
funding, and even if development and marketing efforts are successful,
substantial time may pass before significant revenues will be realized;
accordingly, even if Adamis Labs generates revenues and net income, during this
period Adamis will require additional funds for its Adamis Viral operations, the
availability of which cannot be assured. Consequently, Adamis is subject to many
of 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 of both its Adamis Viral and
Adamis Labs subsidiaries, Adamis will require additional capital to continue
research and development and marketing efforts and to make capital investments
in its operations. No assurance can be given as to the timing or ultimate
success of obtaining future funding, and there are no assurances that
Adamis will be successful, with the limited experience and resources Adamis has
available at the present time, in developing and commercializing the syringe
product, an avian flu vaccine or any other vaccine product or
technology.
The
process of developing new therapeutic products is inherently complex,
time-consuming, expensive and uncertain. Adamis must make long-term investments
and commit significant resources before knowing whether its development programs
will result in products that will receive regulatory approval and achieve market
acceptance. Product candidates that may appear to be promising at all stages of
development may not reach the market for a number of reasons. Product candidates
may be found ineffective or may cause harmful side effects during clinical
trials, may take longer to progress through clinical trials than had been
anticipated, may not be able to achieve the pre-defined clinical endpoint due to
statistical anomalies even though clinical benefit may have been achieved, may
fail to receive necessary regulatory approvals, may prove impracticable to
manufacture in commercial quantities at reasonable cost and with acceptable
quality, or may fail to achieve market acceptance. For these reasons, as well as
other reasons identified above under the heading “Risk Factors,” Adamis is
unable to predict the period in which material net cash inflows from product
candidates incorporating the vaccine technology will commence.
Critical Accounting Policies and
Estimates
Principles of
Consolidation
. The
accompanying consolidated financial statements include Adamis Pharmaceuticals
and its wholly owned subsidiaries, Adamis Labs and INL. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates.
The
preparation of consolidated financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents.
For
purposes of the consolidated statements of cash flows, Adamis considers all
highly liquid investments with original maturities at the date of purchased of
three months or less to be cash equivalents. Adamis had no cash equivalents at
March 31, 2008 and 2007.
Accounts Receivable, Allowance for
Doubtful Accounts and Sales Returns.
Trade
accounts receivable are stated net of an allowance for doubtful accounts and
sales returns. Adamis estimates an allowance based on its historical experience
of the relationship between actual bad debts and net credit sales. At March 31,
2008 and 2007, no allowance for doubtful accounts was recorded. Allowance for
sales returns was $21,000 and $0, for March 31, 2008 and 2007, respectively.
Adamis
has established an allowance for sales returns based on management’s best
estimate of probable loss inherent in the accounts receivable balance.
Management determines the allowance based on current credit conditions,
historical experience, and other currently available information.
Inventory
.
Inventory, consisting of allergy and respiratory products, is recorded at the
lower of cost or market, using the weighted average method.
Property and
Equipment
.
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. The cost of leasehold improvements are
amortized over the lesser of the lease term or the life of the improvement, if
shorter.
Useful
lives used to depreciate property and equipment are as follows:
|
|
Life in
Years
|
|
|
|
Office
Furniture and Equipment
|
|
7
|
|
|
3
|
Vehicles
|
|
3
|
Deferred Acquisition Costs.
Adamis
incurred certain professional fees associated with specific potential
acquisition targets. These costs, should the acquisition occur, will be
capitalized as part of the purchase price paid for the acquisition. Should the
acquisition not occur, Adamis will expense these costs when that determination
occurs.
Revenue Recognition.
Our
primary customers are pharmaceutical wholesalers. In accordance with our revenue
recognition policy, revenue is recognized when title and risk of loss are
transferred to the customer, the sale price to the customer is fixed and
determinable, and collectability of the sale price is reasonably assured.
Reported revenue is net of estimated customer returns and other wholesaler fees.
Our policy regarding sales to customers is that we do not recognize revenue
from, or the cost of, such sales, where we believe the customer has more than a
demonstrably reasonable level of inventory. We make this assessment based on
historical demand, historical customer ordering patterns for purchases, business
considerations for customer purchases and estimated inventory levels. If our
actual experience proves to be different than our assumptions we would then
adjust such allowances accordingly.
We
estimate allowances for revenue dilution items using a combination of
information received from third parties, including market data, inventory
reports from our major U.S. wholesaler customers, when available, historical
information and analysis that we perform. The key assumptions used to arrive at
our best estimate of revenue dilution reserves are estimated customer inventory
levels and purchase forecasts provided. Our estimates of inventory at wholesaler
customers and in the distribution channels are subject to the inherent
limitations of estimates that rely on third-party data, as certain third-party
information may itself rely on estimates, and reflect other limitations. We
believe that such provisions are reasonably ascertainable due to the limited
number of assumptions involved and the consistency of historical experience.
Sales
returns and discounts for the period ended March 31, 2008 were approximately
$328,000. The table below reconciles the “Sales Returns Reserve
Adjustment” for the same period ended March 31, 2008:
Beginning
Balance Sales Returns & Discounts
|
|
$
|
158,000
|
|
Less
Actual Sales Returns & Discounts during Fiscal
2008
|
|
|
(328,000
|
)
|
Reserve
needed to replenish correct reserve
|
|
|
191,000
|
|
Sub
total
|
|
$
|
(137,000
|
)
|
Ending
Sales Returns & Discounts as of March 31, 2008
|
|
$
|
21,000
|
|
The
$137,000 adjustment to “Sales Returns Reserve Adjustment” is the difference
between the actual returns & discounts ($328,000) and the amount needed to
replenish the reserve, $191,000.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at the
time the payment is received and are subsequently recognized as revenue on a
straight-line basis over the longer of the life of the agreement or the life of
the underlying patent. Royalties payable to Adamis under license agreements are
recognized as earned when the royalties are no longer refundable under the terms
defined in the agreement. To date no royalties have been paid.
Goodwill and Intangible
Assets.
Intangible assets include intellectual property and other patent rights
acquired. Consideration paid in connection with acquisitions is required to be
allocated to the acquired assets, including identifiable intangible assets, and
liabilities acquired. Acquired assets and liabilities are recorded based on
Adamis’ estimate of fair value, which requires significant judgment with respect
to future cash flows and discount rates. For intangible assets other than
goodwill, Adamis is required to estimate the useful life of the asset and
recognize its cost as an expense over the useful life. Adamis uses the
straight-line method to expense long-lived assets (including identifiable
intangibles). In accordance with Statement of Financial Accounting Standard
(“SFAS”) No. 142 “Goodwill and Other Intangible Assets,” goodwill and other
intangible assets with indefinite lives are no longer systematically amortized,
but rather Adamis performs an annual assessment for impairment by applying a
fair-value based test. This test is generally performed each year in the fourth
fiscal quarter. Additionally, goodwill and intangible assets are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the asset may not be recoverable. An impairment loss would be recognized based
on the difference between the carrying value of the asset and its estimated fair
value, which would be determined based on either discounted future cash flows or
other appropriate fair value methods. The evaluation of goodwill and other
intangibles for impairment requires management to use significant judgments and
estimates including, but not limited to, projected future revenue, operating
results and cash flows. An impairment would require Adamis to charge to earnings
the write-down in value of such assets.
Long Lived
Assets.
Adamis
periodically assesses whether there has been permanent impairment of its
long-lived assets held and used in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires Adamis
to review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of the asset to future net undiscounted cash
flows expected to be generated from the use and eventual disposition of the
asset.
Research and Development
Expenses
.
Adamis
accounts for research and development costs in accordance with SFAS No. 2,
“Accounting for Research and Development Costs” and Emerging Issues Task Force
(“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for
Goods or Services to Be Used in Future Research and Development Activities.”
Under SFAS No. 2, research and development costs are expensed as incurred.
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. Research and development costs were $203,000 and $83,000 for the
fiscal years ended March 31, 2008 and 2007, respectively, which were expensed.
A
ll
of the costs in fiscal 2007 related to Adamis’ viral and influenza product
development efforts. For fiscal 2008, approximately $153,000 of the
costs related to the epi syringe product candidate, and approximately $50,000 of
the costs related to the viral and influenza product development
efforts.
Shipping and Handling Costs.
Shipping
and handling costs are included in selling, general and administrative expenses.
Shipping and handling costs were $23,000 and $0 for the years ended March 31,
2008 and 2007, respectively.
Advertising Costs
.
Advertising
costs are expensed as incurred as set forth in Statement of Position (“SOP”) No.
93-7, “Reporting on Advertising Costs.” Advertising expenses were $3,000 and $0
for the years ended March 31, 2008 and 2007, respectively.
Net Loss per Share.
Adamis
computes net loss per share in accordance with SFAS No. 128,
"Earnings per
Share,"
under
the provisions of which basic loss per share is computed by dividing the income
attributable to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. Since the effect
of common stock equivalents was anti-dilutive, all such equivalents were
excluded from the calculation of weighted average shares outstanding.
Outstanding warrants at March 31, 2008 were 1,000,000, and there were no common
stock equivalents outstanding at March 31, 2007.
On April
1, 2007, Adamis adopted the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty on Income Taxes, and
Interpretation of SFAS No. 109, Accounting for Income Taxes,” which did not have
a material impact on Adamis’ liability for unrecognized tax benefits.
Discontinued
Operations
.
The
results of operations for the year ended March 31, 2008, and the three and
six month periods ended September 30, 2008 and the assets and
liabilities at March 31, 2008 and September 30, 2008 related to INL have
been accounted for as discontinued operations in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” There were no
operations or related assets and liabilities of INL in the accompanying
consolidated financial statements of prior periods.
For
periods after its disposal on July 18, 2008, INL’s results from operations and
cash flows will be excluded from the ongoing operations of Adamis, and INL
will have no significant continuing involvement with Adamis’ operations.
Similarly,
Adamis will have no significant continuing involvement with the operations of
INL.
For the fiscal year ended March 31, 2008, INL’s operations are
included as part of the consolidated group.
Reclassifications
. Certain
prior period amounts have been reclassified to conform to the current period
presentation. In the Consolidated Statement of Operations for the period from
June 6, 2006 (inception) to March 31, 2007, Adamis reclassified $83,300 for
research and development expenditures incurred, previously reflected as selling,
general, and administrative expense.
Results of
Operations
Adamis’
consolidated results of operations are presented for the fiscal year ending
March 31, 2008 and for the fiscal period from June 6, 2006 (date of inception)
to the fiscal year ending March 31, 2007. Adamis’ consolidated interim results
of operations are presented for the six months ending September
30, 2008 and 2007. Adamis acquired Adamis Labs on April 23, 2007 and INL on
December 31, 2007 and, accordingly, Adamis’ consolidated results of operations
for the fiscal year ended March 31, 2008, do not include a full year of Adamis
Labs’ and INL’s operations. Adamis completed its disposition of INL on July 18,
2008.
Period from June 6, 2006 (date of
inception) to Fiscal Year Ended March 31, 2007
During
the period from June 6, 2006 (date of inception) until its fiscal year ended
March 31, 2007, sometimes referred to in this discussion as fiscal 2007, Adamis
was in the development stage. During that period, Adamis raised approximately
$696,000 of capital in connection with its equity and debt financing
transactions.
Revenues and Cost of Sales.
Adamis
had no revenues or cost of sales for the fiscal 2007 period.
Research and Development
Expenses.
Adamis
had research and development expenses of $83,000 for the fiscal 2007 period
, all of
which related to Adamis’ viral and influenza product development
efforts.
Selling, General and Administrative
Expenses.
Selling,
general and administrative expenses, or SG&A, were approximately $492,500
for the fiscal 2007 period. SG&A expenses primarily consisted of personnel
costs and legal and professional fees.
Other Income
(Expense)
.
Total
other income (expense) for fiscal 2007 was income of $15,000. For the fiscal
2007 period, Adamis recognized interest income of $30,000 relating to interest
on funds invested pursuant to equity and debt financing transactions and
incurred interest expense of $15,000 relating to its debt financing activities.
Fiscal Year Ended March 31, 2008
In the
discussion below, results for the fiscal year ended March 31, 2008, are
presented in comparison to results for the period from June 6, 2006, which is
the date of inception of Adamis, through March 31, 2007, referred to as fiscal
2007. These periods are not comparable for a number of reasons, including that
the 2007 period consisted only of approximately nine months, as well as that
results for fiscal 2008 include the results of Adamis Labs from the date of its
acquisition by Adamis on April 23, 2007. In addition, INL was acquired on
December 31, 2007 and its operations are reflected as being discontinued in
Adamis’ consolidated operations from that date through March 31, 2008. With its
acquisition of Adamis Labs in April 2007, Adamis emerged from the development
stage.
Revenues.
Adamis
had consolidated revenues of approximately $622,000 for fiscal 2008, compared to
no revenues for fiscal 2007. Adamis’ consolidated revenues for fiscal 2008 were
primarily attributable to sales of Adamis Labs’ allergy and respiratory
products.
Cost of Product
Sales
.
Consolidated cost of product sales were approximately $349,000 for fiscal 2008
and were primarily attributable to the sales of Adamis Labs’ allergy and
respiratory products. There was no cost of sales in fiscal 2007. Adamis Labs
employs a contract manufacturer to produce its allergy and respiratory products,
and the costs to manufacture these products consist primarily of direct labor
and raw material manufacturing and packaging costs, shipping costs and those
costs associated with stability and validation testing of finished goods prior
to shipment.
Selling, General and Administrative
Expenses.
Consolidated
selling, general and administrative expenses, or SG&A, were approximately
$3.8 million for fiscal 2008, compared to approximately $493,000 for fiscal
2007. The increase of approximately $3.3 million in SG&A expenses was
primarily attributable to the scale up of Adamis Pharmaceuticals’ and Adamis
Lab’s sales and general business activities, the acquisition of Adamis Labs and
INL and costs associated with the disposition of INL. Consolidated SG&A
expenses for fiscal 2008 included sales and administrative salaries and sales
incentive payments of approximately $1,962,000, legal, accounting and other
professional fees of approximately $761,000 and professional consulting expenses
of approximately $382,000. Adamis Labs’ SG&A expenses associated with the
scale up of its selling, marketing and distribution of its allergy and
respiratory products were approximately $2.1 million for fiscal 2008.
Research and Development Expenses.
Adamis
incurred research and development expenses of approximately $203,000 during
fiscal 2008 and approximately $83,000 during fiscal 2007.
All of
the costs in fiscal 2007 related to Adamis’ viral and influenza product
development efforts. For fiscal 2008, approximately $153,000 of the
costs related to the epi syringe product candidate, and approximately $50,000 of
the costs related to the viral and influenza product development
efforts.
Intangible Impairment.
Subsequent to the acquisition of Adamis Labs (formerly HealthCare Ventures
Group, Inc.) on April 23, 2007, Adamis recorded an impairment charge of
approximately $3.2 million for the entire amount of the acquired intangible
assets, which was comprised primarily of a distribution network, which was the
only asset of any significant value at the time of purchase, as Adamis deemed
that this asset had no future value at March 31, 2008. Adamis later determined
that the purchased distribution network
did not
meet the expectations for the network that were part of the decision to purchase
Adamis Labs, would not sustain the introduction of the new epi syringe product
and had no future value,
and therefore subsequently wrote down the value
of this asset.
Other Income
(Expense)
.
Total
other income (expense) for fiscal 2008 was a net expense of approximately
$322,000. Adamis recognized interest and other income of approximately $77,000
for fiscal 2008, compared to approximately $30,000 for fiscal 2007. The increase
was primarily the result of interest income on invested funds received from
equity and debt financing transactions during the period and the investment of
idle cash resources. Adamis recognized interest expense of approximately
$399,000 for fiscal 2008 as compared to approximately $15,000 for fiscal 2007.
The increase of approximately $384,000 was primarily due to interest expense on
notes payable associated with Adamis’ debt financing activities in fiscal 2008.
Discontinued
Operations.
Adamis
reported INL’s loss from its contract packaging operations of approximately $2.5
million as being discontinued for the fiscal period ending March 31, 2008, due
to the decision to dispose of INL in April 2008. For periods subsequent to INL’s
disposal on July 18, 2008, its results from operations and cash flows will be
excluded from the ongoing operations of Adamis, and it is anticipated that INL
will have no significant continuing involvement with Adamis’ ongoing
operations.
Three Months
Ended September 30, 2008 and 2007
In the
discussion below, results for the quarter ended September 30, 2008 are presented
in comparison to results for the quarter ended September 30,
2007. These periods are comparable for continued operations but not
for discontinued operations since INL had not been acquired as of September 30,
2007.
Revenues.
Adamis
had product sales relating to its allergy and respiratory products of
approximately $202,000 for the quarter ended September 30, 2008, as compared to
product sales of approximately $1,000 for the quarter ended September 30,
2007. Adamis, for the majority of the quarter ended September 30,
2007, could not record orders for product due to a name change in one of its
licenses. The name change in the license is the primary reason for
the variance.
Cost of Product Sales.
Adamis had cost of
product sales relating to its allergy and respiratory business of approximately
$138,000 for the quarter ended September 30, 2008 as compared to cost of product
sales of approximately $66,000 for the quarter ended September 30, 2007,
reflecting lower sales in the earlier period.
Selling, General and Administrative
Expenses.
SG&A expenses for the quarter ended September
30, 2008 were approximately $1,334,000 as compared to approximately $800,000 for
the quarter ended September 30, 2007. The increase of approximately
$534,000 was due primarily to an increase in salaries and wages, professional
and regulatory fees and related services.
Research and Development
Expenses.
Adamis incurred research and development expenses
for the quarter ended September 30, 2008 of approximately $25,000 and
approximately $140,000 for the quarter ended September 30, 2007.
For the
2008 period, approximately $12,500 of the costs related to the epi syringe
product candidate, and approximately $12,500 of the costs related to the viral
and influenza product development efforts. For the 2007 period,
approximately $128,000 of the costs related to the epi syringe product
candidate, and approximately $12,000 of the costs related to the viral and
influenza product development efforts.
Other Income (Expense)
.
Total other income
(expense) for the quarter ended September 30, 2008, was a net expense
of approximately $(195,000) as compared to other income of
approximately $26,000 for the quarter ended September 30,
2007. Adamis recognized interest expense of approximately $195,000
for the quarter ended September 30, 2008, compared to approximately $11,000 for
the quarter ended September 30, 2007. The increase of approximately
$184,000 was due primarily to the increase in notes payable attributable to
Adamis’ debt financing activities in 2008.
Discontinued Operations.
Adamis reported income
from INL’s contract packaging operations of approximately $6 million as being
discontinued due to the decision to dispose of INL in April 2008. For
periods after its disposal on July 18, 2008, INL’s results from operations and
cash flows will be excluded from the ongoing operations of Adamis, and it is
anticipated that INL will have no significant continuing involvement with
Adamis’ ongoing operations.
Six
Months Ended September 30, 2008 and 2007
In the
discussion below, results for the six months ended September 30, 2008 are
presented in comparison to results for the six months ended September 30,
2007. These periods are comparable for continued operations but not
for discontinued operations since INL had not been acquired as of September 30,
2007.
Revenues.
Adamis
had product sales relating to its allergy and respiratory products of
approximately $311,000 for the six months ended September 30, 2008, as compared
to product sales of approximately $203,000 for the six months ended September
30, 2007. Adamis, for the majority of the quarter ended September 30,
2007, could not record orders for product due to a name change in one of its
licenses. The name change in the license is the primary reason for
the variance.
Cost of Product Sales.
Adamis had cost of
product sales relating to its allergy and respiratory business of approximately
$181,000 for the six months ended September 30, 2008 as compared to cost of
product sales of approximately $146,000 for the six months ended September 30,
2007, reflecting lower sales in the earlier period.
Selling, General and Administrative
Expenses.
SG&A expenses for the six months ended September
30, 2008 were approximately $2,336,000 as compared to approximately $1,735,000
for the six months ended September 30, 2007. The increase of
approximately $601,000 was due primarily to an increase in salaries and wages,
professional and regulatory fees and related services.
Research and Development
Expenses.
Adamis incurred research and development expenses
for the six months ended September 30, 2008 of approximately $336,000 and
approximately $153,000 for the six months ended September 30, 2007.
For the
2008 period, approximately $311,000 of the costs related to the epi syringe
product candidate, and approximately $25,000 of the costs related to the viral
and influenza product development efforts. For the 2007 period,
approximately $128,000 of the costs related to the epi syringe product
candidate, and approximately $25,000 of the costs related to the viral and
influenza product development efforts.
Other Income (Expense)
.
Total other income
(expense) for the six months ended September 30, 2008, was a net expense of
approximately $(390,000) as compared to other income of approximately $23,000
for the six months ended September 30, 2007. Adamis recognized
interest expense of approximately $392,000 for the six months ended September
30, 2008, compared to approximately $18,000 for the six months ended September
30, 2007. The increase of approximately $374,000 was due primarily to
the increase in notes payable attributable to Adamis’ debt financing activities
in 2008.
Discontinued Operations.
Adamis reported income
loss from INL’s contract packaging operations of approximately $3.9 million as
being discontinued due to the decision to dispose of INL in April
2008. For periods after its disposal on July 18, 2008, INL’s results
from operations and cash flows will be excluded from the ongoing operations of
Adamis, and it is anticipated that INL will have no significant continuing
involvement with Adamis’ ongoing operations.
Liquidity and Capital
Resources
Fiscal 2007 and
2008
Since its
inception, June 6, 2006, through March 31, 2008, Adamis has financed its
operations principally through debt financing and through private issuances of
common stock. Since inception, Adamis has raised a total of approximately $8.6
million in debt and equity financing transactions, consisting of approximately
$4.3 million in debt financing and approximately $4.3 million in equity
financing transactions. Adamis expects to finance future cash needs primarily
through proceeds from equity or debt financings, loans, and/or collaborative
agreements with corporate partners. Adamis has used the net proceeds from debt
and equity financings for general corporate purposes, which have included
funding for research and development, selling, general and administrative
expenses, working capital, reducing indebtedness, pursuing and completing
acquisitions or investments in other businesses, products or technologies, and
for capital expenditures.
Adamis’
cash was $1,000 and $37,000 as of March 31, 2008 and March 31, 2007,
respectively. The decrease in cash was primarily the result of selling, general
and administrative expenses, expansion of plant and merger costs, partially
offset by funds received from financing transactions.
Net
cash used in operating activities from continuing operations for fiscal 2008 and
2007 were approximately $2.9 million and $456,000, respectively, due primarily
to Adamis’ scale up of sales operations and merger and acquisition costs. Adamis
expects net cash used in operating activities to increase going forward as it
pursues and completes its merger with Cellegy, 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.
Adamis
incurred a one time adjustment to record an intangible impairment of
approximately $3,151,000 due to its determination that the distribution network
acquired in the Adamis Labs acquisition did not meet the expectations for the
network that were part of the decision to purchase Adamis Labs, would not
sustain the introduction of the new epi syringe product and had no future
value. The increase in accounts payable of approximately $723,000
from fiscal 2007 and accrued expenses of $292,000 relates to the acquisition of
Adamis Labs and the increased level of spending that came with product
development. N
et cash used in operating activities from discontinued
operations for fiscal 2008 of approximately $978,000 relate to INL’s contract
packaging operations which were sold in July 2008.
Net cash
provided by investing activities from continuing operations was approximately
$11,000 for fiscal 2008, compared to net cash used in investing activities from
continuing operations for fiscal 2007 of $203,000. Fiscal 2007 included a
related party loan to Healthcare Ventures Group, Inc. of $100,000 prior to the
acquisition by the company. Net cash used in investing activities from
discontinued operations of approximately $3.9 million for fiscal 2008 relate to
INL’s contract packaging operations which were sold in July 2008.
Net cash
provided by financing activities from continuing operations was approximately
$7.8 million in fiscal 2008 and approximately $696,000 in fiscal 2007, primarily
due to the receipt of proceeds from issuance of common stock and debt
financing.
In fiscal
year 2008, Adamis borrowed a total of $2,000,000 from a third party
institutional lender. The initial loan of $1,000,000 was executed on December
21, 2007 and the second loan of $1,000,000 was executed on January 9, 2008. The
loans matured in sixteen (16) months and had an interest rate of 12% per year.
The loans could be prepaid with an additional payment of a premium of one
percent of the outstanding principal. As an inducement to make the loan, Adamis
issued to the third party 800,000 shares of its common stock. Under the terms of
the various loan agreements, virtually all of the assets of Adamis and its
subsidiaries, including INL, were pledged as security. In connection with the
sale of INL in July 2008, the loan was fully repaid and no outstanding balance
or obligations remain under the loan agreements.
On
November 15, 2007, Adamis issued a promissory note to a shareholder in the
principal amount of $1,000,000. The note bore interest at a rate of 10% per
annum. In connection with the sale of INL in July 2008, the loan was fully
repaid.
As of
March 31, 2008, Adamis had outstanding a total of nine promissory notes to
Dennis J. Carlo, President and Chief Executive Officer of Adamis, in the
aggregate outstanding principal amount of $410,000, reflecting loans made by Mr.
Carlo to Adamis. Each of these notes bore interest at an annual rate of 10%. In
connection with the sale of INL in July 2008, the loans were fully repaid.
In
conjunction with signing the definitive agreement to merge with Cellegy, Adamis
borrowed $500,000 from Cellegy on February 12, 2008. The loan bears an interest
rate of 10%. Under the terms of the agreement, the loan will be converted into
Adamis common stock at the time the merger is consummated and the resulting
shares issued will be cancelled.
Three Months Ended September
30, 2008 and 2007
Adamis’
cash was $705,577 as of September 30, 2008 and $127,815 as of September 30,
2007, respectively. The increase in cash was primarily the result of funds
received from financing transactions, offset by selling, general and
administrative expenses, expansion of plant, merger costs and Adamis’
development of its products.
Net
cash used in operating activities from continuing operations was approximately
$3,207,000 and $1,406,000 for the quarters ended September 30, 2008, and
2007, respectively. The increase in the use of cash from continuing operations
was primarily due to Adamis’ scale up of sales operations, merger and
acquisition costs and research activities. Adamis expects net cash used in
operating activities to increase going forward as it pursues and completes its
merger with Cellegy, 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 operating activities from discontinued operations for the quarter
ended September 30, 2008 of approximately $663,000 related to INL’s
contract packaging operations which were sold in July 2008.
Net
cash provided by investing activities from continuing operations was
approximately $6,481,000 and $14,000 for the quarters ended September 30,
2008, and 2007, respectively. Net cash provided by investing activities from
discontinued operations for the quarter ended September 30, 2008, of
approximately $(862,000) relate to INL’s contract packaging operations which
were sold in July 2008.
Net
cash (used) provided by financing activities from continuing operations was
approximately $(2,874,000) and $1,482,000 for the quarters ended September
30, 2008 and 2007, respectively. The decrease is primarily due to the repayment
of debt from the proceeds from the sale of INL. Net cash provided by financing
activities from discontinued operations of approximately $1.3 million relate to
INL’s contract packaging operations which were sold in July 2008.
In
conjunction with signing the definitive agreement to merge with Cellegy, Adamis
borrowed $500,000 from Cellegy on February 12, 2008. The loan bears an interest
rate of 10%. Under the terms of the agreement, the loan will be converted into
Adamis common stock at the time the merger is consummated and the resulting
shares issued will be cancelled.
Even if
development and marketing efforts are successful, substantial time may pass
before significant revenues will be realized, and during this period Adamis will
require additional funds, the availability of which cannot be assured.
Consequently, Adamis 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, Adamis
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 after completion of the merger with Cellegy to
support product development and marketing efforts for the Adamis Labs products,
continue product research and development on its 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 Adamis’
overall cash requirements for the foreseeable future. The amount of required
additional funding will depend in part on the cash that Cellegy and Adamis have
as of the closing date of the merger. Adamis’ 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;
|
|
·
|
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, Adamis 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 Adamis 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 Adamis 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 Adamis, the sale of certain assets and the reduction in overall operating
activities.
Off Balance Sheet
Arrangements
At September
30, 2008, Adamis did not have any off balance sheet
arrangements.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” which establishes the principles and requirements for how an
acquirer: (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (2) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase;
(3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination; and (4) requires acquisition costs incurred prior to
acquisition to be expensed rather than deferred. SFAS No. 141(R) replaces
SFAS No. 141, “Business Combinations.” SFAS No. 141(R) is effective in
fiscal years beginning after December 15, 2008. Under the provisions of
SFAS No. 141(R), $101,247 capitalized as deferred acquisition costs at March 31,
2008 would be expensed.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which will become effective for Adamis in its fiscal year 2009 except as amended
by FSP SFAS 157-1 and FSP SFAS 157-2 as described below. This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements; however, it does not
require any new fair value measurements. The provisions of SFAS No. 157
will be applied prospectively to fair value measurements and required disclosure
for financial assets and financial liabilities and nonfinancial assets and
nonfinancial liabilities recognized or disclosed at fair value in the financial
statements on at least an annual basis beginning in the first quarter of Adamis’
fiscal year 2009. Adamis does not expect its adoption of the provisions of SFAS
No. 157 will have a material effect on its financial condition, results of
operations or cash flows.
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 Adamis
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).
Adamis 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
Adamis in the first quarter of its fiscal 2009 year. Currently, Adamis has no
plan to adopt the fair value option, under SFAS No. 159, for any of its
eligible items.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
” (“SFAS No. 160”), which establishes
accounting and recording standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary to make
them consistent with the requirements of SFAS No. 141(R). SFAS
No. 160 is effective in fiscal years beginning after December 15,
2008. Adamis does not expect that its adoption of the provisions of SFAS No. 160
will have a material effect on its financial condition, results of operations or
cash flows.
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.
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. Adamis adopted FIN 48 effective April
1, 2007 and there was no material effect on its results of operations or
financial position.
MANAGEMENT OF THE COMBINED
COMPANY
Executive Officers and Directors of
the Combined Company Following the Merger
Following
the merger, the combined company’s board of directors will be comprised of six
directors, three from Adamis, and three from Cellegy.
Pursuant
to the merger agreement, all of Cellegy’s current executive officers will resign
immediately before the completion of the merger. Following the merger, the
management team of the combined company is expected to be composed of the
management team of Adamis. The following table lists the names and ages as
of December 31, 2008 and positions of the individuals who are expected to
serve as executive officers and directors of the combined company upon
completion of the merger.
Name
|
|
|
|
Age
|
|
Position
|
Dennis
J. Carlo, Ph.D.
|
|
65
|
|
President,
Chief Executive Officer, and Director
|
Richard
L. Aloi
|
|
54
|
|
President,
Adamis Laboratories, and Director
|
Robert
O. Hopkins
|
|
48
|
|
Vice
President, Finance and Chief Financial Officer
|
David
J. Marguglio
|
|
38
|
|
Vice
President of Business Development and Investor Relations,
Director
|
Richard
C. Williams
|
|
65
|
|
Director,
Chairman of the Board
|
John
Q. Adams, Sr.
|
|
71
|
|
Director
|
Robert
B. Rothermel
|
|
64
|
|
Director
|
Dennis J. Carlo,
Ph.D
. Please
see the information below under the heading “Executive Officers.”
John Q. Adams, Sr.
Mr. Adams
became a Cellegy director in November 2003. He is President of J.Q
Enterprises, a holding company for his interests. He has had a long career
in the pharmaceutical industry and has started three companies: Baylor
Laboratories, sold to Norwich Eaton Pharmaceuticals; his second company,
Allerderm, Inc., sold to Virbac Inc. in France; and Adams Laboratories, a
pharmaceutical company focused on respiratory therapy, sold to Medeva
Pharmaceuticals, where from 1991 to 1995, Mr. Adams was a director and was also
President of Medeva Americas. Mr. Adams later repurchased Adams
Laboratories from Medeva in 1997 and served as Chairman and CEO; he resigned as
CEO in May 2003. Adams Laboratories was renamed Adams Respiratory Therapeutics,
Inc. and became a public company in 2005, and Mr. Adams resigned in October 2005
as Chairman of the Board. He currently serves on the Board of Directors of
Respirics, Inc. a private company based in North Carolina. He also retains
memberships and board positions in several professional and philanthropic
organizations including the American College of Allergy. He is also an
Honorary Fellow of the American Academy of Otolaryngology-Head and Neck
Surgery. Mr. Adams holds a degree in Biology from Heidelberg College and
was elected to the board of trustees in 2006.
Richard L. Aloi.
Please
see the information below under the heading “Executive Officers.”
Robert B.
Rothermel
.
Mr.
Rothermel became a Cellegy director in January 2004. He is currently a partner
of CroBern Management Partnership, a healthcare management and venture capital
firm. In November 2002, he retired from Deloitte & Touche, where in his last
position, he was the global leader of the firm’s Enterprise Risk Services
practice. He previously served as the lead audit engagement partner for several
multi-national corporations, and has led professional services in specialty
areas such as IPOs, acquisitions, divestitures, restructurings, and litigation.
Mr. Rothermel holds a B.S. degree in business administration from Bowling Green
State University.
David J.
Marguglio
. Please
see the information below under the heading “Executive Officers.”
Richard C.
Williams
.
Mr. Williams
became Chairman and Interim Chief Executive Officer in January 2005. He
first joined Cellegy as Chairman of the Board in November 2003. He is
President and Founder of Conner-Thoele Ltd., a consulting and financial advisory
firm specializing in health care acquisition analysis, strategy formulation and
post-merger consolidation and restructuring. Mr. Williams served as Vice
Chairman, Strategic Planning of King Pharmaceuticals from 2000 to 2001 following
the acquisition by King of Medco Research where he was Chairman. He has held a
number of executive level positions with other pharmaceutical companies.
Mr. Williams is 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.
Executive Officers
Dennis J. Carlo,
Ph.D
. Dr.
Carlo 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. influenzae
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.
David J.
Marguglio
. Mr.
Marguglio 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 O. Hopkins
. Mr.
Hopkins joined Adamis in April 2007 and has been Vice President, Finance and
Chief Financial Officer since that time. 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
Enterpises 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.
Richard L. Aloi.
Mr. Aloi
is President of Adamis Laboratories and a director of Adamis. 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.
UNAUDITED PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Adamis
security holders will own, after the merger, approximately 93% of the combined
company on a fully-diluted basis. Further, Adamis directors will constitute a
majority of the combined company’s board of directors and all members of the
executive management of the combined company will be from Adamis. Therefore,
Adamis will be deemed to be the acquiring company for accounting purposes and
the merger transaction will be accounted for as a reverse merger and a
recapitalization. The financial statements of the combined entity after the
merger will reflect the historical results of Adamis before the merger and will
not include the historical financial results of Cellegy before the completion of
the merger. Stockholders’ equity and earnings per share of the combined entity
after the merger will be retroactively restated to reflect the number of shares
of common stock received by Adamis security holders in the merger, after giving
effect to the difference between the par values of the capital stock of Adamis
and Cellegy, with the offset to additional paid-in capital. As a result, the
cost of the proposed merger is measured at net assets acquired and no goodwill
will be recognized.
The
following unaudited pro forma combined condensed consolidated financial
statements have been prepared to give effect to the proposed merger of Adamis
and Cellegy as a reverse acquisition of assets and a recapitalization in
accordance with accounting principles generally accepted in the United States.
For accounting purposes, Adamis is considered to be acquiring Cellegy in the
merger.
Consequently,
all of the assets and liabilities of Cellegy have been reflected in the pro
forma financial statements at their respective fair values and no goodwill or
other intangibles will be recorded as part of acquisition
accounting.
The
unaudited pro forma condensed combined financial statements do not include any
adjustments for income taxes because the combined company is anticipated to
incur taxable losses for the foreseeable future.
The
actual amounts recorded for the merger transaction as of the completion of the
merger may differ materially from the information presented in these unaudited
pro forma combined condensed consolidated financial statements as a result
of:
|
·
|
the
cash cost of Cellegy’s operations between the signing of the merger
agreement and the closing of the
merger;
|
|
·
|
Cellegy’s
net working capital balance as calculated pursuant to the merger
agreement, which will partially determine the actual number of shares of
Cellegy’s common stock to be issued pursuant to the
merger;
|
|
·
|
the
timing of completion of the merger;
and
|
|
·
|
other
changes in Cellegy’s assets that occur before completion of the merger,
which could cause material differences in the information presented
below.
|
The
unaudited pro forma combined condensed consolidated financial statements
presented below are based on the historical financial statements of Adamis and
Cellegy, adjusted to give effect to the acquisition of Cellegy by Adamis for
accounting purposes. The pro forma adjustments are described in the accompanying
notes presented on the following pages.
The
unaudited pro forma combined condensed consolidated balance sheet assumes that
the proposed merger was completed as of September 30, 2008. The unaudited
pro forma combined condensed consolidated statement of operations for the year
ended March 31, 2008 assume that the proposed merger was completed as of April
1, 2007.
The
unaudited pro forma combined condensed consolidated financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the merger occurred at the dates stated above, nor is it
necessarily indicative of future financial position or results of operations.
The unaudited pro forma combined condensed consolidated financial information
has been derived from and should be read in conjunction with the historical
consolidated financial statements and related notes of Adamis and Cellegy which
are included in this joint proxy statement/prospectus.
Unaudited
Pro Forma Combined Condensed Consolidated Balance Sheet
|
|
Historical
(1)
|
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
Cellegy
|
|
|
Adamis
|
|
|
Adjustments
|
|
|
|
As
Adjusted
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
361,000
|
|
|
$
|
706,000
|
|
|
$
|
-
|
|
|
|
$
|
1,067,000
|
|
Accounts
receivable
|
|
|
|
|
|
|
161,000
|
|
|
|
|
|
|
|
|
161,000
|
|
Inventory,
net
|
|
|
|
|
|
|
137,000
|
|
|
|
|
|
|
|
|
137,000
|
|
Prepaid
expenses and other current assets
|
|
|
43,000
|
|
|
|
344,000
|
|
|
|
|
|
|
|
|
387,000
|
|
Assets
from Discontinued Operations
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
500,000
|
|
Total
current assets
|
|
|
404,000
|
|
|
|
1,848,000
|
|
|
|
-
|
|
|
|
|
2,252,000
|
|
Note
receivable from related party
|
|
|
500,000
|
|
|
|
|
|
|
|
(500,000
|
)
|
(B)
|
|
|
-
|
|
Interest
receivable from related party
|
|
|
32,000
|
|
|
|
|
|
|
|
(32,000
|
)
|
(C)
|
|
|
-
|
|
Propery
and equipment, net
|
|
|
|
|
|
|
41,000
|
|
|
|
|
|
|
|
|
41,000
|
|
Deferred
acquisition costs
|
|
|
|
|
|
|
101,000
|
|
|
|
(101,000
|
)
|
(E)
|
|
|
-
|
|
Other
assets
|
|
|
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
22,000
|
|
Total
assets
|
|
$
|
936,000
|
|
|
$
|
2,012,000
|
|
|
$
|
(633,000
|
)
|
|
|
$
|
2,315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
49,000
|
|
|
$
|
710,000
|
|
|
$
|
-
|
|
|
|
$
|
759,000
|
|
Accrued
expenses and other current payables
|
|
|
175,000
|
|
|
|
527,000
|
|
|
|
(32,000
|
)
|
(D)
|
|
|
670,000
|
|
|
|
|
|
|
|
|
|
|
|
|
135,000
|
|
(E)
|
|
|
135,000
|
|
Notes
Payable to related parties
|
|
|
|
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
(B)
|
|
|
-
|
|
Total
current liabilities
|
|
|
224,000
|
|
|
|
1,737,000
|
|
|
|
(397,000
|
)
|
|
|
|
1,564,000
|
|
Notes
payable
|
|
|
713,000
|
|
|
|
|
|
|
|
|
|
|
|
|
713,000
|
|
Derivative
instruments
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Total
liabilities
|
|
|
938,000
|
|
|
|
1,737,000
|
|
|
|
(397,000
|
)
|
|
|
|
2,278,000
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
3,000
|
|
|
|
4,000
|
|
|
|
(3,000
|
)
|
(F)
|
|
|
4,000
|
|
Additional
paid in capital
|
|
|
125,770,000
|
|
|
|
|
|
|
|
(125,770,000
|
)
|
(F)
|
|
|
-
|
|
Additional
paid in capital
|
|
|
|
|
|
|
9,587,000
|
|
|
|
(2,000
|
)
|
(A)
|
|
|
9,585,000
|
|
Accumulated
deficit
|
|
|
(125,775,000
|
)
|
|
|
(9,316,000
|
)
|
|
|
125,775,000
|
|
(F)
|
|
|
(9,316,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(236,000
|
)
|
(E)
|
|
|
(236,000
|
)
|
Total
stockholders' equity
|
|
|
(2,000
|
)
|
|
|
275,000
|
|
|
|
(236,000
|
)
|
|
|
|
37,000
|
|
Total
liabilities and stockholders' equity
|
|
$
|
936,000
|
|
|
$
|
2,012,000
|
|
|
$
|
(633,000
|
)
|
|
|
$
|
2,315,000
|
|
Unaudited
Pro Forma Combined Condensed Consolidated Statement of
Operations
|
|
Historical
(1)
|
|
|
|
|
|
|
|
|
|
|
Cellegy
|
|
|
Adamis
|
|
|
|
|
|
|
|
|
|
|
for
the year ended
|
|
|
for
the year ended
|
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
December
31, 2007
|
|
|
March
31, 2008
|
|
|
Adjustments
|
|
|
|
As
Adjusted
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
-
|
|
|
$
|
622,000
|
|
|
$
|
-
|
|
|
|
$
|
622,000
|
|
Total
revenue
|
|
|
-
|
|
|
|
622,000
|
|
|
|
-
|
|
|
|
|
622,000
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
-
|
|
|
|
349,000
|
|
|
|
-
|
|
|
|
|
349,000
|
|
Research
and development
|
|
|
23,000
|
|
|
|
203,000
|
|
|
|
-
|
|
|
|
|
226,000
|
|
Selling,
general and administrative
|
|
|
1,799,000
|
|
|
|
3,776,000
|
|
|
|
256,000
|
|
(E)
|
|
|
5,831,000
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
3,151,000
|
|
|
|
-
|
|
|
|
|
3,151,000
|
|
Total
costs and expenses
|
|
|
1,822,000
|
|
|
|
7,479,000
|
|
|
|
256,000
|
|
|
|
|
9,557,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,822,000
|
)
|
|
|
(6,857,000
|
)
|
|
|
(256,000
|
)
|
|
|
|
(8,935,000
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
85,000
|
|
|
|
77,000
|
|
|
|
(7,000
|
)
|
(C)
|
|
|
155,000
|
|
Interest
and other expense
|
|
|
(195,000
|
)
|
|
|
(399,000
|
)
|
|
|
7,000
|
|
(D)
|
|
|
(587,000
|
)
|
Debt
forgiveness
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
Total
other income (expense)
|
|
|
(105,000
|
)
|
|
|
(322,000
|
)
|
|
|
-
|
|
|
|
|
(427,000
|
)
|
Loss
from continuing operations
|
|
$
|
(1,927,000
|
)
|
|
$
|
(7,179,000
|
)
|
|
$
|
(256,000
|
)
|
|
|
$
|
(9,362,000
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
-
|
|
|
|
$
|
(0.45
|
)
|
Weighted-average
shares used in computing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted net loss per share
|
|
|
29,834,796
|
|
|
|
17,764,606
|
|
|
|
(26,834,796
|
)
|
(F)
|
|
|
20,764,606
|
|
Unaudited
Pro Forma Combined Condensed Consolidated Statement of
Operations
For
the Six Months Ended September 30, 2008
|
|
Historical
(1)
|
|
|
|
|
|
|
|
|
|
|
Cellegy
|
|
|
Adamis
|
|
|
|
|
|
|
|
|
|
|
for
the six months ended
|
|
|
for
the six months ended
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
September
30, 2008
|
|
|
Adjustments
|
|
|
|
As
Adjusted
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
-
|
|
|
$
|
311,000
|
|
|
$
|
-
|
|
|
|
$
|
311,000
|
|
Total
revenue
|
|
|
-
|
|
|
|
311,000
|
|
|
|
-
|
|
|
|
|
311,000
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
-
|
|
|
|
181,000
|
|
|
|
-
|
|
|
|
|
181,000
|
|
Research
and development
|
|
|
3,000
|
|
|
|
336,000
|
|
|
|
-
|
|
|
|
|
339,000
|
|
Selling,
general and administrative
|
|
|
798,000
|
|
|
|
2,336,000
|
|
|
|
-
|
|
|
|
|
3,134,000
|
|
Total
costs and expenses
|
|
|
801,000
|
|
|
|
2,853,000
|
|
|
|
-
|
|
|
|
|
3,654,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(801,000
|
)
|
|
|
(2,542,000
|
)
|
|
|
-
|
|
|
|
|
(3,343,000
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
42,000
|
|
|
|
-
|
|
|
|
(19,000
|
)
|
(C)
|
|
|
23,000
|
|
Interest
and other expense
|
|
|
(129,000
|
)
|
|
|
(390,000
|
)
|
|
|
25,000
|
|
(D)
|
|
|
(494,000
|
)
|
Total
other income (expense)
|
|
|
(87,000
|
)
|
|
|
(390,000
|
)
|
|
|
6,000
|
|
|
|
|
(471,000
|
)
|
Loss
from continuing operations
|
|
$
|
(888,000
|
)
|
|
$
|
(2,932,000
|
)
|
|
$
|
6,000
|
|
|
|
$
|
(3,814,000
|
)
|
Basic
and diluted net loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
-
|
|
|
|
$
|
(0.14
|
)
|
Weighted-average
shares used in computing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted net loss per share
|
|
|
29,834,796
|
|
|
|
24,438,410
|
|
|
|
(26,834,796
|
)
|
(F)
|
|
|
27,438,410
|
|
|
(1)
|
Amounts
derived from the unaudited condensed consolidated financial statements of
Cellegy beginning on page F-28 of this proxy statement/prospectus and from
the unaudited consolidated financial statements of Adamis beginning on
page F-59 of this proxy
statement/prospectus.
|
Notes to the Unaudited Pro Forma
Combined Condensed Consolidated Financial Statements
On
February 12, 2008, Cellegy Pharmaceuticals, Inc. entered into an Agreement
and Plan of Reorganization with Adamis Pharmaceuticals Corporation, and Cellegy
Holdings, Inc., a Delaware corporation and newly formed wholly-owned
subsidiary of Cellegy, or Merger Sub, pursuant to which Merger Sub will be
merged with and into Adamis, with Adamis surviving after the merger as a
wholly-owned subsidiary of Cellegy.
If the
merger is consummated, each Adamis stockholder, will receive, in exchange for
each share of Adamis common stock held or deemed to be held by such stockholder
immediately before the closing of the merger, a number of shares of Cellegy
common stock equal to one share (excluding in all cases Adamis dissenting
shares). As a result, Cellegy anticipates that it will experience a change in
control because Adamis stockholders will own in excess of approximately 93% of
the outstanding common stock of Cellegy immediately after the
merger.
Further,
Adamis directors will constitute one-half or more of the combined company’s
board of directors and all members of the executive management of the combined
company will be from Adamis. Therefore, Adamis will be deemed to be the
acquiring company for accounting purposes. Based on the above and in accordance
with accounting principles generally accepted in the United States, the proposed
merger is considered to be a reverse acquisition and recapitalization. As a
result, the cost of the proposed merger is measured at net assets acquired and
no goodwill will be recognized.
(A) To
record the fair value of Cellegy’s outstanding common stock assumed in
connection with the merger.
(B) To
reflect the conversion of the related party note between Cellegy and Adamis to
shares of Adamis common stock which will be subsequently cancelled.
(C) To
reflect the elimination of accrued interest income between Cellegy and Adamis in
connection with the related party note as mentioned in Note (B)
above.
(D) To
reflect the elimination of accrued interest expense between Cellegy and
Adamis in connection with the related party note as mentioned in Note (B)
above.
(E)
To reflect the expensing of
deferred
direct costs of the business combination and the accrual of
estimated
direct costs to be incurred after March 31, 2008 by Cellegy and Adamis to
consummate the merger. Merger costs include fees payable for legal, accounting,
printing and other consulting services.
(F)
To adjust Cellegy’s historical common shares to reflect the reverse stock split
and issuance of post split Cellegy shares to Adamis shareholders on a one for
one basis. The pro forma adjustment assumes that the reverse stock split of the
Cellegy shares contemplated by the merger agreement will be approximately
1:9.945 and that, pursuant to the terms of the merger agreement, the Cellegy
shareholders will hold 3,000,000 shares of the combined company immediately
after the merger. Pursuant to the applicable standards for calculating weighted
average shares outstanding for a particular period, the calculation of Adamis
weighted average shares outstanding for the respective periods excludes
outstanding shares that are subject to stock restriction
agreements.
PRINCIPAL STOCKHOLDERS OF
ADAMIS
The
following table sets forth certain information regarding the beneficial
ownership known to Adamis of Adamis’ common stock as of December 31, 2008 by:
(i) each director of Adamis; (ii) each of Adamis’ named executive
officers; (iii) all executive officers and directors of Adamis as a group;
and (iv) all those known by Adamis to be beneficial owners of more than
five percent of its common stock. Unless indicated otherwise below, the address
of each officer or director listed below is c /o Adamis Pharmaceuticals
Corporation, 2658 Del Mar Heights Road, #555 Del Mar, CA 92014.
|
|
Beneficial Ownership(1)
|
|
Name and Address of Beneficial Owner
|
|
Number of
Shares
|
|
Percent of
Total
|
|
Dennis J.
Carlo, Ph.D. (2)
|
|
|
8,368,000
|
|
|
19.5
|
%
|
Robert
O. Hopkins (3)
|
|
|
870,750
|
|
|
2.0
|
|
David
J. Marguglio (4)
|
|
|
3,439,904
|
|
|
8.0
|
|
Richard
L. Aloi (5)
|
|
|
3,593,039
|
|
|
8.4
|
|
Thomas
Parker (6)
|
|
|
3,305,000
|
|
|
7.7
|
|
Rand
P. Mulford (7)
|
|
|
3,775,000
|
|
|
8.8
|
|
All
executive officers and directors as a group (4
persons)
|
|
|
16,271,693
|
|
|
37.9
|
%
|
(1)
|
This
table is based upon information supplied to Adamis by officers, directors
and principal stockholders. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, Adamis
believes that each of the stockholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 42,978,067 shares
outstanding on December 1, 2008. T
he
figures in the table include all options and warrants held by the named
persons that are exercisable within 60 days of the date of the table, of
which there are none, and include all shares subject to stock repurchase
agreements.
|
(2)
|
Approximately
6,368,000 of these shares are subject to repurchase rights, as described
below.
|
(3)
|
All
of these shares are subject to repurchase rights, as described below.
|
(4)
|
Approximately 2,537,019
of these shares are subject to repurchase rights, as described
below.
|
(5)
|
Approximately
2,645,097 of these shares are subject to repurchase rights, as described
below.
|
(6)
|
Approximately
2,357,058 of these shares are subject to repurchase rights, as described
below.
|
(7)
|
Approximately
1,575,000 of these shares are subject to repurchase rights, as described
below.
|
Stock Repurchase
Agreements
Approximately
17,807,000 of the approximately 42,978,000 outstanding share of Adamis common
stock are subject to some form of restriction agreements and may be repurchased
or cancelled by Adamis. The resale of all of the stock listed below is
restricted, and Adamis 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 to certain executive officers of Adamis. These shares
are subject to repurchase by Adamis 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 Adamis 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 Adamis at $0.001 per share if certain
value or performance targets are not met.
|
|
|
|
Total
|
17,806,554
|
|
PRINCIPAL STOCKHOLDERS OF
CELLEGY
The
following table sets forth certain information regarding the beneficial
ownership known to Cellegy of the common stock of Cellegy as of December 31,
2008, by (i) each person known to Cellegy to be a beneficial owner of more
than 5% of the outstanding shares of common stock, (ii) each director,
(iii) each executive officer and (iv) all current directors and
executive officers as a group. Unless indicated otherwise below, the address of
each officer or director listed below is c /o Cellegy Pharmaceuticals,
Inc., 128 Grandview Road, Boyertown, PA 19512.
|
|
Shares Beneficially Owned(1)
|
|
Name
|
|
Number
|
|
Percent
|
|
SJ
Strategic Investments, LLC(2)(9)
|
|
|
7,343,993
|
|
|
24.7
|
%
|
Andrew
H. Tisch (3)
|
|
|
1,104,886
|
|
|
3.70
|
|
David
R. Tisch (3)
|
|
|
1,104,886
|
|
|
3.70
|
|
James
S. Tisch (3)
|
|
|
1,104,886
|
|
|
3.70
|
|
Thomas
J. Tisch (3)
|
|
|
1,104,886
|
|
|
3.70
|
|
Richard
C. Williams(4)(9)
|
|
|
8,363,993
|
|
|
28.0
|
|
Robert
J. Caso (5)
|
|
|
100,000
|
|
|
*
|
|
Tobi
B. Klar, M.D.(6)
|
|
|
100,944
|
|
|
*
|
|
John
Q. Adams(7)
|
|
|
54,000
|
|
|
*
|
|
Robert
B. Rothermel(7)
|
|
|
54,000
|
|
|
*
|
|
Thomas
M. Steinberg(7)
|
|
|
54,000
|
|
|
*
|
|
All
directors and officers as a group (6 Persons)(8) (9)
|
|
|
8,726,937
|
|
|
29.2
|
|
*less
than 1%
(1)
|
Based
upon information supplied by officers, directors and principal
stockholders. Beneficial ownership is determined in accordance with rules
of the SEC that deem shares to be beneficially owned by any person who has
or shares voting or investment power with respect to such shares. Unless
otherwise indicated, the persons named in this table have sole voting and
sole investing power with respect to all shares shown as beneficially
owned, subject to community property laws where applicable. Shares of
common stock subject to an option that is currently exercisable or
exercisable within 60 days of the date of the table are deemed to be
outstanding and to be beneficially owned by the person holding such option
for the purpose of computing the percentage ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Except as otherwise indicated, the address
of each of the persons in this table is as follows: c/o Cellegy
Pharmaceuticals, Inc., 128 Grandview Road, Boyertown, PA 19512.
|
(2)
|
Based
on filings by SJ Strategic Investments, LLC. with the SEC. Includes
290,000 shares subject to warrants. While SJ Strategic Investments, LLC.
believes it possesses sole voting and investment power over such shares,
John M. Gregory may be deemed to also have voting and investment power
over such shares due to his position as Managing Member and Chief Manager
of SJ Strategic Investments, LLC., pursuant to the entity’s Operating
Agreement. While SJ Strategic Investments, LLC disclaims the existence of
a group, due to the indirect beneficial ownership of its members, such
members may be deemed to constitute a group.
|
(3)
|
Based
on filings on Schedule 13D with the SEC by Andrew H. Tisch, Daniel R.
Tisch, James S. Tisch, Thomas J. Tisch, Jessica S. Tisch, Benjamin Tisch,
Merryl H. Tisch and Thomas M. Steinberg (the “Reporting Persons”). The
Schedule 13D, as amended through the date of this report, covered a total
of 5,525,168 shares, or approximately 18% of the outstanding shares.
According to information furnished by the Reporting Persons, 1,104,886
shares are beneficially owned by each of Andrew H. Tisch, Daniel R. Tisch
and James S. Tisch; 1,152,586 shares are beneficially owned by Thomas J.
Tisch; 6,400 shares are beneficially owned by each of Jessica S. Tisch and
Benjamin Tisch and by Merryl H. Tisch as custodian for Samuel Tisch; and
17,125 shares are beneficially owned by Thomas M. Steinberg. Each of the
Reporting Persons has disclaimed beneficial ownership of any shares owned
by any other Reporting Person, except to the extent that beneficial
ownership has been expressly reported in filings with the Securities and
Exchange Commission. The address of Andrew H. Tisch, James S. Tisch,
Thomas J. Tisch and Thomas M. Steinberg is 667 Madison Avenue, New York,
N.Y. 10021, of Daniel R. Tisch is c/o Tower View LLC, 500 Park Avenue, New
York, N.Y. 10022, and of Benjamin Tisch, Jessica S. Tisch and Merryl H.
Tisch is c/o Tisch Financial Management, 655 Madison Avenue, 19th Floor,
New York, N.Y. 10021.
|
(4)
|
Includes
1,000,000 shares issuable upon the exercise of stock options. See also
note 9 below.
|
(5)
|
Includes
100,000 shares subject to stock options.
|
(6)
|
Includes
74,944 shares issuable upon the exercise of stock options.
|
(7)
|
Includes
54,000 shares issuable upon the exercise of stock options.
|
(8)
|
Includes
1,362,944 shares issuable upon the exercise of stock options.
|
(9)
|
Pursuant
to an agreement entered into on November 11, 2008, between SJ Strategic
Investments, LLC, or SJ, and Richard C. Williams, at any time after the
date of the agreement until February 28, 2009, SJ has the right to require
Mr. Williams to purchase all shares and warrants held by SJ, for an
aggregate purchase price of $1,000. The number of shares shown as
beneficially owned by Mr. Williams includes the 7,343,993 shares
beneficially owned by SJ, 1,000,000 shares subject to an option held by
Mr. Williams, and 30,000 shares beneficially owned by Mr. Williams. Mr.
Williams has entered into a voting agreement with Adamis that is identical
in all material respects to the voting agreement executed by SJ. The
number of shares shown in the table as beneficially owned by all directors
and officers as a group includes the 7,343,993 shares beneficially owned
by SJ that are subject to the agreement with Mr. Williams.
|
PRINCIPAL STOCKHOLDERS OF THE
COMBINED COMPANY
The
following table and the related notes present certain information with respect
to the beneficial ownership of the combined company upon consummation of the
merger, by (1) each person expected to be a director or executive officer
of the combined company, (2) each person or group who is known to the
managements of Cellegy and Adamis to become the beneficial owner of more than 5%
of the common stock of the combined company upon the consummation of the merger
and (3) all directors and executive officers of the combined company as a
group. Unless otherwise indicated in the footnotes to this table, Cellegy and
Adamis believe that each of the persons named in this table has sole voting and
investment power with respect to the shares indicated as beneficially
owned.
The
percent of common stock of the combined company gives effect to the reverse
stock split and is based on 45,978,067 shares of common stock of the
combined company outstanding upon the consummation of the merger and a reverse
split ratio of 1:9.945.
Name
|
|
Shares Beneficially Owned Number
|
|
Percent
|
|
Dennis J. Carlo
|
|
|
8,368,000
|
|
|
18.2
|
%
|
Richard
J. Aloi
|
|
|
3,593,039
|
|
|
7.8
|
|
Richard
C. Williams
|
|
|
841,025
|
(1)(3)
|
|
1.8
|
|
John
Q. Adams, Sr.
|
|
|
5,430
|
(2)
|
|
*
|
|
Robert
B. Rothermel
|
|
|
5,430
|
(2)
|
|
*
|
|
Robert
O. Hopkins
|
|
|
870,750
|
|
|
1.9
|
|
David
J. Marguglio
|
|
|
3,439,904
|
|
|
7.5
|
|
All
directors and executive officers as a group (7
persons)
|
|
|
17,123,578
|
|
|
37.2
|
%
|
(1)
|
Pursuant
to an agreement entered into on November 11, 2008, between SJ Strategic
Investments, LLC, or SJ, and Richard C. Williams, at any time after the
date of the agreement until February 28, 2009, SJ has the right to require
Mr. Williams to purchase all shares and warrants held by SJ, for an
aggregate purchase price of $1,000. The number of shares shown as
beneficially owned by Mr. Williams includes the 7,343,993 shares
beneficially owned by SJ, 1,000,000 shares subject to an option held by
Mr. Williams, and 30,000 shares beneficially owned by Mr. Williams. Mr.
Williams has entered into a voting agreement with Adamis that is identical
in all material respects to the voting agreement executed by SJ. Excludes
non-employee director options to purchase 50,000 shares that are expected
to be granted at the closing of the merger.
|
(2)
|
Includes
5,430 shares issuable upon the exercise of stock options. Excludes
non-employee director options to purchase 50,000 shares that are expected
to be granted at the closing of the merger.
|
(3)
|
Excludes
non-employee director options to purchase 50,000 shares that are expected
to be granted at the closing of the merger.
|
DESCRIPTION OF CELLEGY
SECURITIES
As of
the date of this prospectus, the authorized capital stock of Cellegy consisted
of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. As
proposed to be amended in connection with the proposed merger transaction with
Adamis, Cellegy’s authorized capital stock will be 175,000,000 shares of common
stock and 10,000,000 shares of preferred stock. As of December 31, 2008, there
were 29,834,796 shares of Cellegy common stock outstanding and no outstanding
shares of preferred stock.
The
following is a summary of the rights of our common stock and preferred stock.
This summary is not complete. For more detailed information, please see our
amended and restated certificate of incorporation and amended and restated
bylaws, which are filed as exhibits to the registration statement of which this
prospectus is a part.
Common Stock
The
holders of Cellegy common stock are entitled to one vote per share on all
matters to be voted on by Cellegy stockholders, including the election of
directors.
Cellegy’s
amended and restated certificate of incorporation and amended and restated
bylaws do not provide for cumulative voting rights. Because of this, the holders
of a majority of the shares of common stock entitled to vote in any election of
directors can elect all of the directors standing for election, if they should
so choose. However, after the closing of the proposed merger transaction,
cumulative voting may apply with respect to the election of directors as a
result of certain provisions of California law, and t
o the
extent that the combined company becomes subject to any provisions of the
California Corporations Code which would require cumulative voting, then we will
allow our stockholders to cumulate their votes in accordance with applicable
law. For a discussion of the potential application of provisions of the
California Corporations Code, please see “Applicability of Provisions of
California Corporate Law” below.
Subject
to preferences that may be applicable to any outstanding preferred stock, the
holders of Cellegy common stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by Cellegy’s board of directors, in
its discretion, out of legally available funds. Bank credit agreements that
Cellegy may enter into from time to time and debt securities that Cellegy may
issue from time to time may restrict Cellegy’s ability to declare or pay
dividends on its common stock.
However,
at present there are no such bank credit agreements or other agreements whose
terms restrict Cellegy’s ability to declare or pay dividends.
Upon
Cellegy’s liquidation, dissolution or winding up, subject to prior liquidation
rights of the holders of Cellegy preferred stock, the holders of Cellegy common
stock are entitled to receive on a pro rata basis our remaining assets available
for distribution.
The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of our preferred stock that we may designate and issue in the future.
Holders
of Cellegy common stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All outstanding shares of Cellegy common stock are, and
all shares being offered by this joint proxy statement/prospectus will be, fully
paid and not liable to further calls or assessment by Cellegy.
Preferred Stock
On the
date of this joint proxy statement/prospectus, there were no shares of preferred
stock outstanding. Under Cellegy’s amended and restated certificate of
incorporation, as proposed to be amended in connection with the Adamis merger
transaction, the board of directors has the authority, without further action by
the stockholders, to issue up to 10,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in each such series, to fix the rights, preferences and privileges of the shares
of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series, but not below the number of shares of such series then outstanding.
Cellegy’s
board of directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of delaying,
deferring or preventing a change in control of Cellegy that may otherwise
benefit holders of Cellegy common stock and may adversely affect the market
price of the common stock and the voting and other rights of the holders of
common stock. Cellegy has no current plans to issue any shares of preferred
stock.
Anti-Takeover
Provisions
Provisions
of Cellegy’s amended and restated certificate of incorporation and amended
bylaws, as they will be in effect following the closing of the proposed merger,
may delay or discourage transactions involving an actual or potential change in
control of the combined company or change in the combined company’s management,
including transactions in which stockholders might otherwise receive a premium
for their shares or transactions that the combined company’s stockholders might
otherwise deem to be in their best interests. Therefore, these provisions may
adversely affect the price of the combined company’s common stock. Among other
things, the amended and restated certificate of incorporation and amended and
restated bylaws of the combined company will:
|
·
|
provide
that the authorized number of directors may be changed only by resolution
of the board of directors;
|
|
·
|
provide
that all vacancies, including newly created directorships, may, except as
otherwise required by law, be filled by the affirmative vote of a majority
of directors then in office, even if less than a quorum;
|
|
·
|
require
that any action to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and not be taken by
written consent;
|
|
·
|
provide
that stockholders seeking to present proposals before a meeting of
stockholders or to nominate candidates for election as directors at a
meeting of stockholders must provide notice in writing in a timely manner,
and also specify requirements as to the form and content of a
stockholder's notice;
|
|
·
|
not
provide for cumulative voting rights (therefore allowing the holders of a
majority of the shares of common stock entitled to vote in any election of
directors to elect all of the directors standing for election, if they
should so choose); and
|
|
·
|
provide
that special meetings of our stockholders may be called only by the
chairman of the board, our chief executive officer or by the board of
directors pursuant to a resolution adopted by a majority of the total
number of authorized directors, or by holders of at least 25% of the
outstanding shares.
|
The
amendment of any of these provisions would require approval by the holders of a
majority of our then outstanding common stock.
Cellegy
is subject to Section 203 of the DGCL, which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any “business
combination” with an “interested stockholder” for a period of three years
following the time that such stockholder became an interested stockholder,
unless:
|
·
|
permit
the board of directors to issue up to 10,000,000 shares of preferred
stock, with any rights, preferences and privileges as they may designate
(including the right to approve an acquisition or other change in our
control);
|
|
·
|
the
board of directors of the corporation approves either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder, before the time the interested stockholder
attained that status;
|
|
·
|
upon
the closing of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and
also officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
|
|
·
|
at
or subsequent to such time, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
|
With
certain exceptions, an “interested stockholder” is a person or group who or
which owns 15% or more of the corporation’s outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner of 15% or more
of such voting stock at any time within the previous three years.
In
general, Section 203 defines a business combination to
include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock or any class or series of the
corporation beneficially owned by the interested stockholder; or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
A
Delaware corporation may “opt out” of this provision with an express provision
in its original certificate of incorporation or an express provision in its
amended and restated certificate of incorporation or bylaws resulting from a
stockholders’ amendment approved by at least a majority of the outstanding
voting shares. However, Cellegy has not opted out of this provision.
Section 203 could prohibit or delay mergers or other takeover or
change-in-control attempts and, accordingly, may discourage attempts to acquire
Cellegy.
The
authorized but unissued shares of Cellegy’s common stock may be issued at any
time and from time to time by Cellegy’s board of directors without stockholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. One of the effects of the
reverse stock split will be to effectively increase the proportion of authorized
shares of common stock which are unissued relative to those which are issued.
This could result in the combined company’s management being able to issue more
shares without further stockholder approval and could render more difficult or
discourage an attempt to obtain control of the combined company by means of a
proxy contest, tender offer, merger or otherwise. Cellegy currently has no plans
to issue shares of its common stock, other than in connection with the merger,
the transactions contemplated thereby, in connection with possible future
fund-raising transactions after the closing of the merger, and in the ordinary
course of business.
Applicability of Provisions of
California Corporate Law
Although
Cellegy and the combined company are incorporated in Delaware, after the merger
the combined company may become subject to Section 2115(b) of the
California Corporations Code, which imposes various requirements of California
corporate law on non-California corporations if such corporations have
characteristics of ownership and operations indicating significant contacts with
the State of California and if more than 50% of the corporation’s outstanding
voting securities are held of record by persons having addresses in California.
Public companies listed or qualified for trading on a recognized national
securities exchange, such as the New York Stock Exchange, American Stock
Exchange or the Nasdaq National Market (or any successor thereto), are generally
exempt from Section 2115(b). Cellegy’s common stock will not be listed on
any of these markets immediately after the closing of the proposed merger. Among
the key provisions of California corporate law that may apply to the combined
company is the right of the stockholders to cumulate votes in the election of
directors and limitations on the effectiveness of super-majority voting
provisions contained in a corporation’s charter documents.
In May
2005, the Delaware Supreme Court in
Vantage Point Venture Partners
1996 v. Examen, Inc.
held that
Section 2115(b) violates the Delaware internal affairs doctrine, which
provides that only the State of Delaware has the authority to regulate a
Delaware corporation’s internal affairs, and thus Section 2115(b) does not
apply to Delaware corporations. If followed by California courts, this ruling
would mean that the cumulative voting requirements and other sections of the
California Corporations Code do not apply to the combined company. If cumulative
voting applies, then stockholders may cumulate their votes in the election of
directors, and they will be entitled to as many votes as shall equal the number
of shares of common stock held by them multiplied by the number of directors to
be elected and will be permitted to cast all of their votes for a single nominee
or to distribute their votes among two or more nominees. Additionally, certain
provisions of California law limit the effectiveness of supermajority voting
provisions and these provisions may also apply to the combined company as a
result of Section 2115(b).
Transfer
Agent
The
transfer agent for Cellegy common stock is Mellon Investor Services
LLC.
Listing
Cellegy’s
common stock is quoted on the OTC Bulletin Board under the symbol “CLGY.OB”
Cellegy and Adamis anticipate that the combined company will seek to change its
symbol in connection the change of its corporate name.
COMPARISON OF RIGHTS OF HOLDERS OF
CELLEGY STOCK AND ADAMIS STOCK
Both
Cellegy and Adamis are incorporated under the laws of the State of Delaware and,
accordingly, the rights of the stockholders of each are currently, and will
continue to be, governed by the DGCL. If the merger is completed, Adamis
stockholders will be entitled to become stockholders of Cellegy, and their
rights will be governed by the DGCL, the amended and restated certificate of
incorporation of Cellegy and the bylaws of Cellegy, as amended.
The
following is a summary of the material differences between the rights of Cellegy
stockholders and the rights of Adamis stockholders under each company’s
respective charter documents and bylaws. With respect to Cellegy, the
description of the charter documents reflect the certificate and bylaws as they
will be in effect immediately after the closing of the merger, assuming that all
of the Proposals described in this joint proxy statement/prospectus are
approved. While Cellegy and Adamis believe that this summary covers the material
differences between the two, this summary may not contain all of the information
that is important to you. This summary is not intended to be a complete
discussion of the respective rights of Cellegy and Adamis stockholders and is
qualified in its entirety by reference to the DGCL and the various documents of
Cellegy and Adamis that are referred to in this summary. You should carefully
read this entire joint proxy statement/prospectus and the other documents
referred to in this joint proxy statement/prospectus for a more complete
understanding of the differences between being a stockholder of Cellegy and
being a stockholder of Adamis. Cellegy has filed copies of its amended and
restated certificate of incorporation and bylaws, as amended, with the SEC,
which are exhibits to the registration statement of which this joint proxy
statement/prospectus is a part, and will send copies of these documents to you
upon your request. Adamis will also send copies of its documents referred to
herein to you upon your request. See the section entitled “Where You Can Find
More Information” in this joint proxy statement/prospectus.
|
|
Adamis
|
|
Cellegy
|
Authorized
Capital
|
|
The
authorized capital stock of Adamis consists of 100,000,000 shares of
common stock, par value $0.0001 per share, and 20,000,000 shares of
preferred stock, par value $0.0001 per share. The board has the authority
to designate the preferences, special rights, limitations or restrictions
of the shares of preferred stock without further stockholder approval. As
of December 31, 2008, approximately 42,978,065 shares of common stock
were issued and outstanding, and no shares of preferred stock were issued
and outstanding.
|
|
The
authorized capital stock of Cellegy consists of 175,000,000 shares of
common stock, par value $0.0001 per share, and 10,000,000 shares of
preferred stock. The board has the authority to designate the preferences,
special rights, limitations or restrictions of the remaining shares of any
class of stock or any series of any class without further stockholder
approval. As of December 31, 2008, 29,834,796 shares of common stock were
issued and outstanding.
|
Dividends
|
|
Under
Delaware law, subject to any restrictions in the corporation’s certificate
of incorporation, a Delaware corporation may pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in
which declared and for the preceding fiscal year. Delaware law also
provides that dividends may not be paid out of net profits if, after the
payment of the dividend, capital is less than the capital represented by
the outstanding stock of all classes having a preference upon the
distribution of assets. Adamis has never paid a dividend on its common
stock.
|
|
Under
Delaware law, subject to any restrictions in the corporation’s certificate
of incorporation, a Delaware corporation may pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in
which declared and for the preceding fiscal year. Delaware law also
provides that dividends may not be paid out of net profits if, after the
payment of the dividend, capital is less than the capital represented by
the outstanding stock of all classes having a preference upon the
distribution of assets. Cellegy has never paid a dividend on its common
stock.
|
|
|
|
|
|
Cumulative
Voting
|
|
Under
Delaware law, stockholders of a Delaware corporation do not have the right
to cumulate their votes in the election of directors, unless such right is
granted in the certificate of incorporation of the corporation. Adamis’
certificate of incorporation does not provide for cumulative voting by
Adamis stockholders.
|
|
Under
Delaware law, stockholders of a Delaware corporation do not have the right
to cumulate their votes in the election of directors, unless such right is
granted in the certificate of incorporation of the corporation. Cellegy’s
certificate of incorporation does not provide for cumulative voting by
Cellegy stockholders.
|
|
|
|
|
|
Number of
Directors
|
|
Delaware
law provides that the board of directors of a Delaware corporation shall
consist of one or more directors as fixed by the corporation’s certificate
of incorporation or bylaws. Adamis’ bylaws provide that the number of
directors shall be fixed by the board from time to time. The board of
directors or the stockholders are authorized to set the number of
directors. Adamis’ board of directors currently consists of three
directors.
|
|
Delaware
law provides that the board of directors of a Delaware corporation shall
consist of one or more directors as fixed by the corporation’s certificate
of incorporation or bylaws. Cellegy’s certificate of incorporation and
bylaws provide that the number of directors shall be fixed by a resolution
of the directors. Cellegy’s board currently consists of five
directors.
|
Classified
Board
of
Directors
|
|
Delaware
law permits, but does not require, a Delaware corporation to provide in
its certificate of incorporation for a classified board of directors,
dividing the board into up to three classes of directors with staggered
terms of office, with only one class of directors to be elected each year
for a maximum term of three years. Adamis’ certificate of incorporation
does not provide for a classified board of directors. Each director serves
until his or her successor is elected or until his or her earlier
resignation or removal. The bylaws and certificate of incorporation do not
specify a specific term length for service of a director.
|
|
Delaware
law permits, but does not require, a Delaware corporation to provide in
its certificate of incorporation for a classified board of directors,
dividing the board into up to three classes of directors with staggered
terms of office, with only one class of directors to be elected each year
for a maximum term of three years. Cellegy’s certificate of incorporation
does not provide for a classified board of directors. Each director serves
until his or her successor is elected or until his or her earlier
resignation or removal. The bylaws and certificate of incorporation do not
specify a specific term length for service of a director.
|
Removal of
Directors
|
|
Delaware
law provides that directors may be removed from office, with or without
cause, by the holders of a majority of the voting power of all outstanding
voting stock, unless the corporation has a classified board and its
certificate of incorporation otherwise provides. Adamis’ bylaws provide
that any director or the entire board may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote at
an election of directors.
|
|
Delaware
law provides that directors may be removed from office, with or without
cause, by the holders of a majority of the voting power of all outstanding
voting stock, unless the corporation has a classified board and its
certificate of incorporation otherwise provides. Cellegy provides that any
director or the entire board may be removed, with or without cause, by the
holders of a majority of the shares then entitled to vote at an election
of directors.
|
Vacancies
|
|
Delaware
law provides that, unless the corporation’s certificate of incorporation
or bylaws provide otherwise, vacancies and newly created directorships
resulting from an increase in the authorized number of directors elected
by the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office. Under the bylaws of
Adamis, if the office of any director becomes vacant by reason of death,
resignation, disqualification, removal, failure to elect, or otherwise,
vacancies shall, unless the board determines otherwise, be filed solely by
the vote of a majority of the directors then in office, even less than a
quorum.
|
|
Delaware
law provides that, unless the corporation’s certificate of incorporation
or bylaws provide otherwise, vacancies and newly created directorships
resulting from an increase in the authorized number of directors elected
by the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office. Under the
certificate of incorporation bylaws of Cellegy, if the office of any
director becomes vacant by reason of death, resignation, disqualification,
removal, failure to elect, or otherwise, the remaining directors, even if
less than a quorum and unless the board determines otherwise, by a
majority vote of such remaining directors, have the sole right to elect a
successor or successors who shall hold the office for the unexpired
term.
|
Board
Quorum
and
Vote
Requirements
|
|
At
meetings of the board of directors, a majority of the authorized directors
shall constitute a quorum for the transaction of business. The act of a
majority of the directors present at any meeting at which there is a
quorum shall be the act of the board. Only when a quorum is present may
the board of directors continue to do business at any such
meeting.
|
|
At
meetings of the board of directors, a majority of the authorized directors
shall constitute a quorum for the transaction of business. The act of a
majority of the directors present at any meeting at which there is a
quorum shall be the act of the board. Only when a quorum is present may
the board of directors continue to do business at any such
meeting.
|
Special
Meetings
of
Shareholders
|
|
Delaware
law permits special meetings of stockholders to be called by the board of
directors and any others persons specified by the certificate of
incorporation or bylaws. Delaware law permits but does not require that
stockholders be given the right to call special meetings. Adamis’ bylaws
provide that special meetings of stockholders may be called by the board
of directors or by holders of shares entitled to cast at least 10% of the
votes at the meeting. No business may be transacted at a special meeting
except that referred to in the notice of meeting.
|
|
Delaware
law permits special meetings of stockholders to be called by the board of
directors and any others persons specified by the certificate of
incorporation or bylaws. Delaware law permits but does not require that
stockholders be given the right to call special meetings. Cellegy’s bylaws
provide that special meetings of stockholders may be called by the board
of directors, the chairman of the board, the chief executive officer,
president or the holders of at least 25% of all votes entitled to be cast
on any issue proposed to be considered at such special meeting. No
business may be transacted at a special meeting except that referred to in
the notice of meeting
|
Quorum for
Shareholders
Meetings
|
|
Except
as otherwise expressly provided by law or by Adamis’ certificate of
incorporation or bylaws, at all meetings of the stockholders, the holders
of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a
quorum requisite for the transaction of business; provided, however, that
directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to
vote on the election of directors.
|
|
Under
Cellegy’s bylaws, the presence at a meeting, in person or by proxy, of
holders of shares representing a majority of votes entitled to be vote on
a matter constitutes a quorum for the transaction of business; provided,
however, that directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of
directors.
|
Advance
Notice
Procedures for
a
Shareholder
Proposal
|
|
For
nominations or other business to be properly brought before an annual
meeting by a stockholder, a stockholder’s notice must be delivered to the
corporation between 90 and 120 days before to the first anniversary of the
preceding year’s annual meeting; provided, however, that if the date of
the annual meeting is advanced more than 30 days before or delayed by more
than 30 days after the anniversary of the preceding year’s annual meeting,
the notice must be delivered not earlier than the close of business on the
120
th
day before such annual meeting and not later than the later of the
90
th
day before such meeting or the 10
th
day following the day on which public announcement of the date of such
meeting is first made. The stockholder’s notice must include certain
information about the stockholder and the proposal.
|
|
Under
Cellegy’s bylaws for nominations or other business to be properly brought
before an annual meeting by a stockholder, a stockholder’s notice must be
delivered to Cellegy between 90 and 120 days before to the first
anniversary of the preceding year’s annual meeting’ provided, however,
that if the date of the annual meeting is advanced more than 30 days
before or delayed by more than 30 days after the anniversary of the
preceding year’s annual meeting, the notice must be delivered not earlier
than the close of business on the 120
th
day before such annual meeting and not later than the later of the
90
th
day before such meeting or the 10
th
day following the day on which public announcement of the date of such
meeting is first made. The stockholder’s notice must include certain
information about the stockholder and the
proposal.
|
Action by
Shareholders
Without a
Meeting
|
|
Under
Delaware law, unless a corporation’s certificate of incorporation provides
otherwise, any action which may be taken at a meeting of the stockholders
of a corporation may be taken by written consent without a meeting.
Adamis’ bylaws provide that any action taken at any annual or special
meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, or by
electronic transmission, setting forth the action so taken, shall be
signed or authorized by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon
were present and voted; however, following the closing of the company’s
initial public offering of common stock, stockholders may not act by means
of written consent.
|
|
Under
Delaware law, unless a corporation’s certificate of incorporation provides
otherwise, any action which may be taken at a meeting of the stockholders
of a corporation may be taken by written consent without a meeting.
Cellegy’s restated certificate of incorporation, as proposed to be
amended, provides that stockholders may not act by means of written
consent.
|
Amendment
of
Governing
Documents
|
|
Procedures
for Amendment of Certificate of Incorporation: Under Delaware law, the
board of directors shall adopt a resolution setting forth the proposed
amendment and declaring its advisability, and either call a special
meeting of the stockholders entitled to vote thereon or direct that the
proposed amendment shall be considered at the next annual meeting of the
stockholders. The amendment shall be approved by a majority of the
outstanding stock entitled to vote thereon. If the proposed amendment
would adversely affect the rights, powers, par value, or preferences of
the holders of either a class of stock or a series of a class of stock,
then the holders of either the class of stock or series of stock, as
appropriate, shall be entitled to vote as a class.
|
|
Procedures
for Amendment of Certificate of Incorporation: Under Delaware law, the
board of directors shall adopt a resolution setting forth the proposed
amendment and declaring its advisability, and either call a special
meeting of the stockholders entitled to vote thereon or direct that the
proposed amendment shall be considered at the next annual meeting of the
stockholders. The amendment shall be approved by a majority of the
outstanding stock entitled to vote thereon. If the proposed amendment
would adversely affect the rights, powers, par value, or preferences of
the holders of either a class of stock or a series of a class of stock,
then the holders of either the class of stock or series of stock, as
appropriate, shall be entitled to vote as a
class.
|
|
|
Procedures
for Amendment of Bylaws: Adamis’ bylaws provide that the
bylaws may be amended at any meeting of the board, upon notice thereof in
accordance with the bylaws, or at any meeting of the stockholders by the
vote of the holders of the majority of the stock issued and outstanding
and entitled to vote at such a meeting.
|
|
Procedures
for Amendment of Bylaws: Cellegy’s bylaws provide that the
bylaws may be amended at any meeting of the board, upon notice thereof in
accordance with the bylaws, or at any meeting of the stockholders by the
vote of the holders of the majority of the stock issued and outstanding
and entitled to vote at such a
meeting.
|
Indemnification
of
Directors,
Officers
and
Employees
|
|
Adamis’
bylaws provide that it will indemnify and hold harmless against all
expense, liability, and loss (including attorneys’ fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement), to the
fullest extent authorized by Delaware law, any director, trustee, officer,
employee of the corporation, or an agent of another corporation,
partnership, joint venture, trust, or other enterprise (including service
with respect to an employee benefit plan), in connection with a proceeding
to which he, she, or it is made a party or threatened to be made a party
or is otherwise involved in any action, suit, or proceeding of a civil,
criminal, administrative, or investigative nature by reason of being or
having served in such a capacity. This indemnification right continues
after the individual ceases to be a director, trustee, officer, employee,
or agent and inures to the benefit of the individual’s heirs, executors,
and administrators. Notwithstanding the foregoing, an individual that
initiates a proceeding to enforce the right to indemnification will only
be indemnified if such a proceeding is authorized by the board of
directors.
|
|
Cellegy’s
bylaws provide that it will indemnify and hold harmless against all
expense, liability, and loss (including attorneys’ fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement), to the
fullest extent authorized by Delaware law, any director, trustee, officer,
employee of the corporation, or an agent of another corporation,
partnership, joint venture, trust, or other enterprise (including service
with respect to an employee benefit plan), in connection with a proceeding
to which he, she, or it is made a party or threatened to be made a party
or is otherwise involved in any action, suit, or proceeding of a civil,
criminal, administrative, or investigative nature by reason of being or
having served in such a capacity. This indemnification right continues
after the individual ceases to be a director, trustee, officer, employee,
or agent and inures to the benefit of the individual’s heirs, executors,
and administrators. Notwithstanding the foregoing, an individual that
initiates a proceeding to enforce the right to indemnification will only
be indemnified if such a proceeding is authorized by the board of
directors.
|
DGCL
Section
203
|
|
Under
Section 203 of the DGCL, Adamis falls within the exemptions from the
restrictions on business combinations because it does not have a class of
voting stock that is (1) listed on a national securities exchange, (2)
authorized for quotation on the Nasdaq Stock Market, or (3) held of record
by more than 2,000 stockholders.
|
|
Cellegy
is subject to the anti-takeover provisions of Section 203 of the DGCL
unless it falls within an applicable exemption under Section 203 of the
DGCL. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a “business combination” with an “interested
stockholder” for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section
203, a “business combination” includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested
stockholder, and an “interested stockholder” is a person who, together
with affiliates and associates, owns (or within three years prior thereto,
did own) 15% or more of the corporation’s voting
stock.
|
Consideration
of
Other
Constituencies
|
|
Adamis’
certificate of incorporation does not contain any provision specifically
authorizing or requiring Adamis’ board of directors to consider the
interests of any constituencies of Adamis other than its stockholders in
considering whether to approve or oppose any corporate
action.
|
|
Cellegy’s
certificate of incorporation does not contain any provision specifically
authorizing or requiring the Cellegy’s board of directors to consider the
interests of any constituencies of Cellegy other than its stockholders in
considering whether to approve or oppose any corporate
action.
|
|
|
However,
Delaware law provides that, in the performance of their duties to the
corporation, directors are protected in relying on good faith upon the
records of the corporation and information, opinions, reports, or
statements presented to the corporation by any of the corporation’s
officers or employees, or committees of the board of directors, or by any
other person as to matters the director reasonably believes are within
such other person’s professional or expert competence and who has been
selected with reasonable care by or on behalf of the
corporation.
|
|
However,
Delaware law provides that, in the performance of their duties to the
corporation, directors are protected in relying on good faith upon the
records of the corporation and information, opinions, reports, or
statements presented to the corporation by any of the corporation’s
officers or employees, or committees of the board of directors, or by any
other person as to matters the director reasonably believes are within
such other person’s professional or expert competence and who has been
selected with reasonable care by or on behalf of the
corporation.
|
MATTERS TO BE PRESENTED TO THE
CELLEGY STOCKHOLDERS
CELLEGY PROPOSAL NO.
1
APPROVAL OF THE ISSUANCE OF COMMON
STOCK TO ADAMIS STOCKHOLDERS IN THE MERGER
At the
Cellegy annual meeting, Cellegy stockholders will be asked to approve the
issuance of Cellegy common stock to Adamis stockholders pursuant to the merger
agreement and the change in control of Cellegy resulting from the issuance of
Cellegy common stock in the merger. Immediately following the merger, Adamis
stockholders will own approximately 93% of the fully-diluted shares of the
combined company, with existing Cellegy stockholders holding less than
approximately 7% of the fully-diluted shares of the combined
company.
The terms
of, reasons for and other aspects of the merger agreement, the merger, the
issuance of Cellegy common stock to Adamis stockholders pursuant to the merger
agreement and the resulting change in control of Cellegy, are described in
detail in other sections of this joint proxy statement/prospectus.
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Cellegy common
stock having voting power present in person or represented by proxy at the
Cellegy annual meeting is required for approval of Cellegy Proposal No.
1.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL
NO. 1 TO APPROVE THE ISSUANCE OF CELLEGY COMMON STOCK TO ADAMIS STOCKHOLDERS
PURSUANT TO THE MERGER AGREEMENT AND THE RESULTING CHANGE IN CONTROL OF
CELLEGY.
CELLEGY PROPOSAL NO.
2
APPROVAL OF PROPOSAL TO AMEND
CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE
STOCK SPLIT
The
merger agreement provides that Cellegy’s stockholders must approve an amendment
to Cellegy’s amended and restated certificate of incorporation to effect the
reverse stock split of Cellegy common stock as described in this joint proxy
statement/prospectus. If approved, the reverse stock split will be effective
immediately before the effective time of the merger. Upon the effectiveness of
the amendment to Cellegy’s amended and restated certificate of incorporation
effecting the reverse stock split, referred to herein as the split effective
time, the total number of outstanding Cellegy shares immediately before the
split effective time will be combined into a number of shares equal to (i)
3,000,000 plus (ii) the amount of Cellegy net working capital at the end of the
month immediately preceding the month in which the closing of the merger occurs
divided by .50; and the amount of net working capital will not include the
$500,000 that Cellegy previously loaned to Adamis or Adamis’ obligation to repay
that amount. The ratio of (i) the number determined pursuant to the preceding
sentence, to (ii) the number of outstanding Cellegy shares immediately before
the split effective time, will be referred to as the reverse split ratio. For
example, if there were 30,000,000 outstanding Cellegy shares and $0 net working
capital at the measurement date, then the reverse split ratio would be 0.1, or
1:10.
Accordingly,
at the split effective time, each outstanding pre-reverse split Cellegy share
will be reclassified into a fraction of a share equal to the reverse split
ratio. All shares and fractions thereof held by a particular record holder will
be aggregated into whole shares. The merger agreement provides that no
fractional shares will be issued in connection with the reverse stock split. In
lieu of fractional shares, Cellegy stockholders who hold a number of shares not
evenly divisible immediately prior to the reverse split will be entitled to
receive a whole share of Cellegy common stock for any fractional share at no
additional cost. The number of shares of Cellegy common stock to be issued in
connection with rounding up such fractional interests is not expected by
management of Cellegy to be significant. The reverse split would not reduce the
number of authorized shares of common stock and preferred stock set forth in
Cellegy’s certificate of incorporation, as proposed to be amended.
While the
exact ratio of the reverse stock split will not be calculable until near the
closing of the merger, based on an assumed 42,980,000 outstanding Adamis shares
at the closing date, the table below sets forth the approximate percentages of
the total number of shares outstanding immediately after the closing of the
merger that the Cellegy stockholders will hold, based on different levels of
Cellegy net working capital. Cellegy currently anticipates that the reverse
stock split ratio will be at or near the 1:9.3 or 1:9.9 range.
Net Working
Capital
|
|
Percentage of Outstanding
Shares Held by Cellegy
Stockholders Immediately
After the Merger
|
|
Reverse Stock
Split Ratio
|
|
$
|
400,000
|
|
|
8.12
|
%
|
|
1:7.851
|
|
$
|
300,000
|
|
|
7.73
|
%
|
|
1:8.287
|
|
$
|
200,000
|
|
|
7.33
|
%
|
|
1:8.775
|
|
$
|
100,000
|
|
|
6.93
|
%
|
|
1:9.323
|
|
$
|
0
|
|
|
6.52
|
%
|
|
1:9.945
|
|
If
Adamis issues additional shares of its common stock before the closing of the
merger, then the Cellegy stockholders will hold a lower percentage of the
outstanding shares of the combined company immediately after the merger. Cellegy
will publicly announce the final reverse stock split ratio. At September 30,
2008, Cellegy had approximately $180,000 of net working capital.
In
addition to Cellegy net working capital balance, the actual beneficial
percentage ownership percentage of Cellegy stockholders in the combined company
immediately following the merger will depend on a variety of other factors,
including number of outstanding Adamis shares immediately before the closing,
and whether and when options to acquire Adamis common stock, which will become
options to acquire Cellegy shares following the merger, are
exercised.
The
following table provides estimates of the number of shares of Cellegy common
stock authorized, issued and outstanding, and reserved for issuance at the
following times, assuming that there are 29,834,796 Cellegy shares and
43,280,000 Adamis shares outstanding immediately before the effective time of
the merger: (i) before the reverse stock split and closing of the merger, (ii)
after the reverse stock split but immediately before the effective time of the
merger, and (iii) after the reverse stock split and immediately after the
closing of the merger:
|
|
Number of
Shares of
Common Stock
Authorized
|
|
Number of Shares
Issued and
Outstanding(1)
|
|
Number of
Shares Reserved
For Issuance(1)
|
|
Before
the Reverse Stock Split and Closing of the Merger:
|
|
|
50,000,000
|
|
|
29,834,796
|
|
|
4,407,820
|
(2)
|
After
Assumed 1:7.781 Reverse Stock Split with $400,000 Net Working Capital but
Before Closing of the Merger:
|
|
|
175,000,000
|
|
|
3,800,000
|
|
|
561,415
|
(3)
|
After
Assumed 1:9.945 Reverse Stock Split with $0 Net Working Capital but Before
Closing of the Merger:
|
|
|
175,000,000
|
|
|
3,000,000
|
|
|
443,222
|
(3)
|
After
Assumed 1:7.781 Reverse Stock Split with $400,000 Net Working Capital and
Issuance of Shares Following Closing of the Merger:
|
|
|
175,000,000
|
|
|
46,780,000
|
|
|
1,561,415
|
(4)
|
After
Assumed 1:9.945 Reverse Stock Split with $0 Net Working Capital and
Issuance of Shares Following Closing of the Merger:
|
|
|
175,000,000
|
|
|
45,980,000
|
|
|
1,443,222
|
(4)
|
(1)
|
These
estimates assume 29,834,796 shares of Cellegy common stock issued and
outstanding immediately before the closing of the merger which was the
number of shares issued and outstanding as of December 31,
2008.
|
(2)
|
Includes
shares issuable upon exercise of outstanding Cellegy options and warrants,
without giving effect to the reverse stock split. Excludes the shares of
common stock reserved for issuance to Adamis stockholders in connection
with the merger.
|
(3)
|
Excludes
an additional estimated 42,980,000 shares of common stock reserved
for issuance to Adamis stockholders in connection with the merger, as
adjusted for the reverse stock split. Includes post-reverse split shares
issuable upon exercise of outstanding Cellegy options and warrants.
|
(4)
|
Includes
post-reverse split shares issuable upon exercise of outstanding Cellegy
and Adamis options, warrants and convertible securities. Includes
1,000,000 shares issuable upon the exercise of an outstanding Adamis
warrant that will be assumed by Cellegy in the merger. Excludes shares
reserved for issuance under the proposed 2009 Equity Incentive Plan.
|
If
Cellegy Proposal No. 2 is approved, and if the reverse stock split is effected
in connection with the closing of the merger, the reverse stock split would
become effective upon the filing of a certificate of amendment to Cellegy’s
amended and restated certificate of incorporation with the Delaware Secretary of
State.
The
Cellegy board of directors will effect the reverse stock split, if it is
approved by the stockholders, only if the proposal to approve the issuance of
shares of Cellegy common stock to Adamis stockholders pursuant to the merger
agreement, and the other proposals that the merger agreement requires be
approved, are approved, and only in connection with the closing of the merger.
The
amendment to Cellegy’s amended and restated certificate of incorporation to
effect the reverse stock split will effect the reverse stock split but will not
change the number of authorized shares of Cellegy’s common stock or the par
value of Cellegy’s common stock.
By
approving the certificate of amendment to Cellegy’s amended and restated
certificate of incorporation effecting the reverse stock split, stockholders
will be approving the combination of any number of issued shares of common stock
shares into one share, pursuant to the formula set forth in the merger agreement
and described above.
Reasons for the Reverse Stock
Split
The
primary purpose of the reverse stock split is to adjust the number of
outstanding Cellegy shares in relation to the number of shares that will be
issued to the Adamis stockholders in the merger, and to have a smaller total
number of outstanding shares of Cellegy common stock immediately after the
merger with the goal that Cellegy’s common stock will trade at a higher price
per share than its recent trading prices.
Principal Effects of the Reverse
Stock Split
The
amendment to Cellegy’s amended and restated certificate of incorporation
effecting the reverse stock split is set forth in
Annex C
to this
joint proxy statement/prospectus.
The
reverse stock split, if effected, will occur simultaneously for all outstanding
shares of Cellegy common stock. The reverse stock split will affect all of
Cellegy’s stockholders uniformly and will not affect any stockholder’s
percentage ownership interests in Cellegy. Common stock issued pursuant to the
reverse stock split will remain fully paid and nonassessable. The reverse stock
split will not affect Cellegy’s continuing to be subject to the periodic
reporting requirements of the Exchange Act.
If a
reverse stock split is implemented, some stockholders may consequently own less
than one hundred shares of common stock. A purchase or sale of less than one
hundred shares, referred to as an “odd lot” transaction, may result in
incrementally higher trading costs through certain brokers, particularly “full
service” brokers. Therefore, those stockholders who own less than one hundred
shares of common stock following the reverse stock split may be required to pay
higher transaction costs if they sell their shares.
Cellegy
has outstanding certain stock options and warrants to purchase shares of common
stock. Under the terms of the outstanding stock options and warrants, a reverse
stock split will effect a reduction in the number of shares of common stock
issuable upon exercise of such stock options and warrants in proportion to the
exchange ratio of the reverse stock split and will effect a proportionate
increase in the exercise price of such outstanding stock options and warrants,
so that the aggregate dollar amount payable for the purchase of the shares
subject to the options will remain unchanged. In connection with a reverse stock
split, the number of shares of common stock issuable upon exercise or conversion
of outstanding stock options and warrants will be rounded to the nearest whole
share, and no cash payment will be made in respect of such rounding.
Procedure for Effecting Reverse Stock
Split and Exchange of Stock Certificates
If
Cellegy’s stockholders approve the amendment to Cellegy’s restated certificate
of incorporation effecting the reverse stock split, the ratio of the reverse
stock split to be implemented will be determined as provided in the merger
agreement. Cellegy will file the certificate of amendment with the Delaware
Secretary of State in connection with the closing of the merger transaction.
Beginning at the split effective time, each certificate representing pre-split
shares will be deemed for all corporate purposes to evidence ownership of
post-split shares.
As soon
as practicable after the split effective time, stockholders will be notified
that the reverse stock split has been effected. Cellegy expects that Cellegy’s
transfer agent will act as exchange agent for purposes of implementing the
exchange of stock certificates. Holders of pre-split shares will be asked to
surrender to the exchange agent certificates representing pre-split shares in
exchange for certificates representing post-split shares in accordance with the
procedures to be set forth in a letter of transmittal to be sent by Cellegy. No
new certificates will be issued to a stockholder until such stockholder has
surrendered such stockholder’s outstanding certificate(s) together with the
properly completed and executed letter of transmittal to the exchange agent. Any
pre-split shares submitted for transfer, whether pursuant to a sale or other
disposition, or otherwise, will automatically be exchanged for post-split
shares.
Stockholders should not destroy any
stock certificate(s) and should not submit any certificate(s) unless
and until requested to do so.
Fractional Shares
No
fractional shares will be issued in connection with the reverse stock split.
Stockholders of record who otherwise would be entitled to receive fractional
shares because they hold a number of pre-split shares not evenly divisible by
the number of pre-split shares for which each post-split share is to be
reclassified (after aggregating fractional shares), will be entitled, upon
surrender to the exchange agent of certificates representing such shares, to
receive a whole share of Cellegy common stock.
Accounting
Matters
The
reverse stock split will not affect the stockholders’ equity on Cellegy’s
balance sheet. However, because the par value of Cellegy’s common stock will
remain unchanged on the effective date of the split, the components that make up
the common stock capital account will change by offsetting amounts. Depending on
the size of the reverse stock split the board of directors decides to implement,
the stated capital component will be reduced to an amount between approximately
$___ and $____ from its present amount, and the additional paid-in capital
component will be increased with the amount by which the stated capital is
reduced. The per share net income or loss and net book value of Cellegy will be
increased because there will be fewer shares of Cellegy’s common stock
outstanding. Prior periods’ per share amounts will be restated to reflect the
reverse stock split.
Potential Anti-Takeover
Effect
Although
the increased proportion of unissued authorized shares to issued shares could,
under certain circumstances, have an anti-takeover effect, for example, by
permitting issuances that would dilute the stock ownership of a person seeking
to effect a change in the composition of Cellegy’s board of directors or
contemplating a tender offer or other transaction for the combination of Cellegy
with another company, the reverse stock split proposal is not being proposed in
response to any effort of which Cellegy is aware to accumulate shares of Cellegy
common stock or obtain control of Cellegy, nor is it part of a plan by Cellegy’s
management to recommend a series of similar amendments to Cellegy’s board of
directors and stockholders. Other than the proposals being submitted to
Cellegy’s stockholders for their consideration at the Cellegy annual meeting,
Cellegy’s board of directors does not currently contemplate recommending the
adoption of any other actions that could be construed to affect the ability of
third parties to take over or change control of Cellegy.
No Dissenters’
Rights
Under the
DGCL, Cellegy stockholders are not entitled to dissenters’ rights with respect
to the reverse stock split.
Certain Federal Income Tax
Considerations
The
following discussion describes the material United States federal income tax
considerations of the reverse stock split. This discussion is based upon the
Internal Revenue Code of 1986, as amended, existing treasury regulations and
current administrative rulings and court decisions, all of which are subject to
change, possibly with retroactive effect, and to differing interpretations. No
ruling from the Internal Revenue Service or opinion of tax counsel with respect
to the matters discussed herein has been requested, and there is no assurance
that the Internal Revenue Service would agree with the conclusions set forth in
this discussion. All stockholders should consult with their own tax advisors.
This
discussion may not address certain federal income tax consequences that may be
relevant to particular stockholders in light of their personal circumstances or
to certain types of stockholders who may be subject to special treatment under
the federal income tax laws. This discussion assumes that stockholders do not
constructively own any shares of common stock as a result of attribution from
related persons or entities. This discussion also does not address any tax
consequences under state, local, or foreign laws. It does not address the
consequences of the reverse stock split to holders of options or warrants.
STOCKHOLDERS
ARE URGED TO CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO
THEM OF THE REVERSE STOCK SPLIT, INCLUDING THE APPLICABILITY OF ANY STATE,
LOCAL, OR FOREIGN TAX LAWS, OR ANY CHANGES IN APPLICABLE TAX LAWS.
Tax Consequences to
Cellegy
. Cellegy
will not recognize any gain or loss solely as a result of the reverse stock
split.
Tax Consequence to Cellegy
Stockholders Generally
. No gain
or loss should be recognized by a stockholder who receives only shares of common
stock as a result of the reverse stock split.
Stockholder’s Tax Basis in Shares
Received upon the Reverse Stock Split
. Except
as provided above with respect to fractional shares, the aggregate tax basis of
the shares of Cellegy common stock held by a stockholder following the reverse
stock split will equal the stockholder’s aggregate basis in the shares of common
stock held immediately before the reverse stock split.
THE PRECEDING DISCUSSION IS INTENDED
ONLY AS A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE REVERSE STOCK SPLIT AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL OF THE REVERSE STOCK SPLIT’S POTENTIAL TAX EFFECTS. HOLDERS OF
CELLEGY COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE REVERSE STOCK SPLIT AND THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX
LAWS.
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Cellegy common
stock having voting power outstanding on the record date for the Cellegy annual
meeting is required to approve the certificate of amendment to Cellegy’s amended
and restated certificate of incorporation to effect a reverse stock split of
Cellegy common stock. The proposal is a “non-discretionary” item, meaning that
brokerage firms cannot vote shares in their discretion on behalf of a client if
the client has not given voting instructions. Accordingly, if a Cellegy
stockholder holds shares in street name and fails to instruct the broker to vote
the stockholder’s shares for the proposal, the shares will not be counted as
votes cast for the proposal and will have the same effect as shares voted
against the proposal. If the merger with Adamis is not completed for any reason,
the board of directors expects that this proposal will not be
implemented.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL
NO. 2 TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT A REVERSE STOCK SPLIT OF CELLEGY COMMON STOCK.
CELLEGY PROPOSAL NO.
3
APPROVAL OF PROPOSAL TO AMEND
CELLEGY’S AMENDED AND RESTATED
CERTIFICATE OF
INCORPORATION
TO EFFECT A NAME
CHANGE
Name Change
The
Cellegy board of directors has unanimously adopted a resolution approving,
declaring advisable and recommending to the Cellegy stockholders for their
approval an amendment to Cellegy’s amended and restated certificate of
incorporation to change the name of Cellegy Pharmaceuticals, Inc. to Adamis
Pharmaceuticals Corporation, in connection with the closing of the merger
transaction with Adamis. Cellegy intends to file this amendment after the
Cellegy stockholders approve the name change, to take effect upon consummation
of the merger. The proposed amendment effecting the change in corporate name is
set forth as
Annex D
to this
joint proxy statement/prospectus.
Purpose
Because
of the relative contributions of business and assets to the combined company by
each of Cellegy and Adamis, Cellegy believes that the name change will more
accurately reflect the combined company’s business after the merger is
effective. In addition, under the merger agreement, approval of the amendment
described in this proposal is a condition that we must satisfy to complete the
merger with Adamis.
Reasons for the Amendment
The
amendment to Cellegy’s amended and restated certificate of incorporation
described in this proposal is a condition that Cellegy must satisfy to complete
the merger with Adamis. If the amendment is not approved, Cellegy may not be
able to complete the merger with Adamis and the other transactions contemplated
by the merger agreement unless Adamis agrees to waive this condition to closing,
which Cellegy believes is not likely.
Amended and Restated Certificate of
Incorporation
The
Cellegy board of directors has unanimously approved the amended and restated
certificate of incorporation, attached as
Annex F
to this
joint proxy statement/prospectus, that will become effective following the
closing of the proposed merger transaction with Adamis. The amended and restated
certificate of incorporation will include the changes in corporate name
described in this Proposal and the increase in the number of authorized shares
of capital stock described in Proposal No. 4, as well as the other provisions
described in this joint proxy statements/prospectus under the heading
“Comparison of Rights of Holders of Cellegy Stock and Adamis Stock.”
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Cellegy common
stock having voting power outstanding on the record date for the Cellegy annual
meeting is required to approve the amendment to Cellegy’s amended and restated
certificate of incorporation to change the corporate name. The proposal is a
“non-discretionary” item, meaning that brokerage firms cannot vote shares in
their discretion on behalf of a client if the client has not given voting
instructions. Accordingly, if a Cellegy stockholder holds shares in street name
and fails to instruct the broker to vote the stockholder’s shares for the
proposal, the shares will not be counted as votes cast for the proposal and will
have the same effect as shares voted against the proposal. If the merger with
Adamis is not completed for any reason, the board of directors expects that this
proposal will not be implemented.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS VOTE “FOR” CELLEGY PROPOSAL
NO. 3 TO AMEND CELLEGY’S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO CHANGE THE CORPORATE NAME.
CELLEGY
PROPOSAL NO. 4
APPROVAL
OF PROPOSAL TO AMEND CELLEGY’S AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION TO
INCREASE
THE AUTHORIZED CAPITAL STOCK
Increase
in Authorized Capital Stock
At the
Cellegy meeting, holders of Cellegy stock will be asked to approve the amendment
of Cellegy's amended and restated certificate of incorporation to increase the
number of authorized shares of Cellegy common stock from 50,000,000 to
175,000,000 shares of common stock and to increase the number of authorized
shares of Cellegy preferred stock from 5,000,000 to 10,000,000 shares of
preferred stock. These shares would represent post-reverse stock
split shares. See
Annex E
for the full
text of the amendment.
On
December 31, 2008, 29,834,796 shares of Cellegy common stock were
outstanding. Giving effect to the proposed reverse stock split,
between approximately 3,000,000 and 3,800,000 shares of common stock are
expected to be held by current Cellegy stockholders immediately after the
merger. Approximately 42,980,000 shares of Cellegy common stock are
expected to be issued at the effective time of the merger to the Adamis
stockholders, assuming no additional issuances of Adamis shares before the
closing date; and approximately 1,346,706 post-reverse split shares, assuming a
reverse split ratio of 1:9.945, are expected to be reserved for issuance upon
the exercise of outstanding Cellegy options, warrants and convertible securities
and Adamis options, warrants and convertible securities assumed by Cellegy at
the effective time. Assuming no additional issuances of Adamis shares
before the closing date, and assuming the approval of the proposed increase in
the authorized shares of Cellegy common stock and the proposed 2009 Equity
Incentive Plan, following the closing of the merger Cellegy would have between
approximately 45,980,000 and 46,780,000 shares of common stock issued and
outstanding, approximately 1,346,706 shares of common stock reserved for
issuance under outstanding options, warrants and convertible securities,
including assumed Adamis options, warrants and convertible securities,
approximately 7,000,000 shares reserved for issuance under the 2009 Equity
Incentive Plan of which options to purchase 150,000 shares are expected to be
granted to non-employee directors at or after the closing of the merger, and
approximately 120,673,294 shares of common stock authorized but unissued and
unreserved.
Reasons
for the Amendment
The
amendment to Cellegy’s amended and restated certificate of incorporation
described in this proposal is a condition that Cellegy must satisfy to complete
the merger with Adamis. If the amendment is not approved, Cellegy may
not be able to complete the merger with Adamis and the other transactions
contemplated by the merger agreement unless Adamis agrees to waive this
condition to closing, which Cellegy believes is not likely.
Cellegy’s
board of directors believes that the proposed increase the number of shares of
capital stock will give Cellegy the number of shares required to effect the
merger with Adamis pursuant to the terms of the merger agreement. In
addition, the availability of additional authorized shares will provide the
combined company with the flexibility to issue securities for other proper
corporate purposes, such as to raise equity capital, to issue shares (or reserve
additional shares for issuance) under additional employee benefit plans, to
acquire other companies or assets, to grant warrants, in connection with stock
splits, or in connection with other transactions. No additional
action or authorization by stockholders of the combined company would be
necessary before the issuance of such additional shares, unless required by
applicable law or the rules of any stock exchange or national securities
association trading system on which the common stock is then listed or
quoted. Cellegy does not have any commitment, arrangement,
understanding or agreement to issue shares of common stock after the increase in
authorized shares, but Cellegy expects that the combined company may issue
additional shares of common stock following the consummation of the merger in
connection with raising additional financing for the combined
company. Any such financing could dilute the ownership interest of
existing stockholders in the combined company. Cellegy currently
cannot estimate the number of shares of common stock of the combined company
that will be issued to meet the combined company’s financing needs following the
consummation of the merger. The number of shares required to be
issued will depend on a number of factors including the trading price of the
common stock at the time of any such financing, the amount of capital the
combined company is able to raise, investor reaction to the merger and investor
interest in the combined company, and general market
conditions.
The
additional shares of capital stock that would become available for issuance if
the proposed amendment were adopted could also be used by the combined company
to oppose a hostile takeover attempt or delay or prevent changes of control or
changes in or removal of management of the combined company. For
example, without further stockholder approval, the board of directors could
strategically sell shares of common stock in a private transaction to purchasers
who would oppose a takeover or favor the current board of
directors. Although this proposal to increase the number of
authorized shares of common stock and preferred stock has been prompted by the
requirements of the merger agreement and business and financial considerations,
not by the threat of any attempt to accumulate shares or otherwise gain control
of Cellegy or the combined company, stockholders nevertheless should be aware
that approval of the proposal could facilitate future efforts by Cellegy to
deter or prevent changes of control, including transactions that are favored by
a majority of the independent stockholders or in which the stockholders might
otherwise receive a premium for their shares over then-current market prices or
benefit in some other manner.
In
addition, the authority granted by the amended and restated certificate of
incorporation to the board of directors to fix the designations, powers,
preferences, rights, qualifications, limitations and restrictions of any class
or series of preferred stock could be used for anti-takeover
purposes. The proposal to increase the number of authorized shares of
preferred stock, however, is not part of any plan to adopt a series of
amendments having an anti-takeover effect, and Cellegy’s management presently
does not intend to propose anti-takeover measures in future proxy
solicitations.
Effect
of the Amendment
Effectiveness of
Amendment
. If approved by the Cellegy stockholders and filed
with the Secretary of State of the State of Delaware, the amendment to Cellegy’s
certificate of incorporation will increase the authorized common stock from
50,000,000 to 175,000,000 shares. Cellegy’s authorized preferred
stock is currently 5,000,000 shares. If this amendment is approved,
the total authorized shares of preferred stock will be increased to 10,000,000
shares. Cellegy expects that the amendment would be filed with the
Secretary of State of the State of Delaware immediately before the merger with
Adamis.
Effect of Reverse Stock
Split.
The reverse stock split of the common stock proposed in
Proposal No. 2 of this joint proxy statement/prospectus will reduce the
number of shares of common stock outstanding immediately before such reverse
split. However, the reverse stock split will not reduce the
number of authorized shares of common stock set forth in this
amendment.
Dilutive Effect of Potential New
Stock Issuances
. The issuance in the future of additional authorized
shares of common stock may have the effect of diluting the earnings per share
and book value per share, as well as the stock ownership and voting rights, of
the then-currently outstanding shares of common stock.
Amended
and Restated Certificate of Incorporation
The
Cellegy board of directors has unanimously approved the amended and restated
certificate of incorporation, attached as
Annex F
to this joint proxy
statement/prospectus, that will become effective following the closing of the
proposed merger transaction with Adamis. The amended and restated
certificate of incorporation will include the changes in corporate name as
discussed in Proposal No. 3 and the increase in the number of authorized
shares of capital stock described in this Proposal, as well as the other
provisions described in this joint proxy statements/prospectus under the heading
“Comparison of Rights of Holders of Cellegy Stock and Adamis
Stock.”
Vote
Required; Recommendation of Board of Directors
The
affirmative vote of the holders of a majority of the shares of Cellegy common
stock having voting power outstanding on the record date for the Cellegy annual
meeting is required to approve the amendment to Cellegy’s amended and restated
certificate of incorporation to increase the number of authorized shares of
capital stock. The proposal is a “non-discretionary” item, meaning
that brokerage firms cannot vote shares in their discretion on behalf of a
client if the client has not given voting instructions. Accordingly,
if a Cellegy stockholder holds shares in street name and fails to instruct the
broker to vote the stockholder’s shares for the proposal, the shares will not be
counted as votes cast for the proposal and will have the same effect as shares
voted against the proposal. If the merger with Adamis is not
completed for any reason, the board of directors expects that this proposal will
not be implemented.
THE
CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS
VOTE “FOR” CELLEGY PROPOSAL NO. 4 TO AMEND CELLEGY’S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF
SHARES OF CAPITAL STOCK.
CELLEGY PROPOSAL NO.
5
APPROVAL OF
2009 EQUITY INCENTIVE
PLAN
2009 Equity Incentive Plan
The
board of directors adopted the 2009 Equity Incentive Plan, or the 2009 incentive
plan, in ______ 2009. The 2009 incentive plan will become effective immediately
upon the closing of the merger transaction with Adamis. The 2009 incentive plan
will terminate on ________, 2019, unless terminated earlier by the board of
directors.
Stock Awards.
The
2009 incentive plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards, restricted stock unit
awards, stock appreciation rights, performance stock awards, and other forms of
equity compensation, or collectively, stock awards. In addition, the 2009
incentive plan provides for the grant of performance cash awards. Incentive
stock options may be granted only to employees. All other awards may be granted
to employees, including officers, non-employee directors, and consultants.
Share
Reserve.
Following
this offering, the aggregate number of shares of common stock that may be issued
initially pursuant to stock awards under the 2008 incentive 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 prior to the start
of a calendar year for which an increase applies. The maximum number of shares
that may be issued pursuant to the exercise of incentive stock options under the
2009 incentive plan is equal to 70,000,000 shares, as increased from time
to time pursuant to annual increases.
No
person may be granted stock awards covering more than _________ shares of common
stock under the 2009 incentive plan during any calendar year pursuant to stock
options or stock appreciation rights. In addition, no person may be granted a
performance stock award covering more than __________ shares or a performance
cash award covering $_______ in any calendar year. Such limitations are designed
to help assure that any deductions to which we would otherwise be entitled with
respect to such stock awards will not be subject to the $1 million
limitation on the income tax deductibility of compensation paid to certain
executive officers imposed by Section 162(m) of the Internal Revenue
Code.
If a
stock award granted under the 2009 incentive plan expires or otherwise
terminates without being exercised in full, or is settled in cash, the shares of
common stock not acquired pursuant to the stock award again become available for
subsequent issuance under the 2009 incentive plan. In addition, the following
types of shares under the 2009 incentive plan may become available for the grant
of new stock awards under the 2009 incentive plan: (a) shares that are
forfeited to or repurchased by us prior to becoming fully vested;
(b) shares subject to stock awards that are settled in cash;
(c) shares withheld to satisfy income and employment withholding taxes;
(d) shares used to pay the exercise price of an option in a net exercise
arrangement; (e) shares tendered to us to pay the exercise price of an
option; and (f) shares that are cancelled pursuant to an exchange or
repricing program. Shares issued under the 2009 incentive plan may be previously
unissued shares or reacquired shares, including shares bought on the open
market. As of the date hereof, no shares of common stock have been issued under
the 2009 incentive plan.
Administration.
The
board of directors has delegated its authority to administer the 2009 incentive
plan to the compensation committee. Subject to the terms of the 2009 incentive
plan, the board of directors or an authorized committee, referred to as the plan
administrator, determines recipients, dates of grant, the numbers and types of
stock awards to be granted, and the terms and conditions of the stock awards,
including the period of their exercisability and vesting. Subject to the
limitations set forth below, the plan administrator will also determine the
exercise price of options granted, the consideration to be paid for restricted
stock awards, and the strike price of stock appreciation rights.
The plan
administrator has the authority to
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reduce
the exercise price of any outstanding option or the strike price of any
outstanding stock appreciation right;
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cancel
any outstanding option or stock appreciation right and to grant in
exchange one or more of the following:
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new
options or stock appreciation rights covering the same or a different
number of shares of common stock;
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other
valuable consideration; or
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engage
in any action that is treated as a repricing under generally accepted
accounting principles.
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Stock Options.
Incentive
and nonstatutory stock options are granted pursuant to incentive and
nonstatutory stock option agreements adopted by the plan administrator. The plan
administrator determines the exercise price for a stock option, within the terms
and conditions of the 2009 incentive plan, provided that the exercise price of a
stock option cannot be less than 100% of the fair market value of our common
stock on the date of grant. Options granted under the 2009 incentive plan vest
at the rate specified by the plan administrator.
Generally,
the plan administrator determines the term of stock options granted under the
2009 incentive plan, up to a maximum of ten years (except in the case of certain
incentive stock options, as described below). Unless the terms of an optionee's
stock option agreement provide otherwise, if an optionee's relationship with us,
or any of our affiliates, ceases for any reason other than for cause or upon the
optionee’s disability or death, the optionee may exercise any vested options for
a period of three months following the cessation of service, or such other
period as may be provided for in the applicable option agreement or in any other
agreement between the company and the optionee. If an optionee’s service
relationship is terminated for cause, then the option terminated immediately. If
an optionee’s service relationship with us, or any of our affiliates, ceases due
to disability or death (or an optionee dies within a certain period following
cessation of service), the optionee or a beneficiary may exercise any vested
options for a period of 12 months in the event of disability, and
18 months in the event of death. The option term may be extended in the
event that exercise of the option following termination of service is prohibited
by applicable securities laws. In no event, however, may an option be exercised
beyond the expiration of its term.
Acceptable
consideration for the purchase of common stock issued upon the exercise of a
stock option will be determined by the plan administrator and may include
(a) cash, check, bank draft or money order, (b) a broker-assisted
cashless exercise, (c) the tender of common stock previously owned by the
optionee, (d) a net exercise of the option, and (e) other legal
consideration approved by the plan administrator.
Unless
the plan administrator provides otherwise, options generally are not
transferable except by will, the laws of descent and distribution, or pursuant
to a domestic relations order. An optionee may designate a beneficiary, however,
who may exercise the option following the optionee's death.
Tax
Limitations on Incentive Stock Options.
Incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by an
optionee during any calendar year under all of our stock plans may not exceed
$100,000. No incentive stock option may be granted to any person who, at the
time of the grant, owns or is deemed to own stock possessing more than 10% of
our total combined voting power or that of any of our affiliates unless
(a) the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and (b) the term of
the incentive stock option does not exceed five years from the date of grant.
Automatic Option Grant Program for
Non-Employee Directors
. Under
the provisions of the 2009 incentive plan relating to non-employee directors,
each non-employee director who is a member of the board of directors on or
effective as of the closing of the merger, and any person who thereafter becomes
a non-employee director, will automatically receive an initial grant of a
nonstatutory 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 our first annual
meeting of stockholders after the closing of the merger, a nonstatutory option
to purchase 25,000 shares of common stock, or the annual grant, subject to
adjustment of 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 whose
service 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.
Restricted Stock
Awards.
Restricted
stock awards are granted pursuant to restricted stock award agreements adopted
by the plan administrator. Restricted stock awards may be granted in
consideration for: (a) cash, check, bank draft or money order,
(b) past or future services rendered to us or our affiliates or
(c) any other form of legal consideration approved by the plan
administrator. Shares of common stock acquired under a restricted stock award
may, but need not, be subject to a share repurchase option in our favor in
accordance with a vesting schedule to be determined by the plan administrator.
Rights to acquire shares under a restricted stock award may be transferred only
upon such terms and conditions as set by the plan administrator.
Restricted Stock Unit
Awards.
Restricted
stock unit awards are granted pursuant to restricted stock unit award agreements
adopted by the plan administrator. Restricted stock unit awards may be granted
in consideration for any form of legal consideration acceptable to our board of
directors. A restricted stock unit award may be settled by cash, delivery of
stock, a combination of cash and stock as deemed appropriate by the plan
administrator, or in any other form of consideration set forth in the restricted
stock unit award agreement. Additionally, dividend equivalents may be credited
in respect to shares covered by a restricted stock unit award. Except as
otherwise provided in the applicable award agreement, restricted stock units
that have not vested will be forfeited upon the participant's cessation of
continuous service for any reason.
Stock Appreciation
Rights.
Stock
appreciation rights are granted pursuant to stock appreciation rights agreements
adopted by the plan administrator. The plan administrator determines the strike
price for a stock appreciation right which cannot be less than 100% of the fair
market value of the common stock on the date of grant. Upon the exercise of a
stock appreciation right, we will pay the participant an amount equal to the
product of (a) the excess of the per share fair market value of our common
stock on the date of exercise over the strike price, multiplied by (b) the
number of shares of common stock with respect to which the stock appreciation
right is exercised. A stock appreciation right granted under the 2009 incentive
plan vests at the rate specified in the stock appreciation right agreement.
The
plan administrator determines the term of stock appreciation rights granted
under the 2009 incentive plan up to a maximum of ten years. If a participant's
service relationship with us, or any of our affiliates, ceases, then the
participant, or the participant's beneficiary, may exercise any vested stock
appreciation right for three months (or such longer or shorter period specified
in the stock appreciation right agreement) after the date such service
relationship ends. In no event, however, may a stock appreciation right be
exercised beyond the expiration of its term.
Performance
Awards.
The
2009 incentive plan permits the grant of performance stock awards and
performance cash awards that may qualify as performance-based compensation that
is not subject to the $1.0 million limitation on the income tax
deductibility of compensation paid to certain executive officers imposed by
Section 162(m) of the Internal Revenue Code. To assure that the
compensation attributable to one or more performance-based awards will so
qualify, our compensation committee can structure such awards so that stock will
be issued or paid pursuant to such award only upon the achievement of certain
pre-established performance goals during a designated performance period. The
maximum number of shares that may be granted to a participant in any calendar
year attributable to performance stock awards may not exceed ________ shares of
common stock, and the maximum value that may be granted to a participant in any
calendar year attributable performance cash awards may not exceed $___________.
Other Stock
Awards.
The
plan administrator may grant other awards based in whole or in part by reference
to our common stock. The plan administrator will set the number of shares under
the award and all other terms and conditions of such awards.
Changes to Capital
Structure.
In
the event that there is a specified type of change in our capital structure,
such as a stock split, appropriate adjustments will be made to (a) the
number of shares reserved under the 2009 incentive plan, (b) the maximum
number of shares by which the share reserve may increase automatically each
year, (c) the maximum number of options, stock appreciation rights, and
performance stock awards and performance cash awards that can be granted in a
calendar year, (d) the number of shares for which options are subsequently to be
made as initial and annual grants to new and continuing non-employee directors,
and (e) the number of shares and exercise price or strike price, if applicable,
of all outstanding stock awards.
Corporate
Transactions.
In
the event of certain significant corporate transactions as set forth in the 2009
incentive plan, outstanding awards under the 2009 incentive plan may be assumed,
continued or substituted for by any surviving or acquiring entity (or its parent
company). If the surviving or acquiring entity (or its parent company) elects
not to assume, continue or substitute for such stock awards, then (a) with
respect to any such stock awards that are held by individuals whose service with
us or our affiliates has not terminated prior to the effective date of the
corporate transaction, the vesting and exercisability provisions of such stock
awards will be accelerated in full and such awards will be terminated if not
exercised prior to the effective date of the corporate transaction and
(b) all other outstanding stock awards will terminate if not exercised
prior to the effective date of the corporate transaction. Our board of directors
also has the discretion to:
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arrange
for the assumption, continuation, or substitution of a stock award by a
surviving or acquiring entity or parent company;
|
|
·
|
accelerate
the vesting of a stock award and provide for its termination prior to the
effective time of the corporate transaction; or
|
|
·
|
provide
for the surrender of a stock award in exchange for a payment equal to the
excess of (a) the value of the property that the optionee would have
received upon the exercise of the stock award over (b) the exercise price
otherwise payable in connection with the stock
award.
|
Changes in
Control.
Our
board of directors has the discretion to provide that a stock award under the
2009 incentive plan will immediately vest as to all or any portion of the shares
subject to the stock award (a) immediately upon the occurrence of certain
specified change in control transactions, whether or not such stock award is
assumed, continued, or substituted by a surviving or acquiring entity in the
transaction or (b) in the event a participant's service with us or a
successor entity is terminated actually or constructively within a designated
period following the occurrence of certain specified change in control
transactions. Stock awards held by participants under the 2009 incentive plan
will not vest automatically on such an accelerated basis unless specifically
provided by the participant's applicable award agreement.
U.S. Federal Income Tax Consequences
The
information set forth below is a summary only and does not purport to be
complete. The information is based upon current federal income tax rules and
therefore is subject to change when those rules change. Because the tax
consequences to any recipient may depend on his or her particular situation,
each recipient should consult the recipient’s tax adviser regarding the federal,
state, local, and other tax consequences of the grant or exercise of an award or
the disposition of stock acquired as a result of an award. The 2008 incentive
plan is not qualified under the provisions of Section 401(a) of the Code,
and is not subject to any of the provisions of the Employee Retirement Income
Security Act of 1974. Our ability to realize the benefit of any tax deductions
described below depends on our generation of taxable income.
Nonqualified Stock Options
Generally,
there is no taxation upon the grant of a nonqualified stock option where the
option is granted with an exercise price equal to the fair market value of the
underlying stock on the grant date. On exercise, an optionee will recognize
ordinary income equal to the excess, if any, of the fair market value on the
date of exercise of the stock over the exercise price. If the optionee is
employed by us or one of our affiliates, that income will be subject to
withholding tax. The optionee’s tax basis in those shares will be equal to their
fair market value on the date of exercise of the option, and the optionee’s
capital gain holding period for those shares will begin on that date.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) of
the Code and the satisfaction of a tax reporting obligation, we will generally
be entitled to a tax deduction equal to the taxable ordinary income realized by
the optionee.
Incentive Stock Options
The
2009 incentive plan provides for the grant of stock options that qualify as
“incentive stock options,” as defined in Section 422 of the Code. Under the
Code, an optionee generally is not subject to ordinary income tax upon the grant
or exercise of an ISO. If the optionee holds a share received on exercise of an
ISO for more than two years from the date the option was granted and more than
one year from the date the option was exercised, which is referred to as the
required holding period, the difference, if any, between the amount realized on
a sale or other taxable disposition of that share and the holder’s tax basis in
that share will be long-term capital gain or loss.
If,
however, an optionee disposes of a share acquired on exercise of an ISO before
the end of the required holding period, which is referred to as a disqualifying
disposition, the optionee generally will recognize ordinary income in the year
of the disqualifying disposition equal to the excess, if any, of the fair market
value of the share on the date the ISO was exercised over the exercise price.
However, if the sales proceeds are less than the fair market value of the share
on the date of exercise of the option, the amount of ordinary income recognized
by the optionee will not exceed the gain, if any, realized on the sale. If the
amount realized on a disqualifying disposition exceeds the fair market value of
the share on the date of exercise of the option, that excess will be short-term
or long-term capital gain, depending on whether the holding period for the share
exceeds one year.
For
purposes of the alternative minimum tax, the amount by which the fair market
value of a share of stock acquired on exercise of an ISO exceeds the exercise
price of that option generally will be an adjustment included in the optionee’s
alternative minimum taxable income for the year in which the option is
exercised. If, however, there is a disqualifying disposition of the share in the
year in which the option is exercised, there will be no adjustment for
alternative minimum tax purposes with respect to that share. If there is a
disqualifying disposition in a later year, no income with respect to the
disqualifying disposition will be included in the optionee’s alternative minimum
taxable income for that year. In computing alternative minimum taxable income,
the tax basis of a share acquired on exercise of an ISO is increased by the
amount of the adjustment taken into account with respect to that share for
alternative minimum tax purposes in the year the option is exercised.
We are
not allowed an income tax deduction with respect to the grant or exercise of an
ISO or the disposition of a share acquired on exercise of an ISO after the
required holding period. If there is a disqualifying disposition of a share,
however, we are allowed a deduction in an amount equal to the ordinary income
includible in income by the optionee, subject to Section 162(m) of the Code
and provided that amount constitutes an ordinary and necessary business expense
for us and is reasonable in amount, and either the employee includes that amount
in income or we timely satisfy our reporting requirements with respect to that
amount.
Restricted Stock Awards
Generally,
the recipient of a restricted stock award will recognize ordinary compensation
income at the time the stock is received equal to the excess, if any, of the
fair market value of the stock received over any amount paid by the recipient in
exchange for the stock. If, however, the stock is not vested when it is received
(for example, if the employee is required to work for a period of time in order
to have the right to sell the stock), the recipient generally will not recognize
income until the stock becomes vested, at which time the recipient will
recognize ordinary compensation income equal to the excess, if any, of the fair
market value of the stock on the date it becomes vested over any amount paid by
the recipient in exchange for the stock. A recipient may, however, file an
election with the Internal Revenue Service, within 30 days of his or her receipt
of the stock award, to recognize ordinary compensation income, as of the date
the recipient receives the award, equal to the excess, if any, of the fair
market value of the stock on the date the award is granted over any amount paid
by the recipient in exchange for the stock.
The
recipient’s basis for the determination of gain or loss upon the subsequent
disposition of shares acquired from stock awards will be the amount paid for
such shares plus any ordinary income recognized either when the stock is
received or when the stock becomes vested.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) of
the Code and the satisfaction of a tax reporting obligation, we will generally
be entitled to a tax deduction equal to the taxable ordinary income realized by
the recipient of the stock award.
Stock Appreciation Rights
We may
grant under the 2009 incentive plan stock appreciation rights separate from any
other award or in tandem with other awards under the 2009 incentive plan.
Where the
rights are granted with a strike price equal to the fair market value of the
underlying stock on the grant date and where the recipient may only receive the
appreciation inherent in the stock appreciation rights in shares of our common
stock, the recipient will recognize ordinary compensation income equal to the
fair market value of the stock received upon such exercise. If the recipient may
receive the appreciation inherent in the stock appreciation rights in cash or
other property and the stock appreciation right has been structured to conform
to the requirements of Section 409A of the Code, then the cash will be
taxable as ordinary compensation income to the recipient at the time that the
cash is received.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) of
the Code, and the satisfaction of a tax reporting obligation, we will generally
be entitled to a tax deduction equal to the taxable ordinary income realized by
the recipient of the stock appreciation right.
Restricted Stock Units
Generally,
the recipient of a stock unit structured to conform to the requirements of
Section 409A of the Code or an exception to Section 409A of the Code
will recognize ordinary compensation income at the time the stock is delivered
equal to the excess, if any, of the fair market value of the shares of our
common stock received over any amount paid by the recipient in exchange for the
shares of our common stock. To conform to the requirements of Section 409A
of the Code, the shares of our common stock subject to a stock unit award may
only be delivered upon one of the following events: a fixed calendar date (or
dates), separation from service, death, disability or a change of control. If
delivery occurs on another date, unless the stock units qualify for an exception
to the requirements of Section 409A of the Code, in addition to the tax
treatment described above, the recipient will owe an additional 20% tax and
interest on any taxes owed.
The
recipient’s basis for the determination of gain or loss upon the subsequent
disposition of shares acquired from stock units, will be the amount paid for
such shares plus any ordinary income recognized when the stock is delivered.
Subject
to the requirement of reasonableness, the provisions of Section 162(m) of
the Code and the satisfaction of a tax reporting obligation, we will generally
be entitled to a tax deduction equal to the taxable ordinary income realized by
the recipient of the stock award.
Section 162 Limitations
Section 162(m)
of the Code denies a deduction to any publicly held corporation for compensation
paid to certain “covered employees” in a taxable year to the extent that
compensation to such covered employee exceeds $1 million. It is possible that
compensation attributable to stock awards, when combined with all other types of
compensation received by a covered employee from us, may cause this limitation
to be exceeded in any particular year. For purposes of Section 162(m) of
the Code, the term “covered employee” means our chief executive officer and our
four highest compensated officers as of the end of a taxable year as disclosed
in our SEC filings.
Certain
kinds of compensation, including qualified “performance-based” compensation, are
disregarded for purposes of the Section 162(m) of the Code deduction
limitation. In accordance with United States treasury regulations issued under
Section 162(m) of the Code, compensation attributable to certain stock
awards will qualify as performance-based compensation if the award is granted by
a committee of the Board of Directors consisting solely of “outside directors”
and the stock award is granted (or exercisable) only upon the achievement (as
certified in writing by the committee) of an objective performance goal
established in writing by the committee while the outcome is substantially
uncertain, and the material terms of the 2008 incentive plan under which the
award is granted is approved by stockholders. A stock option or stock
appreciation right may be considered “performance-based” compensation as
described in the previous sentence or by meeting the following requirements: the
incentive compensation plan contains a per-employee limitation on the number of
shares for which stock options and stock appreciation rights may be granted
during a specified period, the material terms of the plan are approved by the
shareholders, and the exercise price of the option or right is no less than the
fair market value of the stock on the date of grant.
The
regulations under Section 162(m) of the Code require that the directors who
serve as members of the committee must be “outside directors.” The 2009
incentive plan provides that directors serving on the committee may be “outside
directors” within the meaning of Section 162(m) of the Code. This
limitation would exclude from the committee directors who are (i) current
employees of ours or one of our affiliates, (ii) former employees of ours
or one of our affiliates who are receiving compensation for past services to us
or one of our affiliates (other than benefits under a tax-qualified pension
plan), (iii) current and former officers of ours or one of our affiliates,
(iv) directors currently receiving direct or indirect remuneration from us
or one of our affiliates in any capacity other than as a director, and
(v) any other person who is not otherwise considered an “outside director”
for purposes of Section 162(m) of the Code. The definition of an “outside
director” under Section 162(m) of the Code is generally narrower than the
definition of a “non-employee director” under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. The Compensation
Committee is currently comprised solely of “outside directors” within the
meaning of Section 162(m) of the Code.
New Plan Benefits
The
2009 incentive plan will become effective if adopted by our stockholders and
upon the closing of the merger transaction with Adamis. The Board intends to
grant options to purchase shares of common stock to certain individuals set
forth in the table below, at or shortly after the closing of the merger
transaction. Except as set forth in the table below (or noted in the footnotes
thereto), these options will otherwise have terms consistent with the terms
described above for option grants under the 2009 equity incentive plan.
2009 Equity Incentive Plan
Name and Position
|
|
Number of Shares Underlying
Options to be Granted
|
|
John
Q. Adams, Sr.
|
|
|
50,000
|
(1)
|
Robert
B. Rothermel
|
|
|
50,000
|
(1)
|
Richard
C. Williams
|
|
|
50,000
|
(1)
|
(1)
|
This
option, if granted, will have an exercise price equal to the fair market
value per share on the date of grant, and is to be granted immediately
after the closing of the merger with Adamis. The shares subject to the
grant will vest at a rate of 50% on the grant date and the balance vesting
monthly over three years from the grant date.
|
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and entitled to vote at the Cellegy annual meeting will be
required to approve the 2009 Equity Incentive Plan.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS VOTE "FOR" CELLEGY PROPOSAL
NO. 5 TO APPROVE THE 2009 EQUITY INCENTIVE PLAN.
CELLEGY PROPOSAL NO.
6
ELECTION OF
DIRECTORS
Directors and
Nominees
At the
annual meeting, the stockholders will elect five directors; each nominee is
currently a director of Cellegy. However, one of the closing conditions in the
merger agreement is that all directors and officers of Cellegy that Adamis
designates shall have submitted their resignations to be effective at the
closing of the merger. Richard C. Williams, Robert B. Rothermel and John Q.
Adams, Sr., will, if re-elected as directors at the annual meeting, continue as
directors of the combined company after the merge, and in connection with the
closing of the merger, Ms. Klar and Mr. Steinberg are expected to resign as
directors. Similarly, in connection with the closing of the merger, three
additional persons, each of whom is currently a member of the Adamis board of
directors, will be appointed as new Cellegy directors. The three additional
nominees for election to the board of directors, if elected, will not join the
board of Cellegy unless and until consummation of the merger. Directors will be
elected serve until the next meeting of stockholders of Cellegy or until their
respective successors are elected and qualified or until the death, resignation,
or removal of the director.
In the
event that any nominee is unable or declines to serve as a director at the time
of the annual meeting, an event not now anticipated, the proxies will be voted
for any nominee who shall be designated by the present Cellegy board of
directors to fill the vacancy.
Assuming
a quorum is present, the five nominees receiving the highest number of
affirmative votes of the shares entitled to be voted for them will be elected.
Unless marked otherwise, proxies received will be voted FOR the election of each
of the five nominees named below.
Nominees for Election of Directors
The
principal occupation and certain other information concerning the nominees for
directors are set forth below.
Name
|
|
Age
|
|
Principal
Occupation
|
|
Director
Since
|
Richard
C. Williams
|
|
65
|
|
President,
Conner-Thoele Ltd., Chairman and Interim Chief Executive Officer, Cellegy
Pharmaceuticals
|
|
2003
|
Tobi
B. Klar, M.D.(3)
|
|
53
|
|
Dermatologist
and Associate Clinical Professor in Dermatology, Albert Einstein Medical
Center
|
|
1995
|
John
Q. Adams, Sr
.(
1)(2)(3)
|
|
71
|
|
President,
J.Q. Enterprises
|
|
2003
|
Robert
B. Rothermel (2)
|
|
64
|
|
Partner,
CroBern Management Partnership
|
|
2004
|
Thomas
M. Steinberg(1)(2)(3)
|
|
51
|
|
Financial
Advisor
|
|
2003
|
(1)
Member of the Compensation Committee.
(2)
Member of the Audit Committee.
(3)
Member of the Nominating and Governance Committee.
The
principal occupation and certain other information concerning the persons who
are expected to be directors of Cellegy following consummation of the merger
with Adamis are set forth below.
Name
|
|
Age
|
|
Principal
Occupation
|
|
Director
Since
|
|
|
|
|
|
|
|
Richard
C. Williams
|
|
65
|
|
President,
Conner-Thoele Ltd., Chairman and Interim Chief Executive Officer, Cellegy
Pharmaceuticals
|
|
2003
|
John
Q. Adams, Sr
.
|
|
71
|
|
President,
J.Q. Enterprises
|
|
2003
|
Robert
B. Rothermel
|
|
64
|
|
Partner,
CroBern Management Partnership
|
|
2004
|
Dennis
J. Carlo
|
|
65
|
|
Chief
Executive Officer, Adamis Pharmaceuticals
|
|
|
Richard
L. Aloi
|
|
54
|
|
President,
Adamis Laboratories
|
|
|
David
J. Marguglio
|
|
38
|
|
Vice
President of Business Development and Investor Relations,
Adamis
|
|
|
For
biographical information about the persons expected to be directors of the
combined company after the merger, including Messrs. Williams, Adams and
Rothermel, please see the disclosures under the heading “Management of the
Combined Company.”
Tobi B. Klar, M.D
.
Dr. Klar
became a director for Cellegy in June 1995. She is a physician, board certified
in dermatology. Since 1986, Dr. Klar has maintained a private dermatology
practice and has served as Co-Chairperson of the Department of Dermatology at
New Rochelle Hospital Medical Center, New Rochelle, New York, and Associate
Clinical Professor in Dermatology at Albert Einstein Medical Center in New York
City. Dr. Klar holds a M.D. from the State University of New York.
Thomas M.
Steinberg
. Mr.
Steinberg became a director in November 2003. Since 1991, Mr. Steinberg has been
an adviser to certain members of the Tisch family concerning certain of their
business interests and activities. Mr. Steinberg formerly worked for Goldman
Sachs & Company as a Vice President in its Investment Banking Division. He
has served as a director of a number of other public and private companies
including Gunther International, Infonxx, Inc., and Ableco. Mr. Steinberg
received an economics degree from Yale University where he graduated Summa Cum
Laude and Phi Beta Kappa. He also received an M.B.A. from Stanford
University.
The
Cellegy board of directors, sometimes referred to as the Board, and the
Nominating and Governance Committee of the Board, have each determined that
Messrs. Adams, Klar, Rothermel and Steinberg 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 Cellegy, 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, Cellegy’s directors reviewed and discussed information provided
by the directors and Cellegy with regard to each director’s business and
personal activities as they may relate to Cellegy and its
management.
Executive
Officers
Cellegy’s
current executive officers include the following persons:
Richard
C. Williams
|
65
|
Chairman
and Interim Chief Executive Officer, Director
|
Robert
J. Caso
|
52
|
Vice
President, Finance and Chief Financial
Officer
|
Richard C.
Williams
. Please
see the biography under the heading “Nominees” above.
Robert J. Caso
.
Mr. Caso
became Vice President, Finance and Chief Financial Officer in March 2005. From
January 2003 through 2004, he headed a multinational team in connection with the
implementation of an SAP application for Johnson & Johnson’s Worldwide
Pharmaceutical Group. Subsequent to Johnson & Johnson’s acquisition of
Centocor in 1999, Mr. Caso held the Financial Controller position at Centocor.
From 1988 through 1995 he held various finance positions at Centocor and held
the Corporate Controller position from 1996 to 1999. Mr. Caso has substantial
experience in finance operations, accounting systems, business financing and
domestic and international taxation. Mr. Caso is a Certified Public Accountant
and holds a BS in Accounting from Villanova University and an MBA in Finance
from Lehigh University.
Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with Cellegy.
Board of Directors Meeting Attendance
and Committees
During
the fiscal year ended December 31, 2007, the board held two meetings. Each
person who was a director during fiscal 2007 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.
The
company does not have a policy that requires the attendance of all directors at
the annual meeting of stockholders. Mr. Williams attended the 2005 annual
meeting of stockholders in person.
Audit Committee
Messrs.
Adams, Rothermel and Steinberg are the current members of the Audit Committee.
Mr. Rothermel is the current chair of the committee. During fiscal 2007 the
Audit Committee held six meetings. The Audit Committee assists the full Board in
its general oversight of our financial reporting, internal controls and audit
functions, and is directly responsible for the appointment, compensation and
oversight of the work of our independent registered public accounting firm.
Subject to an approved charter, the Audit Committee reviews our financial
results, accounting practices, internal control systems and the fee arrangements
with our independent auditors as well as their independence and performance, and
meets with our independent auditors concerning the scope and terms of their
engagement and the results of their audits. The Board has determined that each
member of the Audit Committee is “independent” as defined by the applicable
NASDAQ rules and by the Sarbanes-Oxley Act of 2002 and regulations of the SEC,
and that Mr. Rothermel qualifies as an “audit committee financial expert” as
defined in such regulations. The Board has adopted a written charter for the
Audit Committee, a copy of which is attached hereto as
Annex G
.
Compensation
Committee
Messrs.
Adams and Steinberg are the current members of the Compensation Committee. Mr.
Steinberg is the current chair of the committee. The Board has determined that
each member of the Compensation Committee is “independent” as defined in the
applicable NASDAQ Listing Standards. The Compensation Committee met once during
2007 and acted by written consent once. The compensation committee has adopted a
written charter, a copy of which is attached hereto as
Annex H
. 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 2007. 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 Cellegy’s incentive and equity plans, including the 1995
Equity Incentive Plan, 1995 Directors’ Stock Option Plan and the 2005 Equity
Incentive Plan.
Nominating and Governance
Committee
Messrs.
Adams and Steinberg and Dr. Klar are the current members of the Nominating and
Governance Committee. Dr. Klar is the current chair of the committee. The Board
has determined that all current members of the Nominating and Governance
Committee are “independent” as defined in the applicable NASDAQ Listing
Standards. The committee did not meet during 2007. 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 is attached
hereto as
Annex I
.
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 Cellegy, P.O. Box 695,
Boyertown, PA 19512, 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 Cellegy’s books of the stockholder making the
recommendation and the class and number of shares of capital stock of Cellegy
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 Cellegy’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 Cellegy’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 Cellegy.
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 Cellegy
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.
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. The committee did not receive any security holder
recommendations for nomination to the Board in connection with this year’s
meeting. 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.
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, Cellegy
Pharmaceuticals, Inc., P.O. Box 695, Boyertown, PA 19512, 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.
Director Compensation
Outside
directors previously received an annual retainer of $10,000 and a fee of $1,500
for each Board meeting attended in person, as well as their travel expenses
related to attendance at Board meetings, as well as annual retainers of $1,000,
$3,500 and $4,500 for Nominating and Governance, Compensation and Audit
Committee membership, respectively. Pursuant to his agreement with the company,
Mr. Williams, as Chairman of the Board, was entitled to receive $100,000 a year
for his services as chairman. Effective January 23, 2007, the board of directors
approved a reduction in the rate of compensation payable to directors of the
company. Effective January 1, 2007, the Board eliminated the annual retainers
for service on the Board and committees of the Board.
The
following Director Compensation Table sets forth summary information concerning
the compensation paid to our non-employee directors in 2007 for services to
Cellegy. There were no option grants to outside directors during
2007.
Name
|
|
Fees earned or
paid in cash
($)
|
|
Option Awards ($)
|
|
All Other
Compensation ($)(5)
|
|
Total ($)
|
|
John Q.
Adams, Sr.(1)
|
|
$
|
9,250
|
|
$
|
—
|
|
$
|
8,740
|
|
$
|
42,990
|
|
Tobi
B. Klar, M.D.(2)
|
|
|
5,750
|
|
|
—
|
|
|
5,191
|
|
|
29,441
|
|
Robert
B. Rothermel(3)
|
|
|
26,750
|
|
|
—
|
|
|
7,629
|
|
|
19,629
|
|
Thomas
M. Steinberg(4)
|
|
|
7,750
|
|
|
—
|
|
|
5,480
|
|
|
41,230
|
|
Total
|
|
$
|
49,500
|
|
$
|
—
|
|
$
|
27,040
|
|
$
|
133,290
|
|
(1)
|
A
total of 54,000 options were outstanding as of December 31, 2007, of which
32,375 were exercisable as of December 31, 2007.
|
(2)
|
A
total of 100,944 options were outstanding as of December 31, 2007, of
which 84,944 were exercisable as of December 31, 2007.
|
(3)
|
Of
this amount, $23,750 is for fees related to services provided in 2006 but
paid in 2007. A total of 54,000 options were outstanding as of December
31, 2007, of which 26,750 were exercisable as of December 31, 2007.
|
(4)
|
A
total of 54,000 options were outstanding as of December 31, 2007, of which
32,375 were exercisable as of December 31, 2007.
|
(5)
|
The
amounts in this column reflect the compensation expense recognized for
2007 financial statement reporting purposes related to stock options in
accordance with FAS 123R.
|
We
reimburse our non-employee directors for all reasonable out-of-pocket expenses
incurred in the performance of their duties as directors. Directors who are
officers or employees of Cellegy are not compensated for board services in
addition to their regular employee compensation.
Annual
Cash Compensation
:
Effective January 1, 2007, the board eliminated the annual retainers for service
on the board and committees of the board. During fiscal 2007, each member of the
board of directors was eligible to receive cash compensation consisting
of a meeting fee of $1,500 for each meeting attended. Mr. Williams is
entitled to receive $100,000 per year for his services as Chairman of the Board.
Equity
Compensation
: During
fiscal 2007, each member of the board of directors was eligible to receive
option awards under the terms of the Cellegy’s 2005 Plan. New members of the
board receive an initial option grant to purchase 30,000 shares of Cellegy’s
common stock with one-third of the shares vesting after one year from the date
of grant and one-third of the shares vesting annually thereafter. Continuing
members of the board, who have served at least twelve months, receive an annual
option grant of 12,000 shares of common stock, granted on the first business day
after Cellegy’s annual shareholder meeting, with vesting annually over a
three-year period contingent on continued service on the Board of Directors for
one year. No such options were granted in 2007. If the proposed merger
transaction with Adamis is consummated and the 2008 incentive plan is approved,
then equity compensation for directors will be governed by the provisions of
that plan.
See also
“Certain Relationships and Related Transactions” for additional information
concerning compensation to directors.
Director Compensation For the
Combined Company Following the Merger
.
Following the closing of the proposed merger transaction between Cellegy and
Adamis, if the 2008 Equity Incentive Plan is approved as described elsewhere in
this joint proxy statement/prospectus, each non-employee director of the
combined company, including Messrs. Williams, Rothermel and Adams, who is a
member of the board of directors on or effective as of the closing of the
merger, and any person who thereafter becomes a non-employee director, will
automatically receive an initial grant of a nonstatutory 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 nonstatutory 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. 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.
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 2007, all filing requirements
applicable to our officers, directors, greater-than-10% beneficial owners and
other persons subject to Section 16(a) of the Exchange Act were met.
Code of Business Conduct and
Ethics
The Board
has adopted a Code of Business Conduct and Ethics that applies to all directors,
officers and employees of 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 Cellegy Pharmaceuticals, Inc., P.O. Box 695,
Boyertown, PA 19512, Attention: Chief Financial Officer. Following the closing
of the proposed merger with Adamis, Cellegy 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 after the closing of
the merger is expected to be
www.adamispharmaceueticals.com
.
Report of the Audit Committee of
Cellegy’s Board of Directors
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.
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, 2007,
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,
2007, 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.
Thomas M.
Steinberg
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, 2007, and fees billed for audit-related
services, tax services and all other services rendered to us by MHM for 2007.
The table also presents fess for professional services rendered by
PricewaterhouseCoopers LLP, or PWC, for the audit of our annual financial
statements for the year end of December 31, 2005, and fees billed for
audit-related services, tax services, and all other services rendered to us by
PwC for 2005, during the time that PwC served as our principal accountant.
Fees
|
|
2007
|
|
2006
|
|
Audit
fees and expenses
|
|
$
|
77,500
|
|
$
|
281,762
|
(1)
|
Audit-related
fees and expenses
|
|
|
4,992
|
|
|
26,078
|
|
Tax
fees
|
|
|
20,200
|
|
|
20,450
|
|
All
other fees
|
|
|
--
|
|
|
--
|
|
Total
|
|
$
|
102,692
|
|
$
|
328,290
|
|
|
(1)
|
Includes
$136,186 billed by PwC and $145,576 billed by MHM in
2006.
|
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.
Tax fees
.
Tax fees
include fees for services rendered in connection with preparation of federal,
state and foreign tax returns and other filings and tax consultation
services.
All other fees
.
All
other fees include amounts charged by Cellegy’s auditor in connection with
services not generally considered to be audit or audit related
matters.
Pre-Approval
Policies
Under our
pre-approval policies with respect to our independent accountants, the Audit
Committee pre-approves all audit and non-audit services provided by our
independent accountants prior to the engagement of the independent accountants
for such services. The Chairman of the Audit Committee has the authority to
approve any additional audit services and permissible non-audit services,
provided the Chairman informs the Audit Committee of such approval at its next
regularly scheduled meeting.
All fees
reported under the headings Audit fees and expenses, Audit-related fees and
expenses, Tax fees and All other fees above for 2007 were approved by the Audit
Committee before the respective services were rendered, which concluded that the
provision of such services was compatible with the maintenance of the
independence of the firm providing those services in the conduct of its auditing
functions. Accordingly, none of the fees reported under the headings were
approved by the Audit Committee pursuant to federal regulations that permit the
Audit Committee to waive its pre-approval requirement under certain
circumstances.
Executive
Compensation
Summary Compensation
Table
Cellegy
The
following table sets forth all compensation awarded, earned or paid for services
rendered in all capacities to Cellegy during fiscal year 2007 and 2006 to (i)
each person who served as Cellegy’s chief executive officer during 2007, or
“CEO,” (ii) each person who served as Cellegy’s principal financial officer, or
CFO, during 2007, (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 2007 and whose total compensation for such year
exceeded $100,000 (of which there were no such persons), and (iv) up to two
additional individuals for whom disclosures would have been provided in this
table, but for the fact that such persons were not serving as executive officers
as of the end of 2007 (collectively with the CEO and CFO, referred to as the
“Named Officers”).
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
Bonus ($)
|
|
Option
Awards ($) (1)
|
|
All Other
Compensation
($) (2)
|
|
Total ($)
|
|
Richard
C. Williams
Chairman
and Interim
Chief
Executive Officer
|
|
|
2007
|
|
$
|
294,022
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
294,022
|
|
|
|
|
2006
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
J. Caso
Vice
President, Chief Financial Officer
|
|
|
2007
|
|
|
200,000
|
|
|
—
|
|
|
29,207
|
|
|
—
|
|
|
229,207
|
|
|
|
|
2006
|
|
|
200,000
|
|
|
|
|
|
29,084
|
|
|
201,333
|
(4)
|
|
430,417
|
|
(1)
|
The
amounts in this column represent amounts recognized for financial
reporting purposes in 2007 in accordance with SFAS 123(R).
Mr.
Caso has an option to purchase 100,000 shares of common stock at an
exercise price of $1.75 per share. The option is fully
vested .
|
(2)
|
Includes
matching contributions under the company’s 401(k) plan for 2006 of $1,333
for Mr. Caso.
|
(3)
|
Includes
compensation of $60,000 accrued in 2005 and paid in
2006.
|
(4)
|
Includes
a retention payment made to Mr. Caso in July 2006 of
$200,000.
|
There
were no equity grants or awards made to any Named Officer in 2006 or 2007 under
any plan.
Adamis
The
following table sets forth all compensation awarded, earned or paid for services
rendered in all capacities to Adamis during the two fiscal years ended March 31,
2007 and 2008 to (i) each person who served as Adamis’ chief executive officer
during fiscal 2008, or “CEO,” (ii) each person who served as Adamis’ principal
financial officer, or CFO, during fiscal 2008, (iii) the two most highly
compensated officers other than the chief executive officer and principal
financial officer who were serving as executive officers at the end of fiscal
2008 and whose total compensation for such year exceeded $100,000, and (iv) up
to two additional individuals for whom disclosures would have been provided in
this table, but for the fact that such persons were not serving as executive
officers as of the end of fiscal 2008.
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Option
Awards ($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Dennis
J. Carlo, Ph.D.
President
and
|
|
2008
|
|
$
|
229,190
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
229,190
|
|
Chief
Executive Officer
|
|
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
O. Hopkins
Vice
President,
|
|
2008
|
|
$
|
91,910
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,910
|
|
Chief
Financial Officer
|
|
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rand
P. Mulford
Former
Executive Vice President and
|
|
2008
|
|
$
|
176,260
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
176,260
|
|
Director
|
|
2007
|
|
|
112,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
112,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
L. Aloi
President,
Adamis Laboratories, and
|
|
2008
|
|
$
|
181,367
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,367
|
|
Director
|
|
2007
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
J. Marguglio
Vice
President and Director
|
|
2008
|
|
$
|
134,410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,410
|
|
|
|
2007
|
|
|
76,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76,500
|
|
For
Adamis’ fiscal years 2007 and 2008, there were no stock awards or option awards
made to any of the above persons. There are no severance or change of
control arrangements with any of the above officers. There are no
written employment agreements or similar arrangements for any of the above
officers, and compensation levels are determined by the board of directors of
Adamis from time to time. If Messrs. Carlo, Aloi and Marguglio become
directors of the combined company upon the closing of the merger transaction, by
virtue of their status as officers of the company they will not qualify as
independent directors in accordance with the listing requirements of the Nasdaq
Stock Market.
Outstanding Equity Awards at Fiscal
Year-End
The
following table provides information as of December 31, 2007 regarding
unexercised stock options held by each of our Named Officers.
|
|
Option Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Richard C. Williams
|
|
|
600,000
|
|
|
—
|
|
$
|
5.00
|
|
|
11/06/2013
|
|
|
|
|
400,000
|
|
|
—
|
|
|
2.89
|
|
|
11/06/2013
|
|
Robert
J. Caso
|
|
|
66,666
|
(1)
|
|
33,334
|
|
|
1.75
|
|
|
03/30/2015
|
|
(1)
|
The
shares of common stock underlying this option vest in three equal annual
installments beginning March 30,
2006.
|
Potential Payments Upon Termination
or Change in Control
Cellegy
has an employment agreement with Robert J. Caso, who became our Chief Financial
Officer in March 2005. Pursuant to the agreement, Mr. Caso also became a
participant in our Retention and Severance Plan. 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 the Retention and Severance Plan, and was
conditioned upon Mr. Caso executing, at the time of his termination of
employment, a general release of claims similar to the form specified in the
Retention and Severance Plan. The retention amount was paid in July
2008.
Under
the terms of the option agreement relating to the option held by Mr. Caso, upon
a change in control of Cellegy, vesting of the option may accelerate and the
option may become exercisable in full. However, the exercise price of the option
is $1.75 per share, and as of December 31, 2007, the market price of our common
stock was $0.07 per share, and as a result no compensation would be payable if a
change of control event had occurred as of that date. Other than that noted
above, 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. As of June 30, 2008, the option held by Mr. Caso was fully
vested.
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, 2007, who were entitled to receive any severance payments on the
date upon termination of employment.
Retention and Severance Plan;
Options
The Board
adopted a Retention and Severance Plan in April 2003, and Cellegy entered into
related agreements with each of its then officers and certain other employees.
Mr. Williams and Mr. Caso are not participants in the plan, and Cellegy intends
to terminate the plan before the closing of the merger transaction with Adamis.
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).
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 1,000,000 shares of common stock, with 400,000
shares at an exercise price of $2.89 per share, which was the closing market
price of the common stock on the grant date, and 600,000 shares at an exercise
price of $5.00 per share. The option is vested and exercisable in full
immediately, although a portion of the option, covering up to 600,000 shares
initially and declining over a three-year period, was subject to cancellation to
the extent the portion had not been exercised, in the event that
Mr. Williams voluntarily resigned as Chairman and a director within certain
time periods. Following the resignation of our former chief executive officer,
in January 2005 Mr. Williams became interim Chief Executive Officer. In
connection with his appointment, we agreed to pay Mr. Williams a total of
$40,000 per month during his service as interim Chief Executive Officer (which
amount includes the payments for services as Chairman). In 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
has an employment agreement with Robert J. Caso, who became Cellegy’s Chief
Financial Officer in March 2005. The agreement provides 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 100,000 shares of common stock at an exercise
price equal to the fair market value of the common stock on the date of grant.
Mr. Caso also became a participant in Cellegy’s Retention and Severance Plan,
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.
The
Compensation Committee, as plan administrator of Cellegy’s equity incentive
plans, has the authority in certain circumstances to provide for accelerated
vesting of the shares of common stock subject to outstanding options held by the
Named Officers as well as other optionees under the plans in connection with
certain kinds of changes in control of Cellegy.
Equity Compensation Plan
Information
The
following table sets forth, as of December 31, 2007, information with respect to
our equity compensation plans, including our 1995 Equity Incentive Plan, the
1995 Directors’ Stock Option Plan and the 2005 Equity Incentive Plan, and with
respect to certain other options and warrants, as follows:
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
|
|
|
1,363,944
|
|
$
|
3.91
|
|
|
963,333
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
81,869
|
(1)
|
|
11.72
|
|
|
—
|
|
|
|
|
32,229
|
(2)
|
|
6.93
|
|
|
—
|
|
Total
|
|
|
1,478,042
|
|
$
|
4.42
|
|
|
963,333
|
|
(1)
|
Represents
shares subject to outstanding warrants and have exercise prices ranging
from $5.84 to $17.52 per share and expire between the years 2013 and
2014.
|
(2)
|
Represents
options to purchase common stock and are fully vested with exercise prices
ranging from $0.06 to $21.02 and expire between the years 2007 and
2015.
|
Certain Relationships and Related
Transactions
During
2006 and 2007, 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 retention bonus payments
paid to
Mr. Caso in 2006 and the payment made to Mr. Caso in June 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.
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 2007 for any individual was not $1,000,000, and
Cellegy does not expect cash compensation for fiscal 2008 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.
THE
CELLEGY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS
VOTE “FOR” CELLEGY PROPOSAL NO. 6 TO ELECT EACH OF THE NOMINEES AS DIRECTORS OF
THE COMPANY.
CELLEGY PROPOSAL NO.
7
APPROVAL OF POSSIBLE ADJOURNMENT OF
THE CELLEGY ANNUAL MEETING
If
Cellegy fails to receive a sufficient number of votes to approve Cellegy
Proposal Nos. 1, 2, 3, 4, 5 and 6, Cellegy may propose to adjourn the
Cellegy annual meeting, for a period of not more than 30 days, for the purpose
of soliciting additional proxies to approve Cellegy Proposal Nos. 1, 2, 3, 4,
5 and 6. Cellegy currently does not intend to propose adjournment at the
Cellegy annual meeting if there are sufficient votes to approve Cellegy Proposal
Nos. 1, 2, 3, 4, 5 and 6.
Vote Required; Recommendation of
Board of Directors
The
affirmative vote of the holders of a majority of the shares of Cellegy common
stock having voting power present in person or represented by proxy at the
Cellegy annual meeting is required to approve the adjournment of the Cellegy
annual meeting for the purpose of soliciting additional proxies to approve
Cellegy Proposal Nos. 1, 2, 3, 4, 5 and 6.
THE CELLEGY BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CELLEGY’S STOCKHOLDERS VOTE "FOR" CELLEGY PROPOSAL
NO. 7 TO ADJOURN THE ANNUAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL
PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF CELLEGY PROPOSAL NOS. 1, 2
, 3, 4, 5, 6 AND 7.
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 currently in a Phase 3 contraception trial in the United States; and
UC-781, a non-nucleoside reverse transcriptase, or RT, inhibitor.
Cellegy
does not currently have any commercially available
products.
Following
Cellegy’s sale of assets relating to most of its products and product candidates
to ProStrakan Group plc, a publicly-traded pharmaceutical company based in the
United Kingdom, Cellegy’s operations currently relate primarily to the
intellectual property rights relating to the Biosyn product candidates.
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. 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 prepares and files required
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
the second quarter 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. We
expect negative cash flows to continue for the foreseeable future. Cellegy
believes that it presently has enough financial resources to continue operations
as they currently exist approximately until the end of January 2009, absent
unforeseen significant additional expenses. If the proposed merger transaction
with Adamis is still pending and Cellegy requires additional cash resources to
complete the transaction, Cellegy and Adamis are engaged in discussions
concerning an agreement for Adamis to provide funding sufficient to permit the
merger to be completed, although there can be no assurance that such funding
will be available.
Summary of Certain Other
Developments
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 unlikely that the number of events
required to evaluate the effect of Savvy
®
on HIV
could be reached, even if the trials were continued.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization, 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.
On April
25, 2006, the Cardiovascular Renal Drugs Advisory Committee (the “Committee”) of
the United States Food and Drug Administration, referred to as the FDA or the
Agency, met to review Cellegy’s New Drug Application (“NDA”) relating to its
Cellegesic product candidate. The Committee voted on three questions in
connection with its review, with the following results:
|
1.
|
A
majority of the Committee found that, taking all three studies into
consideration, the data was compelling that there was an effect of
nitroglycerin ointment on the pain associated with anal
fissures.
|
|
2.
|
A
majority of the Committee agreed that the quadratic model was the proper
statistical analysis for the purpose of
decision-making.
|
|
3.
|
In
its final vote, six members of the Committee voted for “Approval” of
Cellegesic and six voted “Approvable pending another study of
effectiveness.” There were no votes for “Not
Approvable.”
|
On July
7, 2006 the FDA issued an Approvable Letter for Cellegy’s product candidate
Cellegesic, but indicated that before Cellegy’s NDA may be approved and the
product approved for marketing, Cellegy must conduct another clinical trial to
demonstrate the efficacy at a level deemed statistically significant by the FDA.
The letter indicated that the FDA was requiring an additional study because it
believed the results of the three trials conducted to date did not provide
substantial evidence that the drug was effective. The letter also provided a
number of comments on the results previously presented by Cellegy and
recommendations concerning the design and protocol of the additional required
study.
On June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic in
certain major European countries. Following the payment, ProStrakan had no
further payment obligations to Cellegy under the Rectogesic license agreement.
Simultaneously
with the signing of the Asset Purchase Agreement, or APA, with ProStrakan, in
September 2006, ProStrakan loaned Cellegy $2,000,000 pursuant to a secured
promissory note, a patent collateral security and pledge agreement and a
trademark collateral and security agreement. The loan was paid in full in
connection with the closing of the asset sale transaction in November, 2006.
In
connection with the signing and closing of the APA with ProStrakan, Cellegy also
resolved its obligations under previous agreements between Cellegy and PDI. On
September 20, 2006, Cellegy and PDI entered into a letter agreement, pursuant to
which Cellegy agreed to pay PDI, in full and final settlement of all obligations
due PDI, an aggregate amount of $3,000,000 subsequent to the sale of assets to
ProStrakan which was consummated in November 2006.
On
November 28, 2006, for an aggregate purchase price of approximately $9.0
million, we completed the sale to ProStrakan of our rights to Cellegesic®
(nitroglycerin ointment), Fortigel® (testosterone gel), Tostrex® (testosterone
gel), Rectogesic® and Tostrelle® (testosterone gel), and related intellectual
property. Pursuant to the APA, ProStrakan also assumed various existing
distribution and other agreements, including in certain Southeast Asian
countries, relating to the intellectual property that was included in the sale.
Cellegy’s stockholders approved the transaction at a special meeting of
stockholders held on November 22, 2006.
Cellegy
obtained rights to the product candidate Savvy with its October 2004 acquisition
of Biosyn. Savvy, a microbicidal gel, is intended for the reduction in
transmission of HIV and also showed promising preliminary results in the
prevention of other sexually transmitted diseases, or STDs, including those
caused by herpes simplex virus and Chlamydia. Savvy has also shown activity
against gonorrhea and syphilis. The active compound in Savvy is C31G, a
broad-spectrum compound with antiviral, antibacterial and antifungal activity.
Its mechanism of action is via immediate membrane disruption, and it is also
spermicidal. Because of its mechanism of action, C31G has a low potential for
resistance and is active against drug resistant pathogens.
Certain
Phase 3 trial expenses for Savvy, and certain other clinical and preclinical
development costs for the Biosyn pipeline, are funded by grant and contract
commitments through agencies including: the United States Agency for
International Development, 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.
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 the second quarter of 2009. While Cellegy
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. It
is uncertain whether Savvy will be commercialized or whether 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.
Cellegy
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 Cellegy would be able to achieve profitability with this
product, if approved.
A
second-generation product candidate, UC-781, is a non-nucleoside RT inhibitor
that has demonstrated efficacy against a wide range of HIV-1 isolates, including
laboratory adapted strains, T cell and macrophage tropic isolates, and primary
isolates of all major clades (A through G and isolates that are resistant to
other RT inhibitors). Certain Phase 1 human safety studies as well as human
anal/rectal efficacy studies of UC-781 are
underway.
Cellegy’s
research and development expenses were approximately $23,000 and $1,812,000 in
2007 and 2006, respectively.
Our
policy is to protect our technology by, among other things, filing patent
applications for technology that we consider important to our business. We
intend to file additional patent applications, when appropriate, relating to our
technology, improvements to our technology and to specific products that we
develop.
Cellegy
is not aware of any organization that currently has legally blocking proprietary
rights relating to Cellegy’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. Cellegy also relies upon unpatented trade secrets and
know-how, and 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. It is
our policy to require our employees to execute an invention assignment and
confidentiality agreement upon employment. Our consultants are required to
execute a confidentiality agreement upon the commencement of their consultancy.
Each agreement provides that all confidential information developed or made
known to the employee or consultant during the course of employment or
consultancy 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 shall be the exclusive property of Cellegy.
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.
Cellegy
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.
Cellegy
had previously entered into a license agreement with PDI for the promotion and
distribution of Fortigel in North America. This agreement was also the subject
of a lawsuit between the two parties and was later renegotiated and settled. In
2006, Cellegy settled all of its outstanding obligations to PDI for an aggregate
amount of $3,000,000 and recognized a gain of approximately $2,100,000 in
connection with the settlement.
From 2004
through 2006, Cellegy had license agreements with ProStrakan relating to
development and commercialization of Tostrex and Rectogesic in Europe and in
certain nearby non-European Union countries. Effective with the sale of assets
to ProStrakan in November 2006, Cellegy’s license agreements with ProStrakan
were terminated, and Cellegy will not receive any further amounts under these
agreements.
In
October 1996, Biosyn acquired C31G Technology from the inventor of the
technology, Edwin B. Michaels.
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 Cellegy 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 Chentura to purchase up to 39,050
shares of Cellegy common stock at an exercise price of $17.52 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 Cellegy or Biosyn to Chentura pursuant
to this agreement.
On
October 18, 2007, Cellegy and CONRAD amended its license agreement to modify the
non-exclusive license grant 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.
Under the
terms of certain of its funding agreements, Biosyn has been granted the right to
commercialize products supported by the funding in developed and developing
countries and Biosyn is obligated to make its commercialized products, if any,
available in developing countries, as well as available to public sector
agencies in developed countries, at prices reasonably above cost or at a
reasonable royalty rate.
Biosyn
entered into various other research and technology agreements. Under these other
agreements, Biosyn is working in collaboration with various other parties.
Should any discoveries be made under such arrangements, Biosyn may be required
to negotiate the licensing of the discovery for the development of the
respective technologies. Due to cancellation of 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 we
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, we have 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.
FDA Requirements for Human
Drugs
.
The
research, development, testing, manufacturing, storage, labeling, record
keeping, distribution, advertising, promotion and marketing of drug products are
extensively regulated by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous FDA
regulations pursuant to, among other laws, the Food, Drug and Cosmetic
Act.
The steps
ordinarily required before a new pharmaceutical product may be marketed in the
United States include:
|
(ii)
|
the
submission to the FDA of an Investigational New Drug Application, or IND,
which must be approved before human clinical trials commence;
|
|
(iii)
|
adequate
and well-controlled clinical trials to establish the safety and efficacy
of the product for its proposed indication;
|
|
(iv)
|
the
submission to the FDA of a NDA; and
|
|
(v)
|
FDA
review and approval of the NDA or Product License Application before any
commercial sale or shipment of the product. Preclinical tests include
laboratory evaluation of product formulation and animal studies (if an
appropriate animal model is available) to assess the potential safety and
efficacy of the product. Formulations must be manufactured according to
the FDA’s current Good Manufacturing Practice, or GMP, requirements, and
preclinical safety tests must be conducted by laboratories that comply
with FDA’s Good Laboratory Practice
regulations.
|
The
results of preclinical testing are submitted to the FDA as part of an IND and
are reviewed by the FDA before commencement of human clinical trials. Clinical
trials may begin 30 days after the IND is received, unless the FDA raises
concerns or questions about the conduct of the clinical trials. If concerns or
questions are raised, the IND sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials. In some instances, the IND application process can result in substantial
delay and expense. Clinical trials are normally done in three phases, although
the phases may overlap. Phase 1 trials are concerned primarily with the safety
and pharmacokinetics of the product. Phase 2 trials are designed primarily to
demonstrative effectiveness and safety in treating the disease or condition for
which the product is indicated. These trials typically explore various dose
regimens. Phase 3 trials are expanded clinical trials intended to gather
additional information on safety and effectiveness necessary to clarify the
product’s benefit-risk relationship, discover less common side effects and
adverse reactions, and generate information for proper labeling of the drug. The
FDA receives reports on the progress of each phase of clinical testing and may
require the modification, suspension or termination of clinical trials if an
unwarranted risk is presented to patients. When data is required from long-term
use of a drug following its approval and initial marketing, the FDA can require
Phase 4, or post-marketing, studies to be conducted. The FDA, upon request
through a Special Protocol Assessment, can also provide specific written
guidance on the acceptability of protocol designs for selected clinical
trials.
After
successful completion of the required clinical testing, an NDA is generally
submitted. FDA approval of the NDA (as described below) is required before
marketing may begin in the United States. The FDA reviews all NDAs submitted and
may request more information before it accepts the filing. The review process is
often extended significantly by FDA requests for additional information or
clarification. The FDA may refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee. During the review process,
the FDA generally will conduct an inspection of the relevant drug manufacturing
facilities and clinical trial sites to ensure that the facilities are in
compliance with applicable GMP requirements. If FDA evaluations of the NDA
application, manufacturing facilities, and clinical sites are favorable, the FDA
may issue either an approvable letter or a not approvable letter that contains a
number of conditions that must be met in order to secure approval of the NDA.
When and if those conditions have been met to the FDA’s satisfaction, the FDA
will issue an approvable letter, authorizing commercial marketing of the drug
for certain specific indications.
If the
FDA’s evaluation of the NDA submission or manufacturing facilities is not
favorable, the FDA may refuse to approve the NDA or may issue a not approvable
letter, outlining the deficiencies in the submission and often requiring
additional testing or information. Notwithstanding the submission of any
requested additional data or information in response to an approvable or not
approvable letter, the FDA ultimately may decide that the application does not
satisfy the regulatory criteria for approval. Even if FDA approval is obtained,
a marketed drug product and its manufacturer are subject to continual review and
inspection, and later discovery of previously unknown problems with the product
or manufacturer may result in restrictions or sanctions on such product or
manufacturer, including withdrawal of the product from the market.
The
process of developing and obtaining approval for a new pharmaceutical product
within this regulatory framework requires a number of years and the expenditure
of substantial resources. There can be no assurance that necessary approvals
will be obtained in a timely manner, if at all. Delays in obtaining regulatory
approvals could have a material adverse effect on the applicant. Failure to
comply with applicable regulatory requirements for marketing drugs could subject
the applicant to administrative or judicially imposed sanctions such as warning
letters, fines, product recalls or seizures, injunctions against production,
distribution, sales, or marketing, delays in obtaining marketing authorizations
or the refusal of the government to grant such approvals, suspensions and
withdrawals of previously granted approvals, civil penalties and/or criminal
prosecution.
Manufacturing
.
Each
domestic drug manufacturing facility must be registered with the FDA. Domestic
drug manufacturing establishments are subject to routine inspection by the FDA
and other regulatory authorities and must comply with GMP requirements and any
applicable state or local regulatory requirements. Foreign manufacturing
facilities are also subject to periodic FDA inspections or inspections by
foreign regulatory authorities. Among other things, the FDA may withhold
approvals of NDAs or other product applications if deficiencies are found at the
facility. Vendors that supply finished products or components used to
manufacture, package and label products are subject to similar regulation and
periodic inspection. There can be no assurances that manufacturing or quality
control problems will not arise at the manufacturing plants of contract
manufacturers or that such manufacturers will have the financial capabilities or
management expertise to adequately supply products or maintain compliance with
the regulatory requirements necessary to continue manufacturing
products.
Foreign Regulation of
Drugs
.
Whether
or not FDA approval has been obtained, approval of a product by comparable
regulatory authorities may be necessary in foreign countries before the
commencement of marketing of the product in such countries. The approval
procedures vary among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general each
country has its own procedures and requirements, many of which are time
consuming and expensive. Under EU regulatory systems, a company may submit
marketing authorization applications either under a centralized or decentralized
procedure. The centralized procedure, which is available for medicines produced
by biotechnology or which are highly innovative, provides for the grant of a
single marketing authorization that is valid for EU member states. This
authorization is called a Marketing Authorization Approval, or MAA. The
decentralized procedure provides for mutual recognition of national approval
decisions. Under this procedure, the holder of a national Marketing
Authorization may submit an application to the remaining member states. Each
member state must then make its own determination regarding approval. This
procedure is referred to as the European Union Mutual Recognition Procedure, or
MRP. There can be substantial delays in obtaining required approvals from both
the FDA and foreign regulatory authorities after the relevant applications are
filed.
Health Care
Reform
.
In the
United States, there have been, and Cellegy expects there will continue to be, a
number of federal and state proposals to implement cost controls and other
health care regulatory measures. Future legislation could result in a
substantial restructuring of the health care delivery system. While we cannot
predict whether any legislative or regulatory proposals will be adopted or the
effect such proposals may have on our business, the uncertainty of such
proposals could have a negative effect on our ability to raise capital and to
identify and reach agreements with potential partners, and the adoption of such
proposals could have an adverse effect on Cellegy. In both domestic and foreign
markets, sales of therapeutic products will depend in part on the availability
of reimbursement from third-party payers. There can be no assurance that our
products, if commercially developed, will be considered cost effective or that
reimbursement will be available. We cannot predict the outcome of any government
or industry reform initiatives or the impact thereof on our financial position
or results of operations.
The
pharmaceutical industry is characterized by extensive research efforts and rapid
and significant technological change and intense competition. Cellegy is much
smaller in terms of size and resources than many of its competitors in the
United States and abroad, which include, among others, major pharmaceutical,
chemical, consumer product, and biotechnology companies, specialized firms,
universities and other research institutions. Cellegy’s competitors may succeed
in developing technologies and products that are safer, more effective or less
costly than any developed by Cellegy, thus rendering its technology and
potential products obsolete and noncompetitive. Many of these competitors have
substantially greater financial and technical resources, clinical production and
marketing capabilities and regulatory experience than Cellegy.
Savvy is
subject to competition from other microbicides that are currently undergoing
clinical trials and which may be sold by prescription or over-the-counter, as
well as non-microbicidal products such as condoms. There is also a number of
existing contraception products currently on the market which could greatly
limit the marketability of the Savvy contraception product candidate. As a
result, there can be no assurance that Biosyn’s products under development will
be able to compete successfully with existing products or other innovative
products under development.
As of
December 31, 2007, Cellegy had three (3) full-time employees. In addition, we
utilize the services of professional consultants, as well as regulatory and
clinical research organizations to supplement our internal staff’s activities.
None of our employees are represented by a labor union. We have experienced no
work stoppages and we believe that our employee relations are
good.
We are
subject to the reporting requirements under the Securities Exchange Act of 1934.
Consequently, we are required to file reports and information with the SEC,
including reports on the following forms:
|
(i)
|
annual
report on Form 10-K,
|
|
(ii)
|
quarterly
reports on Form 10-Q,
|
|
(iii)
|
current
reports on Form 8-K,
|
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(iv)
|
and
amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934.
|
These
reports and other information concerning us may be obtained at the SEC’s Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or
accessed through the SEC’s website at
http://www.sec.gov
or by
calling 1-800-SEC-0330. Upon written request to Cellegy at Cellegy
Pharmaceuticals, Inc., P.O. Box 695, Boyertown, PA. 19512, Attention: Chief
Financial Officer, Cellegy will provide a copy of the annual report on Form 10-K
to any stockholder.
CELLEGY MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Cellegy appearing elsewhere in this joint proxy
statement/prospectus. 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 the section entitled “Risk Factors—Risks Related to
Cellegy” in this joint proxy statement/prospectus, the other risks and
uncertainties described in the section entitled “Risk Factors” in this joint
proxy statement/prospectus and the other risks and uncertainties described
elsewhere in this joint proxy statement/prospectus. All forward-looking
statements included in this joint proxy statement/prospectus are based on
information available to Cellegy 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,
Cellegy assumes no obligation to
update any such forward-looking statement.
General
Cellegy
Pharmaceuticals is a specialty biopharmaceutical company. Cellegy’s operations
currently relate primarily to the intellectual property rights relating to the
Biosyn product candidates.
Summary of Certain Developments
During 2006 and 2007
In
November 2005, Cellegy renegotiated its marketing agreement with ProStrakan.
Under the terms of the amended agreement, ProStrakan agreed to assume
responsibility for all manufacturing and other product support functions and
agreed to purchase the product directly from the manufacturer rather than from
Cellegy. In connection with its revised marketing agreement, Cellegy received a
payment of $2.0 million.
On
January 16, 2006 Cellegy entered into an amendment of its Exclusive License and
Distribution Agreement dated July 9, 2004, with ProStrakan. Under the amendment,
ProStrakan agreed to assume responsibility for all of the manufacturing and
other product support functions for Tostrex in Europe.
On
January 31, 2006, Cellegy announced that it entered into a non-exclusive,
developing world licensing agreement with CONRAD, for the collaboration on the
development of Cellegy’s entire microbicide pipeline. The agreement encompassed
the licensing of Savvy, UC-781 and Cyanovirin-N.
On March
24, 2006, Cellegy announced that ProStrakan had successfully completed the
European Union MRP for Rectogesic, and that following the successful conclusion
of the MRP process, national licenses would be sought and were expected to be
issued in due course in the nineteen (19) additional countries (in addition to
the United Kingdom where approvals have been previously obtained) included in
the MRP submission application. Cellegy received $250,000 for this milestone and
under its previous agreement with PDI, remitted one-half of these proceeds to
PDI.
On June
20, 2006, Cellegy amended its license agreement with ProStrakan concerning
Rectogesic. The amendment added several countries and territories in Eastern
Europe, including several countries and territories that were part of the former
Soviet Union, to the territories covered by the original agreement. As part of
the amendment, ProStrakan paid to Cellegy the sum of $500,000 on July 3, 2006,
representing a prepayment of the milestone due upon approval of Rectogesic in
certain major European countries. Following the payment described above,
ProStrakan had no further payment obligations to Cellegy under the Rectogesic
license agreement.
On July
7, 2006, the FDA issued an Approvable Letter for Cellegy’s product candidate
Cellegesic, but indicated that before Cellegy's NDA may be approved and the
product approved for marketing, Cellegy must conduct another clinical trial to
demonstrate efficacy at a level deemed statistically significant by the agency.
The letter indicated that the agency was requiring an additional study because
it believed the results of the three trials conducted to date did not provide
substantial evidence that the drug is effective, and provided a number of
comments on the results previously presented by Cellegy and recommendations
concerning the design and protocol of the additional required study.
On August
28, 2006, Cellegy announced that FHI planned to stop the Savvy Phase 3 trial
being conducted in Nigeria with enrollment of approximately 2,000 patients, to
determine whether Savvy is safe and effective for reducing women’s risk of
acquiring HIV infection. In November 2005, a similar trial being conducted in
Ghana with enrollment of approximately 2,100 patients was stopped for similar
reasons. Each of the trials was part of an international effort to evaluate
microbicides as a tool to reduce the risk of HIV infection in people at high
risk. The decision to stop these trials followed recommendations by the studies’
external independent DMC. After reviewing the study interim data, DMC members
concluded that the trials as designed were unlikely to provide statistically
significant evidence that Savvy protects against HIV, because of a lower than
expected rate of HIV seroconversion in the trial, which was less than half of
the expected rate. This lower rate was possibly due in part to procedures
designed to ensure ethical trial design, including counseling on HIV prevention
and distribution of condoms. Without obvious signals of effectiveness in the
interim data, the study would be unlikely to detect a reduction in the HIV risk
at a level deemed statistically significant if it were to continue.
On
November 28, 2006, Cellegy completed the sale to ProStrakan for $9.0 million of
its rights to Cellegesic, Fortigel, Tostrex, Rectogesic, Tostrelle, and related
intellectual property assets. ProStrakan also assumed various existing
distribution and other agreements relating to the assets and intellectual
property. Cellegy’s stockholders approved the transaction at a special meeting
of stockholders held on November 22, 2006. In connection with the sale, Cellegy
renegotiated its outstanding obligations with PDI, Inc. and settled its those
claims for $3.0 million.
On
September 12, 2007, FHI released the final results of two clinical trials halted
in November 2005 and August 2006 that examined the safety and effectiveness of
Savvy
®
(C31G
vaginal gel) as a potential microbicide for the prevention of male-to-female
transmission of HIV among women at high risk of infection. The trials—in Ghana
and Nigeria—were unable to show that Savvy
®
was more
effective than a placebo gel. The FHI release noted that the trial results
possibly were influenced by the fact that all participants, including those
receiving the placebo gel, received risk reduction counseling and condoms. These
final results are consistent with the information that Cellegy previously
reported on November 8, 2005 and on August 28, 2006 concerning FHI’s decision to
terminate the trials. The previous announcements indicated that a lower than
expected rate of HIV seroconversion in Ghana made it unlikely that the number of
events required to evaluate the effect of Savvy
®
on HIV
could be reached, even if the trials continued.
On
October 18, 2007, Cellegy and CONRAD amended its license agreement to modify the
non-exclusive license grant 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, requires management to make
estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Revenue
Recognition
.
Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk non-refundable milestone payments specified
under development contracts are recognized as the milestones are achieved.
Cellegy received certain government and non-government grants that support its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
were incurred. Advanced payments received under these agreements prior to
completion of the related work are recorded as deferred revenue until earned.
Should the research funded by federal grants result in patented technologies,
the federal government would be entitled to a nonexclusive, nontransferable,
irrevocable, paid-up license to utilize such technologies.
Revenues
related to product sales are recognized when title has been transferred to the
customer and when all of the following criteria are met: a persuasive evidence
of an arrangement exists, delivery has occurred or service has been rendered,
the price is fixed or determinable and collectability is reasonably assured.
There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at the
time the payment is received and are subsequently recognized as revenue on a
straight-line basis over the longer of the life of the agreement or the life of
the underlying patent.
Royalties
payable to Cellegy under these license agreements are recognized as earned when
the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Goodwill and Intangible
Assets
.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,”
goodwill and other intangible assets with indefinite lives are no longer
systematically amortized, but rather Cellegy performs an annual assessment for
impairment by applying a fair-value based test. This test is generally performed
each year in the fourth quarter. Additionally, goodwill and intangible assets
are reviewed for impairment whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable. An impairment loss would be
recognized based on the difference between the carrying value of the asset and
its estimated fair value, which would be determined based on either discounted
future cash flows or other appropriate fair value methods. The evaluation of
goodwill and other intangibles for impairment requires management to use
significant judgments and estimates including, but not limited to, projected
future revenue, operating results and cash flows. An impairment would require
Cellegy to charge to earnings the write-down in value of such
assets.
Impairment of Long Lived
Assets
.
Cellegy
reviews long-lived assets for impairment whenever events or changes in business
conditions indicate that these carrying values may not be recoverable in the
ordinary course of business. When such an event occurs, management determines
whether there has been an impairment by comparing the anticipated undiscounted
future net cash flows to the related asset’s carrying value. If an asset is
considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or appraised value, depending
on the nature of the asset.
Research and Development
Expenses
.
Research
and development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities, are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and the number of subjects that have completed treatment for each
trial.
Milestone
payments that are made upon the occurrence of future contractual events prior to
receipt of applicable regulatory approvals are charged to research and
development expense. Cellegy may capitalize and amortize certain future
milestone and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Derivative
Instruments
.
Cellegy
accounts for certain warrants issued in conjunction with its financings as
derivative financial instruments. As a derivative, the fair value of the warrant
is recorded as a liability in the balance sheet and changes in the fair value of
the warrant are recognized as other income or expense during each period. The
fair value of the warrant is calculated using the Black-Scholes valuation model
and is expected to change primarily in response to changes in Cellegy’s stock
price. Significant increases in the fair value of our stock could give rise to
significant expense in the period of the change. Likewise, a reduction in our
stock price could give rise to significant income in the period of the
change.
Results of
Operations
In
November 2006 Cellegy sold substantially all its intellectual property related
to Cellegesic, Rectogesic, Tostrex, Fortigel and certain other products to
ProStrakan. As such, Cellegy will record no additional sales or licensing
revenues in connection with these products or the underlying technologies. The
operations of Cellegy Australia, Pty., Ltd., or Cellegy Australia, for the
periods presented are shown as discontinued operations due to the disposition of
Cellegy Australia in April of 2006.
Years Ended December 31, 2007
and 2006
Revenues.
Cellegy
had no revenues in 2007 and had total revenues of approximately $2,660,000 in
2006. Total revenues in 2006 consist of licensing, product sales and grant
revenues.
Licensing
Revenues
.
Cellegy
had no licensing revenues in 2007. Licensing revenues were approximately
$477,000 in 2006. Licensing revenues in 2006 arose from the amortization to
income of deferred revenue recorded in connection with agreements relating to
Rectogesic and Tostrex. We expect to recognize no licensing revenues in the
foreseeable future.
Grant Revenues
.
Cellegy
had no grant revenues in 2007. Grant revenues were approximately $1,926,000 to
2006. Grant revenues for 2006 were generated by funding from several agencies in
support of the following development programs: $1,361,000 for Cyanovirin-N,
$55,000 for Savvy, $218,000 for UC-781 and $292,000 for a UC-781/C31G
combination product.
The level
of grant funding under the various grant arrangements is generally dependent
upon the amount of direct labor (primarily laboratory personnel) and direct
expenses such as supplies, testing services and other direct costs expected to
be incurred in connection with the given program over its duration. The grant
agreements generally provide for an overhead percentage that is applied to the
direct labor costs. These amounts, along with the amounts billed to the grantor
for direct costs comprise the total amount billed and recorded as grant revenue.
Cellegy has discontinued its grant funding in connection with the reduction of
Biosyn research activities and does not expect to record grant revenues in the
future.
In
addition to the grant funding above, Biosyn benefits indirectly from agency
funding paid to third party contractors in support of its ongoing Phase 3
clinical trial. Payments from these funding agencies are made directly to the
service providers, not to Biosyn. Under the terms of certain of its funding
agreements, Biosyn has been granted the right to commercialize products
supported by the funding in developed and developing countries, and is obligated
to make its commercialized products, if any, available in developing countries,
as well as to public sector agencies in developed countries at prices reasonably
above cost or at a reasonable royalty rate.
Product Sales
.
Cellegy
had no product sales revenues in 2007. Product sales were approximately $257,000
in 2006. Sales revenue for 2006 consisted of the sale of certain inventory items
to ProStrakan in connection with its purchase of Cellegy’s European rights to
Rectogesic. Due to the renegotiation of its agreements with ProStrakan and the
asset sale transaction with ProStrakan in 2006, Cellegy no longer records
product sales revenue from ProStrakan.
Cost of Product
Sales
. Cost of
product sales is comprised primarily of direct labor and raw material
manufacturing costs for commercialized products and also includes shipping costs
and those costs associated with stability and validation testing of finished
goods prior to shipment. The stability and validation testing components of cost
of product sales comprise a significant percentage of gross sales since these
costs are substantially fixed in nature. Cellegy had no cost of sales in 2007.
Cost of product sales was approximately $257,000 in 2006.
Research and Development
Expenses
.
Research
and development expenses consist primarily of internal salaries and allocated
costs as well as external clinical costs, including: clinical site payments,
costs of manufacturing, testing and shipping clinical supplies and service fees
to CROs that monitor the clinical sites and perform other related trial support
services. Additionally, research expenses consist of regulatory costs, including
the cost of filing product approval applications around the world, and the costs
of various consultants to support the filings.
Following
the FDA’s decision in July 2006, Cellegy elected not to pursue substantial
additional research activities relating to Cellegesic. Cellegy is also not
currently devoting significant financial resources to its Savvy product
candidate, due in part to the cessation of the Nigeria and Ghana HIV clinical
trials in August 2006 and November 2005, respectively. In 2006, Cellegy
eliminated its direct research activities relating to its CV-N and UC-781
product candidates and has transferred certain IND’s to CONRAD pursuant to the
parties’ agreement. The Savvy Phase 3 contraception study conducted in the U.S.
is ongoing although Cellegy is not directly involved with the conduct or funding
of this trial. The manufacturing costs associated with supplying the clinical
materials for the study are being borne by CONRAD in exchange for access to
Cellegy’s past research in accordance with the agreements between the
parties.
Research
and development expenses were approximately $23,000 and $1,812,000 in 2007 and
2006, respectively. Research and development expenses, which are primarily
related to the costs of clinical trials and/or regulatory filings, represented
1% and 25% of our total operating expenses in 2007 and 2006, respectively.
Cellegy expects that there will be no significant research spending in the
foreseeable future.
Research
expenses in 2007 consist of regulatory filings and related supporting services.
In 2006, Cellegy eliminated all clinical and laboratory research
activities.
Selling, General and Administrative
Expenses
.
Selling,
general and administrative expenses, or SG&A were approximately $1,799,000
and $5,026,000 in 2007 and 2006, respectively. In 2007, SG&A expenses
decreased approximately $3.2 million as compared to 2006 due primarily to the
full year effect of staff reductions, lower patent trademark expenses, lower
legal and professional fees and generally lower expenses overall due to the
reduced business activities in 2007. In 2006, SG&A expenses decreased
approximately $3.9 million as compared to 2005. The decrease was due primarily
to further staffing reductions in 2006 of $1.2 million, and a decrease in
professional fees of $2.7 million relating to
office
closures and reductions in consulting, litigation, patent, trademark, accounting
and legal costs.
Other Income
(Expense)
.
Cellegy
recognized interest and other income of approximately $90,000, in 2007 and
$123,000 in 2006. Included in these amounts was interest income of approximately
$82,000 in 2007 and $25,000 in 2006. Other income for 2006 also included
approximately $97,000, of net Pennsylvania research and development credits that
Cellegy has recognized as income in connection with the sale these credits.
Cellegy
recognized interest and other expense of approximately $198,000 in 2007 and
$808,000 in 2006. Amounts recognized in 2007 related primarily to interest
expense accreted in connection with the Ben Franklin note. Interest and other
expense for 2006 consisted primarily of interest expense related to the PDI and
Ben Franklin notes payable. The PDI notes were renegotiated and paid in full in
November 2006.
Gain on
sale of technology of approximately $12.6 million in 2006 included $9.0 million
recognized in connection with the sale of intellectual property rights to
ProStrakan discussed above and approximately $3.6 million of unamortized
deferred revenue related to licensing agreements with ProStrakan under which all
obligations were deemed to have been fulfilled in connection with the sale.
Cellegy renegotiated its outstanding debt obligations with PDI in 2006 which
resulted in the recognition of approximately $2.2 million in debt forgiveness
which was recorded in other income. Cellegy renegotiated its license agreement
with Neptune Pharmaceuticals in 2006 and obtained a release from future
obligations under this agreement. In connection with the release, Cellegy paid
Neptune Pharmaceuticals $250,000 which was recorded as other
expense.
Cellegy
recorded approximately $189,000 in derivative revaluation income associated with
the Kingsbridge and PIPE warrants in 2006 due to the decline in Cellegy’s share
price during this period.
Discontinued
Operations
.
On April
11, 2006, Epsilon Pharmaceuticals Pty., Ltd. purchased all of the shares of
Cellegy Australia and Cellegy has reflected Cellegy Australia as a discontinued
operation. The subsidiary was part of the Pharmaceutical Segment for the
Australian and Pacific Rim geographic areas. The purchase price for the shares
was $1.0 million plus amounts equal to the liquidated value of Cellegy
Australia's cash, accounts receivable and inventory. The total proceeds of the
sale were approximately $1.3 million. Income from operations of the discontinued
operation was approximately $326,000 for 2006.
Three and Nine Months
Ended September 30, 2008 and 2007
Revenues.
Cellegy
had no revenues for the three and nine month periods ended September
30, 2008 and 2007. Cellegy and its Biosyn subsidiary benefit indirectly from
agency funding paid to third party contractors in support of its ongoing Phase 3
clinical trials. These payments from the funding agencies are made directly to
the service providers, not to Biosyn. Under the terms of certain of its funding
agreements, Biosyn has been granted the right to commercialize products
supported by the funding in developed and developing countries, and is obligated
to make its commercialized products, if any, available in developing countries,
as well as to public sector agencies in developed countries at prices reasonably
above cost or at a reasonable royalty rate.
Research and Development
Expenses
.
Cellegy incurred no research and development expenses in the three month
period ended September 30, 2008. For the nine month period
ending September 30, 2008, Cellegy incurred research and development
expenses of approximately $3,000. In the three and nine month periods
ending September 30, 2007, Cellegy incurred research and development
expenses of approximately $2,000 and $23,000, respectively.
Selling, General and Administrative
Expenses
.
Selling, general and administrative expenses for the three and nine month
periods ending September 30, 2008 were approximately $262,000 and
$1,060,000, respectively. Selling, general and administrative expenses for the
three and nine month periods ending September 30, 2007 were
approximately $404,000 and $1,345,000, respectively. Selling, general and
administrative expenses consist primarily of legal fees incurred in connection
with merger activities, accounting and audit fees, regulatory expenses and
salaries. The reduction in 2008 expense levels compared to the comparable
periods in 2007 was primarily a result of reduced levels of
operations.
Other Income
(Expenses)
.
Interest and other income for the three and nine month periods
ending September 30, 2008 was approximately $17,000 and $60,000,
respectively, as compared to approximately $147,000 and $203,000, respectively
for the comparable periods in 2007. Interest and other income consists primarily
of interest income earned in connection with bank deposits and the note
receivable with Adamis. The decrease in interest income was primarily due to the
decline in Cellegy’s cash deposits.
Interest
and other expense for the three and nine month periods
ending September 30, 2008 was approximately $76,000 and $206,000,
respectively, as compared to approximately $67,000 and $101,000 for the
comparable periods in 2007. The increase in interest expense in the current
periods was due primarily to the increased interest accretion of the note
payable to Ben Franklin.
Liquidity and Capital
Resources
Our
cash and cash equivalents were approximately $361,000 and $1,827,000
at September 30, 2008 and December 31, 2007, respectively. Cash and
cash equivalents decreased approximately $1,466,000 during the nine month
period ending September 30, 2008, due to our $500,000 loan to Adamis in
connection with the proposed merger, related merger expenses and operating
expenses incurred in connection with Cellegy’s present level of
operations.
We
prepared the condensed 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 condensed consolidated financial statements, consideration was
given to Cellegy’s future business alternatives as described below, which may
preclude Cellegy from realizing the value of certain assets during their future
course of business.
Cellegy’s
operations currently relate primarily to the 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. While the Savvy
Phase 3 contraception trial in the United States is ongoing, Cellegy is not
directly involved with the conduct and funding thereof and it is uncertain
whether Savvy will be commercialized or whether Cellegy will ever realize
revenues therefrom. We therefore expect negative cash flows to continue for the
foreseeable future. Cellegy believes that it presently has enough financial
resources to continue operations as they currently exist until approximately the
end of January 2009, absent unforeseen significant additional expenses. If the
proposed merger transaction with Adamis is still pending and Cellegy requires
additional cash resources to complete the transaction, Cellegy and Adamis
are engaged in discussions concerning an agreement for Adamis to provide funding
sufficient to permit the merger to be completed, although there can be no
assurance that such funding will be available.
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. 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. Accordingly, neither Cellegy nor its
stockholders will receive any additional shares.
If the
merger with Adamis is not completed, Cellegy’s board of directors will be
required to explore alternatives for Cellegy’s business and assets. These
alternatives might include seeking the dissolution and liquidation of Cellegy,
merging or combining with another company, or initiating bankruptcy proceedings.
There can be no assurance that any third party will be interested in merging
with Cellegy or acquiring the remaining assets of Cellegy. Although Cellegy may
try to pursue an alternative strategic transaction, it will likely have very
limited cash resources, and will likely be forced to file for federal bankruptcy
protection. If Cellegy files for bankruptcy protection, Cellegy will most likely
not be able to raise any type of funding from any source. In that event, the
creditors of Cellegy would have first claim on the value of the assets of
Cellegy which, other than remaining cash, would most likely be liquidated in a
bankruptcy sale. Cellegy can give no assurance as to the magnitude of the net
proceeds of such sale and whether such proceeds would be sufficient to satisfy
Cellegy’s obligations to its creditors, let alone to permit any distribution to
its equity holders. These factors, among others, raise substantial doubt about
our ability to continue as a going concern.
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.
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 Cellegy’s mark-to-model value. SFAS
157 also requires expanded disclosure of the effect on earnings for items
measured using unobservable data. Under SFAS 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the market in which the
reporting entity transacts. In this standard, FASB clarified the principle that
fair value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy.
The FASB
agreed to defer the effective date of SFAS 157 for all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The FASB again rejected the proposal
of a full one-year deferral of the effective date of SFAS 157. SFAS 157 was
issued in September 2006, and is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Accordingly, Cellegy adopted this statement on October 1, 2007,
for assets and liabilities not subject to the deferral and adopted this
statement October 1, 2008, for all other assets and liabilities. Cellegy is
currently assessing the impact of this statement. There was no impact upon
Cellegy’s financial statements resulting from the adoption of this
pronouncement.
SFAS No. 141 (Revised 2007),
Business Combinations
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). Under SFAS 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition date fair value with limited exceptions. SFAS
141R will change the accounting treatment for certain specific items, including:
acquisition costs will be generally expensed as incurred; non-controlling
interests will be valued at fair value at the acquisition date; acquired
contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date until the completion or abandonment of
the associated research and development efforts; restructuring costs associated
with a business combination will be generally expensed subsequent to the
acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense.
SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Cellegy is currently
assessing the impact of this statement.
SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB No.
51”
On
December 4, 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the non-controlling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the non-controlling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
non-controlling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. Cellegy believes that this pronouncement will
have no effect on its consolidated financial statements.
The
validity of the shares of Cellegy common stock being offered hereby will be
passed on by Weintraub Genshela Chediak, a law corporation. Weintraub
Genshela Chediak will also deliver an opinion as to certain federal income tax
consequences of the merger. See the section entitled “Material U.S. Federal
Income Tax Consequences” in this joint proxy
statement/prospectus.
The
consolidated financial statements of Cellegy Pharmaceuticals, Inc. at December
31, 2007 and 2006, and for each of the two years in the period ended December
31, 2007, included in this joint proxy statement/prospectus of Cellegy
Pharmaceuticals, Inc., which is referred to and made a part of this prospectus
and registration statement, have been audited by Mayer Hoffman McCann P.C.,
independent registered public accounting firm, as set forth in their report
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about Cellegy’s ability to continue as a going concern as
described in Note 1 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The
consolidated financial statements of Adamis Pharmaceuticals Corporation at March
31, 2008 and 2007, and for each of the two years in the period ended March 31,
2008, included in this joint proxy statement/prospectus, which are referred to
and made a part of this prospectus and registration statement, have been so
included in reliance on the report of Goldstein Lewin & Co., an independent
registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
Cellegy
files annual, quarterly, current and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that Cellegy files at the SEC’s Public Reference Room at 100 F.
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the Public Reference Room. In addition, the SEC maintains
an Internet site that contains annual, quarterly, current and special reports,
proxy statements and other information regarding issuers that file
electronically with the SEC, including Cellegy, at
http://www.sec.gov.
As of the
date of this joint proxy statement/prospectus, Cellegy has filed a registration
statement on Form S-4 to register with the SEC the Cellegy common stock
that Adamis stockholders will be entitled to receive in the merger. This joint
proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of Cellegy, as well as a proxy statement of Cellegy and
Adamis for their respective annual and special stockholder
meetings.
Cellegy
has supplied all information contained in this joint proxy statement/prospectus
relating to Cellegy, and Adamis has supplied all information contained in this
joint proxy statement/ prospectus relating to Adamis.
If you
would like to request documents from Cellegy or Adamis, please send a request in
writing or by telephone to either Cellegy or Adamis at the following
address:
Cellegy
Pharmaceuticals, Inc.
P.O.
Box 695
Boyertown,
PA 19512
Telephone:
(215)
529-6084
Attn:
Chief Financial Officer
|
|
Adamis
Pharmaceuticals Corporation
c/o
Chief Financial Officer
2658
Del Mar Heights Rd., #555
Del
Mar, California 92014
Telephone:
(858) 401-3984
|
You should rely only on the
information contained in this joint proxy statement/prospectus to vote your
shares at the Cellegy annual meeting or the Adamis special meeting. Neither
Cellegy nor Adamis has authorized anyone to provide you with information that
differs from that contained in this joint proxy statement/prospectus. This joint
proxy statement/prospectus is dated
,
2009. You should not assume that the information contained in this joint proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement/prospectus to stockholders nor
the issuance of shares of Cellegy common stock in the merger shall create any
implication to the contrary.
Information
on any Adamis or Cellegy website is not part of this joint proxy
statement/prospectus and you should not rely on that information in deciding
whether to approve any of the proposals described in this joint proxy
statement/prospectus, unless that information is also in this joint proxy
statement/prospectus.
The
deadline for stockholders to submit proposals to be considered for inclusion in
the combined company’s proxy statement for next year’s annual meeting of
stockholders is ______________. Such proposals may be included in next year’s
proxy statement if they comply with certain rules and regulations
promulgated by the SEC and the procedures set forth in the combined company’s
bylaws, as amended, which, among other things, require notice to be delivered or
mailed and received at the combined company’s executive offices. In addition,
the deadline for stockholders to submit proposals, including director
nominations, that will be included in the combined company’s proxy statement for
next year’s annual meeting of stockholders is on or before
[_______________].
INDEX TO FINANCIAL STATEMENTS
CELLEGY CONSOLIDATED FINANICAL
STATEMENTS
Financial Statements as of and for
the Period Ending December 31, 2007
|
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated
Balance Sheets
|
|
F-3
|
Consolidated
Statements of Operations
|
|
F-4
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) and Comprehensive
Income
|
|
F-5
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
Notes
to Consolidated Financial Statements
|
|
F-8
|
|
|
|
Unaudited Financial Statements
as of and for the Period Ending
September
30, 2008
|
|
|
|
|
|
Page
|
Consolidated
Balance Sheets
|
|
F-28
|
Consolidated
Statements of Operation
|
|
F-29
|
Consolidated
Statements of Cash Flows
|
|
F-30
|
Notes
to Consolidated Financial Statements
|
|
F-31
|
|
|
|
|
|
|
|
|
|
Financial Statements as of and
for the Period Ending March 31, 2008
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-39
|
|
|
|
Consolidated
Balance Sheets
|
|
F-40
|
Consolidated
Statements of Operations
|
|
F-41
|
Consolidated
Statements of Changes in Stockholders’ Equity
(Deficit)
|
|
F-42
|
|
|
|
Unaudited Financial Statements
as of and for the Period Ending
September
30, 2008
|
|
|
|
FINANCIAL
STATEMENTS (UNAUDITED):
|
|
|
|
|
|
Consolidated
Balance Sheet
|
|
F-61
|
Consolidated
Statements of Operations
|
|
F-62
|
|
|
F-63
|
Notes
to the Consolidated Financial Statements
|
|
F-65
|
Report of Independent Registered
Public Accounting Firm
To the
Board of Directors and Stockholders
Cellegy Pharmaceuticals,
Inc.
We have
audited the accompanying consolidated balance sheets of Cellegy Pharmaceuticals
Inc. and its subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (PCAOB). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements, referred to above, present
fairly, in all material respects, the consolidated financial position of Cellegy
Pharmaceuticals Inc. and its subsidiary as of December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the years then
ended in conformity with U.S. generally accepted accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses
from operations and has limited working capital to pursue its business
alternatives. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans with regard to these matters
are also described in Note 1. The 2007 and 2006 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Mayer
Hoffman McCann P.C.
Plymouth
Meeting, Pennsylvania
March 19,
2008
Cellegy
Pharmaceuticals, Inc.
Consolidated Balance
Sheets
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,826,614
|
|
$
|
3,803,832
|
|
Accounts
receivable
|
|
|
-
|
|
|
62,605
|
|
Prepaid
expenses and other current assets
|
|
|
267,478
|
|
|
278,740
|
|
Total
assets
|
|
$
|
2,094,092
|
|
$
|
4,145,177
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
$
|
174,839
|
|
Accrued
expenses and other current liabilities
|
|
|
396,088
|
|
|
536,591
|
|
Current
portion of notes payable
|
|
|
-
|
|
|
44,700
|
|
Total
current liabilities
|
|
|
396,088
|
|
|
756,130
|
|
Notes
payable
|
|
|
507,067
|
|
|
322,125
|
|
Derivative
instruments
|
|
|
1,189
|
|
|
3,987
|
|
Total
liabilities
|
|
|
904,344
|
|
|
1,082,242
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
Stock, no par value; 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
no
shares issued and outstanding at December 31, 2007 and
2006
|
|
|
|
|
|
|
|
Common
stock, par value $.0001; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
29,834,796
shares issued and outstanding at December 31, 2007 and
2006
|
|
|
2,984
|
|
|
2,984
|
|
Additional
paid-in capital
|
|
|
125,753,019
|
|
|
125,699,145
|
|
Accumulated
deficit
|
|
|
(124,566,255
|
)
|
|
(122,639,194
|
)
|
Total
stockholders' equity
|
|
|
1,189,748
|
|
|
3,062,935
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,094,092
|
|
$
|
4,145,177
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
Licensing,
milestone and development funding
|
|
$
|
-
|
|
$
|
477,082
|
|
Grants
|
|
|
-
|
|
|
1,925,779
|
|
Product
sales
|
|
|
-
|
|
|
257,197
|
|
Total
revenues
|
|
|
-
|
|
|
2,660,058
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of product sales
|
|
|
-
|
|
|
257,197
|
|
Research
and development
|
|
|
23,022
|
|
|
1,812,088
|
|
Selling,
general and administrative
|
|
|
1,798,626
|
|
|
5,025,786
|
|
Equipment
fair market value adjustment
|
|
|
-
|
|
|
250,729
|
|
Total
costs and expenses
|
|
|
1,821,648
|
|
|
7,345,800
|
|
Operating
loss
|
|
|
(1,821,648
|
)
|
|
(4,685,742
|
)
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
85,334
|
|
|
122,983
|
|
Gain
on sale of technology
|
|
|
-
|
|
|
12,615,540
|
|
Debt
forgiveness
|
|
|
4,700
|
|
|
2,162,776
|
|
Contingency
settlement
|
|
|
-
|
|
|
(250,000
|
)
|
Interest
and other expense
|
|
|
(198,245
|
)
|
|
(807,945
|
)
|
Derivative
revaluation
|
|
|
2,798
|
|
|
188,583
|
|
Total
other income (expenses)
|
|
|
(105,413
|
)
|
|
14,031,937
|
|
Net
income (loss) from continuing operations applicable
|
|
|
|
|
|
|
|
to
common stockholders
|
|
|
(1,927,061
|
)
|
|
9,346,195
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Income
from operations of the discontinued component,
|
|
|
|
|
|
|
|
including
gain on the disposal of $249,451, in 2006
|
|
|
-
|
|
|
325,610
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common stockholders
|
|
$
|
(1,927,061
|
)
|
$
|
9,671,805
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
(0.06
|
)
|
$
|
0.31
|
|
From
discontinued operations
|
|
|
-
|
|
|
-
|
|
Basic
net income (loss) per common share:
|
|
$
|
(0.06
|
)
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
(0.06
|
)
|
$
|
0.31
|
|
From
discontinued operations
|
|
|
-
|
|
|
-
|
|
Diluted
net income (loss) per common share:
|
|
$
|
(0.06
|
)
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares used in per share
|
|
|
|
|
|
|
|
calculations:
|
|
|
|
|
|
|
|
Basic
|
|
|
29,834,796
|
|
|
29,833,609
|
|
Diluted
|
|
|
29,834,796
|
|
|
29,851,254
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Cellegy
Pharmaceuticals, Inc.
Consolidated Statements of Changes in
Stockholders’ Equity (Deficit) and Comprehensive Income
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Stockholders'
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
(Loss)
|
|
Deficit
|
|
(Deficit)
|
|
Balances
at December 31, 2005
|
|
|
29,831,625
|
|
$
|
2,983
|
|
$
|
125,547,788
|
|
$
|
283,694
|
|
$
|
(132,310,999
|
)
|
$
|
(6,476,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of options to purchase common stock
|
|
|
3,171
|
|
|
1
|
|
|
895
|
|
|
-
|
|
|
-
|
|
|
896
|
|
Noncash
compensation expense related to stock options
|
|
|
-
|
|
|
-
|
|
|
150,462
|
|
|
-
|
|
|
-
|
|
|
150,462
|
|
Unrealized
loss on investments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,598
|
)
|
|
-
|
|
|
(8,598
|
)
|
Loss
on foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(275,096
|
)
|
|
-
|
|
|
(275,096
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,671,805
|
|
|
9,671,805
|
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,388,111
|
|
Balances
at December 31, 2006
|
|
|
29,834,796
|
|
|
2,984
|
|
|
125,699,145
|
|
|
-
|
|
|
(122,639,194
|
)
|
|
3,062,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
compensation expense related to stock options
|
|
|
-
|
|
|
-
|
|
|
53,874
|
|
|
-
|
|
|
-
|
|
|
53,874
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
(1,927,061
|
)
|
|
(1,927,061
|
)
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances
at December 31, 2007
|
|
|
29,834,796
|
|
$
|
2,984
|
|
$
|
125,753,019
|
|
$
|
-
|
|
$
|
(124,566,255
|
)
|
$
|
1,189,748
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Cellegy
Pharmaceuticals, Inc.
Consolidated Statements of Cash
Flows
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,927,061
|
)
|
$
|
9,671,805
|
|
Adjustments to reconcile net
income (loss) from continuing
|
|
|
|
|
|
|
|
operations to net cash used in
operating activities:
|
|
|
|
|
|
|
|
Bad
debt expense and other noncash items
|
|
|
-
|
|
|
21,861
|
|
Depreciation
and amortization expenses
|
|
|
-
|
|
|
121,132
|
|
Intangible
assets amortization and impairment
|
|
|
-
|
|
|
196,204
|
|
Loss
on sale of property and equipment
|
|
|
-
|
|
|
375,286
|
|
Equity
compensation expense
|
|
|
53,874
|
|
|
150,462
|
|
Derivative
revaluation
|
|
|
(2,798
|
)
|
|
(188,583
|
)
|
Interest
accretion on notes payable
|
|
|
184,942
|
|
|
762,872
|
|
PDI
settlement
|
|
|
-
|
|
|
(2,162,776
|
)
|
MPI
settlement
|
|
|
(4,700
|
)
|
|
-
|
|
Gain
on sale of technology
|
|
|
-
|
|
|
(12,615,540
|
)
|
Gain
on sale of Australian subsidiary
|
|
|
-
|
|
|
(249,451
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
11,262
|
|
|
778,106
|
|
Inventory
|
|
|
-
|
|
|
257,197
|
|
Accounts
receivable
|
|
|
62,605
|
|
|
989,507
|
|
Accounts
payable
|
|
|
(174,839
|
)
|
|
(1,568,814
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(140,503
|
)
|
|
(1,847,107
|
)
|
Other
long-term liabilities
|
|
|
-
|
|
|
(7,663
|
)
|
Deferred
revenue
|
|
|
-
|
|
|
273,018
|
|
Net
cash used in operating activities
|
|
|
(1,937,218
|
)
|
|
(5,042,484
|
)
|
Investing
activities:
|
|
|
|
|
|
|
|
Proceeds
from the sale of short-term investments
|
|
|
-
|
|
|
11,189
|
|
Proceeds
from sale of Australian subsidiary
|
|
|
-
|
|
|
1,331,033
|
|
Proceeds
from the sale of technology
|
|
|
-
|
|
|
9,000,000
|
|
Transfer
of cash balance upon disposition of discontinued/ held for sale
operations
|
|
|
-
|
|
|
(185,554
|
)
|
Net
cash provided by investing activities
|
|
|
-
|
|
|
10,156,668
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Issuance
of notes payable
|
|
|
-
|
|
|
2,000,000
|
|
Repayment
of notes payable
|
|
|
(40,000
|
)
|
|
(5,458,500
|
)
|
Net
proceeds from issuance of common stock
|
|
|
-
|
|
|
896
|
|
Net
cash used in financing activities
|
|
|
(40,000
|
)
|
|
(3,457,604
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
34,244
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,977,218
|
)
|
|
1,690,824
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3,803,832
|
|
|
2,113,008
|
|
Cash
and cash equivalents, end of year
|
|
$
|
1,826,614
|
|
$
|
3,803,832
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Cellegy
Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(Continued)
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
2006
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
$
|
23,029
|
|
Supplemental disclosure of
noncash transactions:
|
|
|
|
|
|
|
|
Interest
expense amortization for long-term obligations
|
|
$
|
184,942
|
|
$
|
762,872
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Cellegy Pharmaceuticals,
Inc.
1.
Accounting
Policies
Description of Business and
Principles of Consolidation
The
consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. (“Cellegy,” or the “Company”) and its wholly-owned
subsidiary, Biosyn, Inc. (“Biosyn”). All intercompany balances and significant
intercompany transactions have been eliminated.
Cellegy
is a specialty pharmaceutical company engaged in the development and
commercialization of prescription drugs targeting primarily women’s health care,
including the reduction in transmitting of Human Immunodeficiency Virus (“HIV”),
female sexual dysfunction and gastrointestinal conditions using proprietary
topical formulations and nitric oxide donor technologies. Biosyn’s technology
includes a portfolio of proprietary product candidates known as microbicides
that are used intravaginally to reduce transmission of sexually transmitted
diseases, (“STDs”), including HIV and Acquired Immunodeficiency Disease
(“AIDS”). Biosyn’s product candidates, which include both contraceptive and
non-contraceptive microbicides, include Savvy, which is undergoing Phase 3
clinical trials in the United States; and UC-781 vaginal gel, in Phase 1
trials.
Our cash
and cash equivalents were approximately $1.8 million and $3.8 million at
December 31, 2007 and 2006, respectively.
We
prepared the consolidated financial statements assuming that we will continue as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities during the normal course of business. In preparing
these consolidated financial statements, consideration was given to the
Company’s future business alternatives as described below, which may preclude
the Company from realizing the value of certain assets during their future
course of business.
Cellegy’s
operations currently relate primarily to the intellectual property rights of its
Biosyn subsidiary. While the Savvy Phase 3 contraception trial in the United
States is ongoing, the Company is not directly involved with the conduct and
funding thereof and, due to the cessation of the HIV Phase 3 trials in 2005 and
2006, it is uncertain whether Savvy will be commercialized or whether the
Company will ever realize revenues there from. We therefore expect negative cash
flows to continue for the foreseeable future. The Company believes that it
presently has enough financial resources to continue operations as they
currently exist until approximately September 30, 2008, absent unforeseen
significant additional expenses; however, it does not have the technological nor
the financial assets to fund the expenditures that would be required to conduct
the future clinical and regulatory work required to commercialize Savvy or other
product candidates without additional funding.
On
February 12, 2008, Cellegy entered into a definitive merger agreement providing
for the acquisition of Cellegy by Adamis Pharmaceuticals Corporation (“Adamis”).
There is no assurance that the Company will be able to close the transaction
with Adamis. If the merger with Adamis is not completed, Cellegy’s board of
directors will be required to explore alternatives for Cellegy’s business and
assets. These alternatives might include seeking to sell remaining assets to
third parties, seeking the dissolution and liquidation of Cellegy, merging or
combining with another company, or initiating bankruptcy proceedings. There can
be no assurance that any third party will be interested in merging with Cellegy
or acquiring the remaining assets of Cellegy or would agree to a price and other
terms that we would deem adequate. Although Cellegy may try to pursue an
alternative strategic transaction, it will likely have very limited cash
resources, and if no such alternate transaction can be negotiated and completed
within a reasonable period of time, will likely be forced to file for federal
bankruptcy protection. If Cellegy files for bankruptcy protection, Cellegy will
most likely not be able to raise any type of funding from any source. In that
event, the creditors of Cellegy would have first claim on the value of the
assets of Cellegy which, other than remaining cash, would most likely be
liquidated in a bankruptcy sale. Cellegy can give no assurance as to the
magnitude of the net proceeds of such sale and whether such proceeds would be
sufficient to satisfy Cellegy’s obligations to its creditors, let alone to
permit any distribution to its equity holders. These factors, among others,
raise substantial doubt about our ability to continue as a going
concern.
Use of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
Revenues
related to cost reimbursement provisions under development contracts are
recognized as the costs associated with the projects are incurred. Revenues
related to substantive and at risk nonrefundable milestone payments specified
under development contracts are recognized as the milestones are achieved. The
Company received certain government and non-government grants that support its
research effort in defined research projects. These grants generally provided
for reimbursement of approved costs incurred as defined in the various grants.
Revenues associated with these grants are recognized as costs under each grant
incurred. Advanced payments received under these agreements, prior to completion
of the related work, are recorded as deferred revenue until earned. Should the
research funded by federal grants result in patented technologies, the federal
government would be entitled to a nonexclusive, nontransferable, irrevocable,
paid-up license to utilize such technologies. In 2006, the Company discontinued
its grant funding in connection with the reduction of its Biosyn research
activities.
Revenues
related to product sales are recognized when title has been transferred to the
customer and when all of the following criteria are met; i.e., a persuasive
evidence of an arrangement exists, delivery has occurred or service has been
rendered, the price is fixed or determinable and, collectability is reasonably
assured. There is no right of return for our products.
Revenues
under license and royalty agreements are recognized in the period the earnings
process is completed based on the terms of the specific agreement. Advanced
payments received under these agreements are recorded as deferred revenue at the
time the payment is received and are subsequently recognized as revenue on a
straight-line basis over the longer of the life of the agreement or the life of
the underlying patent.
Royalties
payable to Cellegy under these license agreements are recognized as earned when
the royalties are no longer refundable under certain minimum royalty terms
defined in the agreement.
Research and
Development
Research
and development expenses, which include clinical study payments made to clinical
sites and clinical research organizations, consulting fees, expenses associated
with regulatory filings and internally allocated expenses such as rent, supplies
and utilities are charged to expense as they are incurred. Clinical study
expenses are accrued based upon such factors as the number of subjects enrolled
and number of subjects that have completed treatment for each
trial.
Milestone
payments that are made upon the occurrence of future contractual events prior to
receipt of applicable regulatory approvals are charged to research and
development expenses. The Company may capitalize and amortize certain future
milestones and other payments subsequent to the receipt of applicable regulatory
approvals, if any.
Cash and Cash
Equivalents
Cash and
cash equivalents consist of demand deposits and highly liquid financial
instruments with original maturities of three months or less. The carrying value
of cash and cash equivalents approximates fair value as of December 31,
2007 and 2006. As of December 31, 2007, the Company’s cash and cash equivalents
are maintained at two financial institutions in the United States. Deposits in
these financial institutions may, from time to time, exceed federally insured
limits.
Accounts
Receivable
Accounts
receivable are carried at cost, less an allowance for losses. The Company does
not accrue finance or interest charges. On a quarterly basis, the Company
evaluates its accounts receivable and establishes an allowance for losses, based
on the history of past write-offs and collections and current economic
conditions.
Concentration of Credit
Risk
As of
December 31, 2007, the Company had its cash in demand deposits and money
market funds.
Property and
Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of property and equipment are computed using the
straight-line method over the estimated useful lives of the respective assets.
|
|
Estimated Useful Lives
|
Furniture
and fixtures
|
|
3
years
|
Office
equipment
|
|
3
years
|
Laboratory
equipment
|
|
5
years
|
Leasehold
improvements
|
|
10
years
|
Amortization
for leasehold improvements and equipment held under capital leases is taken over
the shorter of the estimated useful life of the asset or the remaining lease
term. Upon sale or retirement, the asset’s cost and related accumulated
depreciation or amortization are removed from the accounts and the related gain
or loss is reflected in operations.
Intangible
Assets
Statement
of Financial Accounting Standards (“SFAS”) No. 142 requires that intangible
assets with definite lives be amortized over their estimated useful lives. The
Company amortizes intangible assets on a straight-line basis over their
estimated useful lives.
Stock-based
Compensation
Effective
January 1, 2006, the Company began recording compensation expense associated
with stock options and other forms of equity compensation in accordance with
SFAS No. 123 (revised 2004),
Share-Based
Payment
(“SFAS
No. 123R”), as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to
January 1, 2006, the Company accounted for stock options according to the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees
(“APB
Opinion No. 25”), and related interpretations and, therefore, no related
compensation expense was recorded for awards granted with no intrinsic value.
The Company adopted the modified prospective transition method provided for
under SFAS No. 123R and, consequently, has not retroactively adjusted results
from prior periods. Under this transition method, compensation cost associated
with stock options recognized in the year ended December 31, 2006, includes: 1)
amortization related to the remaining unvested portion of all stock option
awards granted prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock-Based
Compensation
; and 2)
amortization relating to all stock option awards granted or modified on or
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123R.
As a
result of the adoption of SFAS No. 123R, the Company’s net income for the year
ended December 31, 2006, was approximately $150,000 lower than under the
Company’s previous accounting method for share-based compensation.
Prior to
the adoption of SFAS No. 123R, the Company presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Consolidated
Statements of Cash Flows. SFAS No. 123R requires that cash flows resulting from
tax deductions the cumulative compensation cost recognized for options exercised
(excess tax benefits) be classified as financing cash flows. The Company has
sufficient net operating loss carryforwards to generally eliminate cash payments
for income taxes. Therefore, no cash has been retained as a result of excess tax
benefits relating to share-based payments made to directors and
employees.
For the
years ended December 31, 2007 and 2006, for stock options granted prior to the
adoption of SFAS No. 123R, there is no difference between reported amounts and
pro forma net loss and basic and diluted income per common share if compensation
expense for the Company’s various stock option plans had been determined based
upon estimated fair values at the grant dates in accordance with SFAS No.
123.
Cellegy
values its options on the date of grant using the Black-Scholes valuation model.
The Company did not grant any stock options during 2007 and 2006.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”)
Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.” Under EITF Issue No. 96-18, the fair value of the equity
instrument is calculated using the Black-Scholes valuation model at each
reporting period with charges amortized to the results of operations over the
instrument’s vesting period.
Recent Accounting
Pronouncements
SFAS No. 157, Fair Value
Measurements
SFAS No. 157,
“Fair Value
Measurements”
(“SFAS 157”), has been issued by the Financial Accounting Standards Board
(the “FASB”). This new standard provides guidance for using fair value to
measure assets and liabilities. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value but does
not expand the use of fair value in any new circumstances. Currently, over 40
accounting standards within GAAP require (or permit) entities to measure assets
and liabilities at fair value. The standard clarifies that for items that are
not actively traded, such as certain kinds of derivatives, fair value should
reflect the price in a transaction with a market participant, including an
adjustment for risk, not just the Company’s mark-to-model value. SFAS 157
also requires expanded disclosure of the effect on earnings for items measured
using unobservable data. Under SFAS 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the market in which the
reporting entity transacts. In this standard, FASB clarified the principle that
fair value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, SFAS 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy.
The FASB
agreed to defer the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The FASB again rejected the
proposal of a full one-year deferral of the effective date of SFAS 157.
SFAS 157 was issued in September 2006, and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Accordingly, the Company will adopt
this statement on October 1, 2007 for assets and liabilities not subject to
the deferral and October 1, 2008, for all other assets and liabilities. The
Company is currently assessing the impact of this statement.
SFAS No. 141 (Revised
2007), Business Combinations
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business
Combinations”
(“SFAS 141R”). Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific items,
including:
|
·
|
acquisition
costs will be generally expensed as incurred;
|
|
·
|
non-controlling
interests will be valued at fair value at the acquisition date;
|
|
·
|
acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount or the
amount determined under existing guidance for non-acquired contingencies;
|
|
·
|
in-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date until the
completion or abandonment of the associated research and development
efforts;
|
|
·
|
restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date; and
|
|
·
|
changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax expense.
|
SFAS 141R
also includes a substantial number of new disclosure requirements.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is currently assessing the impact of this
statement.
SFAS No. 160,“Non-controlling
Interests in Consolidated Financial Statements — An Amendment of ARB
No. 51”
On
December 4, 2007, the FASB issued SFAS No. 160,
“Non-controlling Interests in
Consolidated Financial Statements — An Amendment of ARB
No. 51”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the non-controlling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its non-controlling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company believes
that this pronouncement will have no effect on its financial
statements.
FIN No. 48, “Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
FASB
Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement
No. 109”
(“FIN 48”) was issued on July 13, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with FASB Statement No. 109,
“Accounting for Income
Taxes”
.
FIN 48 prescribes a recognition threshold and measurement attribute for the
consolidated financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The new FASB standard also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to be
recognized upon adoption of FIN 48. The cumulative effect of applying the
provisions of FIN 48 should be reported as an adjustment to the opening
balance of retained earnings (or other appropriate components of equity in the
consolidated balance sheet) for that fiscal year. Cellegy adopted FIN 48 on
January 1, 2007 and its implementation did not have a material impact on
Cellegy’s financial position, results of operations or cash flows.
Basic and Diluted Net Income (Loss)
per Common Share
Basic net
income (loss) per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. The total number of
shares that had their impact excluded were:
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
2006
|
|
Options
|
|
|
1,349,741
|
|
|
1,381,589
|
|
Warrants
|
|
|
2,114,593
|
|
|
2,374,593
|
|
Total
number of shares excluded
|
|
|
3,464,334
|
|
|
3,756,182
|
|
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform with current
year presentation.
2.
Accounts
Receivable
At
December 31, 2007 and 2006, accounts receivable consist of the
following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Grant
receivable
|
|
$
|
-
|
|
$
|
62,605
|
|
3.
Prepaid Expenses and Other Current
Assets
At
December 31, 2007 and 2006, prepaid expenses and other current assets includes
the following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Prepaid
insurance
|
|
$
|
134,248
|
|
$
|
236,815
|
|
Security
deposits
|
|
|
8,100
|
|
|
18,100
|
|
Retention
Compensation
|
|
|
120,130
|
|
|
-
|
|
Other
|
|
|
5,000
|
|
|
23,825
|
|
Total
prepaid expenses and other current assets
|
|
$
|
267,478
|
|
$
|
278,740
|
|
Retention
compensation of approximately $120,000 represents the unamortized portion of
approximately $139,000 in retention payments offered and accepted by employees
in 2007. The retention payments are to be paid if the employee maintains his or
her employment with the Company through the retention period indicated in the
individual’s retention agreement. The retention payment was in lieu of all other
severance or similar payments that the Company may have been obligated to make
under any other existing agreement, arrangement or understanding, but would be
in addition to any accrued salary and vacation earned through the end of the
respective retention period. The retention periods terminate between March 31
and June 30, 2008.
|
|
Year Ended December 31, 2007
|
|
Year Ended December 31, 2006
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Capitalized
workforce -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biosyn
acquisition
|
|
$
|
381,558
|
|
$
|
(381,558
|
)
|
$
|
-
|
|
$
|
381,558
|
|
$
|
(381,558
|
)
|
$
|
-
|
|
Subsequent
to the purchase of Biosyn in 2004, several of its key people left the Company in
2006. The departure of these employees required the reduction in the carrying
value of the intangible asset recorded in connection with the acquisition.
Estimating the fair market value of the key people remaining resulted in an
impairment of the asset as of December 31, 2006 and $149,352 was recognized as
impairment expense in 2006.
The
Company recorded no amortization expense in 2007. Amortization expense recorded
for the year ended December 31, 2006 was $46,852.
At
December 31, 2007 and 2006, property and equipment, net consist of the
following:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Furniture,
fixtures and office equipment
|
|
$
|
19,855
|
|
$
|
19,855
|
|
Less:
accumulated depreciation
|
|
|
(19,855
|
)
|
|
(19,855
|
)
|
Total
property and equipment, net
|
|
$
|
-
|
|
$
|
-
|
|
Cellegy
recorded no depreciation expense in 2007. Depreciation and leasehold
amortization expenses for 2006 were approximately $121,000.
On
September 30, 2006, Cellegy closed its offices in Brisbane, California and
disposed of certain property and equipment. At that time, the Company relocated
its Huntingdon Valley, Pennsylvania headquarters to Quakertown, Pennsylvania and
either disposed of or wrote down all of its research and development equipment
and certain other fixed assets, and recorded impairment charges of approximately
$251,000.
6.
Accrued Expenses and Other Current
Liabilities
Cellegy
accrues for services received but for which billings have not been received.
Accrued expenses and other current liabilities at December 31, 2007 and 2006,
were as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Accrued
legal fees
|
|
$
|
29,317
|
|
$
|
22,262
|
|
Accrued
compensation
|
|
|
29,739
|
|
|
99,989
|
|
Accrued
retention
|
|
|
139,370
|
|
|
-
|
|
Accrued
accounting and consulting fees
|
|
|
125,000
|
|
|
175,000
|
|
Insurance
payable
|
|
|
12,995
|
|
|
163,554
|
|
Other
|
|
|
59,667
|
|
|
75,786
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
396,088
|
|
$
|
536,591
|
|
7.
Notes Payable
Ben Franklin
Note
Biosyn
issued a note to Ben Franklin Technology Center of Southeastern Pennsylvania
(“Ben Franklin Note”) in October 1992, in connection with funding the
development of a compound to prevent the transmission of
AIDS.
The Ben
Franklin Note was recorded at its estimated fair value of $205,000 and was
assumed by Cellegy in connection with its acquisition of Biosyn in 2004. The
repayment terms of the non-interest bearing obligation include the remittance of
an annual fixed percentage of 3% applied to future revenues of Biosyn, if any,
until the principal balance of $777,902 is satisfied. Under the terms of the
obligation, revenues are defined to exclude the value of unrestricted research
and development funding received by Biosyn from nonprofit sources. Absent a
material breach of contract by Cellegy, there is no obligation to repay the
amounts in the absence of future Biosyn revenues. Cellegy is accreting the
discount of $572,902 against earnings using the interest rate method over the
discount period of five years, which was estimated in connection with the note’s
valuation at the time of the acquisition. At December 31, 2007 and 2006, the
outstanding balance of the note was $507,067 and $322,125,
respectively.
PDI Notes
In
connection with a settlement agreement dated April 11, 2005, PDI, Inc. (“PDI”)
issued two non-interest bearing notes; a $3.0 million secured promissory note
payable on October 12, 2006, and a $3.5 million nonnegotiable senior convertible
debenture with a maturity date of April 11, 2008 (the “PDI Notes”). The PDI
Notes were settled in full for $3.0 million in September 2006.
The $3.0
million secured promissory note was originally payable on October 12, 2006.
There was no stated interest rate and no periodic payments were
required. The net present value of the secured promissory note was
recalculated based on its remaining principal whenever a payment was made by
Cellegy. Payments in 2006 totaled $458,500.
Prior to
the settlement and repayment, the $3.5 million nonnegotiable senior convertible
debenture had a maturity date of April 11, 2008, three years from the PDI
settlement date of April 11, 2005. There was no stated interest rate and no
periodic payments were required.
In an
agreement dated September 20, 2006, Cellegy agreed to pay PDI an aggregate
amount of $3.0 million as full and final settlement of the PDI Notes. In
accordance with the terms of the settlement, Cellegy remitted $500,000 to PDI on
September 28, 2006, and remitted $2.5 million on November 29, 2006. PDI and
Cellegy agreed to release each other and related parties from any claims or
liabilities arising before the date of their agreement relating to any of the
terms of the previous settlement agreement, other than as a result of the
released person’s gross negligence or willful misconduct.
Cellegy
recorded debt forgiveness of approximately $2.2 million as a result of the
settlement in other income. For the year ended December 31, 2006, Cellegy
recorded interest expense relating to the PDI Notes of $645,384.
ProStrakan Note
In
September 2006, ProStrakan Group plc (LSE: PSK) (“ProStrakan”) loaned Cellegy
$2.0 million, evidenced by a secured promissory note (the “ProStrakan Note”). On
November 29, 2006, Cellegy satisfied the ProStrakan Note by making payments of
$2.0 million in principal and approximately $20,000 in interest
expense.
MPI Note
In 2007,
Cellegy settled its obligation to MPI, Inc. of $44,700 for $40,000 and recorded
$4,700 in other income. At December 31, 2007, future minimum payments on
the notes were payable as follows:
2009
and thereafter
|
|
$
|
777,902
|
|
Less:
amount representing discount
|
|
|
(270,835
|
)
|
Net
present value of notes at December 31, 2007
|
|
$
|
507,067
|
|
8.
Derivative
Instruments
Warrants
issued in connection with the May 2005, financing and the Kingsbridge SSO are
considered derivative instruments and are revalued at the end of each reporting
period as long as they remain outstanding. The estimated fair value of these
warrants using the Black-Scholes valuation model and recorded as derivative
liability at December 31, 2007 and 2006 was approximately $1,200 and $4,000,
respectively. The changes in the estimated fair value of the warrants have been
recorded as other income (expenses) in the consolidated statements of
operations. For the years ended December 31, 2007 and 2006, the Company
recognized approximately $2,800 and $189,000, respectively, as other income from
derivative revaluation.
9.
Deferred Revenue
10.
Commitments and
Contingencies
Operating Leases
The
Company leases its facilities under a non-cancelable operating lease on a
month-to-month basis and has no future minimum lease payments as of December 31,
2007. Operating lease expense is recorded on a straight-line basis over the term
of the lease. Rent expense was $32,400 and $205,000 for the years ended
December 31, 2007 and 2006, respectively.
Legal
Proceedings
The
Company has no significant ongoing legal proceedings.
11.
401(k) Plan
The
Company maintained a savings and retirement plan under
Section 401(k) of the Internal Revenue Code until it was terminated in
August 2006. All employees were eligible to participate on the first day of the
calendar quarter following three months of employment with the Company. Under
the plan, employees could contribute up to 15% of their salaries per year
subject to statutory limits. The Company provided a matching contribution equal
to 25% of the employee’s rate of contribution, up to a maximum contribution rate
of 4% of the employee’s annual salary. Expenses related to the plan for the
years ended December 31, 2006, were not significant.
12.
License and Other
Agreements
Cellegy
In
July 2004, Cellegy and ProStrakan entered into to an exclusive license
agreement for the future commercialization of Tostrex® (testosterone gel) in
Europe. Under the terms of the agreement, ProStrakan was responsible for
regulatory filings, sales, marketing and distribution of Tostrex throughout the
European Union (“EU”) and in certain nearby non-EU countries. Under the original
agreement, the Company was responsible for supplying finished product to
ProStrakan through Cellegy’s contract manufacturer. Assuming successful
commercial launch, Cellegy was entitled to receive up to $5.75 million in total
payments including a $500,000 non-refundable upfront payment made in
July 2004, and a royalty on net sales of Tostrex. The advanced payment
received by the Company was recorded as deferred revenue to be amortized to
income over eighteen (18) years, which represents the estimated life of the
underlying patent.
In
December 2004, Cellegy and ProStrakan entered into an exclusive license
agreement for the commercialization of Cellegesic, branded Rectogesic outside of
the United States, in Europe. Under the terms of the agreement, Cellegy received
a nonrefundable payment of $1.0 million and was entitled to receive an
additional $4.6 million in milestone payments, along with additional payments
based on sales of product to ProStrakan for distribution in Europe. ProStrakan
was responsible for additional regulatory filings, sales, marketing and
distribution of Rectogesic throughout Europe. In all, the agreement covered
thirty-eight (38) European territories, including all EU member states. Cellegy
was responsible for supplying finished product to ProStrakan through its
contract manufacturer. The $1.0 million upfront fee received by the Company was
recorded as deferred revenue to be amortized to income over ten (10) years,
which represented the estimated life of the underlying patent.
In
November 2005, Cellegy amended its December 2004 agreement with ProStrakan
concerning Rectogesic.
Under
the terms of the amended agreement, ProStrakan assumed responsibility for all
manufacturing and other product support functions. In return, Cellegy received a
nonrefundable payment of $2.0 million which was recorded as deferred revenue and
was amortized to income over the remaining estimated life of the underlying
patent considered in connection with the December 2004, agreement.
In
January 2006, Cellegy amended its 2004 agreement with ProStrakan concerning
Tostrex. Under the terms of the amended agreement, ProStrakan assumed
responsibility for all manufacturing and other product support functions and
agreed to purchase Tostrex directly from Cellegy’s contract manufacturer rather
than purchasing the product from Cellegy under the terms of the original
agreement. Cellegy was entitled to continue to receive milestones and royalties
as set forth in the original agreement.
On June
20, 2006, Cellegy amended its December 2004 agreement with ProStrakan concerning
Rectogesic. This second amendment added several countries and territories in
Eastern Europe, including several countries and territories that were part of
the former Soviet Union, to the territories covered by the original agreement.
As part of the amendment, ProStrakan paid to Cellegy the sum of $500,000
representing a prepayment of the milestone due upon approval of Rectogesic in
certain major European countries.
On
November 28, 2006, Cellegy sold to ProStrakan for $9.0 million its rights to
Cellegesic, Rectogesic, Fortigel, Tostrex, Tostrelle, and related intellectual
property assets. ProStrakan also assumed various existing distribution and other
agreements relating to the intellectual property. Cellegy’s stockholders
approved the transaction at a special meeting of stockholders held on November
22, 2006. ProStrakan has no further obligations to Cellegy under the previous
license agreement. The Company recorded a gain on sale of technology of
approximately $12.6 million as other income which includes $9.0 million
recognized in connection with the sale of Cellegy’s intellectual property
discussed above and approximately $3.6 million of unamortized deferred revenue
related to licensing agreements under which all obligations were deemed to have
been fulfilled in connection with the sale.
Biosyn
In
October 1989, Biosyn entered into an agreement, whereby it obtained an
exclusive license to develop and market products using the C31G
Technology.
In
October 1996, Biosyn acquired the C31G Technology from its inventor, Edwin
B. Michaels. As part of the agreement, Biosyn is required to make annual royalty
payments equal to the sum of 1% of net product sales of up to $100 million, 0.5%
of the net product sales over $100 million and 1% of any royalty payments
received by Biosyn under license agreements. The term of the agreement lasts
until December 31, 2011, or upon the expiration of the C31G Technology’s
patent protection, whichever is later. Biosyn’s current C31G patents expire
between 2011 and 2018. There were no royalty payments incurred for the years
ended December 31, 2007, and 2006.
In
May 2001, Biosyn entered into an exclusive license agreement with Crompton,
now Chemtura (“Chemtura”) ,under which Biosyn obtained the rights to develop and
commercialize UC-781, a non-nucleoelostide reverse transcriptase inhibitor, as a
topical microbicide. Under the terms of the agreement, Biosyn paid Chemtura a
nonrefundable, upfront license fee that was expensed in research and
development. Chemtura also received 39,050 warrants to purchase Cellegy stock in
connection with Cellegy’s acquisition of Biosyn in 2004 and are exercisable for
a period of two years upon initiation of Phase 3 trials of UC-781. Chemtura is
entitled to milestone payments upon the achievement of certain development
milestones and royalties on product sales. If UC-781 is successfully developed
as a microbicide, then Biosyn has exclusive worldwide commercialization rights.
There were no royalty payments incurred for the years ended December 31, 2007
and 2006.
In
February 2003, Biosyn acquired exclusive worldwide rights from the National
Institutes of Health (“NIH”), for the development and commercialization of
protein Cyanovirin-N as a vaginal gel to prevent the sexual transmission of HIV.
NIH is entitled to milestone payments upon achievement of certain development
milestones and royalties on product sales. There were no royalty payments
incurred for the years ended December 31, 2007 and 2006. Due to cancellation of
its license with the NIH in 2007, Biosyn forfeited the rights for the
commercialization of CV-N but the existing agreements between Biosyn and
research institutions related to CV-N remain in effect.
On
January 31, 2006, Cellegy announced that it had entered into a nonexclusive,
developing world licensing agreement with the Contraceptive Research and
Development Organization (“CONRAD”) for the collaboration on the development of
Cellegy’s entire microbicide pipeline. The agreement encompasses the licensing
in the developing countries (as defined in the agreements) of Savvy, UC-781 and
Cyanovirin-N. The agreement provided CONRAD with access to Biosyn’s current and
past microbicidal research.
Under the
terms of certain of its funding agreements, Biosyn has been granted the right to
commercialize products supported by the funding in developed and developing
countries, and is obligated to make its commercialized products, if any,
available in developing countries, as well as to public sector agencies in
developed countries at prices reasonably above cost or at a reasonable royalty
rate.
Biosyn
has previously entered into various other collaborating research and technology
agreements. Should any discoveries be made under such arrangements, Biosyn may
be required to negotiate the licensing of the technology for the development of
the respective discoveries. There are no significant funding commitments under
any of these other agreements.
13.
Stockholders’
Equity
Preferred Stock
The
Company’s Restated Certificate of Incorporation provides that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The Board
of Directors is authorized to establish, from time to time, the number of shares
to be included in, and the designation of, any such series and to determine or
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock and to increase or
decrease the number of shares of any such series without any further vote or
action by the stockholders.
Stock Market
Listing
Cellegy’s
common stock currently trades on the Over-the-Counter Bulletin Board (“OTCBB”)
under the symbol: CLGY.OB.
Stock Option
Plans
2005 Equity Incentive
Plan
The 2005
Equity Incentive Plan (the “2005 Plan”) replaced the 1995 Equity Incentive
Plan (“Prior Plan”) which had expired. The 2005 Plan is administered by the
Company’s Compensation Committee. The Board of Directors may at any time amend,
alter, suspend or discontinue the 2005 Plan without stockholders’ approval,
except as required by applicable law. The 2005 Plan is not subject to ERISA and
is not qualified under Section 401(a) of the Code.
The 2005
Plan provides for the granting of options and other awards to employees,
directors and consultants. Options granted under the 2005 Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
may be granted only to employees. The Compensation Committee determines who will
receive options or other awards under the 2005 Plan and their terms, including
the exercise price, number of shares subject to the option or award, and the
vesting and exercisability thereof. Options granted under the 2005 Plan
generally have a term of ten years from the grant date, and exercise price
typically is equal to the closing price of the common stock on the grant date.
Options typically vest over a three-year or four-year period. Options granted
under the 2005 Plan typically expire if not exercised within 90 days from the
date on which the optionee is no longer an employee, director or consultant. The
vesting and exercisability of options may also be accelerated upon certain
change of control events. As of December 31, 2007, the future compensation
expense to be recognized for unvested options is approximately $20,000 over the
remaining weighted average period of 1.75 years.
|
|
|
|
Weighted
|
|
|
|
Shares Under
|
|
Average
|
|
|
|
Option
|
|
Exercise Price
|
|
Balance
at December 31, 2006
|
|
|
48,000
|
|
$
|
1.34
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
48,000
|
|
|
1.34
|
|
The
following table summarizes those stock options outstanding related to the 2005
Plan at December 31, 2007:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Number of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
48,000
|
|
|
7.74
Years
|
|
$
|
1.31
|
|
$
|
-
|
|
|
32,000
|
|
|
7.74
years
|
|
$
|
1.34
|
|
$
|
-
|
|
There
were 16,000 options vested under the 2005 Plan for the year
ended December 31, 2007.
Prior Plan
The total
number of shares reserved and available for issuance pursuant to the exercise of
awards under the Prior Plan is 4,850,000 shares. The Prior Plan will continue to
govern the stock options previously granted thereunder, however, no further
stock options or other awards will be made pursuant to the Prior Plan. As of
December 31, 2007, the future compensation expense to be recognized for unvested
options is approximately $60,000 over the remaining weighted average period of
approximately 1.40 years.
|
|
|
|
Weighted
|
|
|
|
Shares Under
|
|
Average
|
|
|
|
Option
|
|
Exercise Price
|
|
Balance
at December 31, 2006
|
|
|
222,944
|
|
$
|
3.12
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
(18,000
|
)
|
|
(8.43
|
)
|
Exercised
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
204,944
|
|
|
2.66
|
|
The
following table summarizes those stock options outstanding and exercisable
related to the Prior Plan at December 31, 2007:
Options
Outstanding
|
|
Options
Exercisable
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Aggregate
|
|
Number
|
|
Average
|
|
Average
|
|
Aggregate
|
|
Number of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
Options
|
|
Contractual Life
|
|
Price
|
|
Value
|
|
Options
|
|
Contractual Life
|
|
Price
|
|
Value
|
|
204,944
|
|
|
6.42
Years
|
|
$
|
2.66
|
|
$
|
-
|
|
|
165,986
|
|
|
6.27
Years
|
|
$
|
2.78
|
|
$
|
-
|
|
There
were 50,209 options vested under the Prior Plan for the year ended December 31,
2007. No future options may be offered under the Prior Plan.
1995 Directors’ Stock Option
Plan
In 1995,
Cellegy adopted the 1995 Directors’ Stock Option Plan (the “Directors’ Plan”) to
provide for the issuance of nonqualified stock options to eligible outside
Directors. When the plan was established, Cellegy reserved 150,000 shares for
issuance. From 1996 to 2005, a total of 350,000 shares were reserved for
issuance under the Directors’ Plan. The 2005 Plan replaces the Directors’
Plan.
The
Directors’ Plan provides for the grant of initial and annual nonqualified stock
options to non-employee directors. Initial options vest over a four-year period
and subsequent annual options vest over three years. The exercise price of
options granted under the Directors’ Plan is the fair market value of the common
stock on the grant date. Options generally expire 10 years from the grant date,
and generally expire within 90 days of the date the optionee is no longer a
director. The vesting and exercisability of options may also be accelerated upon
certain change of control events.
Activity
under the Directors’ Plan is summarized as follows:
|
|
|
|
Weighted
|
|
|
|
Shares Under
|
|
Average
|
|
|
|
Option
|
|
Exercise Price
|
|
Balance
at December 31, 2006
|
|
|
93,000
|
|
$
|
4.44
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
(1,000
|
)
|
|
(3.25
|
)
|
Exercised
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
92,000
|
|
|
4.45
|
|
The
following table summarizes those stock options outstanding and exercisable
related to the Directors’ Plan at December 31, 2007:
Options
Outstanding
|
|
Options
Exercisable
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Aggregate
|
|
Number
|
|
Average
|
|
Average
|
|
Aggregate
|
|
Number of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
of
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
Options
|
|
Contractual Life
|
|
Price
|
|
Value
|
|
Options
|
|
Contractual Life
|
|
Price
|
|
Value
|
|
92,000
|
|
|
4.83
Years
|
|
$
|
4.45
|
|
$
|
-
|
|
|
92,000
|
|
|
4.83
Years
|
|
$
|
4.45
|
|
$
|
-
|
|
There
were 16,000 options vested under the Directors’ Plan for the year ended December
31, 2007. As of December 31, 2007 and 2006, there were no options available for
future grants under the Directors’ Plan.
Non-Plan Options
In
November 2003, the Company granted an initial stock option to
Mr. Richard Williams, on his appointment to become Chairman of the Board,
to purchase 1,000,000 shares of common stock. 400,000 of the options have an
exercise price of $2.89 per share, the closing price of the stock on the grant
date and 600,000 of the options have an exercise price of $5.00 per share. The
option was vested and exercisable in full on the grant date, although a portion
of the option, covering up to 600,000 shares initially and declining over time,
is subject to cancellation if they have not been exercised in the event that
Mr. Williams voluntarily resigns as Chairman and a director within certain
future time periods. As of December 31, 2007, none of these options
have been exercised.
In
October 2004, in conjunction with its acquisition of Biosyn, Cellegy issued
stock options to certain Biosyn option holders to purchase 236,635 shares of
Cellegy common stock. All options issued were immediately vested and
exercisable.
|
|
|
|
Weighted
|
|
|
|
Shares Under
|
|
Average
|
|
|
|
Option
|
|
Exercise Price
|
|
Balance
at December 31, 2006
|
|
|
39,229
|
|
$
|
6.93
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Canceled
|
|
|
(34,432
|
)
|
|
(7.85
|
)
|
Exercised
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
4,797
|
|
|
0.29
|
|
The
following table summarizes information about stock options outstanding and
exercisable related to Biosyn option grants at December 31,
2007:
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Average
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
Number
|
|
Remaining
|
|
Average
|
|
Aggregate
|
|
Number of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
of
|
|
Contractual
|
|
Exercise
|
|
Intrinsic
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
Options
|
|
Life
|
|
Price
|
|
Value
|
|
4,797
|
|
|
6.05
Years
|
|
$
|
0.29
|
|
$
|
-
|
|
|
4,797
|
|
|
6.05
Years
|
|
$
|
0.29
|
|
$
|
-
|
|
Shares Reserved
As of
December 31, 2007, the Company has reserved shares of common stock for
future issuance as follows:
Biosyn
options
|
|
|
4,797
|
|
Director's
Plan
|
|
|
92,000
|
|
Warrants
|
|
|
2,114,593
|
|
Nonplan
options
|
|
|
1,000,000
|
|
1995
Equity Incentive Plan
|
|
|
204,944
|
|
2005
Equity Incentive Plan
|
|
|
1,000,000
|
|
Total
shares reserved
|
|
|
4,416,334
|
|
Warrants
The
Company has the following warrants outstanding to purchase common stock as of
December 31, 2007:
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
Warrant
|
|
Price
Per
|
|
|
|
Expiration
|
|
|
|
Shares
|
|
Share
|
|
Date
Issued
|
|
Date
|
|
June
2004 PIPE
|
|
|
604,000
|
|
$
|
4.62
|
|
|
July
27, 2004
|
|
|
July
27, 2009
|
|
Biosyn
warrants
|
|
|
81,869
|
|
|
5.84-17.52
|
|
|
October 22, 2004
|
|
|
2008
- 2014
|
|
May
2005 PIPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
714,362
|
|
|
2.25
|
|
|
May
13, 2005
|
|
|
May 13, 2010
|
|
Series
B
|
|
|
714,362
|
|
|
2.50
|
|
|
May
13, 2005
|
|
|
May
13, 2010
|
|
Total
warrants
|
|
|
2,114,593
|
|
|
|
|
|
|
|
|
|
|
Non Cash Compensation Expense
Related to Stock Options
For the
year ended December 31, 2007, the Company recorded non-cash compensation
expense of approximately $54,000, all of which was charged to selling, general
and administrative expenses (“SG&A”) expense. For the year ended
December 31, 2006, the Company recorded non cash compensation expense of
approximately $150,000, of which approximately $136,000 and $14,000 was charged
to SG&A and research and development expense,
respectively.
14.
Income Taxes
At
December 31, 2007, the Company had net operating loss carryforwards of
approximately $94.4 million and $17.3 million for federal and state
purposes, respectively. The federal net operating loss carryforwards expire
between the years 2007 and 2027. The state net operating loss carryforwards
expire between the years 2007 and 2017. At December 31, 2007, the Company
also had state research and development credit carryforwards of approximately
$2.8 million and $200,000 for federal and state purposes, respectively. The
federal credits expire between the years 2007 and 2027 and the state credits
expire between the years 2015 and 2019. The Tax Reform Act of 1986 (the “Act”)
provides for a limitation on the annual use of net operating loss and research
and development tax credit carryforwards following certain ownership changes
that could limit the Company’s ability to utilize these carryforwards. The
Company most likely has experienced various ownership changes, as defined by the
Act, as a result of past financings. Accordingly, the Company’s ability to
utilize the aforementioned carryforwards may be limited. A future sale or merger
of the Company, as contemplated and described in Footnote 1, may also impact the
ability for the Company to utilize its current net operating loss carryforwards.
Additionally, U.S. tax laws limit the time during which these carryforwards may
be applied against future taxes; therefore, the Company may not be able to take
full advantage of these carryforwards for federal income tax purposes. The
Company determined that the net operating loss carryforwards relating to Biosyn
are limited due to its acquisition in 2004 and has reflected the estimated
amount of usable net operating loss carryforwards in its deferred tax assets
below.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The amount of deferred tax assets in
2007 and 2006, not available to be recorded as a benefit due to the exercise of
nonqualified employee stock options are approximately $559,000 and $643,000,
respectively.
Under the
provisions of paragraph 30 of SFAS No. 109,
Accounting for Income
Taxes
(“SFAS
No. 109”), if a valuation allowance is recognized for the deferred tax asset for
an acquired entity's deductible temporary differences or operating loss or tax
credit carryforwards at the acquisition date, the tax benefits for those items
that are first recognized in the consolidated financial statements after the
acquisition date shall be applied: (a) first to reduce to zero any goodwill
related to the acquisition, (b) second to reduce to zero other non-current
intangible assets related to the acquisition, and (c) third to reduce income tax
expense. The future tax benefit of the Biosyn pre-acquisition net operating
losses, tax credits, and other deductible temporary differences, when they are
ultimately recognized, will be recorded in accordance with paragraph 30 of SFAS
No. 109. Significant components of the Company’s deferred tax liabilities and
assets are as follows (in thousands):
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
32,100
|
|
$
|
31,900
|
|
Credit
carryforward
|
|
|
2,900
|
|
|
3,700
|
|
Capitalized
research and development
|
|
|
7,400
|
|
|
9,800
|
|
Depreciation
and amortization
|
|
|
1,000
|
|
|
1,300
|
|
Other,
net
|
|
|
300
|
|
|
500
|
|
Total
deferred tax assets
|
|
|
43,700
|
|
|
47,200
|
|
Valuation
allowance
|
|
|
(43,700
|
)
|
|
(47,200
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
Reconciliation
of the statutory federal income tax rate to the Company’s effective income
tax rate (dollars in thousands):
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
2006
|
|
Net
income (loss)
|
|
$
|
(1,927
|
)
|
|
|
|
$
|
9,672
|
|
|
|
|
Tax
(benefit) at Federal statutory rate
|
|
$
|
(655
|
)
|
|
33.99
|
%
|
$
|
3,289
|
|
|
34.00
|
%
|
Meals
and entertainment
|
|
|
1
|
|
|
(0.05
|
)
|
|
3
|
|
|
0.03
|
|
Stock
compensation expense
|
|
|
24
|
|
|
(1.25
|
)
|
|
20
|
|
|
0.21
|
|
Gain
on sale of subsidiary
|
|
|
-
|
|
|
-
|
|
|
30
|
|
|
0.31
|
|
Research
credits
|
|
|
6
|
|
|
(0.31
|
)
|
|
8
|
|
|
0.09
|
|
Deferred
taxes not benefited
|
|
|
624
|
|
|
(32.38
|
)
|
|
(3,350
|
)
|
|
(34.64
|
)
|
Provision
for taxes
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
The
valuation allowance for deferred tax assets for 2007 and 2006 decreased by
approximately $3.5 and $2.8 million, respectively.
On
January 1, 2007, the Company adopted FIN 48 which clarifies the accounting for
uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken, or expected to be taken, in a tax return. FIN 48 requires
that Cellegy recognize in the financial statements the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The implementation of FIN 48 did not have a material
impact on the Company's consolidated financial statements. At January 1, 2007
and December 31, 2007 the Company had no unrecognized tax benefits and has not
accrued any tax liabilities for unrecognized tax benefits.
The
Company does not believe the total amount of unrecognized benefit as of December
31, 2007 will increase or decrease significantly in the next twelve months.
The Company’s Federal, California, and Pennsylvania tax returns are
subject to examination by the tax authorities. At December 31, 2007, the statute
of limitations for Federal, California and Pennsylvania tax examinations vary
from 2003 to 2011.
15.
Segment Reporting
Cellegy’s
revenues consisted of Rectogesic sales in Europe, Australia, New Zealand,
Singapore and South Korea, as well as licensing revenue relating to Fortigel,
Rectogesic and Tostrex. Revenues also consist of grant funding from various
domestic agencies and foundations.
Management
regularly assesses segment operating performance and makes decisions as to how
resources are allocated based upon segment performance. The accounting policies
of the reportable segments are consistent with those described in Accounting
Policies (Note 1).
Revenues
from external sources by major geographic area are as follows:
|
|
Years Ended December
31,
|
|
Revenues
|
|
2007
|
|
2006
|
|
North
America
|
|
|
|
|
|
|
|
Pharmaceuticals
|
|
$
|
-
|
|
$
|
1,925,779
|
|
Europe
|
|
|
|
|
|
|
|
Pharmaceuticals
|
|
|
-
|
|
|
734,279
|
|
|
|
|
|
|
|
|
|
Revenue
from continuing operations
|
|
$
|
-
|
|
$
|
2,660,058
|
|
Net
operating income (loss) from continuing operations by geographic region is as
follows:
|
|
Years Ended December
31,
|
|
Operating Income
(Loss)
|
|
2007
|
|
2006
|
|
North
America
|
|
|
|
|
|
Pharmaceuticals
|
|
$
|
(1,927,061
|
)
|
$
|
9,119,113
|
|
Europe
|
|
|
|
|
|
|
|
Pharmaceuticals
|
|
|
-
|
|
|
227,082
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
(1,927,061
|
)
|
$
|
9,346,195
|
|
Assets
by major geographic region are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
North
America
|
|
$
|
2,094,092
|
|
$
|
4,145,177
|
|
Pacific
Rim
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,094,092
|
|
$
|
4,145,177
|
|
16.
Related Party
Transactions
The
Company pays fees to its board members in connection with services rendered to
the board. In 2007, the Company began paying fees to its board members for their
services rendered only as board members and not for services rendered in
connection with the audit, nominating, and compensation committees. The total
cash payments
to board
members made in connection with these services during the years ended December
31, 2007 and 2006 were $49,500 and $104,250, respectively.
17.
Discontinued
Operations
On April
11, 2006, Epsilon Pharmaceuticals Pty., Ltd. purchased all of the shares of
Cellegy Australia Pty., Ltd. (“Cellegy Australia”) The subsidiary was part of
the Pharmaceutical Segment for the Australian and Pacific Rim geographic areas.
The purchase price for the shares was $1.0 million plus amounts equal to the
liquidated value of Cellegy Australia's cash, accounts receivable and inventory.
The total amount received was approximately $1.3 million. Below is a summary of
the assets and liabilities included in the sale:
Cash
|
|
$
|
185,554
|
|
Inventory
|
|
|
69,427
|
|
Accounts
Receivable
|
|
|
52,305
|
|
Goodwill
|
|
|
955,415
|
|
Current
liabilities
|
|
|
13,747
|
|
Cellegy
recorded a pretax gain of approximately $88,000 which is reflected in other
income. There was no income tax effect to this transaction. Cellegy's
discontinued operations reflect the operating results for the disposal group
through the date of disposition and recognize the subsidiary's foreign currency
translation balance as income in the current period pursuant to SFAS No. 52, “
Foreign Currency
Translation
.” Below
is a summary of those results:
|
|
Years Ended December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
-
|
|
$
|
165,805
|
|
Cost
of revenues
|
|
|
-
|
|
|
26,586
|
|
Gross
Profit
|
|
|
-
|
|
|
139,219
|
|
R&D
expenses
|
|
|
-
|
|
|
-
|
|
SG&A
expenses
|
|
|
-
|
|
|
(64,614
|
)
|
Operating
income
|
|
|
-
|
|
|
74,605
|
|
Interest
income
|
|
|
-
|
|
|
1,554
|
|
Gain
on foreign currency translation
|
|
|
-
|
|
|
249,451
|
|
Income
from discontinued operations
|
|
$
|
-
|
|
$
|
325,610
|
|
19.
Subsequent Events
On
February 12, 2008, Cellegy entered into a definitive merger agreement providing
for the acquisition of Cellegy by Adamis. The transaction was unanimously
approved by the boards of directors of both companies and is anticipated to
close during the second or third quarter of 2008, subject to the filing of a
registration statement and proxy statement with the Securities and Exchange
Commission, the approval of Adamis’ and Cellegy’s respective stockholders at
stockholder meetings following distribution of a definitive proxy statement, and
other customary closing conditions. Holders of approximately 40% of Cellegy’s
outstanding common stock have entered into voting agreements pursuant to which
they agreed to vote their shares in favor of the transaction.
If the
merger is consummated, each Adamis stockholder will receive, in exchange for
each share of Adamis common stock held by such stockholder immediately before
the closing, one (post-reverse stock split) share of Cellegy common stock
(excluding in all cases dissenting shares). If the transaction is approved by
Cellegy’s stockholders, before the closing Cellegy will implement a reverse
stock split of its common stock so that the outstanding Cellegy shares will be
converted into a number of shares equal to the sum of (i) 3,000,000 plus (ii)
the amount of Cellegy’s net working capital as of the end of the month
immediately preceding the month in which the closing occurs divided by .50.
Based on several assumptions that are subject to change, including, without
limitation, the number of shares of Cellegy common stock outstanding immediately
before the merger and the amount of Cellegy’s current assets and liabilities as
of the end of the month immediately prior to the closing, Cellegy estimates that
the reverse stock split will be between approximately 1:7.8 to 1 and 1:9.9. The
actual amounts and percentages will depend on many factors, and actual amounts
and percentages could be higher or lower.
In
addition, the Merger Agreement contains certain termination rights for both
Cellegy and Adamis, and further provides that, upon termination of the merger
agreement under specified circumstances, either party may be required to pay the
other party a termination fee of $150,000. Both parties have the right to
terminate the Merger Agreement if the merger is not consummated by December 31,
2008, so long as the terminating party is not in breach of the Merger Agreement
and such breach is a principal failure of the merger to occur by such
date.
In
connection with the signing of the Merger Agreement, Cellegy also issued to
Adamis an unsecured convertible promissory note pursuant to which Cellegy agreed
to lend Adamis $500,000 to provide additional funds to Adamis during the
pendency of the merger transaction (the “Promissory Note”). Any principal
outstanding under the Promissory Note accrues interest at 10% per annum. The
Promissory Note becomes immediately due and payable in the event that the Merger
Agreement is terminated by Adamis or Cellegy for certain specified reasons or on
the later of (i) the sixteen month anniversary of the issue date of the
Promissory Note or (ii) the date that is two business days following the first
date on which certain other notes issued by Adamis to a third party have been
repaid in full. If the Promissory Note is outstanding as of the closing of the
merger transaction, the Promissory Note will convert into shares of Adamis
stock, and those shares will be cancelled.
The terms
of the Promissory Note provide Cellegy with no collateralized interest in the
assets of Adamis. In the event the merger is not consummated with Adamis,
Cellegy bears the risk of collecting the Promissory Note and therefore is
subject to the risks and uncertainties of being in the position of an unsecured
creditor. While the Company feels that it is more likely than not that the
merger will be consummated, in the event it is not, the Cellegy will have no
ability to attach a claim to Adamis’ assets.
Cellegy
Pharmaceuticals, Inc.
(Amounts
in thousands)
(Unaudited)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
361
|
|
|
$
|
1,827
|
|
Prepaid
expenses and other current assets
|
|
|
43
|
|
|
|
267
|
|
Total
current assets
|
|
|
404
|
|
|
|
2,094
|
|
Note
receivable
|
|
|
500
|
|
|
|
—
|
|
Interest
receivable
|
|
|
32
|
|
|
|
—
|
|
Total
assets
|
|
$
|
936
|
|
|
$
|
2,094
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity (Deficiency)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
49
|
|
|
$
|
—
|
|
Accrued
expenses and other current liabilities
|
|
|
175
|
|
|
|
396
|
|
Total
current liabilities
|
|
|
224
|
|
|
|
396
|
|
Note
payable
|
|
|
713
|
|
|
|
507
|
|
Derivative
instruments
|
|
|
1
|
|
|
|
1
|
|
Total
liabilities
|
|
|
938
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficiency):
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
3
|
|
|
|
3
|
|
Additional
paid-in capital
|
|
|
125,770
|
|
|
|
125,753
|
|
Accumulated
deficit
|
|
|
(125,775
|
)
|
|
|
(124,566
|
)
|
Total
stockholders' equity (deficiency)
|
|
|
(2
|
)
|
|
|
1,190
|
|
Total
liabilities and stockholders' equity
|
|
$
|
936
|
|
|
$
|
2,094
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Cellegy
Pharmaceuticals, Inc.
(Amounts
in thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
23
|
|
Selling,
general and administrative
|
|
|
262
|
|
|
|
404
|
|
|
|
1,060
|
|
|
|
1,345
|
|
Total
costs and expenses
|
|
|
262
|
|
|
|
406
|
|
|
|
1,063
|
|
|
|
1,368
|
|
Operating
loss
|
|
|
(262
|
)
|
|
|
(406
|
)
|
|
|
(1,063
|
)
|
|
|
(1,368
|
)
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
17
|
|
|
|
147
|
|
|
|
60
|
|
|
|
203
|
|
Interest
and other expense
|
|
|
(76
|
)
|
|
|
(67
|
)
|
|
|
(206
|
)
|
|
|
(161
|
)
|
Derivative
revaluation
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
1
|
|
Total
other income (expenses)
|
|
|
(59
|
)
|
|
|
85
|
|
|
|
(146
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(321
|
)
|
|
$
|
(321
|
)
|
|
$
|
(1,209
|
)
|
|
$
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares used in per share
calculations:
|
|
|
29,835
|
|
|
|
29,835
|
|
|
|
29,835
|
|
|
|
29,835
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Cellegy
Pharmaceuticals, Inc.
Condensed
Consolidated Statements of Cash Flows
(Amounts
in thousands)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,209
|
)
|
|
$
|
(1,325
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Equity
compensation expense
|
|
|
17
|
|
|
|
40
|
|
Derivative
revaluation
|
|
|
—
|
|
|
|
(2
|
)
|
Interest
accretion on notes payable
|
|
|
206
|
|
|
|
131
|
|
Interest
on long term note receivable
|
|
|
(32
|
)
|
|
|
—
|
|
Forgiveness
of debt
|
|
|
—
|
|
|
|
(5
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
224
|
|
|
|
(15
|
)
|
Accounts
receivable
|
|
|
—
|
|
|
|
77
|
|
Accounts
payable
|
|
|
49
|
|
|
|
(159
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(221
|
)
|
|
|
(371
|
)
|
Net
cash used in operating activities
|
|
|
(966
|
)
|
|
|
(1,629
|
)
|
Investing
activity:
|
|
|
|
|
|
|
|
|
Issuance
of long term note receivable
|
|
|
(500
|
)
|
|
|
—
|
|
Net
cash used in investing activity
|
|
|
(500
|
)
|
|
|
—
|
|
Financing
activity:
|
|
|
|
|
|
|
|
|
Repayment
of note payable
|
|
|
—
|
|
|
|
(40
|
)
|
Net
cash used in financing activity
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,466
|
)
|
|
|
(1,669
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
1,827
|
|
|
|
3,804
|
|
Cash
and cash equivalents, end of period
|
|
$
|
361
|
|
|
$
|
2,135
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Cellegy Pharmaceuticals,
Inc.
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
Note 1: Basis of
Presentation
The
accompanying unaudited interim condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in annual financial statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (including normal
recurring adjustments and the elimination of intercompany accounts) considered
necessary for a fair statement of all periods presented. The results of Cellegy
Pharmaceuticals, Inc. (“Cellegy” or “the Company”) operations for any interim
periods are not necessarily indicative of the results of operations for any
other interim period or for a full fiscal year. These unaudited interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in
Cellegy’s Annual Report on Form 10-K for the year ended December 31,
2007.
Liquidity and Capital
Resources
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”). Adamis is a privately held specialty
pharmaceuticals company that is engaged in the research, development and
commercialization of products for the prevention of viral infections, including
influenza. Adamis currently markets and sells a line of prescription products
for a variety of allergy, respiratory disease and pediatric conditions, and also
has other devices and drug candidates in its product pipeline. The transaction
was unanimously approved by the boards of directors of both companies.
The
closing of the transaction is subject to several closing conditions,
including
the filing of a registration statement and proxy statement
with the Securities and Exchange Commission (“SEC”), the approval of Adamis’ and
Cellegy’s respective stockholders at stockholder meetings following distribution
of a definitive proxy statement, and other customary closing conditions. Holders
of approximately 40% of Cellegy’s outstanding common stock have entered into
voting agreements pursuant to which they agreed to vote their shares in favor of
the transaction. The combined company expects to continue to be publicly traded
after completion of the merger, although under a different corporate
name.
If the
merger is consummated, each Adamis stockholder will receive, in exchange for
each share of Adamis common stock held by such stockholder immediately before
the closing, one share of Cellegy common stock (post-reverse stock split and
excluding in all cases dissenting shares). If the transaction is approved by
Cellegy’s stockholders, before the closing Cellegy will implement a reverse
stock split of its common stock so that the outstanding Cellegy shares will be
converted into a number of shares equal to the sum of (i) 3,000,000 plus (ii)
the amount of Cellegy’s net working capital as of the end of the month
immediately preceding the month in which the closing occurs divided by .50.
Based on several assumptions that are subject to change, including, without
limitation, the number of shares of Cellegy common stock outstanding immediately
before the merger and the amount of Cellegy’s current assets and liabilities as
of the end of the month immediately prior to the closing, Cellegy estimates that
the reverse stock split will be approximately 1:9.9. The actual amounts and
percentages will depend on many factors, and actual amounts and percentages
could be higher or lower.
In
addition, the Merger Agreement contains certain termination rights for both
Cellegy and Adamis, and further provides that, upon termination of the merger
agreement under specified circumstances, either party may be required to pay the
other party a termination fee of $150,000. Both parties have the right to
terminate the Merger Agreement if the merger is not consummated by
March 31,
2009,
so long as the terminating party is not in breach of the Merger
Agreement and such breach is a principal failure of the merger to occur by such
date.
In
connection with the signing of the Merger Agreement, Cellegy also issued to
Adamis an unsecured convertible promissory note (the “Promissory Note”) pursuant
to which Cellegy agreed to lend Adamis $500,000 to provide additional funds to
Adamis during the pendency of the merger transaction. Any principal outstanding
under the Promissory Note accrues interest at 10% per annum. The Promissory Note
becomes immediately due and payable in the event that the Merger Agreement is
terminated by Adamis or Cellegy for certain specified reasons or on the later of
(i) the sixteen month anniversary of the issue date of the Promissory Note or
(ii) the date that is two business days following the first date on which
certain other notes issued by Adamis to a third party have been repaid in full.
If the Promissory Note is outstanding as of the closing of the merger
transaction, the Promissory Note will not be repaid, but will convert into
shares of Adamis stock and these shares will be immediately cancelled.
Accordingly neither Cellegy nor its stockholders will receive any additional
shares. The terms of the Promissory Note provide Cellegy with no collateralized
interest in the assets of Adamis. In the event the merger is not consummated
with Adamis, Cellegy bears the risk of collecting the Promissory Note and
therefore is subject to the risks and uncertainties of being in the position of
an unsecured creditor. While the Company feels that it is more likely than not
that the merger will be consummated, in the event it is not, the Cellegy will
have no ability to attach a claim to Adamis’ assets.
There is
no assurance that the Company will be able to close the transaction with Adamis.
If the proposed merger transaction with Adamis is still pending and Cellegy
requires additional cash resources to complete the transaction, Cellegy and
Adamis are engaged in discussions concerning an agreement for Adamis to provide
funding sufficient to permit the merger to be completed, although there can be
no assurance that such funding will be available.
Should
Cellegy be unable to secure the additional shareholder votes necessary to
approve the transaction with Adamis or otherwise be unable to close the
transaction, the Company may chose to pursue liquidation or voluntarily file
bankruptcy proceedings. If Cellegy files for bankruptcy protection, Cellegy will
most likely not be able to raise any type of funding from any source. In that
event, the creditors of Cellegy would have first claim on the value of the
assets of Cellegy which, other than remaining cash, would most likely be
liquidated in a bankruptcy sale. Cellegy can give no assurance as to the
magnitude of the net proceeds of such sale and whether such proceeds would be
sufficient to satisfy Cellegy’s obligations to its creditors, let alone to
permit any distribution to its equity holders. 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 negatively affect the market
price of our common stock and could otherwise have a material adverse effect on
our business, financial condition and results of operations. These factors raise
substantial doubt about our ability to continue as a going concern.
Note 2: Loss per Common
Share
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. There is no difference between basic and diluted net
loss per common share, as presented in the condensed consolidated statements of
operations, because all options and warrants are anti-dilutive. The total number
of shares that had their impact excluded was (in thousands):
|
|
Three and
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Options
|
|
|
1,333
|
|
|
1,363
|
|
Warrants
|
|
|
2,115
|
|
|
2,115
|
|
Total
number of shares excluded
|
|
|
3,448
|
|
|
3,478
|
|
Note 3: Stock-Based
Compensation
In the
condensed consolidated statement of operations for the third quarters
of 2008 and 2007, the Company recorded stock based compensation expenses of
$2,902 and $16,154, respectively.
2005 Equity Incentive Plan (“2005
Plan”)
|
|
Number of
Options
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregat
e
Intrinsic
Value
|
|
48,000
|
|
7.00
Years
|
|
$
|
1.34
|
|
|
$
|
-
|
|
There
were no grants, cancellations or exercises of options under the 2005 Plan during
the quarter ended September 30, 2008, and 16,000 options vested in the
quarter ended September 30, 2008.
1995 Equity Incentive Plan (“Prior
Plan”)
Options Outstanding and Exercisable
|
|
Number
of
Options
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
204,944
|
|
|
5.67
Years
|
|
$
|
2.66
|
|
$
|
-
|
|
There
were no grants, cancellations, exercises or vestings of options under the Prior
Plan during the quarter ended September 30, 2008. No future options may be
granted under the Prior Plan.
Directors’ Stock Option Plan
(“Director’s Plan”)
Options Outstanding and Exercisable
|
|
Number
of
Options
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
84,000
|
|
|
4.50
Years
|
|
$
|
4.35
|
|
$
|
-
|
|
There
were
no
grants, cancellations, exercises or vestings of options during the quarter ended
September 30, 2008.
No future options may be granted under the Directors’
Plan.
Non-Plan Options
In
November 2003, the Company granted an initial stock option to Mr. Richard C.
Williams, upon his appointment as Chairman of the Board, to purchase 1,000,000
shares of common stock. 400,000 and 600,000 options have exercise prices of
$2.89 and $5.00 per share, respectively. The options were vested and exercisable
in full on the grant date, although a portion of the option covering up to
600,000 shares initially and declining over time is subject to cancellation if
they have not been exercised in the event that Mr. Williams voluntarily resigns
as Chairman and as director within certain future time periods. As of September
30, 2008 none of these options have been exercised and none are subject to
cancellation.
Biosyn Options
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.
During
the quarter ended September 30, 2008, there were no exercises under Biosyn
options plan; however, 514 options were cancelled during this period. The
following table summarizes information about stock options outstanding and
exercisable related to Biosyn option grants at September 30,
2008:
Options Outstanding and Exercisable
|
|
Number of
Options
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
4,283
|
|
|
5.31
Years
|
|
$
|
0.29
|
|
$
|
-
|
|
Shares Reserved
As of
September 30, 2008, the Company has reserved shares of common stock for
issuance upon exercise as follows:
Biosyn
options
|
|
|
4,283
|
|
Director's
Plan
|
|
|
84,000
|
|
Warrants
|
|
|
2,114,593
|
|
Nonplan
options
|
|
|
1,000,000
|
|
1995
Equity Incentive Plan
|
|
|
204,944
|
|
2005
Equity Incentive Plan
|
|
|
1,000,000
|
|
Total
|
|
|
4,407,820
|
|
Warrants
|
|
Warrant
Shares
|
|
Exercise Price
Per Share
|
|
Date Issued
|
|
Expiration Date
|
|
June
2004 PIPE
|
|
|
604,000
|
|
$
|
4.62
|
|
|
July
27, 2004
|
|
|
July
27, 2009
|
|
Biosyn
warrants
|
|
|
81,869
|
|
|
5.84
- 17.52
|
|
|
October 22, 2004
|
|
|
2008
- 2014
|
|
May
2005 PIPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
714,362
|
|
|
2.25
|
|
|
May
13, 2005
|
|
|
May 13, 2010
|
|
Series
B
|
|
|
714,362
|
|
|
2.50
|
|
|
May
13, 2005
|
|
|
May
13, 2010
|
|
Total
|
|
|
2,114,593
|
|
|
|
|
|
|
|
|
|
|
Note 4: Recent Accounting
Pronouncements
SFAS No. 157, Fair Value
Measurements
In September 2006,
the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157,
“Fair Value
Measurements"(“
SFAS 157”). SFAS 157 provides enhanced guidance for using
fair value to measure assets and liabilities and expands disclosure with respect
to fair value measurements. This statement was originally effective for fiscal
years beginning after November 15, 2007. In February 2008, the FASB
issued FSP No. 157-2 which allows companies to elect a one year deferral of
adoption of SFAS 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed at fair value in the financial statements on a
non-recurring basis. On January 1, 2008, the Company adopted the provisions
of SFAS 157 for financial assets and liabilities. As permitted by FSP No.157-2,
the Company elected to defer the adoption of SFAS 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis, until
January 1, 2009. SFAS 157 provides a framework for measuring fair
value under U.S. GAAP and requires expanded disclosures regarding fair value
measurements. SFAS 157 defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs, where available, and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
|
Level
1
|
|
Quoted
prices in active markets for identical assets or liabilities. Our Level 1
assets and liabilities include investments in marketable securities and
cash equivalents.
|
|
|
|
|
|
Level
2
|
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
|
|
|
|
|
Level
3
|
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
There
was no impact upon the Company’s consolidated financial statements resulting
from the adoption of this pronouncement.
The FASB
agreed to defer the effective date of SFAS 157 for all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The FASB again rejected the
proposal of a full one-year deferral of the effective date of SFAS 157.
SFAS 157 was issued in September 2006, and is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. Accordingly, the Company adopted this
statement on October 1, 2007 for assets and liabilities not subject to the
deferral and will adopt this statement October 1, 2008, for all other
assets and liabilities. There was no impact upon the Company’s financial
statements resulting from the adoption of this pronouncement.
SFAS No. 141 (Revised
2007), Business Combinations
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business
Combinations”
(“SFAS 141R”). Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific items including:
|
·
|
acquisition
costs will be generally expensed as
incurred;
|
|
·
|
non-controlling
interests will be valued at fair value at the acquisition
date;
|
|
|
acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
in-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date until the
completion or abandonment of the associated research and development
efforts;
|
|
|
restructuring
costs associated with a business combination will generally be expensed
subsequent to the acquisition
date; and
|
|
·
|
changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS 141R
also includes a substantial number of new disclosure requirements.
SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is
prohibited. The
Company
will adopt this statement in 2009.
SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements — An
Amendment of ARB No. 51”
On
December 4, 2007, the FASB issued SFAS No. 160,
“Non-controlling Interests in
Consolidated Financial Statements — An Amendment of ARB
No. 51”
(“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement.
SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the non-controlling equity investment on the deconsolidation date. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its non-controlling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company believes
that this pronouncement will have no effect on its financial
statements.
In
May 2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted
Accounting Principles”
(“SFAS 162”)
,
which identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of non-governmental
entities that are presented in conformity with generally accepted accounting
principles (“GAAP”) in the United States. The effective date of SFAS 162 is yet
to be determined; it will become effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411,
The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles
. SFAS 162 is not expected to have a significant impact on the
Company’s consolidated financial statements.
Note 5:
Prepaid Expenses and Other Current
Assets
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
September 30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
Prepaid
insurance
|
|
$
|
43
|
|
$
|
134
|
|
Security
deposits
|
|
|
-
|
|
|
8
|
|
Retention
compensation
|
|
|
-
|
|
|
120
|
|
Other
|
|
|
-
|
|
|
5
|
|
|
|
$
|
43
|
|
$
|
267
|
|
Note 6:
Accrued Expenses and Other Current
Liabilities
The
Company accrues for goods and services received but for which billings have not
been received. Accrued expenses and other current liabilities consist of the
following (in thousands):
|
|
September 30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
Accrued
legal fees
|
|
$
|
18
|
|
$
|
29
|
|
Accrued
compensation
|
|
|
71
|
|
|
30
|
|
Accrued
retention
|
|
|
—
|
|
|
139
|
|
Accrued
accounting and consulting fees
|
|
|
33
|
|
|
125
|
|
Insurance
payable
|
|
|
11
|
|
|
13
|
|
Other
|
|
|
42
|
|
|
60
|
|
Total
|
|
$
|
175
|
|
$
|
396
|
|
Accrued
retention represents the unamortized portion of approximately $139,000 in
retention payments offered and accepted by employees in 2007. The retention
payments are to be paid if the employee maintains his or her employment with the
Company through the retention period indicated in the individual’s retention
agreement. The retention payment was in lieu of all other severance or similar
payments that the Company may have been obligated to make under any other
existing agreement, arrangement or understanding, but would be in addition to
any accrued salary and vacation earned through the end of the respective
retention period. As of September 30, 2008, the retention periods have been
satisfied
and all
retention payments have been made.
Note 7: Note
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 Acquired
Immunodeficiency Disease (“AIDS”).
The
Ben Franklin Note was recorded at its estimated fair value of $205,000 and was
assumed by Cellegy in connection with its acquisition of Biosyn in 2004. The
repayment terms of the non-interest bearing obligation include the remittance of
an annual fixed percentage of 3% applied to future revenues of Biosyn, if any,
until the principal balance of $777,902 is satisfied. Under the terms of the
obligation, revenues are defined to exclude the value of unrestricted research
and development funding received by Biosyn from nonprofit sources. There is no
obligation to repay the amounts in the absence of future Biosyn revenues. The
Company is accreting the discount of $572,902 using the interest rate method
over the discount period of five years, which was estimated in connection with
the note’s valuation at the time of the acquisition. At September 30, 2008,
the outstanding balance of the note is $712,600.
Note 8: Derivative
Instrument
The
warrants issued in connection with the May 2005 PIPE financing are revalued at
the end of each reporting period as long as they remain outstanding. The
estimated fair value of all warrants, using the Black-Scholes valuation model,
recorded as derivative instruments liability at September 30, 2008 and December
31, 2007 was approximately $1,200. Any change in the estimated fair value of the
warrants has been recorded as other income and expense in the condensed
consolidated statement of operations. For the three and nine months ended
September 30, 2008, the Company recognized no income or expense related to
derivative revaluation. For the three and nine months ended September 30,
2007, the Company recognized
expense
of approximately $5,000 and income of approximately $1,000,
respectively,
from derivative revaluation.
Note 9: Note
Receivable
In
connection with the signing of the Merger Agreement with Adamis, Cellegy issued
to Adamis an unsecured convertible promissory note in the amount of $500,000 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
cancelled. Accordingly, neither Cellegy nor its stockholders will receive any
additional shares. Due to the uncertainty surrounding the timing of closing the
merger transaction with Adamis, if the transaction closes at all, the Company
has shown the Promissory Note and its related interest income accrual as long
term.
REPORT OF THE INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Adamis
Pharmaceuticals Corporation and Subsidiaries
Del Mar,
California
We have
audited the accompanying consolidated balance sheets of Adamis Pharmaceuticals
Corporation and Subsidiaries as of March 31, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and cash flows for the year ended March 31, 2008 and the period since inception
(June 6, 2006) to March 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
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 financial position of Adamis Pharmaceuticals
Corporation and Subsidiaries as of March 31, 2008 and 2007, and the results of
their operations and their cash flows for the year ended March 31, 2008 and the
period since inception (June 6, 2006) to March 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Goldstein Lewin & Co.
Boca
Raton, Florida
November
12, 2008
ADAMIS PHARMACEUTICALS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
|
|
March
31,
|
|
ASSETS
|
|
2008
|
|
2007
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
541
|
|
$
|
36,763
|
|
Accounts
Receivable, Net
|
|
|
76,270
|
|
|
-
|
|
Interest
Receivable
|
|
|
-
|
|
|
29,699
|
|
Subscription
Receivable
|
|
|
-
|
|
|
126,000
|
|
Inventory,
Net
|
|
|
24,263
|
|
|
-
|
|
Current
Maturities of Notes Receivable
|
|
|
-
|
|
|
250,000
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
144,221
|
|
|
50,000
|
|
Assets
from Discontinued Operations
|
|
|
9,626,425
|
|
|
-
|
|
Total
Current Assets
|
|
|
9,871,720
|
|
|
492,462
|
|
|
|
|
|
|
|
|
|
NOTES
RECEIVABLE, Less Current Maturities
|
|
|
-
|
|
|
200,000
|
|
PROPERTY
AND EQUIPMENT, Net
|
|
|
53,980
|
|
|
2,633
|
|
DEFERRED
ACQUISITION COSTS
|
|
|
101,247
|
|
|
-
|
|
OTHER
ASSETS
|
|
|
21,871
|
|
|
-
|
|
Total
Assets
|
|
$
|
10,048,818
|
|
$
|
695,095
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
991,144
|
|
$
|
119,011
|
|
Accrued
Expenses
|
|
|
379,982
|
|
|
329
|
|
Liabilities
from Discontinued Operations
|
|
|
6,246,161
|
|
|
-
|
|
Notes
Payable to Related Parties
|
|
|
1,744,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
9,361,287
|
|
|
219,340
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE TO RELATED PARTY
|
|
|
500,000
|
|
|
-
|
|
LONG-TERM
DEBT, Net of Financing Cost
|
|
|
1,680,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
11,541,287
|
|
|
219,340
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Preferred
Stock – Par Value $.0001; 20,000,000 Shares
|
|
|
|
|
|
|
|
Authorized;
Issued and Outstanding-None
|
|
|
-
|
|
|
-
|
|
Common
Stock – Par Value $.0001; 100,000,000 Shares
Authorized;
|
|
|
|
|
|
|
|
34,721,110
and 19,727,637 Issued and Outstanding, Respectively
|
|
|
3,471
|
|
|
1,972
|
|
Additional
Paid-in Capital
|
|
|
8,788,485
|
|
|
1,035,081
|
|
Accumulated
Deficit
|
|
|
(10,284,425
|
)
|
|
(561,298
|
)
|
Total
Stockholders' Equity (Deficit)
|
|
|
(1,492,469
|
)
|
|
475,755
|
|
|
|
$
|
10,048,818
|
|
$
|
695,095
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
ADAMIS PHARMACEUTICALS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
June 6, 2006
|
|
|
|
Year Ended
|
|
(Inception) to
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
REVENUE
|
|
$
|
621,725
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
348,640
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
273,085
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
3,775,644
|
|
|
492,500
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
203,489
|
|
|
83,300
|
|
INTANGIBLE IMPAIRMENT
|
|
|
3,150,985
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(6,857,033
|
)
|
|
(575,800
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
55,998
|
|
|
29,699
|
|
Interest
Expense
|
|
|
(399,031
|
)
|
|
(15,197
|
)
|
Other
Income
|
|
|
21,050
|
|
|
-
|
|
Total
Other Income (Expense)
|
|
|
(321,983
|
)
|
|
14,502
|
|
|
|
|
|
|
|
|
|
(Loss)
from Continuing Operations
|
|
|
(7,179,016
|
)
|
|
(561,298
|
)
|
(Loss)
from Discontinued Operations
|
|
|
(2,544,111
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(9,723,127
|
)
|
$
|
(561,298
|
)
|
|
|
|
|
|
|
|
|
Basic
and Diluted (Loss) Per Share:
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(0.40
|
)
|
$
|
(0.07
|
)
|
Discontinued
Operations
|
|
|
(0.08
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted (Loss) Per Share
|
|
$
|
(0.48
|
)
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted Average Shares Outstanding
|
|
|
17,764,606
|
|
|
8,068,932
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
ADAMIS PHARMACEUTICALS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Common Stock
|
|
Additional
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
6, 2006 (Inception)
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Cash -$0.001 per share
|
|
|
16,684,500
|
|
|
1,669
|
|
|
15,016
|
|
|
-
|
|
|
16,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Cash - $0.10 per share
|
|
|
1,253,000
|
|
|
125
|
|
|
125,175
|
|
|
-
|
|
|
125,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Retirement of Debt and Accrued Interest - $0.50 per
Share
|
|
|
629,737
|
|
|
62
|
|
|
314,806
|
|
|
-
|
|
|
314,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Cash - $0.50 per share
|
|
|
1,160,400
|
|
|
116
|
|
|
580,084
|
|
|
-
|
|
|
580,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(561,298
|
)
|
|
(561,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2007
|
|
|
19,727,637
|
|
|
1,972
|
|
|
1,035,081
|
|
|
(561,298
|
)
|
|
475,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in HealthCare Venture Group, Inc.
|
|
|
5,159,807
|
|
|
516
|
|
|
2,579,388
|
|
|
-
|
|
|
2,579,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in International Laboratories, Inc.
|
|
|
2,000,000
|
|
|
200
|
|
|
999,800
|
|
|
-
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Loan Financing - $0.50 per share
|
|
|
800,000
|
|
|
80
|
|
|
399,920
|
|
|
-
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Cash - $0.50 per share
|
|
|
6,591,000
|
|
|
659
|
|
|
3,294,841
|
|
|
-
|
|
|
3,295,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder
Loan Beneficial Conversion Feature
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder
Warrant, Unexcercised
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock in Lieu of Interest
|
|
|
50,000
|
|
|
5
|
|
|
24,995
|
|
|
-
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Cash - $0.75 per share
|
|
|
392,666
|
|
|
39
|
|
|
294,460
|
|
|
-
|
|
|
294,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,723,127
|
)
|
|
(9,723,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2008
|
|
|
34,721,110
|
|
$
|
3,471
|
|
$
|
8,788,485
|
|
$
|
(10,284,425
|
)
|
$
|
(1,492,469
|
)
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
ADAMIS PHARMACEUTICALS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF
CASH FLOWS
|
|
|
|
June 6, 2006
|
|
|
|
Year Ended
|
|
(Inception) to
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
(Loss) from Continuing Operations
|
|
$
|
(7,179,016
|
)
|
$
|
(561,298
|
)
|
Adjustments
to Reconcile Net (Loss) from Continuing Operations to Net
Cash
(Used in) Operating Activities:
|
|
|
|
|
|
|
|
Deferred
Acquisition Cost Amortization
|
|
|
80,000
|
|
|
-
|
|
Depreciation
Expense
|
|
|
19,798
|
|
|
167
|
|
Goodwill
Impairment
|
|
|
3,150,985
|
|
|
-
|
|
Inventory
Reserve Adjustment
|
|
|
(308,479
|
)
|
|
-
|
|
Interest
Expense Converted to Equity
|
|
|
177,000
|
|
|
14,868
|
|
Sales
Returns Reserve Adjustment
|
|
|
(137,327
|
)
|
|
-
|
|
Change
in Assets and Liabilities:
|
|
|
|
|
|
|
|
(Increase)
Decrease in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
61,948
|
|
|
-
|
|
Interest
Receivable
|
|
|
29,699
|
|
|
(29,699
|
)
|
Inventory
|
|
|
321,589
|
|
|
-
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
(22,306
|
)
|
|
-
|
|
Other
Assets
|
|
|
571
|
|
|
-
|
|
Deferred
Acquisition Costs
|
|
|
(101,247
|
)
|
|
-
|
|
Increase
in:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
723,345
|
|
|
119,010
|
|
Accrued
Expenses
|
|
|
292,482
|
|
|
329
|
|
Net
Cash (Used in) Operating Activities from Continuing
Operations
|
|
|
(2,890,958
|
)
|
|
(456,623
|
)
|
Net
Cash (Used in) Operating Activities from Discontinued
Operations
|
|
|
(978,017
|
)
|
|
-
|
|
Net
Cash (Used in) Operating Activities
|
|
|
(3,868,975
|
)
|
|
(456,623
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Cash
Acquired in HealthCare Ventures Group, Inc. Acquisition
|
|
|
12,611
|
|
|
-
|
|
Loans
to Related Parties
|
|
|
-
|
|
|
(200,000
|
)
|
Purchases
of Property and Equipment
|
|
|
(1,500
|
)
|
|
(2,800
|
)
|
Net
Cash Provided by (Used in) Investing Activities from Continuing
Operations
|
|
|
11,111
|
|
|
(202,800
|
)
|
Net
Cash (Used In) Investing Activities from Discontinued
Operations
|
|
|
(3,946,358
|
)
|
|
-
|
|
Net
Cash (Used In) Investing Activities
|
|
|
(3,935,247
|
)
|
|
(202,800
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Decrease
in Subscriptions Receivable
|
|
|
126,000
|
|
|
-
|
|
Payments
of Notes Payable to Related Parties
|
|
|
(100,000
|
)
|
|
-
|
|
Proceeds
from Issuance of Common Stock
|
|
|
3,590,000
|
|
|
596,186
|
|
Proceeds
from Issuance of Loans Payable
|
|
|
2,000,000
|
|
|
-
|
|
Proceeds
from Issuance of Notes Payable to Related Parties
|
|
|
910,000
|
|
|
100,000
|
|
Proceeds
from Issuance of Notes Payable to Shareholders
|
|
|
1,242,000
|
|
|
-
|
|
Net
Cash Provided by Financing Activities from Continuing
Operations
|
|
|
7,768,000
|
|
|
696,186
|
|
(Decrease)
Increase in Cash
|
|
|
(36,222
|
)
|
|
36,763
|
|
ADAMIS PHARMACEUTICALS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF
CASH FLOWS
|
|
|
|
June 6, 2006
|
|
|
|
Year Ended
|
|
(Inception) to
|
|
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Cash:
|
|
|
|
|
|
|
|
Beginning
|
|
|
36,763
|
|
|
-
|
|
Ending
|
|
$
|
541
|
|
$
|
36,763
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
$
|
86,193
|
|
$
|
-
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Stock
Issued to Acquire HealthCare Ventures Group, Inc. (Note 2)
|
|
$
|
2,579,904
|
|
$
|
-
|
|
Stock
Issued to Acquire International Laboratories, Inc. (Note
2)
|
|
$
|
1,000,000
|
|
$
|
-
|
|
Stock
Issued as Loan Acquisition Cost (Note 9)
|
|
$
|
400,000
|
|
$
|
-
|
|
Stock
Warrant Issued (Note 8)
|
|
$
|
80,000
|
|
$
|
-
|
|
Capital
from Beneficial Conversion Feature (Note 8)
|
|
$
|
80,000
|
|
$
|
-
|
|
Stock
Issued in Lieu of Interest (Note 12)
|
|
$
|
25,000
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business
Adamis
Pharmaceuticals Corporation and Subsidiaries is comprised of the following
companies: Adamis Pharmaceuticals Corporation, Adamis Viral Therapies, Inc.,
Adamis Laboratories, Inc., and International Laboratories, Inc. (collectively
“Adamis Pharmaceuticals”, the “Company”, “we”, “our”). The Company’s strategic
objective is to build a publicly-held company that combines the financial
stability and sales force of a specialty pharmaceutical company with the
near-term development of biopharmaceutical products. From June 6, 2006 to March
31, 2007, the Company was in the development stage. With its acquisition of
Adamis Laboratories, Inc. on April 23, 2007, the Company emerged from the
development stage.
Adamis
Pharmaceuticals Corporation was established under the laws of the State of
Delaware on June 6, 2006 and has devoted substantially all its efforts to
establishing a new business. Adamis Viral Therapies, Inc. was established under
the laws of the State of Delaware on March 23, 2007, and was merged into Adamis
Pharmaceuticals Corporation, the surviving entity, on March 30, 2007. The merged
company changed its name to Adamis Viral Therapies, Inc. (“Viral”) on March 30,
2007. Viral had no activity during the periods ended March 31, 2008 and
2007.
Adamis
Holding Corporation was established under the laws of the State of Delaware on
March 23, 2007. Adamis Holding Corporation changed its name to Adamis
Pharmaceuticals Corporation on March 30, 2007. Viral transferred all of its
authorized and outstanding shares of stock to Adamis Pharmaceuticals Corporation
on March 30, 2007.
Adamis
Laboratories, Inc. (formally known as HealthCare Ventures Group, Inc.) was
established under the laws of the State of Delaware on September 2, 2005, and
was acquired by the Company on April 23, 2007 (Note 2). On April 24, 2007,
Healthcare Ventures Group, Inc. changed its name to Adamis Laboratories, Inc.
(“Adamis Labs”). Adamis Labs is a distributor of respiratory
products.
International
Laboratories, Inc. (“INL”) was incorporated in the State of Florida in March
1981. INL’s operations consist of the packaging of prescription and
non-prescription pharmaceutical and nutraceutical goods mainly for a major
retailer (Notes 2, 3 and 15).
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of
Consolidation
The
accompanying consolidated financial statements include Adamis Pharmaceuticals
and its wholly- owned subsidiaries, Adamis Labs and INL. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Accounting
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statement. Actual results
could differ from those estimates, and the differences could be
material.
Long-Lived
Assets
The
Company periodically assesses whether there has been permanent impairment of its
long-lived assets held and used in accordance with Statement of Financial
Standards (“SFAS”) No. 144, “
Accounting for the Impairment or
Disposal of Long-Lived Assets
” (“SFAS
No. 144”). SFAS No. 144 requires the Company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying amount of the asset
to future net undiscounted cash flows expected to be generated from the use and
eventual disposition of the asset.
Discontinued
Operations
As
discussed in Note 3, the results of operations for the year ended March 31,
2008, and the assets and liabilities at March 31, 2008, related to INL have been
accounted for as discontinued operations in accordance with SFAS No. 144. There
were no operations or related assets and liabilities of INL in the accompanying
consolidated financial statements of prior periods.
Cash and Cash
Equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid investments with original maturities at the date of purchase of
three months or less to be cash equivalents. The Company had no cash equivalents
at March 31, 2008 and 2007.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “
Accounting for Income
Taxes
” (“SFAS
No. 109”). SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes. Under the asset and liability
approach, deferred taxes are provided for the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Valuation
allowances are established where management determines that it is more likely
than not that some portion or all of a deferred tax asset will not be
realized.
On April
1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48, “
Accounting for Uncertainty on Income
Taxes, and Interpretation of SFAS No. 109, Accounting for Income
Taxes
,” which
did not have a material impact on the Company’s liability for unrecognized tax
benefits.
Revenue
Recognition
Our
primary customers are pharmaceutical wholesalers. In accordance with our revenue
recognition policy, revenue is recognized when title and risk of loss are
transferred to the customer, the sale price to the customer is fixed and
determinable, and collectability of the sale price is reasonably assured.
Reported revenue is net of estimated customer returns and other wholesaler fees.
Our policy regarding sales to customers is that we do not recognize revenue
from, or the cost of, such sales, where we believe the customer has more than a
demonstrably reasonable level of inventory. We make this assessment based on
historical demand, historical customer ordering patterns for purchases, business
considerations for customer purchases and estimated inventory levels. If our
actual experience proves to be different than our assumptions, we would then
adjust such allowances accordingly.
We
estimate allowances for revenue dilution items using a combination of
information received from third parties, including market data, inventory
reports from our major U.S. wholesaler customers, when available, historical
information and analysis that we perform. The key assumptions used to arrive at
our best estimate of revenue dilution reserves are estimated customer inventory
levels and purchase forecasts provided
.
Our
estimates of inventory at wholesaler customers and in the distribution channels
are subject to the inherent limitations of estimates that rely on third-party
data, as certain third-party information may itself rely on estimates, and
reflect other limitations. We believe that such provisions are reasonably
ascertainable due to the limited number of assumptions involved and the
consistency of historical experience.
Inventory
Inventory,
consisting of allergy and respiratory products, is recorded at the lower of cost
or market, using the weighted average method.
Property and
Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets. The costs of leasehold improvements are amortized over the
lesser of the lease term or the life of the improvement, if
shorter.
Estimated
useful lives used to depreciate property and equipment are as
follows:
|
|
Estimated Useful
|
|
|
|
Lives in Years
|
|
Office
Furniture and Equipment
|
|
|
7
|
|
Computer
Equipment and Software
|
|
|
3
|
|
Vehicles
|
|
|
3
|
|
Deferred Acquisition
Costs
The
Company incurred certain professional fees associated with specific potential
acquisition targets. These costs, should the acquisition occur, will be
capitalized as part of the purchase price paid for the acquisition. Should the
acquisition not occur, the Company will expense these costs when that
determination occurs.
Accounts Receivable,
Allowance for Doubtful Accounts and Sales Returns
Trade
accounts receivable are stated net of an allowance for doubtful accounts. The
Company estimates an allowance based on its historical experience of the
relationship between actual bad debts and net credit sales. At March 31, 2008
and 2007, no allowance for doubtful accounts was recorded.
The
Company has established an allowance for sales returns based on management’s
best estimate of probable loss inherent in the accounts receivable balance.
Management determines the allowance based on current credit conditions,
historical experience, and other currently available information. The allowance
for sales returns was $21,022 and $0 at March 31, 2008 and 2007, respectively,
and is included in accrued expenses on the consolidated balance
sheets.
Registration Payment
Arrangements
The
Company accounts for registration payment arrangements under FASB Staff Position
EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to make
future payments under
a
registration
payment
arrangement
should
be separately recognized and measured in accordance with SFAS No. 5, “Accounting
for Contingencies.” FSP EITF 00-19-2 was issued in December 2006. Early adoption
of FSP EITF 00-19-2 is permitted and the Company adopted FSP EITF 00-19-2
effective January 3, 2007. At March 31, 2008, the Company has no accrued
estimated penalty. (Notes 8 and 11)
Research and
Development
The
Company accounts for research and development costs in accordance with SFAS No.
2, “
Accounting for Research and
Development Costs
” (“SFAS
No. 2”) and
Emerging
Issues Task Force (“EITF”) Issue No. 07-3, “
Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities
” (“EITF
Issue No. 07-3”).
Under
SFAS No. 2, research and development costs are expensed as incurred.
EITF Issue
No. 07-3 requires nonrefundable 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.
Research
and development costs
, which
primarily consist of salaries, contractor fees, facility and building costs,
utilities, administrative expenses and other corporate costs expensed in
accordance with such pronouncements,
were $203,489 and $83,300 for the
years ended March 31, 2008 and 2007, respectively.
During
fiscal 2008, $150,000 was spent on an outside contractor for the development of
the epi syringe and approximately $50,000 was spent on an outside contractor for
the development of the influenza technology. During fiscal 2007,
$55,000 was spent on licensing technology for the influenza project and
approximately $28,000 was spent on an outside contractor for the development of
the influenza technology.
Shipping and
Handling
Shipping
and handling costs are included in selling, general and administrative expenses.
Shipping and handling costs were $23,046 and $0 for the years ended March 31,
2008 and 2007, respectively.
Advertising
Expenses
Advertising
costs are expensed as incurred as set forth in Statement of Position (“SOP”) No.
93-7,
“
Reporting on Advertising
Costs
.”
Advertising expenses were $2,848 and $0 for the years ended March 31, 2008 and
2007, respectively.
Net Loss Per
Share
The
Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per
Share,"
under
the provisions of which basic loss per share is computed by dividing the loss
attributable to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. Since the effect
of common stock equivalents was anti-dilutive, all such equivalents were
excluded from the calculation of weighted average shares outstanding.
Outstanding warrants at March 31, 2008 were 1,000,000, and there were no other
common stock equivalents outstanding at March 31, 2007.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “
Business
Combinations
” (“SFAS
No. 141(R)”), which establishes the principles and requirements for how an
acquirer: (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (2) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase;
(3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination; and (4) requires acquisition costs incurred prior to
acquisition to be expensed rather than deferred. SFAS No. 141(R) replaces
SFAS No. 141. SFAS No. 141(R) is effective in fiscal years beginning
after December 15, 2008. The Company has noted that under the provisions of
SFAS No. 141(R), $101,247 capitalized as deferred acquisition costs at March 31,
2008 would be expensed.
In
September 2006, the FASB issued SFAS No. 157, “
Fair Value
Measurements
,” which
will become effective for the Company in its fiscal 2009, except as amended by
FSP SFAS 157-1 and FSP SFAS 157-2, as described below. This Statement
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements; however, it does not require any new
fair value measurements. The provisions of SFAS No. 157 will be applied
prospectively to fair value measurements and disclosures for financial assets
and financial liabilities and nonfinancial assets and nonfinancial liabilities
recognized or disclosed at fair value in the financial statements on at least an
annual basis beginning in the first quarter of the Company's fiscal 2009 year.
The Company does not expect that its adoption of the provisions of SFAS
No. 157 will have a material effect on its financial condition, results of
operations or cash flows.
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
SFS 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 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 that 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
” (“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. Currently, the Company has no plan to
adopt the fair value option, under SFAS No. 159, for any of its eligible
items.
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 Issue No. 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 Issue No. 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.
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 April 1, 2007,
and there was no material effect on its results of operations or financial
position.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. In the Consolidated Statement of Operations for the period from
June 6, 2006 (inception) to March 31, 2007, the Company reclassified $83,300 for
research and development expenditures incurred, previously reflected as selling,
general, and administrative expense.
NOTE 2:
ACQUISITIONS
Acquisition of HealthCare
Ventures Group, Inc.
On April
23, 2007, the Company acquired all of the outstanding shares of HealthCare
Ventures Group, Inc. in exchange for 5,159,807 shares of common stock valued at
$0.50 per share, or approximately $2.6 million (the “HVG Acquisition”). The
purchase agreement provides for an additional 7,451,304 restricted shares held
in escrow with issuance conditional upon future earnings targets, 719,019 of
which were subsequently cancelled. The acquired company’s name was changed to
Adamis Labs.
The HVG
Acquisition was accounted for as a business combination using the purchase
method of accounting under the provisions of SFAS No. 141. Accordingly, the
results of Adamis Labs’s operations have been included in the consolidated
financial statements from the date of acquisition. The allocation of
consideration for acquisitions requires extensive use of accounting estimates
and management’s judgment to allocate the purchase price of tangible and
identifiable intangible assets acquired and liabilities assumed based on their
respective fair values. Management believes fair values assigned to the assets
acquired and liabilities assumed are based on reasonable estimates and
assumptions.
The
purchase price for the HVG Acquisition was allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date, with the excess being allocated
to intangibles, as follows:
Cash
|
|
$
|
12,611
|
|
Accounts
Receivable
|
|
|
138,218
|
|
Inventory
|
|
|
37,373
|
|
Prepaid
and Other Current Assets
|
|
|
71,915
|
|
Property
|
|
|
69,645
|
|
Other
Assets
|
|
|
22,442
|
|
Intangibles
|
|
|
3,150,985
|
|
Accounts
Payable
|
|
|
(148,657
|
)
|
Accrued
Liabilities
|
|
|
(191,611
|
)
|
Interest
Payable
|
|
|
(33,017
|
)
|
Loan
Payable
|
|
|
(550,000
|
)
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
2,579,904
|
|
Subsequent
to the acquisition, the Company recorded an impairment charge related to the
intangible asset (consisting primarily of a distribution network) associated
with the transaction that the Company determined had no remaining value at March
31, 2008.
The
following table represents summarized financial information of the results of
operations included in the Consolidated Statement of Operations for the year
ended March 31, 2008:
Revenue,
net
|
|
$
|
621,725
|
|
Operating
Loss
|
|
$
|
(5,060,544
|
)
|
Net
Loss from Operations
|
|
$
|
(5,039,494
|
)
|
Acquisition of International
Laboratories, Inc.
On
December 31, 2007, the Company acquired all of the outstanding shares of INL in
an all stock transaction for 2,000,000 shares of common stock valued at $0.50
per share, or $1.0 million (the “INL Acquisition”). The purchase agreement
provided for an additional 8,000,000 restricted shares to be held in escrow with
issuance conditional upon future earnings targets (Note 3).
The INL
Acquisition was accounted for as a business combination using the purchase
method of accounting under the provisions of SFAS No. 141. Accordingly, the
results of International Laboratories, Inc.’s operations have been included in
the consolidated financial statements beginning December 31, 2007. The
allocation of consideration for acquisitions requires extensive use of
accounting estimates and management judgment to allocate the purchase price of
tangible and identifiable intangible assets acquired and liabilities assumed
based on their respective fair values. Management believes the fair values
assigned to the assets acquired and liabilities assumed are based on reasonable
estimates and assumptions.
The
purchase price for the INL Acquisition was allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date, with the excess being allocated
to intangible assets, as Management deems a significant customer agreement with
a finite term as the value purchased.
The
customer agreement was with a top retailer, and without such agreement Adamis
would not have acquired INL. The length of the agreement at the time
of INL’s purchase was in excess of two and one-half years. The
purchase price was allocated as follows:
Cash
and Cash Equivalents
|
|
$
|
219,321
|
|
Accounts
Receivable
|
|
|
707,101
|
|
Prepaids
and Other Current Assets
|
|
|
29,155
|
|
Inventory
|
|
|
305,723
|
|
Property
|
|
|
434,935
|
|
Intangible
Asset Acquired
|
|
|
6,328,704
|
|
Accounts
Payable
|
|
|
(1,757,312
|
)
|
Accrued
Liabilities
|
|
|
(282,307
|
)
|
Deferred
Revenue
|
|
|
(114,437
|
)
|
Current
Portion of Long-Term Debt
|
|
|
(151,930
|
)
|
Long
Term Debt
|
|
|
(4,718,953
|
)
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
1,000,000
|
|
The
customer agreement valued as the acquired intangible asset had a remaining term
of 2.5 years at the acquisition date. Amortization of the intangible asset
recorded during the fiscal year ended March 31, 2008 was $632,870.
Subsequent
to year-end, INL was sold. Accordingly, the assets, liabilities, and results
from operations are classified as discontinued operations in the consolidated
financial statements (Notes 3 and 15).
NOTE 3:
DISCONTINUED
OPERATIONS
Effective
July 18, 2008, the Company’s packaging division (INL) (Note 2) was sold for
$2,654,000. On the closing date, $2,154,000 was paid to a lender (investor –
Note 9) to retire long term debt.
Additionally,
$500,000 of the purchase price was held in escrow to secure any of the Company’s
indemnification obligations. In addition, INL repaid loans
and
accrued interest
of approximately $4.6 million to Adamis
Pharmaceuticals
;
however, the Company forgave $570,618 of outstanding loans to INL.
The
8,000,000 shares of common stock held in escrow in connection with the Company’s
purchase and accrued interest of INL were released and cancelled in conjunction
with the sale agreement.
The
sale of INL resulted in an estimated gain of approximately $5.9 million.
Operating losses from INL from the acquisition date through disposal aggregated
approximately $4.6 million.
The
following table presents information regarding the calculation of the estimated
gain from the sale of INL:
Sale
Price - Imperium note payment
|
|
$
|
2,154,000
|
|
Sale
Price - Cash held in Escrow
|
|
|
500,000
|
|
Total
Sale Price
|
|
|
2,654,000
|
|
|
|
|
|
|
INL
Assets
|
|
|
9,615,763
|
|
INL
Liabilities
|
|
|
(13,470,365
|
)
|
Net
Liabilities
|
|
|
(3,854,602
|
)
|
|
|
|
|
|
Amount
of inter-company loan not paid by Buyer
|
|
|
570,618
|
|
|
|
|
|
|
Total
Basis
|
|
|
(3,283,984
|
)
|
|
|
|
|
|
Gain
on Sale
|
|
$
|
5,937,984
|
|
The
following table presents the major classes of assets and liabilities that have
been presented as assets of discontinued operations and liabilities of
discontinued operations at March 31, 2008:
Cash
and Cash Equivalents
|
|
$
|
144,490
|
|
Accounts
Receivable
|
|
|
1,361,973
|
|
Prepaids
and Other Current Assets
|
|
|
12,634
|
|
Inventory
|
|
|
464,887
|
|
Property
|
|
|
1,946,607
|
|
Long
Term Assets
|
|
|
5,695,834
|
|
|
|
|
|
|
Total
Assets from Discontinued Operations
|
|
$
|
9,626,425
|
|
Accounts
Payable
|
|
$
|
2,957,629
|
|
Accrued
Liabilities
|
|
|
455,456
|
|
Accrued
Interest
|
|
|
2,036
|
|
Deferred
Revenue
|
|
|
381,193
|
|
Debt
|
|
|
2,449,847
|
|
|
|
|
|
|
Total
Liabilities from Discontinued Operations
|
|
$
|
6,246,161
|
|
The
following table represents summarized financial information for the discontinued
operations for the year ended March 31, 2008:
Revenue,
net
|
|
$
|
1,492,253
|
|
Operating
Loss
|
|
$
|
(2,682,113
|
)
|
Net
Loss from Discontinued Operations
|
|
$
|
(2,544,111
|
)
|
NOTE 4:
CONCENTRATIONS OF CREDIT
RISK
Financial
instruments that potentially subject the Company to credit risk consist
principally of cash, accounts receivable, purchases and accounts
payable.
Cash
The
Company at times may have cash in excess of the Federal Deposit Insurance
Corporation (“FDIC”) limit. The Company maintains its cash with larger financial
institutions. The Company has not experienced losses on these accounts and
management believes that the Company is not exposed to significant risks on such
accounts. At March 31, 2008 and 2007, the Company had no cash deposits in excess
of FDIC limits.
Sales and Accounts
Receivable
The
Company grants credit to customers, substantially all of whom are pharmaceutical
distribution and medical parties located throughout the United States. The
Company typically does not require collateral from customers. The Company
monitors exposure to credit losses and maintains allowances for anticipated
losses considered necessary under the circumstances.
The
Company had no accounts receivable at March 31, 2007, and had one customer that
comprised 29.58% of the total accounts receivable balance at March 31,
2008.
The
Company is dependant on a limited number of customers for a significant portion
of its revenue. The Company had no sales during the year ended March 31, 2007,
and had the following concentrations in its sales during the year ended March
31, 2008:
|
|
2008
|
|
Cardinal
Health
|
|
|
38.49
|
%
|
McKesson
|
|
|
35.43
|
|
AmerisourceBergin
|
|
|
11.39
|
|
|
|
|
|
|
|
|
|
85.31
|
%
|
Accounts
receivable from continuing operations was $76,270 at March 31,
2008.
Purchases and Accounts
Payable
The
Company had no outstanding balance greater than 10% of total accounts payable at
March 31, 2007 and 2008.
The
Company is dependant on a limited number of vendors for a significant portion of
its trade purchases. The Company had no trade purchases during the year ended
March 31, 2007, and had one vendor that comprised 13.15% of the total trade
purchases during the year ended March 31, 2008.
NOTE 5:
INVENTORY
The
Company had no inventory at March 31, 2007. Inventory consists of the following
at March 31, 2008:
|
|
2008
|
|
|
|
|
|
Respiratory
and Allergy Products
|
|
$
|
104,151
|
|
Less:
Obsolescence Reserve
|
|
|
(79,888
|
)
|
Inventory,
Net
|
|
$
|
24,263
|
|
NOTE 6:
PREPAID EXPENSES AND OTHER CURRENT
ASSETS
Prepaid
expenses and other current assets at March 31, 2008 and 2007 consists of the
following:
|
|
2008
|
|
2007
|
|
Prepaid
Insurance
|
|
$
|
64,755
|
|
$
|
-
|
|
Prepaid
Rent
|
|
|
39,697
|
|
|
-
|
|
Other
Prepaid Expenses
|
|
|
-
|
|
|
50,000
|
|
Prepaid
Inventory
|
|
|
39,769
|
|
|
-
|
|
|
|
$
|
144,221
|
|
$
|
50,000
|
|
Prepaid
inventory consists of supplies valued at a cost of $39,769, which the Company
plans to use for future product research, development and testing. The Company
intends to charge the cost of these items to expense when the items are
used.
NOTE 7:
PROPERTY AND
EQUIPMENT
Property
and Equipment consists of the following at March 31, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Office
Furniture and Equipment
|
|
$
|
133,038
|
|
$
|
2,800
|
|
Computer
Equipment
|
|
|
22,707
|
|
|
-
|
|
Computer
Software
|
|
|
59,639
|
|
|
-
|
|
Vehicles
|
|
|
13,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
228,884
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
(174,904
|
)
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
53,980
|
|
$
|
2,633
|
|
NOTE 8:
NOTES PAYABLE TO RELATED
PARTIES
The
Company had notes payable amounting to $2,244,000 and $100,000 at March 31, 2008
and 2007, respectively, that bear interest at various rates between 10% and 12%.
All of the notes payable were from related parties and $480,000 of which was not
collateralized. The remaining notes were collateralized by substantially all of
the Company’s assets.
On
November 15, 2007, the Company issued a convertible promissory note to a
shareholder for $1,000,000 (included in the above amount) that bears interest at
10% per annum, matured on April 15, 2008, and granted a warrant, that expires on
November 15, 2012, to issue 1,000,000 shares of the Company’s common stock with
an exercise price of $0.50 per share.
The
warrant also includes piggyback registration rights in the event the Company
files a registration statement with the Securities and Exchange Commission
(“SEC”) subsequent to exercise of the warrant. The Company determined the
present value of the warrant at the grant date to be $0.42 per share using the
Black-Scholes method, assuming 0.10% volatility, 0.00% dividend rate, and a
discount rate of 3.67%. The difference between the present value and the
exercise price for the warrants, or $80,000, was recorded as additional paid-in
capital and a discount to the note payable, and is being accreted on a
straight-line basis as interest expense over the term of the note. The balance
of the discount was $8,000 at March 31, 2008.
The note
also contained a conversion feature that extends the shareholder the right to
convert the note into $1,000,000 of the Company’s common stock at a rate of
$0.50 per share, or 2,000,000 shares. The conversion of the $1,000,000 note, net
of the $80,000 discount, or $920,000, into 2,000,000 shares at a net value of
$0.46 per share results in a beneficial conversion. Accordingly, the benefit per
share was recorded as additional paid-in capital and a one-time interest charge
of $80,000.
The
effective interest rate of the note considering the attached warrant and
beneficial conversion feature is 39.6%.
The note
and accrued interest were retired on July 21, 2008, subsequent to the stated
April 15, 2008 maturity date. The Company continued to pay interest through the
retirement of the note, and there were no other penalties required by the lender
resulting from the default.
On
February 12, 2008, the Company issued a convertible promissory note to Cellegy
Pharmaceuticals, Inc. (“Cellegy”) for $500,000 (included in the above amount)
that bears interest at 10% per annum, and matures on June 12, 2009. The
conversion feature extends to Cellegy the right to convert the principal amount
of the note and accrued interest into shares of the Company’s common stock at
the fair market value at the time of the note, or $0.50 per share, in the event
that the effective date of the merger between Cellegy and the Company precedes
the stated maturity date (Note 15).
NOTE 9:
LONG-TERM DEBT
Long-term
debt consists of two $1,000,000 notes payable to an investor. The Notes bear
interest at 12% and are due on April 1, 2009 and April 10, 2009, respectively.
The investor was also issued 800,000 shares of the Company’s stock as a
condition to issue the debt, valued at $0.50 per share, or $400,000, recorded as
deferred financing costs, which is being amortized using the straight-line
method over the term of the note. Unamortized financing costs at March 31, 2008
amounted to $320,000 (Notes 11 and 15).
NOTE 10:
LICENSE AGREEMENT
On July
28, 2006, the Company entered into a nonexclusive, royalty free license
agreement with an entity for the technology used to research and develop new
viral therapies, and an exclusive royalty-bearing license requiring
a small
percentage
of revenue received by the Company on future products
developed and sold,with a payment cap of $10,000,000. The Company paid the
entity an initial license fee and granted one of the entity’s officers the right
to purchase 1,000,000 Founder’s shares in the Company at a price of $0.001
pursuant to a separate stock purchase agreement. The Company also granted the
entity a royalty-free nonexclusive license to use any improvements made on the
existing technology for research purposes only. The Company and the entity have
the right to sublicense with written permission of each party. In the event that
the entity 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
the Company.
Upon
development of the first product by the Company, the Company will pay the entity
the following amounts when certain milestones are reached:
Amount
|
|
Date due
|
|
|
|
|
$
|
50,000
|
|
Within
30 days of commencement of Phase I/II clinical
trial.
|
|
|
|
|
$
|
50,000
|
|
Within
30 days of commencement of a separate Phase II trial as required by the
Food and Drug Administration (“FDA”).
|
|
|
|
|
$
|
300,000
|
|
Within
30 days of commencement of a Phase III trial.
|
|
|
|
|
$
|
500,000
|
|
Within
30 days of submission of a biological license application or a new drug
application with the
FDA.
|
Total
milestone payments not to exceed $900,000. The total milestone
payments are only payable one time and will not repeat for subsequent
products. At March 31, 2008, no milestones had been
achieved.
The
agreement will remain in effect as long as the patent rights remain in
effect. Adamis has the right to terminate the agreement if it is
determined that no viable product can come from the
technology. Adamis would be required to transfer and assign 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. The licensor may terminate the license agreement in the
event of a material breach of the agreement by Adamis that has not been cured or
corrected within 90 days of notice of the breach.
On
September 22, 2006, the Company entered into an agreement with an entity to
manufacture an influenza vaccine for the Company. The agreement requires the
Company to pay $70,000 upon commencement of the project, followed by monthly
payments based upon services performed until the project is complete. No product
has been manufactured and no payments have been made at March 31,
2008.
Once the
project begins, the total payments will aggregate $283,420. The
project has an open ended start time.
Adamis
may terminate the agreement upon notice to the other party, other than
reimbursing the other party for non-cancelable materials and supplies ordered,
and work in process, through the date of termination.
NOTE 11:
COMMITMENTS AND
CONTINGENCIES
Operating
Leases
The
Company leases its office space under a two-year non-cancelable operating lease,
expiring December 31, 2008. The lease is in its second year and requires monthly
payments of approximately $7,800. At March 31, 2008, future minimum lease
payments under the non-cancelable operating lease were $70,247.
Contingencies
In
conjunction with the issuance of the long-term debt and private placement of
800,000 shares of common stock to one investor (Notes 9 and 12), the Company
entered into a registration rights agreement (the “Registration”) on December
21, 2007, which requires the Company to file a registration statement for the
resale of the common shares. The Company must file a registration statement
within one year of the first closing date (December 21, 2007). The Company
must also use its best efforts to have the registration statement declared
effective within 90 days of the filing with the SEC. In addition, the
Company must use its best efforts to maintain the effectiveness of the
registration statement until all common shares have been sold or may be sold
without volume restrictions pursuant to Rule 144(k) of the Securities
Act.
If the
registration statement is not filed or declared effective within the allowable
time frame or the Company cannot maintain its effectiveness, the Company must
pay partial liquidated damages in cash to the investor amounting to $30,000 for
each 30-day period that the Registration default remains uncured up to a
cumulative amount of $200,000. This obligation of the Company is to cease if (i)
the effective time of the Cellegy merger occurs on or prior to the Registration
Deadline, and (ii) certain terms related to these shares in conjunction with the
merger are satisfied (Note 15).
The
Company currently considers that the contingent payments required under the
registration rights agreement are not probable and, therefore, has not recorded
any liability. Should these payments become probable then a liability will be
recorded.
Litigation
INL is a
party in a pending State of Florida 6
th
Judicial
Circuit action styled
MBA MARKETING, LLC d/b/a EXPRESS
PERSONNEL SERVICES, a Florida limited liability company v. INTERNATIONAL
LABORATORIES, INC., a Florida for profit corporation
CASE NO.:
08-4941 CI 19. The claim asserts money that is due for using the employment
services of employees of the Plaintiff in violation of the servicing agreement.
Though Management believes that the plaintiff is unlikely to prevail in its
request for damages, if the plaintiff were to prevail in these claims it could
have a material adverse effect on the Company’s consolidated financial position
and results of operations.
NOTE 12:
CAPITAL STRUCTURE
The
Company is authorized to issue 100,000,000 shares of common stock and 20,000,000
shares of preferred stock with a par value of $0.0001 per share.
In June
2006, the Company was founded through an issuance of 16,684,500 shares of common
stock for $0.001 per share or $16,685. The Company has repurchase rights related
to 10,409,500 of these shares as of March 31, 2008, which have not been included
in the calculation of weighted average shares outstanding.
In July
2006, the Company issued 1,253,000 of its common stock to seed investors for
$0.10 per share, or $125,300.
During
2007, the Company retired outstanding debt and accrued interest through issuing
629,737 shares of its common stock at $0.50 per share, or $314,868.
On
various dates during 2006 and 2007, the Company sold 1,160,400 shares of its
common stock valued at $0.50 per share, or $580,200, in a private
placement.
In April
2007, the Company issued 5,159,807 shares of its common stock in exchange for
all of the outstanding shares of HVG at $0.50 per share (Note 2). The Company
has repurchase options related to 1,000,000 of the shares, of which 71,287 have
lapsed as of March 31, 2008 (Note 15). The remaining 928,713 have not been
included in the calculation of weighted-average shares outstanding.
In
November 2007, 669,019 shares of the Company’s common stock were issued to
executives of the Company at $0.50 per share with various repurchase rights,
which are not included in the calculation of weighted average shares
outstanding.
In
November 2007, the Company issued 50,000 shares of its common stock at $0.50 per
share in lieu of interest associated with an outstanding loan.
In
December 2007, the Company issued 800,000 of its common stock at $0.50 per share
as costs to obtain long-term debt (Note 9).
In
December 2007, the Company issued 2,000,000 shares of its common stock in
exchange for all of the outstanding shares of INL at $0.50 per
share.
On
various dates during 2007, the Company sold 6,591,000 shares of its common stock
valued at $0.50 per share, or $3,295,500, in a private placement.
On
various dates during 2008, the Company sold 392,666 shares of its common stock
valued at $0.75, or $294,499, in a private placement.
NOTE 13:
INCOME TAXES
The
Company did not elect to file consolidated tax returns. Accordingly, the
deferred tax assets for each of the consolidated companies can only be used to
offset future tax expense of the respective company.
The
benefit for income taxes from continuing operations consists of the following
for the years ended March 31, 2008 and 2007:
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
Adamis
Pharmaceuticals
|
|
Adamis
Labs
|
|
Adamis
Pharmaceuticals
|
|
Adamis
Labs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Deferred
|
|
|
(606,000
|
)
|
|
(741,000
|
)
|
|
(211,000
|
)
|
|
(235,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(606,000
|
)
|
|
(741,000
|
)
|
|
(211,000
|
)
|
|
(235,000
|
)
|
Change
in Valuation Allowance
|
|
|
606,000
|
|
|
741,000
|
|
|
211,000
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Benefit, net
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
At March
31, 2008 and 2007, the significant components of the deferred tax assets from
continuing operations are summarized below:
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
Adamis
Pharmaceuticals
|
|
Adamis
Labs
|
|
Adamis
Pharmaceuticals
|
|
Adamis
Labs
|
|
Net
Operating Loss
Carryforwards
|
|
$
|
812,000
|
|
$
|
843,000
|
|
$
|
196,000
|
|
$
|
3,000
|
|
Deferred
Tax Assets
|
|
|
128,000
|
|
|
133,000
|
|
|
44,000
|
|
|
232,000
|
|
Deferred
Tax
(Liabilities)
|
|
|
(123,000
|
)
|
|
-
|
|
|
(29,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Assets
|
|
|
817,000
|
|
|
976,000
|
|
|
211,000
|
|
|
235,000
|
|
Less
Valuation
Allowance
|
|
|
(817,000
|
)
|
|
(976,000
|
)
|
|
(211,000
|
)
|
|
(235,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
We have
determined at March 31, 2008 and 2007 that a full valuation allowance would be
required against all of our operating loss carryforwards and deferred tax assets
that we do not expect to be utilized by deferred tax liabilities.
The
following table reconciles our losses from continuing operations before income
taxes for the years ended March 31, 2008 and 2007:
|
|
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
Adamis
Labs
|
|
Adamis
Pharmaceuticals
|
|
Adamis Labs
|
|
Loss
from Continuing
Operations
|
|
|
|
|
$
|
(2,165,000
|
)
|
$
|
(5,014,000
|
)
|
$
|
(561,000
|
)
|
$
|
(627,000
|
)
|
Permanent
Differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Impairment
|
|
|
|
|
|
-
|
|
|
3,151,000
|
|
|
-
|
|
|
-
|
|
Non-Cash
Interest
|
|
|
|
|
|
257,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Meals
and Entertainment
|
|
|
|
|
|
64,000
|
|
|
14,000
|
|
|
2,000
|
|
|
2,000
|
|
|
|
|
|
|
$
|
(1,844,000
|
)
|
$
|
(1,849,000
|
)
|
$
|
(559,000
|
)
|
$
|
(625,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Statutory Rate
|
|
|
34.00
|
%
|
$
|
(736,000
|
)
|
$
|
(1,705,000
|
)
|
$
|
(191,000
|
)
|
$
|
(213,000
|
)
|
State
Income Tax, net of
Federal
Tax
|
|
|
3.63
|
%
|
|
(79,000
|
)
|
|
(182,000
|
)
|
|
(21,000
|
)
|
|
(23,000
|
)
|
Intercompany
Eliminations
|
|
|
37.63
|
%
|
|
88,000
|
|
|
(45,000
|
)
|
|
-
|
|
|
-
|
|
Permanent
Differences
|
|
|
37.63
|
%
|
|
121,000
|
|
|
1,191,000
|
|
|
1,000
|
|
|
1,000
|
|
Change
in Valuation
Allowance
|
|
|
|
|
|
606,000
|
|
|
741,000
|
|
|
211,000
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Tax Benefit
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
We paid
no income tax during the years ended March 31, 2008 and 2007. We do not expect
to pay income tax in the fiscal year ending March 31, 2009.
NOTE 14:
LIQUIDITY
The
consolidated financial statements have been presented on the basis that the
Company is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred losses since its inception, and has an accumulated deficit of
$10,284,425 at March 31, 2008. The Company’s operations have been financed
primarily through the issuance of debt and equity infusions. The Company is
constantly evaluating its cash needs and existing burn rate, in order to make
appropriate adjustments to operating expenses. Depending on its actual future
cash needs, the Company may need to raise additional debt or equity capital to
provide funding for ongoing future operations, or to refinance existing
indebtedness. No assurances can be given that the Company will be successful in
obtaining additional capital, or that such capital will be available on terms
acceptable to the Company. The Company’s continued existence is dependent upon
its ability to raise capital and to market and sell its products successfully.
The consolidated financial statements do not include any adjustments to reflect
future effects on the recoverability and classification of assets or amounts and
classification of liabilities that may result if the Company is
unsuccessful.
NOTE 15:
SUBSEQUENT EVENTS
The
Company entered into a merger agreement on February 12, 2008 with Cellegy. While
the agreement has different ownership scenarios depending on the amount of cash
that Cellegy contributes, the approximate ownership split is anticipated to be
approximately 93% for the Company and approximately 7% for Cellegy shareholders.
The merger is contingent, among other items, on the filing and effectiveness of
a Form S-4 registration statement and approval of both companies’ shareholders.
Should the merger not occur because of the Company’s failure to meet certain
requirements, as described in the agreement, a termination fee of $150,000 would
be owed to Cellegy.
Effective
July 18, 2008, the Company’s packaging division (INL) (Note 2) was sold for
$2,654,000. On the closing date, $2,154,000 was paid to a lender (investor –
Note 9) to retire long-term debt. Additionally, $500,000 of the purchase price
was held in escrow to secure any of the Company’s indemnification obligations.
In addition, INL repaid loans of approximately $4.6 million to Adamis
Pharmaceuticals. The 8,000,000 shares of common stock held in escrow in
connection with the Company’s purchase of INL were released and cancelled in
conjunction with the sale agreement. The sale of INL resulted in an estimated
gain of approximately $6.7 million. Operating losses from INL from the
acquisition date through disposal aggregated approximately $7.0
million.
The
Company’s two million dollar long-term notes to an investor were repaid July 18,
2008 as part of the sale of INL. The amount repaid was $2,154,000. The amount
consisted of principal, 12% interest and an early repayment penalty of $20,000.
The Company also retired $1,744,000 of its current debt to various related party
debt holders.
In
September 2008, the Company exercised its repurchase option related to 316,000
shares of its common stock issued in connection with the HVG Acquisition (Note
12). The common stock was repurchased for $0.50 per share and is held in the
Company’s treasury.
ADAMIS
PHARMACEUTICALS CORPORATION
AND
SUBSIDIARIES
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
ADAMIS
PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
|
PAGE
|
|
|
FINANCIAL
STATEMENTS (UNAUDITED):
|
|
|
|
Consolidated
Balance Sheet
|
F-61
|
|
|
Consolidated
Statements of Operations
|
F-62
|
|
|
Consolidated
Statements of Cash Flows
|
F-63-F-64
|
|
|
Notes
to the Consolidated Financial Statements
|
F-65-F-80
|
CONSOLIDATED
BALANCE SHEET
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
705,577
|
|
|
$
|
541
|
|
Accounts
Receivable, Net
|
|
|
160,766
|
|
|
|
76,270
|
|
Inventory,
Net
|
|
|
137,061
|
|
|
|
24,263
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
344,191
|
|
|
|
144,221
|
|
Assets
from Discontinued Operations
|
|
|
500,000
|
|
|
|
9,626,425
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,847,595
|
|
|
|
9,871,720
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, Net
|
|
|
40,959
|
|
|
|
53,980
|
|
DEFERRED
ACQUISITION COSTS
|
|
|
101,247
|
|
|
|
101,247
|
|
OTHER
ASSETS
|
|
|
21,871
|
|
|
|
21,871
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
2,011,672
|
|
|
$
|
10,048,818
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
709,892
|
|
|
$
|
991,144
|
|
Accrued
Expenses
|
|
|
527,228
|
|
|
|
379,982
|
|
Liabilities
from Discontinued Operations
|
|
|
-
|
|
|
|
6,246,161
|
|
Notes
Payable to Related Parties
|
|
|
500,000
|
|
|
|
1,744,000
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,737,120
|
|
|
|
9,361,287
|
|
|
|
|
|
|
|
|
|
|
NOTE
PAYABLE TO RELATED PARTY, Less Current Maturity
|
|
|
-
|
|
|
|
500,000
|
|
LONG-TERM
DEBT, Net of Financing Cost
|
|
|
-
|
|
|
|
1,680,000
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,737,120
|
|
|
|
11,541,287
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
Preferred
Stock – Par Value $.0001; 20,000,000 Shares Authorized; Issued and
Outstanding-None
|
|
|
-
|
|
|
|
-
|
|
Common
Stock – Par Value $.0001; 100,000,000 Shares Authorized; 35,892,761 and
34,721,110 Issued and Outstanding, Respectively
|
|
|
3,589
|
|
|
|
3,471
|
|
Additional
Paid-in Capital
|
|
|
9,587,107
|
|
|
|
8,788,485
|
|
Treasury
Stock @ Cost - 316,000 and - Shares,
Respectively
|
|
|
(316
|
)
|
|
|
-
|
|
Accumulated
Deficit
|
|
|
(9,315,828
|
)
|
|
|
(10,284,425
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Deficit
|
|
|
274,552
|
|
|
|
(1,492,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,011,672
|
|
|
$
|
10,048,818
|
|
ADAMIS
PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
202,339
|
|
|
$
|
1,327
|
|
|
$
|
311,481
|
|
|
$
|
203,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
137,759
|
|
|
|
66,383
|
|
|
|
181,448
|
|
|
|
145,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
64,580
|
|
|
|
(65,056
|
)
|
|
|
130,033
|
|
|
|
57,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,333,786
|
|
|
|
800,222
|
|
|
|
2,335,760
|
|
|
|
1,735,428
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
25,195
|
|
|
|
140,489
|
|
|
|
336,138
|
|
|
|
153,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(1,294,401
|
)
|
|
|
(1,005,767
|
)
|
|
|
(2,541,865
|
)
|
|
|
(1,830,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
-
|
|
|
|
16,209
|
|
|
|
-
|
|
|
|
19,732
|
|
Interest
Expense
|
|
|
(194,631
|
)
|
|
|
(11,442
|
)
|
|
|
(391,706
|
)
|
|
|
(17,827
|
)
|
Other
Income
|
|
|
-
|
|
|
|
21,050
|
|
|
|
-
|
|
|
|
21,050
|
|
Gain
on Sale of Asset
|
|
|
-
|
|
|
|
-
|
|
|
|
1,329
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(194,631
|
)
|
|
|
25,817
|
|
|
|
(390,377
|
)
|
|
|
22,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
|
(1,489,032
|
)
|
|
|
(979,950
|
)
|
|
|
(2,932,242
|
)
|
|
|
(1,807,954
|
)
|
Income
from Discontinued Operations
|
|
|
6,031,550
|
|
|
|
-
|
|
|
|
3,900,839
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
4,542,518
|
|
|
$
|
(979,950
|
)
|
|
$
|
968,597
|
|
|
$
|
(1,807,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
Discontinued
Operations
|
|
|
0.24
|
|
|
|
-
|
|
|
|
0.16
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Income (Loss) Per Share
|
|
$
|
0.18
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted Average Shares Outstanding
|
|
|
24,697,594
|
|
|
|
16,240,122
|
|
|
|
24,438,410
|
|
|
|
14,442,089
|
|
ADAMIS
PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Six
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) from Continuing Operations
|
|
$
|
(2,932,242
|
)
|
|
$
|
(1,807,954
|
)
|
Adjustments
to Reconcile Net (Loss) from Continuing Operations to Net
Cash
(Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
Expense
|
|
|
9,349
|
|
|
|
4,663
|
|
Gain
on Sale of Asset
|
|
|
(1,329
|
)
|
|
|
-
|
|
Inventory
Reserve Adjustment
|
|
|
(22,366
|
)
|
|
|
-
|
|
Loan
Discount Accretion
|
|
|
328,000
|
|
|
|
-
|
|
Beneficial
Conversion Feature Interest
|
|
|
(80,000
|
)
|
|
|
-
|
|
Sales
Returns Reserve Adjustment
|
|
|
(10,681
|
)
|
|
|
-
|
|
Change
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
Decrease in:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(84,496
|
)
|
|
|
59,751
|
|
Interest
Receivable
|
|
|
-
|
|
|
|
29,699
|
|
Inventory
|
|
|
(90,432
|
)
|
|
|
(25,100
|
)
|
Prepaid
Expenses and Other Current Assets
|
|
|
(199,970
|
)
|
|
|
68,043
|
|
Other
Assets
|
|
|
-
|
|
|
|
571
|
|
Increase
(Decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
(281,252
|
)
|
|
|
268,306
|
|
Accrued
Expenses
|
|
|
157,927
|
|
|
|
(3,487
|
)
|
Net
Cash (Used in) Operating Activities from Continuing
Operations
|
|
|
(3,207,492
|
)
|
|
|
(1,405,508
|
)
|
Net
Cash (Used in) Operating Activities from Discontinued
Operations
|
|
|
(662,603
|
)
|
|
|
-
|
|
Net
Cash (Used in) Operating Activities
|
|
|
(3,870,095
|
)
|
|
|
(1,405,508
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash
Acquired in HealthCare Ventures Group, Inc.
Acquisition
|
|
|
-
|
|
|
|
12,611
|
|
Cash
Received from Sale of International Laboratories, Inc.
|
|
|
2,154,000
|
|
|
|
-
|
|
International
Laboratories, Inc. Obligation Repayments
|
|
|
4,322,082
|
|
|
|
-
|
|
Sale
of Property and Equipment
|
|
|
5,001
|
|
|
|
1,680
|
|
Net
Cash Provided by Investing Activities from Continuing
Operations
|
|
|
6,481,083
|
|
|
|
14,291
|
|
Net
Cash (Used in) Investing Activities from Discontinued
Operations
|
|
|
(862,122
|
)
|
|
|
-
|
|
Net
Cash Provided by Investing Activities
|
|
|
5,618,961
|
|
|
|
14,291
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Decrease
in Subscriptions Receivable
|
|
|
-
|
|
|
|
126,000
|
|
Payments
of Notes Payable to Related Parties
|
|
|
(1,752,000
|
)
|
|
|
(1,026,731
|
)
|
Proceeds
from Issuance of Common Stock
|
|
|
878,740
|
|
|
|
2,383,000
|
|
Purchase
of Treasury Stock
|
|
|
(316
|
)
|
|
|
-
|
|
Payments
of Loans
|
|
|
(2,000,000
|
)
|
|
|
-
|
|
Net
Cash (Used in) Provided by Financing Activities from Continuing
Operations
|
|
|
(2,873,576
|
)
|
|
|
1,482,269
|
|
Net
Cash Provided by Financing Activities from Discontinued
Operations
|
|
|
1,829,746
|
|
|
|
-
|
|
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(1,043,830
|
)
|
|
|
1,482,269
|
|
Increase
in Cash
|
|
|
705,036
|
|
|
|
91,052
|
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
541
|
|
|
|
36,763
|
|
Ending
|
|
$
|
705,577
|
|
|
$
|
127,815
|
|
ADAMIS
PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Six
Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid for Interest
|
|
$
|
208,470
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING AND
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Issued to Acquire HealthCare Ventures Group, Inc. (Note
2)
|
|
$
|
-
|
|
|
$
|
2,579,904
|
|
|
|
|
|
|
|
|
|
|
Forgiveness
of Debt to International Laboratories, Inc. (Note 3)
|
|
$
|
570,618
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Reduction
of Capital from Unexcercised Beneficial Conversion Feature
(Note 7)
|
|
$
|
80,000
|
|
|
$
|
-
|
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of
Business
Adamis
Pharmaceuticals Corporation and Subsidiaries is comprised of the following
companies: Adamis Pharmaceuticals Corporation, Adamis Laboratories, Inc., and
International Laboratories, Inc. (collectively “Adamis Pharmaceuticals”, the
“Company”, “we”, “our”). The Company’s strategic objective is to build a
publicly-held company that combines the financial stability and sales force of a
specialty pharmaceutical company with the near-term development of
biopharmaceutical products.
Adamis
Pharmaceuticals Corporation was established under the laws of the State of
Delaware on June 6, 2006 and has devoted substantially all its efforts to
establishing a new business. Adamis Viral Therapies, Inc. was established under
the laws of the State of Delaware on March 23, 2007, and was merged into Adamis
Pharmaceuticals Corporation, the surviving entity, on March 30, 2007. The merged
company changed its name to Adamis Viral Therapies, Inc. (“Viral”) on March 30,
2007. Viral had no activity during the periods ended September 30, 2008 and
2007.
Adamis
Holding Corporation was established under the laws of the State of Delaware on
March 23, 2007. Adamis Holding Corporation changed its name to Adamis
Pharmaceuticals Corporation on March 30, 2007. Viral transferred all of its
authorized and outstanding shares of stock to Adamis Pharmaceuticals Corporation
on March 30, 2007.
Adamis
Laboratories, Inc. (formally known as HealthCare Ventures Group, Inc.) was
established under the laws of the State of Delaware on September 2, 2005, and
was acquired by the Company on April 23, 2007 (Note 2). On April 24, 2007,
Healthcare Ventures Group, Inc. changed its name to Adamis Laboratories, Inc.
(“Adamis Labs”). Adamis Labs is a distributor of respiratory
products.
International
Laboratories, Inc. (“INL”) was incorporated in the State of Florida in March
1981. INL’s operations consist of the packaging of prescription and
non-prescription pharmaceutical and nutraceutical goods mainly for a major
retailer (Notes 2 and 3).
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The
accompanying unaudited consolidated financial statements include Adamis
Pharmaceuticals and its wholly-owned subsidiaries, Adamis Labs and INL. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Accounting
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the unaudited consolidated financial
statement. Actual results could differ from those estimates, and the
differences could be material.
Long-Lived
Assets
The
Company periodically assesses whether there has been permanent impairment of its
long-lived assets held and used in accordance with Statement of Financial
Standards (“SFAS”) No. 144, “
Accounting for the Impairment or
Disposal of Long-Lived Assets
” (“SFAS No. 144”). SFAS No. 144 requires
the Company to review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated from the use and eventual
disposition of the asset.
Discontinued
Operations
As
discussed in Note 3, the results of operations for the three and six months
ended September 30, 2008, and the assets and liabilities at September 30, 2008
and March 31, 2008, related to INL have been accounted for as discontinued
operations in accordance with SFAS No. 144. There were no operations
or related assets and liabilities of INL in the accompanying unaudited
consolidated financial statements of prior periods.
Cash and Cash
Equivalents
For
purposes of the unaudited consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities at the date of
purchase of three months or less to be cash equivalents. The Company
had $640,584 and $0 in money market securities at September 30, 2008 March 31,
2008, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “
Accounting for Income Taxes
”
(“SFAS No. 109”). SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes. Under the asset and
liability approach, deferred taxes are provided for the net tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Valuation allowances are established where management determines that it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
On
April 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “
Accounting for Uncertainty on Income
Taxes, and Interpretation of SFAS No. 109, Accounting for Income Taxes
,”
which did not have a material impact on the Company’s liability for unrecognized
tax benefits.
Revenue
Recognition
Our
primary customers are pharmaceutical wholesalers. In accordance with our revenue
recognition policy, revenue is recognized when title and risk of loss are
transferred to the customer, the sale price to the customer is fixed and
determinable, and collectability of the sale price is reasonably assured.
Reported revenue is net of estimated customer returns and other wholesaler fees.
Our policy regarding sales to customers is that we do not recognize revenue
from, or the cost of, such sales, where we believe the customer has more than a
demonstrably reasonable level of inventory. We make this assessment based on
historical demand, historical customer ordering patterns for purchases, business
considerations for customer purchases and estimated inventory levels. If our
actual experience proves to be different than our assumptions, we would then
adjust such allowances accordingly.
We
estimate allowances for revenue dilution items using a combination of
information received from third parties, including market data, inventory
reports from our major U.S. wholesaler customers, when available, historical
information and analysis that we perform. The key assumptions used to arrive at
our best estimate of revenue dilution reserves are estimated customer inventory
levels and purchase forecasts provided
.
Our
estimates of inventory at wholesaler customers and in the distribution channels
are subject to the inherent limitations of estimates that rely on third-party
data, as certain third-party information may itself rely on estimates, and
reflect other limitations. We believe that such provisions are reasonably
ascertainable due to the limited number of assumptions involved and the
consistency of historical experience.
Inventory
Inventory,
consisting of allergy products, respiratory products, and pre-launch epi
inventory is recorded at the lower of cost or market, using the weighted average
method.
Property and
Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets. The costs of leasehold improvements, if any, are amortized
over the lesser of the lease term or the life of the improvement, if
shorter.
Estimated
useful lives used to depreciate property and equipment are as
follows:
|
Estimated Useful
|
|
Lives In Years
|
|
|
Office
Furniture and Equipment
|
7
|
Computer
Equipment and Software
|
3
|
Vehicles
|
3
|
Deferred Acquisition
Costs
The
Company incurred certain professional fees associated with specific potential
acquisition targets. These costs, should the acquisition occur, will be
capitalized as part of the purchase price paid for the acquisition. Should the
acquisition not occur, the Company will expense these costs when that
determination occurs.
Accounts Receivable,
Allowance for Doubtful Accounts and Sales Returns
Trade
accounts receivable are stated net of an allowance for doubtful
accounts. The Company estimates an allowance based on its historical
experience of the relationship between actual bad debts and net credit
sales. At September 30, 2008 and March 31, 2008, no allowance for
doubtful accounts was recorded.
The
Company has established an allowance for sales returns based on management’s
best estimate of probable loss inherent in the accounts receivable
balance. Management determines the allowance based on current credit
conditions, historical experience, and other currently available information.
The allowance for sales returns was $10,341 and $21,022 at September 30, 2008
and March 31, 2008, respectively, and is included in accrued expenses on the
consolidated balance sheet.
Registration Payment
Arrangements
The
Company accounts for registration payment arrangements under FASB Staff Position
EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to make
future payments under a registration
payment
arrangement should be
separately recognized and measured in accordance with SFAS No. 5, “Accounting
for Contingencies.” FSP EITF 00-19-2 was issued in December 2006. Early adoption
of FSP EITF 00-19-2 is permitted and the Company adopted FSP EITF 00-19-2
effective January 3, 2007. At September 30, 2008 and March 31, 2008 the Company
has no accrued estimated penalty. (Notes 7 and 10)
Research and
Development
The
Company accounts for research and development costs in accordance with SFAS No.
2, “
Accounting for Research
and Development Costs
” (“SFAS No. 2”) and Emerging Issues Task Force
(“EITF”) Issue No. 07-3, “
Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities
” (“EITF Issue No. 07-3”). Under SFAS No. 2, research and
development costs are expensed as incurred. EITF Issue No. 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.
Research
and development costs, which primarily consists of salaries, contractor fees,
facility and building costs, utilities, administrative expenses and other
corporate costs expensed in accordance with such pronouncements, were $25,195
and $140,489 for the three months ended September 30, 2008 and 2007,
respectively, and $336,138 and $153,089 for the six months ended September 30,
2008 and 2007, respectively. Expenses related to outside contractors for
development of the epinephrine syringe (“EPI”) product during the three months
ended September 30, 2008 and 2007 were $16,571 and $137,400, respectively, and
were $50,427 and $150,000 for the six months ended September 30, 2008 and 2007,
respectively. Non-refundable advanced payments used and expensed during the
three and six months ended September 30, 2008 were $0 and $143,207,
respectively, and were $0 for both the three and six months ended September 31,
2007. Non-refundable advanced payments for products to be used in the
development of EPI were $295,729 and $39,769 at September 30, 2008 and March 31,
2008, respectively. Expenses related to outside contractors for the
development of influenza technology were $8,624 and $3,089 for the three months
ended September 30, 2008 and 2007, respectively, and were $142,504 and $3,089
for the six months ended September 30, 2007, respectively.
Shipping and
Handling
Shipping
and handling costs are included in selling, general and administrative expenses.
Shipping and handling costs were $3,728 and $2,345 for the three months ended
September 30, 2008 and 2007, respectively, and $6,647 and $14,021 for the six
months ended September 30, 2008 and 2007, respectively.
Advertising
Expenses
Advertising
costs are expensed as incurred as set forth in Statement of Position (“SOP”) No.
93-7,
“
Reporting on Advertising
Costs
.” Advertising expenses were $2,848 and $0 during the three months
ended September 30, 2008 and 2007, respectively, and $2,848 and $0 during the
six months ended September 30, 2008 and 2007, respectively.
Net Loss Per
Share
The
Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share,"
under
the provisions of which basic loss per share is computed by dividing the loss
attributable to holders of common stock for the period by the weighted average
number of shares of common stock outstanding during the period. Since the effect
of common stock equivalents was anti-dilutive, all such equivalents were
excluded from the calculation of weighted average shares outstanding.
Outstanding warrants at September 30, 2008 and March 31, 2008 were 1,000,000,
and there were no other common stock equivalents outstanding.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “
Business Combinations
” (“SFAS
No. 141(R)”), which establishes the principles and requirements for
how an acquirer: (1) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
(3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination; and (4) requires acquisition costs incurred prior to
acquisition to be expensed rather than deferred. SFAS No. 141(R) replaces
SFAS No. 141, “
Business
Combinations.
” SFAS No. 141(R) is effective in fiscal years
beginning after December 15, 2008. The Company has noted that under the
provisions of SFAS No. 141(R), $101,247 capitalized as deferred acquisition
costs at September 30, 2008 and March 31, 2008, would be
expensed.
In
September 2006, the FASB issued SFAS No. 157, “
Fair Value
Measurements
,” which will become effective for the Company in
its fiscal 2009, except as amended by FSP SFAS 157-1 and FSP
SFAS 157-2, as described below. This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements; however, it does not require any new fair value
measurements. The provisions of SFAS No. 157 will be applied prospectively
to fair value measurements and disclosures for financial assets and financial
liabilities and nonfinancial assets and nonfinancial liabilities recognized or
disclosed at fair value in the financial statements on at least an annual basis
beginning in the first quarter of the Company's fiscal 2009 year. The Company
does not expect that its adoption of the provisions of SFAS No. 157 will
have a material effect on its financial condition, results of operations or cash
flows.
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 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 that 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, the 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. Currently, the Company has no plan to adopt the fair value option,
under SFAS No. 159, for any of its eligible items.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
” (“SFAS No. 160”), which establishes
accounting and recording standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary to make
them consistent with the requirements of SFAS No. 141(R). SFAS No. 160 is
effective in fiscal years beginning after December 15, 2008. The Company
does not expect that its adoption of the provisions of SFAS No. 160 will have a
material effect on its financial condition, results of operations or cash
flows.
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 Issue No. 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 Issue No. 07-3
applies prospectively for new contractual arrangements entered into in fiscal
years beginning after December 15, 2007. The Company recognizes these
non-refundable advanced payments as an asset upon payment, and expenses costs as
goods are used and services are provided in accordance with EITF Issue No.
07-3.
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
April 1, 2007, and there was no material effect on its results of operations or
financial position.
NOTE
2: ACQUISITIONS
Acquisition of HealthCare
Ventures Group, Inc.
On
April 23, 2007, the Company acquired all of the outstanding shares of HealthCare
Ventures Group, Inc. in exchange for 5,159,807 shares of common stock valued at
$0.50 per share, or approximately $2.6 million (the “HVG Acquisition”). The
purchase agreement provides for an additional 7,451,304 restricted shares held
in escrow with issuance conditional upon future earnings targets, 719,019 of
which were subsequently cancelled. The acquired company’s name was changed to
Adamis Labs.
The
HVG Acquisition was accounted for as a business combination using the purchase
method of accounting under the provisions of SFAS No. 141. Accordingly, the
results of Adamis Labs’s operations have been included in the unaudited
consolidated financial statements from the date of acquisition. The allocation
of consideration for acquisitions requires extensive use of accounting estimates
and management’s judgment to allocate the purchase price of tangible and
identifiable intangible assets acquired and liabilities assumed based on their
respective fair values. Management believes fair values assigned to the assets
acquired and liabilities assumed are based on reasonable estimates and
assumptions.
The
purchase price for the HVG Acquisition was allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date, with the excess being allocated
to intangible assets, as follows:
Cash
|
|
$
|
12,611
|
|
Accounts
Receivable
|
|
|
138,218
|
|
Inventory
|
|
|
37,373
|
|
Prepaid
and Other Current Assets
|
|
|
71,915
|
|
Property
|
|
|
69,645
|
|
Other
Assets
|
|
|
22,442
|
|
Intangible
Assets
|
|
|
3,150,985
|
|
Accounts
Payable
|
|
|
(148,657
|
)
|
Accrued
Liabilities
|
|
|
(191,611
|
)
|
Interest
Payable
|
|
|
(33,017
|
)
|
Loan
Payable
|
|
|
(550,000
|
)
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
2,579,904
|
|
During
the year ended March 31, 2008, the Company recorded an impairment charge related
to the intangible asset (consisting primarily of a distribution network)
associated with the transaction that the Company determined had no remaining
value.
The
following table represents summarized financial information of the results of
operations included in the Consolidated Income:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
202,339
|
|
|
$
|
1,327
|
|
|
$
|
311,481
|
|
|
$
|
203,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
$
|
(810,690
|
)
|
|
$
|
(1,676,830
|
)
|
|
$
|
(1,545,059
|
)
|
|
$
|
(1,284,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Operations
|
|
$
|
(807,659
|
)
|
|
$
|
(1,655,780
|
)
|
|
$
|
(1,545,059
|
)
|
|
$
|
(1,263,308
|
)
|
Acquisition of International
Laboratories, Inc.
On
December 31, 2007, the Company acquired all of the outstanding shares of INL in
an all stock transaction for 2,000,000 shares of common stock valued at $0.50
per share, or $1.0 million (the “INL Acquisition”). The purchase agreement
provided for an additional 8,000,000 restricted shares to be held in escrow with
issuance conditional upon future earnings targets (Note 3).
The
INL Acquisition was accounted for as a business combination using the purchase
method of accounting under the provisions of SFAS No. 141. Accordingly, the
results of International Laboratories, Inc.’s operations have been included in
the unaudited consolidated financial statements beginning December 31, 2007. The
allocation of consideration for acquisitions requires extensive use of
accounting estimates and management judgment to allocate the purchase price of
tangible and identifiable intangible assets acquired and liabilities assumed
based on their respective fair values. Management believes the fair values
assigned to the assets acquired and liabilities assumed are based on reasonable
estimates and assumptions.
The
purchase price for the INL Acquisition was allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date, with the excess being allocated
to intangible assets, as Management deems a significant customer agreement with
a finite term as the value purchased. The customer agreement was with
a top retailer, and without such agreement Adamis would not have acquired
INL. The length of the agreement at the time of INL’s purchase was in
excess of two and one-half years.
The
purchase price was allocated as follows:
Cash
and Cash Equivalents
|
|
$
|
219,321
|
|
Accounts
Receivable
|
|
|
707,101
|
|
Prepaids
and Other Current Assets
|
|
|
29,155
|
|
Inventory
|
|
|
305,723
|
|
Property
|
|
|
434,935
|
|
Intangible
Asset Acquired
|
|
|
6,328,704
|
|
Accounts
Payable
|
|
|
(1,757,312
|
)
|
Accrued
Liabilities
|
|
|
(282,307
|
)
|
Deferred
Revenue
|
|
|
(114,437
|
)
|
Current
Portion of Long-Term Debt
|
|
|
(151,930
|
)
|
Long-Term
Debt
|
|
|
(4,718,953
|
)
|
|
|
|
|
|
Net
Assets Acquired
|
|
$
|
1,000,000
|
|
The
customer agreement valued as the acquired intangible asset had a remaining term
of 2.5 years at the acquisition date. Amortization of the intangible asset
recorded during the three and six months ended September 30, 2008 was $126,574
and $759,444, respectively.
On
July 18, 2008, INL was sold. Accordingly, the assets, liabilities, and results
from operations are classified as discontinued operations in the unaudited
consolidated financial statements (Note 3).
NOTE
3: DISCONTINUED
OPERATIONS
Effective
July 18, 2008, the Company’s packaging division (INL) (Note 2) was sold for
$2,654,000. On the closing date, $2,154,000 was paid to a lender (investor –
Note 9) to retire long-term debt. Additionally, $500,000 of the purchase price
was held in escrow to secure any of the Company’s indemnification obligations.
In addition, INL repaid loans and accrued interest of $4,630,813 to Adamis
Pharmaceuticals; however, the Company forgave $570,618 of outstanding loans to
INL. The 8,000,000 shares of common stock held in escrow in connection with the
Company’s purchase of INL were released and cancelled in conjunction with the
sale agreement.
The
following table presents information regarding the calculation of the gain from
the sale of INL:
Sale
Price - Imperium note payment
|
|
$
|
2,154,000
|
|
Sale
Price - Cash held in Escrow
|
|
|
500,000
|
|
Total
Sale Price
|
|
|
2,654,000
|
|
|
|
|
|
|
INL
Assets
|
|
|
9,615,763
|
|
INL
Liabilities
|
|
|
(13,470,365
|
)
|
Net
Liabilities
|
|
|
(3,854,602
|
)
|
|
|
|
|
|
Amount
of inter-company loan not paid by Buyer
|
|
|
570,618
|
|
|
|
|
|
|
Total
Basis
|
|
|
(3,283,984
|
)
|
|
|
|
|
|
Gain
on Sale
|
|
$
|
5,937,984
|
|
Operating
loss from INL from the acquisition date through disposal, excluding the gain on
sale, was $4,581,256. Total income from discontinued operations for
the three and six months ended September 30, 2008 was $6,031,550 and $3,900,839,
respectively.
The
following table presents the major classes of assets and liabilities that have
been presented as assets and liabilities of discontinued operations
at:
|
|
September 30,
2008
|
|
|
March 31, 2008
|
|
Cash
and Cash Equivalents
|
|
$
|
-
|
|
|
$
|
144,490
|
|
Purchase
Price Held in Escrow
|
|
|
500,000
|
|
|
|
-
|
|
Accounts
Receivable
|
|
|
-
|
|
|
|
1,361,973
|
|
Prepaids
and Other Current Assets
|
|
|
-
|
|
|
|
12,634
|
|
Inventory
|
|
|
-
|
|
|
|
464,887
|
|
Property
|
|
|
-
|
|
|
|
1,946,607
|
|
Long-Term
Assets
|
|
|
-
|
|
|
|
5,695,834
|
|
|
|
|
|
|
|
|
|
|
Total
Assets from Discontinued Operations
|
|
$
|
500,000
|
|
|
$
|
9,626,425
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
-
|
|
|
$
|
2,957,629
|
|
Accrued
Liabilities
|
|
|
-
|
|
|
|
455,456
|
|
Accrued
Interest
|
|
|
-
|
|
|
|
2,036
|
|
Deferred
Revenue
|
|
|
-
|
|
|
|
381,193
|
|
Debt
|
|
|
-
|
|
|
|
2,449,847
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities from Discontinued Operations
|
|
$
|
-
|
|
|
$
|
6,246,161
|
|
NOTE
4: CONCENTRATIONS
OF CREDIT RISK
Financial
instruments that potentially subject the Company to credit risk consist
principally of cash, accounts receivable, purchases and accounts
payable.
Cash
The
Company at times may have cash in excess of the Federal Deposit Insurance
Corporation (“FDIC”) limit. The Company maintains its cash with
larger financial institutions. The Company has not experienced losses
on these accounts and management believes that the Company is not exposed to
significant risks on such accounts.
Sales and Accounts
Receivable
The
Company grants credit to customers, substantially all of whom are pharmaceutical
distribution and medical parties located throughout the United
States. The Company typically does not require collateral from
customers. The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances.
The
Company had the following concentrations in accounts receivable
at:
|
|
September 30,
2008
|
|
|
March 31,
2008
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
46.28
|
%
|
|
|
29.58
|
%
|
Customer
B
|
|
|
40.29
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.57
|
%
|
|
|
29.58
|
%
|
The
Company is dependant on a limited number of customers for a significant portion
of its revenue. The Company had no customers with sales greater than 10% in the
three and six months ended September 30, 2007, and had the following
concentrations in its sales during the three and six months ended September 30,
2008:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
17.28
|
%
|
|
|
20.82
|
%
|
Customer
B
|
|
|
49.58
|
|
|
|
47.93
|
|
Customer
C
|
|
|
-
|
|
|
|
11.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.86
|
%
|
|
|
20.04
|
%
|
Accounts
receivable from continuing operations was $160,766 and $76,270 at September 30,
2008 and March 31, 2008, respectively.
Purchases and Accounts
Payable
The
Company had no outstanding balance greater than 10% of total accounts payable at
September 30, 2008 and March 31, 2008.
The
Company is dependant on a limited number of vendors for a significant portion of
its trade purchases. The Company had no vendors that comprised greater than 10%
of trade purchases during the three and six months ended September
30, 2007, and had one vendor that comprised 57.22% and 59.09% of total trade
purchases for three and six months ended September 30, 2008,
respectively.
NOTE
5: INVENTORY
Inventory
consists of the following at:
|
|
September 30,
2008
|
|
|
March 31,
2008
|
|
|
|
|
|
|
|
|
Respiratory
and Allergy Products
|
|
$
|
77,634
|
|
|
$
|
104,151
|
|
Less:
Obsolescence Reserve
|
|
|
(57,522
|
)
|
|
|
(79,888
|
)
|
|
|
|
|
|
|
|
|
|
Respiratory
and Allergy Products, Net
|
|
|
20,112
|
|
|
|
24,263
|
|
Pre-Launch
epi Inventory
|
|
|
116,949
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Inventory,
Net
|
|
$
|
137,061
|
|
|
$
|
24,263
|
|
The
epi product is in the final phase of validation, and we expect the product to be
launched prior to expiration.
NOTE
6: PROPERTY
AND EQUIPMENT
Property
and Equipment consists of the following at:
|
|
September 30,
2008
|
|
|
March 31, 2008
|
|
Office
Furniture and Equipment
|
|
$
|
128,738
|
|
|
$
|
133,038
|
|
Computer
Equipment
|
|
|
22,707
|
|
|
|
22,707
|
|
Computer
Software
|
|
|
59,639
|
|
|
|
59,639
|
|
Vehicles
|
|
|
13,500
|
|
|
|
13,500
|
|
|
|
|
224,584
|
|
|
|
228,884
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
Depreciation
|
|
|
(183,625
|
)
|
|
|
(174,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,959
|
|
|
$
|
53,980
|
|
NOTE
7: NOTES
PAYABLE TO RELATED PARTIES
The
Company had notes payable amounting to $500,000 and $2,244,000 at September 30,
2008 and March 31, 2008, that bear interest at various rates between 10% and
12%. All of the notes payable were from related parties and $410,000 at March
31, 2008 was not collateralized. The remaining notes were collateralized by
Company’s assets or optional conversion feautures. The Company retired
$1,744,000 of the notes payable in July 2008.
NOTE
7: NOTES
PAYABLE TO RELATED PARTIES (CONTINUED)
On
November 15, 2007, the Company issued a convertible promissory note to a
shareholder for $1,000,000 (included in the amounts above) that bore interest at
10% per annum, matured on April 15, 2008, and granted a warrant, that expires on
November 15, 2012, to issue 1,000,000 shares of the Company’s common stock with
an exercise price of $0.50 per share.
The
warrant also includes piggyback registration rights in the event the Company
files a registration statement with the Securities and Exchange Commission
(“SEC”) subsequent to exercise of the warrant. The Company determined the
present value of the warrant at the grant date to be $0.42 per share using the
Black-Scholes method, assuming 0.10% volatility, 0.00% dividend rate, and a
discount rate of 3.67%.
The
difference between the present value and the exercise price for the warrants, or
$80,000, was recorded as additional paid-in capital and a discount to the note
payable, and is being accreted on a straight-line basis as interest expense over
the term of the note.
The
note also contained a conversion feature that extends the shareholder the right
to convert the note into $1,000,000 of the Company’s common stock at a rate of
$0.50 per share, or 2,000,000 shares. The conversion of the $1,000,000 note, net
of the $80,000 discount, or $920,000, into 2,000,000 shares at a net value of
$0.46 per share results in a beneficial conversion. Accordingly, the benefit per
share was recorded as additional paid-in capital and a one-time interest charge
of $80,000.
The
effective interest rate of the note considering the attached warrant and
beneficial conversion feature is 39.6%.
The
note and accrued interest were retired on July 21, 2008, subsequent to the
stated April 15, 2008 maturity date. The Company continued to pay interest
through the retirement of the note, and there were no other penalties required
by the lender resulting from the default. The additional paid-in capital
recorded as a result of the beneficial conversion feature was reversed as the
feature was not excercised.
On
February 12, 2008, the Company issued a convertible promissory note to Cellegy
Pharmaceuticals, Inc. (“Cellegy”) for $500,000 (included in the above amount)
that bears interest at 10% per annum, and matures on June 12, 2009. The
conversion feature extends to Cellegy the right to convert the principal amount
of the note and accrued interest into shares of the Company’s common stock at
the fair market value at the time of the note, or $0.50 per share, in the event
that the effective date of the merger between Cellegy and the Company precedes
the stated maturity date or an event of default (Note 14).
NOTE
8: LONG-TERM
DEBT
Long-term
debt at March 31, 2008 consists of two $1,000,000 notes payable to an
investor. The Notes bear interest at 12% and are due on April 1, 2009
and April 10, 2009, respectively. The investor was also issued
800,000 shares of the Company’s stock as a condition to issue the debt, valued
at $0.50 per share, or $400,000, recorded as deferred financing costs, which is
being amortized using the straight-line method over the term of the note.
Unamortized financing costs at March 31, 2008 amounted to $320,000 (Notes
10).
On
July 18, 2008, the Company retired all of its long-term debt in plus accrued
interest and early payment penalties of $154,000 in connection with the sale of
INL. The remaining balance of the unamortized financing costs was charged to
interest as a result of the retirement.
NOTE
9: LICENSE
AGREEMENT
On
July 28, 2006, the Company entered into a nonexclusive, royalty free license
agreement with an entity for the technology used to research and develop new
viral therapies, and an exclusive royalty-bearing license requiring a small
percentage of revenue received by the Company on future products developed and
sold with a payment cap of $10,000,000. The Company paid the entity an initial
license fee and granted one of the entity’s officers the right to purchase
1,000,000 Founder’s shares in the Company at price of $0.001 pursuant to a
separate stock purchase agreement. The Company also granted the entity a
royalty-free non-exclusive license to use any improvements made on the existing
technology for research purposes only. The Company and the entity have the right
to sublicense with written permission of each party. In the event that the
entity 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
the Company.
Upon
development of the first product by the Company, the Company will pay the entity
the following amounts when certain milestones are
reached:
Amount
|
|
Date due
|
|
|
|
|
$
|
50,000
|
|
Within
30 days of commencement of Phase I/II clinical
trial.
|
|
|
|
|
|
50,000
|
|
Within
30 days of commencement of a separate Phase II trial as required by the
FDA.
|
|
|
|
|
|
300,000
|
|
Within
30 days of commencement of a Phase III trial.
|
|
|
|
|
|
500,000
|
|
Within
30 days of submission of a biological license application or a new drug
application with the
FDA.
|
Total
milestone payments not to exceed $900,000. The total milestone
payments are only payable one time and will not repeat for subsequent
products. At September 30, 2008, no milestones had been
achieved.
The
agreement will remain in effect as long as the patent rights remain in
effect. Adamis has the right to terminate the agreement if it is
determined that no viable product can come from the
technology. Adamis would be required to transfer and assign 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.
On
September 22, 2006, the Company entered into an agreement with an entity to
manufacture an influenza vaccine for the Company. The agreement requires the
Company to pay $70,000 upon commencement of the project, followed by monthly
payments based upon services performed until the project is complete. No product
has been manufactured and no payments have been made at September 30, 2008.
At
September 30, 2008, no milestones have been achieved.
On
September 22, 2006, the Company entered into an agreement with an entity to
manufacture an influenza vaccine for the Company. The agreement requires the
Company to pay $70,000 upon commencement of the project, followed by monthly
payments based upon services performed until the project is complete. No product
has been manufactured and no payments have been made at March 31,
2008. Once the project begins, the total payments will aggregate
$283,420. The project has an open ended start time. Adamis
may terminate the agreement upon notice to the other party, other than
reimbursing the other party for non-cancelable materials and supplies ordered,
and work in process, through the date of termination.
NOTE
10: COMMITMENTS
AND CONTINGENCIES
Contingencies
In
conjunction with the issuance of the long-term debt and private placement of
800,000 shares of Common Stock to one investor (Notes 8 and 11), the Company
entered into a registration rights agreement on December 21, 2007, which
required the Company to file a registration statement for the resale of the
common shares. The Company must file a registration statement within one year of
the first closing date (December 21, 2007). The Company must also use its
best efforts to have the registration statement declared effective within 90
days of the filing with the Securities and Exchange Commission (“SEC”). In
addition, the Company must use its best efforts to maintain the effectiveness of
the registration statement until all common shares have been sold or may be sold
without volume restrictions pursuant to Rule 144(k) of the Securities
Act.
If the
registration statement is not filed or declared effective within the allowable
time frame or the Company cannot maintain its effectiveness, the Company must
pay partial liquidated damages in cash to the investor amounting to $30,000 for
each 30 day period that the Registration default remains uncured up to an
cumulative amount of $200,000. This obligation of the Company is to
cease if (i) the effective time of the Cellegy merger occurs on or prior to the
Registration Deadline, and (ii) certain terms related to these shares in
conjunction with the merger are satisfied (Note 14).
The
Company currently considers that the contingent payments required under the
registration rights agreement are not probable and, therefore, has not recorded
any liability. Should these payments become probable then a liability will be
recorded.
Litigation
INL is
a party in a pending State of Florida 6
th
Judicial Circuit action styled
MBA MARKETING, LLC d/b/a EXPRESS
PERSONNEL SERVICES, a Florida limited liability company v. INTERNATIONAL
LABORATORIES, INC., a Florida for profit corporation
CASE NO.: 08-4941 CI 19.
The claim asserts money that is due for using the employment services of
employees of the Plaintiff in violation of the servicing agreement. Though
Management believes that the plaintiff is unlikely to prevail in its request for
damages, if the plaintiff were to prevail in these claims it could have a
material adverse effect on the Company’s unaudited consolidated financial
position and results of operations.
NOTE
11: CAPITAL
STRUCTURE
The
Company is authorized to issue 100,000,000 shares of common stock and 20,000,000
shares of preferred stock with a par value of $0.0001 per
share.
In
June 2006, the Company was founded through an issuance of 16,684,500 shares of
common stock for $0.001 per share or $16,685. The Company has repurchase rights
related to 10,409,500 of these shares, which have not been included in the
calculation of weighted average shares outstanding.
In
July 2006, the Company issued 1,253,000 of its common stock to seed investors
for $0.10 per share, or $125,300.
During
2007, the Company retired outstanding debt and accrued interest through issuing
629,737 shares of its common stock at $0.50 per share, or
$314,868.
On
various dates during 2006 and 2007, the Company sold 1,160,400 shares of its
common stock valued at $0.50 per share, or $580,200, in a private
placement.
In
April 2007, the Company issued 5,159,807 shares of its common stock in exchange
for all of the outstanding shares of HVG at $0.50 per share (Note 2). The
Company had repurchase options related to 1,000,000 of the shares, of which
684,000 have lapsed. The remaining 316,000 were exercised by the Company and
repurchased at $.001 per share per the repurchase agreement.
In
November 2007, 669,019 shares of the Company’s common stock were issued to
executives of the Company at $0.50 per share with various repurchase rights,
which are not included in the calculation of weighted average shares
outstanding.
In
November 2007, the Company issued the remaining 50,000 shares of its common
stock at $0.50 per share in lieu of interest associated with an outstanding
loan.
In
November 2007, the Company issued 50,000 shares of its common stock at $0.50 per
share in lieu of interest associated with an outstanding loan.
In
December 2007, the Company issued 800,000 of its common stock at $0.50 per share
as costs to obtain long-term debt (Note 8).
In
December 2007, the Company issued 2,000,000 shares of its common stock in
exchange for all of the outstanding shares of INL at $0.50 per
share.
On
various dates during 2007, the Company sold 6,591,000 shares of its common stock
valued at $0.50 per share, or $3,295,500, in a private
placement.
On
various dates during the three month period ended March 31, 2008, the Company
sold 392,666 shares of its common stock valued at $0.75, or $294,499, in a
private placement.
On
various dates during the six month period ended September 30, 2008, the Company
sold 1,771,651 shares of its common stock valued at $0.75, or $878,740, in a
private placement.
NOTE
12: INCOME
TAXES
The
Company did not elect to file consolidated tax returns for the year ended March
31, 2008. Accordingly, the deferred tax assets for each of the consolidated
companies can only be used to offset future tax expense of the respective
company.
The
(benefit) expense for income taxes from continuing operations consists of the
following:
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(212,000
|
)
|
|
|
(193,000
|
)
|
|
|
(119,000
|
)
|
|
|
(332,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(212,000
|
)
|
|
|
(193,000
|
)
|
|
|
(119,000
|
)
|
|
|
(332,000
|
)
|
Change
in Valuation Allowance
|
|
|
212,000
|
|
|
|
193,000
|
|
|
|
119,000
|
|
|
|
332,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Benefit, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Six Months Ended September 30,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
Current
(Benefit) Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
(Benefit) Expense
|
|
|
(71,000
|
)
|
|
|
(490,000
|
)
|
|
|
191,000
|
|
|
|
(482,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(71,000
|
)
|
|
|
(490,000
|
)
|
|
|
191,000
|
|
|
|
(482,000
|
)
|
Change
in Valuation Allowance
|
|
|
71,000
|
|
|
|
490,000
|
|
|
|
(191,000
|
)
|
|
|
482,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
(Benefit) Expense, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
significant components of the deferred tax assets from continuing operations at
September 30, 2008 and March 31, 2008 are summarized below:
|
|
September 30,
2008
|
|
|
September 30,
|
|
|
March 31, 2008
|
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
Net
Operating Loss Carryforwards
|
|
$
|
755,000
|
|
|
$
|
1,310,000
|
|
|
$
|
812,000
|
|
|
$
|
843,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets
|
|
|
137,000
|
|
|
|
156,000
|
|
|
|
128,000
|
|
|
|
133,000
|
|
Deferred
Tax (Liabilities)
|
|
|
(147,000
|
)
|
|
|
-
|
|
|
|
(123,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Assets
|
|
|
745,000
|
|
|
|
1,466,000
|
|
|
|
817,000
|
|
|
|
976,000
|
|
Less
Valuation Allowance
|
|
|
(745,000
|
)
|
|
|
(1,466,000
|
)
|
|
|
(817,000
|
)
|
|
|
(976,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We
have determined at September 30, 2008 and March 31, 2008 that a full valuation
allowance would be required against all of our operating loss carryforwards and
deferred tax assets that we do not expect to be utilized by deferred tax
liabilities.
The
following tables reconcile our income (losses) before income
taxes:
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss)
|
|
|
|
|
$
|
4,887,000
|
|
|
$
|
(438,000
|
)
|
|
$
|
(352,000
|
)
|
|
$
|
(628,000
|
)
|
Permanent
Differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Interest
|
|
|
|
|
|
160,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
INL
Gain
|
|
|
|
|
|
(4,754,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Meals
and Entertainment
|
|
|
|
|
|
164,000
|
|
|
|
3,000
|
|
|
|
7,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
457,000
|
|
|
$
|
(435,000
|
)
|
|
$
|
(345,000
|
)
|
|
$
|
(626,000
|
)
|
Federal
Statutory Rate
|
|
|
34.00
|
%
|
|
$
|
1,661,000
|
|
|
$
|
(149,000
|
)
|
|
$
|
(120,000
|
)
|
|
$
|
(213,000
|
)
|
State
Income Tax, net of Federal Tax
|
|
|
3.63
|
%
|
|
|
178,000
|
|
|
|
(16,000
|
)
|
|
|
(13,000
|
)
|
|
|
(23,000
|
)
|
Intercompany
Eliminations
|
|
|
37.63
|
%
|
|
|
40,000
|
|
|
|
(29,000
|
)
|
|
|
11,000
|
|
|
|
(97,000
|
)
|
Permanent
Differences
|
|
|
37.63
|
%
|
|
|
(1,667,000
|
)
|
|
|
1,000
|
|
|
|
3,000
|
|
|
|
1,000
|
|
Change
in Valuation Allowance
|
|
|
|
|
|
|
(212,000
|
)
|
|
|
193,000
|
|
|
|
119,000
|
|
|
|
332,000
|
|
Expected
Tax (Benefit) Expense
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
Adamis
Pharmaceuticals
|
|
|
Adamis Labs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss)
|
|
|
|
|
$
|
4,178,000
|
|
|
$
|
(1,172,000
|
)
|
|
$
|
(545,000
|
)
|
|
$
|
(1,263,000
|
)
|
Permanent
Differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Interest
|
|
|
|
|
|
248,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
INL
Gain
|
|
|
|
|
|
(4,754,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Meals
and Entertainment
|
|
|
|
|
|
231,000
|
|
|
|
5,000
|
|
|
|
7,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(97,000
|
)
|
|
$
|
(1,167,000
|
)
|
|
$
|
(538,000
|
)
|
|
$
|
(1,253,000
|
)
|
Federal
Statutory Rate
|
|
|
34.00
|
%
|
|
$
|
1,420,000
|
|
|
$
|
(399,000
|
)
|
|
$
|
(185,000
|
)
|
|
$
|
(430,000
|
)
|
State
Income Tax, net of Federal Tax
|
|
|
3.63
|
%
|
|
|
152,000
|
|
|
|
(42,000
|
)
|
|
|
(20,000
|
)
|
|
|
(46,000
|
)
|
Intercompany
Eliminations
|
|
|
37.63
|
%
|
|
|
108,000
|
|
|
|
(51,000
|
)
|
|
|
11,000
|
|
|
|
(10,000
|
)
|
Permanent
Differences
|
|
|
37.63
|
%
|
|
|
(1,609,000
|
)
|
|
|
2,000
|
|
|
|
3,000
|
|
|
|
4,000
|
|
Change
in Valuation Allowance
|
|
|
|
|
|
|
(71,000
|
)
|
|
|
490,000
|
|
|
|
191,000
|
|
|
|
482,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Tax Benefit
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We
paid no income tax during the three and six months ended September 30, 2008 and
2007. We do not expect to pay income tax in the year ending March 31,
2009.
NOTE
13: LIQUIDITY
The
unaudited consolidated financial statements have been presented on the basis
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred losses since its inception, and
has an accumulated deficit of $9,315,828 at September 30, 2008. The
Company’s operations have been financed primarily through the issuance of debt
and equity infusions. The Company is constantly evaluating its cash
needs and existing burn rate, in order to make appropriate adjustments to
operating expenses. Depending on its actual future cash needs, the
Company may need to raise additional debt or equity capital to provide funding
for ongoing future operations, or to refinance existing
indebtedness. No assurances can be given that the Company will be
successful in obtaining additional capital, or that such capital will be
available on terms acceptable to the Company. The Company’s continued
existence is dependent upon its ability to raise capital and to market and sell
its products successfully. The unaudited consolidated financial
statements do not include any adjustments to reflect future effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result if the Company is unsuccessful.
NOTE
14: SUBSEQUENT
EVENTS
The
Company entered into a merger agreement on February 12, 2008 with
Cellegy. While the agreement has different ownership scenarios
depending on the amount of cash that Cellegy contributes, the approximate
ownership split is anticipated to be approximately 93% for the Company and 7%
for Cellegy shareholders. The merger is contingent, among other
items, on the filing and effectiveness of a Form S-4 registration statement and
approval of both companies’ shareholders. Should the merger not occur because of
the Company’s failure to meet certain requirements, as described in the
agreement, a termination fee of $150,000 would be owed to
Cellegy.
AGREEMENT AND PLAN OF
MERGER
By and Among
CELLEGY PHARMACEUTICALS, INC.,
CELLEGY HOLDINGS, INC.,
And
ADAMIS PHARMACEUTICALS
CORPORATION
AGREEMENT AND PLAN OF
REORGANIZATION
between
CELLEGY PHARMACEUTICALS,
INC.,
a Delaware
corporation,
CELLEGY HOLDINGS,
INC.
a Delaware
corporation
and
ADAMIS PHARMACEUTICALS
CORPORATION,
a Delaware
corporation
Dated as of February 12,
2008
TABLE OF CONTENTS
ARTICLE
I THE MERGER
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A-8
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1.1.
Merger of Merger Sub into Adamis.
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A-8
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1.2
Effect of the Merger
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A-8
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1.3
Closing; Effective Time
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A-8
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1.4
Certificate of Incorporation and Bylaws; Directors and
Officers
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A-9
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1.5
Reverse Split of Cellegy Common Stock
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A-9
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1.6
Shares to Be Issued; Effect on Capital Stock
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A-10
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1.7
Calculation of the Exchange Ratio
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A-11
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1.8
Dissenting Shares.
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A-11
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1.9
No Further Transfer of Adamis Capital Stock
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A-12
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1.10
Exchange of Certificates
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A-12
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1.11
Further Action
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A-14
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ARTICLE
II REPRESENTATIONS AND WARRANTIES OF ADAMIS
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A-14
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2.1
Organization and Good Standing
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A-14
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2.2
Subsidiaries
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A-14
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2.3
Authority
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A-15
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2.4
No Conflict
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A-15
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2.5
Consents
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A-15
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2.6
Governmental Authorizations
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A-15
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2.7
Capitalization
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A-16
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2.8
Adamis Financial Statements
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A-16
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2.9
Absence of Certain Changes
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A-16
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2.10
Interested Party Transactions
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A-16
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2.11
Intellectual Property
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A-17
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2.12
Taxes
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A-17
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2.13
Employee Benefit Plans
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A-19
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2.14
Employee Matters
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A-19
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2.15
Insurance
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A-20
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2.16
Compliance with Legal Requirements
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A-20
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2.17
Environmental Matters
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A-20
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2.18
Legal Proceedings
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A-20
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2.19
Contracts; No Defaults
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A-21
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2.20
Labor Matters
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A-21
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2.21
Unlawful Payments
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A-21
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2.22
Representations Complete
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A-21
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2.23
Financial Advisor
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A-21
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ARTICLE
III REPRESENTATIONS AND WARRANTIES OF CELLEGY AND MERGER
SUB
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A-22
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3.1
Organization and Good Standing
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A-22
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3.2
Subsidiaries
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A-22
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3.3
Authority
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A-23
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3.4
No Conflict
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A-23
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3.5
Consents
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A-24
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3.6
Governmental Authorizations
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A-24
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3.7
Capitalization; Integration
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A-24
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3.8
SEC Reports; Financial Statements; Listing and Maintenance
Requirements
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A-25
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3.9
Absence of Changes
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A-26
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3.10
Intellectual Property
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A-27
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3.11
Taxes
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A-27
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3.12
Employee Benefit Plans
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A-29
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3.13
Employee Matters
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A-30
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3.14
Insurance
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A-31
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3.15
Compliance with Legal Requirements
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A-31
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3.16
Environmental Matters
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A-31
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3.17
Legal Proceedings
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A-31
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3.18
Contracts; No Defaults
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A-32
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3.19
Labor Matters
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A-32
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3.20
Regulatory Compliance
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A-32
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3.21
Representations Complete
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A-34
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3.22
Interested Party Transactions
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A-34
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3.23
Unlawful Payments
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A-34
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3.24
Financial Advisor
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A-34
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3.25
Certificate of Incorporation and Bylaws; Records
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A-34
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3.26
Title to Assets; No Real Property
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A-35
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ARTICLE
IV CONDUCT PRIOR TO THE EFFECTIVE TIME
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A-35
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4.1
Access and Investigation
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A-35
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4.2
Operation of Cellegy’s Business
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A-36
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4.3
Operation of Adamis’ Business
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A-36
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4.4
Disclosure Schedule Updates
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A-37
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4.5
No Solicitation
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A-37
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ARTICLE
V ADDITIONAL AGREEMENTS
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A-39
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5.1
Proxy Statement; Registration Statement
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A-39
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5.2
Adamis Stockholder Approval
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A-41
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5.3
Cellegy Stockholder Meeting; Change in the Cellegy Board Recommendation;
Adoption of Agreement by Cellegy as Sole Stockholder of Merger
Sub.
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A-41
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5.4
Regulatory Approvals
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A-43
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5.5
Indemnification of Officers and Directors
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A-43
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5.6
Additional Agreements
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A-44
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5.7
Disclosure
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A-44
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5.8
Directors; Officers
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A-45
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5.9
Tax Matters
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A-45
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5.10
Cellegy Amendment
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A-45
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5.11
Adamis Auditors
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A-46
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5.12
Cellegy's Auditors
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A-46
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5.13
Legends
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A-46
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5.14
Confidentiality
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A-46
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5.15
FIRPTA Compliance
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A-46
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5.16
Rule 16b-3.
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A-46
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5.17
Equity Financing.
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A-46
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5.18
Termination of Retention Plan.
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A-47
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ARTICLE
VI CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH PARTY
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A-47
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6.1
Stockholder Approval
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A-47
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6.2
No Restraints
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A-47
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6.3
Governmental Authorization
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A-47
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6.4
No Governmental Proceedings Relating to Contemplated Transactions or Right
to Operate Business
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A-47
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6.5
Registration Statement
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A-48
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ARTICLE
VII ADDITIONAL CONDITIONS PRECEDENT TO OBLIGATIONS OF Cellegy AND MERGER
SUB
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A-48
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7.1
Accuracy of Representations
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A-48
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7.2
Performance of Covenants
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A-48
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7.3
No Fundamental Impairment
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A-48
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7.4
Agreements and Other Documents
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A-48
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ARTICLE
VIII ADDITIONAL CONDITIONS PRECEDENT TO OBLIGATION OF
Adamis
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A-49
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8.1
Accuracy of Representations
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A-49
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8.2
Performance of Covenants
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A-49
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8.3
No Fundamental Impairment
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A-49
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8.4
Documents
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A-49
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8.5
Sarbanes-Oxley Certifications
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A-49
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8.6
Board of Directors
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A-50
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8.7
Officers
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A-50
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8.8
Certificate of Amendment
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A-50
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8.9
SEC Reports
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A-50
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ARTICLE
IX TERMINATION
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A-50
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9.1
Termination
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A-50
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9.2
Effect of Termination
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A-52
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9.3
Expenses; Termination Fees
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A-52
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ARTICLE
X MISCELLANEOUS PROVISIONS
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A-52
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10.1
Non-Survival of Representations and Warranties
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A-52
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10.2
Amendment
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A-53
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10.3
Waiver
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A-53
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10.4
Entire Agreement; Counterparts; Exchanges by Facsimile
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A-53
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10.5
Applicable Law; Jurisdiction
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A-53
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10.6
Waiver of Jury Trial
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A-54
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10.7
Notices
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A-54
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10.8
Cooperation
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A-55
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10.9
Severability
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A-55
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10.10
Other Remedies; Specific Performance
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A-55
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10.11
Construction
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A-55
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AGREEMENT AND PLAN OF
REORGANIZATION
THIS
AGREEMENT AND PLAN OF REORGANIZATION (the “
Agreemen
t”) is
made and entered into as of February 12, 2008, by and among Cellegy
Pharmaceuticals, Inc., a Delaware corporation (“
Cellegy”
),
Cellegy Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of
Cellegy (“
Merger Sub
”), and
Adamis Pharmaceuticals Corporation,
a
Delaware corporation (“
Adamis
”).
Certain capitalized terms used in this Agreement are defined in
Exhibit A
attached
hereto.
RECITALS
A.
The Board
of Directors of Cellegy and Adamis have each determined that it is in the best
interests of their respective stockholders for Adamis and Cellegy to enter into
a business combination transaction pursuant to which Merger Sub will merge with
and into Adamis (the “
Merger
”), with
Adamis continuing after the Merger as the surviving corporation and wholly owned
subsidiary of Cellegy.
B.
Pursuant
to the Merger, each outstanding share of common stock, $0.0001 par value per
share, of Adamis (“
Adamis Common
Stock
”) will,
in accordance with the provisions of this Agreement, be converted into the
number of shares of Cellegy’s common stock, $0.0001 par value per share
(“
Cellegy Common
Stock
”) equal
to the Exchange Ratio.
C.
In
connection with, and immediately before the consummation of, the Merger, a
reverse stock split of Cellegy Common Stock shall be consummated, pursuant to
which each outstanding share of Cellegy Common Stock shall be converted into the
number of shares of Cellegy Common Stock determined as provided in Section 1.5
below.
D.
The Board
of Directors of Cellegy (i) has approved and declared advisable this Agreement,
the Merger and the other transactions contemplated by this Agreement, (ii) has
determined that the Merger is in the best interests of Cellegy and its
stockholders and has determined to recommend the approval of this Agreement and
the Merger to the stockholders of Cellegy, and (iii) has determined to recommend
that Cellegy, in its capacity as the sole stockholder of Merger Sub, vote to
adopt this Agreement and approve the Merger and such other actions as are
contemplated by this Agreement.
E.
The Board
of Directors of Adamis (i) has approved and declared advisable this Agreement,
the Merger and the other transactions contemplated by this Agreement and (ii)
has determined that the Merger is in the best interests of Adamis and its
stockholders and has determined to recommend the approval of this Agreement and
the Merger to the stockholders of Adamis.
F.
The
parties hereto intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986.
G.
As an
inducement to Adamis to enter into this Agreement, concurrently herewith certain
stockholders of Cellegy have entered into an agreement with Adamis, in the form
attached hereto (a “
Voting
Agreement
”),
pursuant to which each such person has agreed, among other things, to vote the
shares of capital stock of Cellegy owned by such person to approve this
Agreement and the transactions contemplated hereby.
H.
Before
the execution and delivery of this Agreement, Cellegy and Adamis have entered
into a Convertible Promissory Note dated as of the date of this Agreement (the
“
Adamis
Note
”),
reflecting a loan by Cellegy to Adamis of $500,000.
AGREEMENT
The
parties to this Agreement, intending to be legally bound, agree as
follows:
ARTICLE
I
THE
MERGER
1.1
Merger of Merger Sub into
Adamis
. Upon
the terms and subject to the conditions set forth in this Agreement and in
accordance with the DGCL, at the Effective Time Merger Sub shall be merged with
and into Adamis, and the separate existence of Merger Sub shall cease. Adamis
will continue as the surviving corporation following the Merger (the
“
Surviving
Corporation
”).
1.2
Effect of the
Merger
. The
Merger shall have the effects set forth in this Agreement and the applicable
provisions of the DGCL. As a result of the Merger, Adamis will become a
wholly-owned subsidiary of Cellegy. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Adamis and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Adamis and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.3
Closing; Effective
Time
. The
consummation of the transactions contemplated by this Agreement (the
“
Closing
”) shall
take place at the offices of Cooley Godward Kronish
llp
in San
Diego, California, at 10:00 a.m., on a date to be agreed by Cellegy and Adamis
(the “
Closing
Date”
), which
shall be no later than the third Business Day after the satisfaction or waiver
of the last to be satisfied or waived of the conditions set forth in Articles
VI, VII and VIII (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of such
conditions), or at such other time, date and place as Cellegy and Adamis may
mutually agree in writing. At the Closing, subject to the terms and conditions
of this Agreement, the parties hereto shall cause the Merger to be consummated
by executing and filing with the Secretary of State of the State of Delaware a
Certificate of Merger with respect to the Merger, satisfying the applicable
requirements of the DGCL and in a form reasonably acceptable to Cellegy and
Adamis. The Merger shall become effective at the time of the filing of such
Certificate of Merger with the Secretary of State of the State of Delaware or at
such later time as may be specified in such Certificate of Merger (the time as
of which the Merger becomes effective being referred to as the “
Effective
Time
”).
1.4
Certificate of Incorporation
and Bylaws; Directors and Officers
.
At the
Effective Time:
(a)
Adamis Certificate of
Incorporation
. The
Adamis Charter, as in effect immediately before the Effective Time, shall be
amended in the Merger to read in its entirety as set forth on
Exhibit B
hereto
and, as so amended, shall be the certificate of incorporation of the Surviving
Corporation until thereafter amended as provided by the DGCL and such
certificate of incorporation;
(b)
Adamis
Bylaws
. The
Adamis Bylaws, as in effect immediately before the Effective Time, shall be the
bylaws of the Surviving Corporation, until thereafter amended as provided by the
DGCL and such Bylaws;
(c)
Adamis
Directors
. The
directors of Adamis immediately before the Effective Time shall be the initial
directors of the Surviving Corporation, each to hold office in accordance with
the certificate of incorporation and bylaws of the Surviving Corporation; and
(d)
Adamis
Officers
. The
officers of Adamis immediately before the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified, or until their earlier
death, resignation or removal.
1.5
Reverse Split of Cellegy
Common Stock
.
(a)
Cellegy Restated
Certificate
.
Immediately before the Effective Time, and subject to receipt of the requisite
stockholder approval at the Cellegy Stockholder Meeting, Cellegy shall cause to
be filed an Amended and Restated Certificate of Incorporation (the “
Cellegy Restated
Certificate
”),
whereby without any further action on the part of Cellegy, Adamis or any
stockholder of Cellegy:
(i)
the
number of shares of Cellegy Common Stock issued and outstanding immediately
before the filing of the Cellegy Restated Certificate equal to the Reverse Stock
Split Ratio shall be converted and combined into and become one share of Cellegy
Common Stock (the “
Reverse Stock
Split
”);
(ii)
any
shares of Cellegy Common Stock held as treasury stock or held or owned by
Cellegy immediately before the filing of the Cellegy Restated Certificate shall
each be reclassified and combined into and become an identical fractional number
of shares of Cellegy Common Stock as determined by the Board of Directors of
Cellegy in connection with Section 1.5(a)(i) above; and
(iii)
the total
number of authorized shares of Cellegy Common Stock and Cellegy Preferred Stock
shall be 175,000,000 and 10,000,000 shares, respectively.
(b)
No Fractional
Shares
. No
fractional shares of Cellegy Common Stock shall be issued in connection with the
Reverse Stock Split, and no certificates or scrip representing such fractional
shares shall be issued. Cellegy will round down to the nearest whole share any
fraction of a share that any Cellegy stockholder would otherwise receive (after
aggregating all fractional shares issuable to such holder), and any holder of
Cellegy Common Stock who would otherwise be entitled to receive a fraction of a
share of Cellegy Common Stock (after aggregating all fractional shares of
Cellegy Common Stock issuable to such holder) shall, in lieu of such fraction of
a share and upon surrender of such holder’s certificate representing such
fractional shares of Cellegy Common Stock, instead receive from Cellegy an
amount of cash (rounded to the nearest whole cent), without interest, equal to
the product of (i) such fraction, multiplied by (ii) the applicable price per
share which shall be equal to the average closing price of Cellegy Common Stock
(as reported on the OTC Bulletin Board or, if the Cellegy Common Stock is not
traded on the OTC Bulletin Board, then the Pink Sheets, and, if not traded on
the Pink Sheets, then as determined in good faith by Cellegy’s Board of
Directors) on the five trading days immediately prior to the effective date of
the Reverse Stock Split (giving effect to the Reverse Stock Split).
(c)
Reverse Stock Split and the
Exchange Ratio
. The
Exchange Ratio set forth herein assumes the effectiveness of the Reverse Stock
Split set forth above.
1.6
Shares to be Issued; Effect
on Capital Stock
. Subject
to the terms and conditions of this Agreement, at the Effective Time, by virtue
of the Merger and without any action on the part of Cellegy, Merger Sub, Adamis
or any stockholder of Adamis, the following shall occur:
(a)
Conversion of Adamis Common
Stock
. Subject
to the terms of Section 1.10(h), each share of Adamis Common Stock issued and
outstanding immediately before the Effective Time (other than any shares of
Adamis Common Stock to be canceled pursuant to Section 1.6(b), if any, and
excluding any Dissenting Shares (to the extent provided in Section 1.8)) will be
converted automatically into the right to receive: (i) that number of shares of
Cellegy Common Stock equal to the Exchange Ratio, and (ii) any cash, without
interest, to be paid in lieu of any fractional share of Adamis Common Stock in
accordance with Section 1.6(f).
(b)
Cancellation of Treasury and
Cellegy-Owned Shares
. Any
shares of Adamis Capital Stock held as treasury stock or held or owned by
Adamis, Cellegy or any direct or indirect wholly-owned Subsidiary of Adamis or
of Cellegy immediately before the Effective Time shall be canceled and shall
cease to exist, and no consideration shall be delivered in exchange therefor.
(c)
Adamis Restricted
Stock
. If any
shares of Adamis Common Stock issued and outstanding immediately before the
Effective Time are unvested or are subject to a repurchase option or the risk of
forfeiture or under any applicable restricted stock purchase agreement, stock
restriction agreement, cancellation agreement or other agreement with Adamis
(such shares, the “
Adamis Restricted
Stock
”), then
the shares of Cellegy Common Stock issued in exchange for such shares of Adamis
Restricted Stock pursuant to Section 1.6(a) will to the same extent be unvested
and subject to the same repurchase option or risk of forfeiture, and the
certificates representing such shares of Cellegy Common Stock shall accordingly
be marked with appropriate legends to reflect such repurchase option or risk of
forfeiture. Adamis and Cellegy shall take all action that may be necessary to
ensure that, from and after the Effective Time, Cellegy is entitled to exercise
any such repurchase option or right of cancellation or other right set forth in
any such restricted stock purchase agreement or other agreement.
(d)
Capital Stock of Merger
Sub
. Each
share of common stock of Merger Sub issued and outstanding immediately before
the Effective Time shall automatically be converted into and exchanged for one
validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership
of any such shares shall, as of the Effective Time, evidence ownership of such
shares of common stock of the Surviving Corporation.
(e)
Adjustments to Exchange
Ratio
. If,
between the date of this Agreement and the Effective Time, any outstanding
shares of Adamis Common Stock, Adamis Preferred Stock or Cellegy Common Stock
shall have been changed into, or exchanged for, a different number of shares or
a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, reverse split, combination or
exchange of shares (other than the Reverse Stock Split), the Exchange Ratio
shall be correspondingly adjusted to provide the holders of Adamis Capital Stock
and Adamis Options the same economic effect as contemplated by this Agreement
before such event and any such adjustment to the Exchange Ratio shall be
approved by Adamis.
(f)
No Fractional
Shares
. No
fractional shares of Cellegy Common Stock shall be issued in connection with the
Merger, and no certificates or scrip representing such fractional shares shall
be issued. The holder of shares of Adamis Common Stock who would otherwise be
entitled to receive a fraction of a share of Cellegy Common Stock (after
aggregating all fractional shares of Cellegy Common Stock to be received by such
holder) shall, in lieu of such fraction of a share and upon surrender of such
holder’s certificate representing shares of Adamis Capital Stock (the
“
Adamis Stock
Certificate
”),
instead receive from Cellegy an amount of cash (rounded to the nearest whole
cent), without interest, equal to the product of (i) such fraction, multiplied
by (ii) the applicable price per share which shall be equal to the average
closing price of Cellegy Common Stock (as reported on the OTC Bulletin Board or,
if the Cellegy Common Stock is not traded on the OTC Bulletin Board, then the
Pink Sheets, and, if not traded on the Pink Sheets, then as determined in good
faith by Cellegy’s Board of Directors) on the five trading days immediately
prior to the Effective Date (after giving effect to the Reverse Stock Split).
1.7
Calculation of the Exchange
Ratio
. For
purposes of this Agreement, the “
Exchange
Ratio
” shall
be one (1) share of Cellegy Common Stock (assuming the effectiveness of the
Reverse Stock Split) in exchange for one (1) share of Adamis Common Stock
outstanding immediately before the Effective Time.
1.8
Dissenting
Shares
.
Notwithstanding any other provision of this Agreement to the contrary, any
shares of Adamis Capital Stock that have not been voted in favor of adoption of
this Agreement, and with respect to which a demand for payment and appraisal
have been properly made in accordance with (a) Section 262 of the DGCL or (b)
Chapter 13 of the California Corporations Code (to the extent applicable to
Adamis by virtue of Section 2115 thereof) (such shares referred to as
“
Dissenting
Shares
”), shall
not be converted into or represent a right to receive Cellegy Common Stock
pursuant to Section 1.6(a), but shall be converted in to the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the DGCL or the California Corporations Code, as
applicable;
provided, however,
that if a
holder of Dissenting Shares (a
“Dissenting
Stockholder”
)
withdraws such holder’s demand for such payment and appraisal or becomes
ineligible for such payment and appraisal then, as of the later of the Effective
Time or the date of which such Dissenting Stockholder withdraws such demand or
otherwise becomes ineligible for such payment and appraisal, such holder’s
Dissenting Shares will cease to be Dissenting Shares and will be converted into
the right to receive Cellegy Common Stock as determined in accordance with
Section 1.6(a).
1.9
No Further Transfer of
Adamis Capital Stock
. At the
Effective Time all shares of Adamis Capital Stock outstanding immediately before
the Effective Time shall automatically be exchanged, and all holders of Adamis
Capital Stock that were outstanding immediately before the Effective Time shall
cease to have any rights as stockholders of Adamis, except the right to receive
the consideration described in Section 1.6(a) or Section 1.8, as applicable. No
further transfer of any such shares of Adamis Capital Stock shall be made on
such stock transfer books after the Effective Time. Subject to Section 1.10(f)
if, after the Effective Time, any shares of Adamis Capital Stock are presented
to the Exchange Agent or to Adamis or Cellegy, such Adamis shares shall be
canceled and shall be exchanged as provided in Section 1.10.
1.10
Exchange of
Certificates
.
(a)
Exchange
Agent
. Prior
to the Effective Time, Cellegy and Adamis will jointly select and designate a
national bank, trust company or transfer agent to act as agent of Cellegy for
purposes of, among other things, mailing and receiving transmittal letters and
distributing the Cellegy Common Stock to the holders of Adamis Common Stock (the
“
Exchange
Agent
”).
(b)
Cellegy to Provide Common
Stock
.
Promptly after the Effective Time, Cellegy shall supply or cause to be supplied
or made available to the Exchange Agent for exchange in accordance with this
Section 1.10 through such reasonable procedures as Cellegy may adopt,
instructions regarding issuance of certificates evidencing the shares of Cellegy
Common Stock issuable pursuant to Section 1.6(a) in exchange for shares of
Adamis Capital Stock outstanding immediately before the Effective Time (the
“
Exchange
Shares”
).
(c)
Exchange
Procedures
. As
promptly as practicable after the Effective Time, the Exchange Agent will mail
to each holder of record of Adamis Capital Stock whose shares would be converted
into the right to receive shares of Cellegy Common Stock pursuant to Section
1.6(a), (i) a letter of transmittal in customary form; (ii) such other customary
documents as may be required pursuant to such instructions; and (iii)
instructions for use in effecting the surrender of Adamis Capital Stock in
exchange for certificates representing shares of Cellegy Common Stock. Upon
surrender of Adamis Capital Stock for cancellation to the Exchange Agent,
together with such letter of transmittal and other documents, duly completed and
validly executed in accordance with the instructions thereto, the holder of such
Adamis Capital Stock shall be entitled to receive in exchange therefor (x) a
certificate representing the number of whole Exchange Shares into which the
Adamis Common Stock represented thereby shall have been converted into the right
to receive as of the Effective Time, (y) any dividends or other distributions to
which such holder is entitled pursuant to Section 1.10(d), and (z) cash in
respect of any fractional shares as provided in Section 1.6(f), and the Adamis
Capital Stock so surrendered shall forthwith be canceled. Until so surrendered,
each such outstanding share of Adamis Capital Stock will be deemed from and
after the Effective Time, for all corporate purposes other than the payment of
dividends, to evidence the ownership of the number of full shares of Cellegy
Common Stock into which such shares of Adamis Capital Stock shall have been so
converted and the right to receive cash in lieu of the issuance of any
fractional shares. If any Adamis Stock Certificate shall have been lost, stolen
or destroyed, Cellegy may, in its discretion and as a condition precedent to the
issuance of any certificate representing Cellegy Common Stock, require the owner
of such lost, stolen or destroyed Adamis Stock Certificate to provide a
reasonable affidavit as indemnity against any claim that may be made against the
Exchange Agent, Cellegy or the Surviving Corporation with respect to such Adamis
Stock Certificate.
(d)
Distributions With Respect
to Unexchanged Shares
. No
dividends or other distributions with respect to Cellegy Common Stock with a
record date after the Effective Time will be paid to the holder of any
unsurrendered Adamis Capital Stock with respect to the shares of Cellegy Common
Stock represented thereby until the holder of record of such Adamis Capital
Stock shall surrender such shares of Adamis Capital Stock. Subject to applicable
law, following surrender of any such Adamis Capital Stock, there shall be
delivered to the record holder of Adamis Capital Stock a certificate
representing whole shares of Cellegy Common Stock issued in exchange therefor
(including any cash in respect of any fractional shares), without interest at
the time of such surrender, and the amount of any such dividends or other
distributions with a record date after the Effective Time theretofore payable
(but for the provisions of this Section) with respect to such shares of Cellegy
Common Stock.
(e)
Transfers of
Ownership
. If any
certificate for shares of Cellegy Common Stock is to be issued in a name other
than that in which Adamis Stock Certificate surrendered in exchange therefor is
registered, it will be a condition of the issuance thereof that the Adamis
Capital Stock so surrendered will be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange will have paid to
Cellegy or any agent designated by it any transfer or other taxes required by
reason of the issuance of a certificate for shares of Cellegy Common Stock in
any name other than that of the registered holder of the Adamis Capital Stock
surrendered, or established to the satisfaction of Cellegy or any agent
designated by it that such tax has been paid or is not payable, and shall
provide such written assurances regarding federal and state securities law
compliance as Cellegy may reasonably request.
(f)
Termination of Exchange
Shares.
Any
Exchange Shares which remain undistributed to the stockholders of Adamis twelve
(12) months after the Effective Time shall be delivered to Cellegy, upon demand,
and any stockholders of Adamis who have not previously complied with this
Section shall thereafter look only to Cellegy for payment of their claim for
their portion of the Exchange Shares and any dividends or distributions with
respect to the Exchange Shares.
(g)
No
Liability
.
Notwithstanding anything to the contrary in this Section, none of the Exchange
Agent, Cellegy, Adamis or any party hereto shall be liable to any person for any
amount properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(h)
Dissenting
Shares
. The
provisions of this Section shall also apply to Dissenting Shares that lose their
status as such, except that the obligations of Cellegy under this Section shall
commence on the date of loss of such status and the holder of such shares shall
be entitled to receive in exchange such shares to which such holder is entitled
pursuant to Section 1.6.
1.11
Further
Action
.
If, at
any time after the Effective Time, any further action that is commercially
reasonable and lawful is determined by Cellegy to be necessary or appropriate to
carry out the purposes of this Agreement or to vest Cellegy with full right,
title and possession of all shares of Adamis Capital Stock, the officers and
directors of Adamis and Cellegy shall be fully authorized (in the name of Adamis
and/or Cellegy or otherwise) to take such action.
ARTICLE
II
REPRESENTATIONS AND
WARRANTIES OF ADAMIS
.
Adamis
represents and warrants to Cellegy that the statements contained in this Article
II are true and correct as set forth herein and as qualified by the disclosure
letter separately delivered to Cellegy concurrently herewith (the “
Adamis Disclosure
Letter
”). The
disclosures set forth in the Adamis Disclosure Letter shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II. The disclosures in any section or subsection of the Adamis
Disclosure Letter shall qualify other sections and subsections in this Article
II to the extent it is reasonably clear from a reading of the disclosure that
such disclosure is applicable to such other sections and
subsections.
2.1.
Organization and Good
Standing
. Adamis
is a corporation duly organized, validly existing, and validly subsisting under
the laws of its jurisdiction of incorporation, with requisite corporate power
and authority to conduct its business as now being conducted and to own or use
its properties and assets. Adamis is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which either the ownership or use of the properties owned or
used by it, or the nature of the activities conducted by it, requires such
qualification, except where the failure to be so qualified or in good standing
would not have a Material Adverse Effect on Adamis.
2.2.
Subsidiaries
. The
Adamis Disclosure Letter sets forth all direct and indirect Subsidiaries of
Adamis. Adamis owns all of the equity of each Subsidiary. Except as set forth on
the Adamis Disclosure Letter, Adamis does not have any Subsidiaries or
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any corporation,
partnership, limited liability company, association, joint venture or other
business entity (each an
“Entity”
). Each
Subsidiary of Adamis: (i) is a corporation duly organized and validly existing
under the laws of its jurisdiction of incorporation, (ii) has all requisite
corporate power and authority to own, operate or lease the properties and assets
owned, operated or leased by such Subsidiary and to carry on its business as it
is currently conducted by such Subsidiary and (iii) is duly qualified to do
business and is in good standing in each jurisdiction in which the properties
owned or leased by it or the operation of its business makes such qualification
necessary, except, in each of clauses (i), (ii) and (iii), such failures which,
when taken together with all other such failures, would not have a Material
Adverse Effect on Adamis and its Subsidiaries, when considered together.
2.3.
Authority
. Adamis
has all requisite corporate power and authority to enter into this Agreement and
the other agreements to which it is a party expressly required to be executed
and delivered in connection with the transactions contemplated hereby, including
the Adamis Note (collectively, the “
Ancillary
Agreements
”), to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Ancillary Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Adamis, subject only to the approval of this
Agreement by the stockholders of Adamis. The Board of Directors of Adamis has
unanimously approved this Agreement and the Merger. This Agreement has been (and
the Ancillary Agreements will be at the Closing) duly executed and delivered by
Adamis, and this Agreement constitutes (and the Ancillary Agreements will
constitute at the Closing) the valid and binding obligation of Adamis
enforceable against Adamis in accordance with their terms, except that such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting or relating to creditors' rights generally, and is
subject to general principles of equity.
2.4.
N
o
Conflict
. The
execution and delivery by Adamis of this Agreement and the Ancillary Agreements
to which Adamis is a party, does not, and the consummation of the transactions
contemplated hereby and thereby will not (i) conflict with, or result in any
violation of, any provision of the Adamis Charter (in its current form and as it
may be amended immediately before the Effective Time) or the Adamis Bylaws, (ii)
except as would not reasonably be expected to have a Material Adverse Effect on
Adamis, result in any violation of or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under any mortgage,
indenture, lease, contract, grant, funding arrangement, or other agreement or
instrument, permit, concession, franchise or license of Adamis, (iii) subject to
obtaining the approval of Adamis’ stockholders and except as would not
reasonably be expected to have a Material Adverse Effect on Adamis, conflict
with, or result in any violation of any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Adamis or any of its properties or
assets, or (iv) conflict with, or result in a violation of any resolution
adopted by Adamis’ stockholders, Adamis’ board of directors or any committee of
Adamis’ board of directors.
2.5.
Consents
. No
consent, waiver, approval, order or authorization of, or registration,
declaration or filing with or notice to, any Governmental Entity or any party to
any Material Contract of Adamis is required by or with respect to Adamis in
connection with the execution and delivery of this Agreement by Adamis and any
Ancillary Agreement to which Adamis is a party or the consummation of the
transactions contemplated hereby and thereby, except for (a) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable securities laws, (b) the filing of
the Certificate of Merger with the Delaware Secretary of State, and (c) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations or filings which, if not obtained or made, would not have a
Material Adverse Effect on Adamis.
2.6.
Governmental
Authorizations
. Adamis
has obtained each material federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
(a) pursuant to which Adamis currently operates or holds any interest in any of
its properties, or (b) that is required for the operation of Adamis’ business or
the holding of any such interest, and all of such authorizations are in full
force and effect, except for such consents, licenses, permits, grants or other
authorizations, which if not obtained would not have a Material Adverse Effect
on Adamis.
2.7.
Capitalization
. The
authorized capital stock of Adamis consists of 100,000,000 shares of Adamis
Common Stock, $0.001 par value, and 20,000,000 shares of Adamis Preferred Stock,
$0.001 par value, of which there were issued and outstanding, as of the date of
this Agreement, 49,529,748 shares of Adamis Common Stock and no shares of Adamis
Preferred Stock. To the Knowledge of Adamis, all of the outstanding shares of
Adamis Capital Stock (i) have been duly authorized and validly issued, and are
fully paid and non-assessable, (ii) except for rights of first refusal,
exchange, repurchase, forfeiture and/or cancellation rights in favor of Adamis,
are not subject to preemptive rights or rights of first refusal created by
statue, the Adamis Charter, the Adamis Bylaws or any agreement to which Adamis
is a party or by which it is bound and (iii) have been issued in compliance in
all material respects with federal and state securities laws. There are no
declared or unpaid dividends with respect to any shares of Adamis Capital Stock.
There are no issued or outstanding Adamis Options or other rights of any kind
entitling any person to purchase or acquire shares of Adamis Capital Stock, and
Adamis has not adopted any stock option plan or similar employee benefit plan
pursuant to which equity securities of Adamis may be issued.
2.8.
Adamis Financial
Statements
. Adamis
has furnished to Cellegy copies of (i) an audited consolidated balance sheet of
Adamis as of March 31, 2007 and the related consolidated statement of
operations, statement of changes in stockholders’ equity and statement of cash
flows for the 12-month period then ended, (ii) an unaudited consolidated balance
sheet of Adamis as of December 31, 2007 and the related consolidated statement
of operations, statement of changes in stockholders’ equity and statement of
cash flows for the period then ended, (iii) an audited consolidated balance
sheet of Adamis Laboratories, Inc. as of March 31, 2007, and the related
consolidated statement of operations, statement of changes in stockholders’
equity and statement of cash flows for the period then ended, (iv) an unaudited
consolidated balance sheet of Adamis Laboratories, Inc. as of December 31, 2007
and the related consolidated statement of operations, statement of changes in
stockholders’ equity and statement of cash flows for the period then ended, and
(v) an audited consolidated balance sheet of International Laboratories, Inc. as
of December 31, 2007, and the related consolidated statement of operations,
statement of changes in stockholders’ equity and statement of cash flows for the
period then ended (the financial statements in clauses (i) through (v) above,
collectively, the
“Adamis
Financial
Statements
”). The
Adamis Financial Statements are accurate and complete in all material respects,
have been prepared in accordance with GAAP consistently applied and present
fairly the financial position of Adamis as of the dates thereof, and the results
of its operations for the respective periods then ended. The unaudited balance
sheet of Adamis as of December 31, 2007 that is included in the Adamis Financial
Statements is referred to herein as the “
Current Balance
Sheet
.”
2.9.
Absence of Certain
Changes
. Since
December 31, 2007 (the “
Base Date
”),
except as set forth in the Adamis Disclosure Letter, there has not occurred any
change, event or condition (whether or not covered by insurance) that has
resulted in, or would reasonably be expected to result in, a Material Adverse
Effect on Adamis.
2.10.
Interested Party
Transactions
. Adamis
is not indebted to any director, officer or employee of Adamis (except for
amounts due as normal salaries and bonuses and in reimbursement of ordinary
expenses), and no such person is indebted to Adamis. Adamis is not a party to
any transaction involving over $60,000 in which any director, officer or 5%
stockholder of Adamis (or a member of such person's immediate family) had a
direct or indirect material interest, except where such person's interest arises
solely from his or her ownership of Adamis Capital Stock.
2.11.
Intellectual
Property
.
(a)
To the
Knowledge of Adamis, Adamis and each of its Subsidiaries owns or possesses the
right to use the Intellectual Property that is owned by or licensed to Adamis
and each of its Subsidiaries (the “
Adamis Patent and Proprietary
Rights
”),
except where the failure to own or possess such rights would not have a Material
Adverse Effect on Adamis or any of its Subsidiaries, considered
together.
(b)
Neither
Adamis nor any of its Subsidiaries has received any notice of any asserted
rights with respect to any of Adamis Patent and Proprietary Rights which, if
determined unfavorably with respect to the interests of Adamis or any of its
Subsidiaries would have a Material Adverse Effect on Adamis or any of its
Subsidiaries, considered together.
(c)
To
Adamis’ Knowledge, neither Adamis nor any of its Subsidiaries has ever infringed
(directly, contributorily, by inducement, or otherwise), misappropriated, or
otherwise violated or made unlawful use of any right to Intellectual Property of
any other Person or engaged in unfair competition. No infringement,
misappropriation, or similar claim or Legal Proceeding is pending or, to Adamis’
Knowledge, threatened against Adamis, any of its Subsidiaries or any other
Person who is or may be entitled to be indemnified, defended, held harmless, or
reimbursed by Adamis or any of its Subsidiaries with respect to such claim or
Legal Proceeding. Neither Adamis nor any of its Subsidiaries has received notice
or is otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any of Adamis Patent and Proprietary Rights, which
infringement or conflict (if the subject of any unfavorable decision, ruling or
finding), individually or in the aggregate, would result in a Material Adverse
Effect on Adamis or any of its Subsidiaries, considered together.
(d)
To
Adamis’ Knowledge, neither Adamis nor any of its Subsidiaries has engaged in
patent or copyright misuse or any fraud or inequitable conduct in connection
with any Adamis Patent and Proprietary Rights, and no trademark or trade name
owned, used, or applied for by Adamis or any of its Subsidiaries conflicts or
interferes with any trademark or trade name owned, used, or applied for by any
other Person.
2.12.
Taxes
.
(a)
As used
in this Agreement, the terms “
Tax
” and,
collectively, “
Taxes
” mean
any and all federal, state, local or foreign taxes of any country, assessments
and other similar governmental charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, stamp transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor Entity.
(b)
Adamis
has prepared and timely filed all Tax Returns relating to any and all Taxes
concerning or attributable to Adamis and such Tax Returns are true and correct
in all material respects and have been completed in accordance with applicable
law. Adamis has delivered or made available to Cellegy correct and complete
copies of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by Adamis or any of its Subsidiaries
filed or received since January 1, 2004 or, if later, since
inception.
(c)
Adamis
(i) is not delinquent in the payment of any Taxes due and owing by Adamis and
(ii) has withheld and timely paid all Taxes required to have been withheld and
paid with respect to any amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party.
(d)
There is
no Tax deficiency outstanding or assessed or, to Adamis’ Knowledge, proposed
against Adamis that is not reflected as a liability on the Current Balance
Sheet, nor has Adamis executed any agreements or waivers extending any statute
of limitations on or extending the period for the assessment or collection of
any Tax (other than extensions which have expired). No claim has ever been made
by an authority in a jurisdiction where Adamis does not file Tax Returns that it
is or may be subject to taxation by that jurisdiction. There are no liens for
Taxes (other than Taxes not yet due and payable) upon any of the assets of
Adamis.
(e)
To the
Knowledge of Adamis, Adamis has no liabilities for unpaid Taxes that have not
been accrued for or reserved on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise.
(f)
Adamis
has not received from any Governmental Entity any (i) notice indicating an
intent to open an audit or other review, (ii) request for information related to
Tax matters, or (iii) notice of deficiency or proposed adjustment of or any
amount of Tax proposed, asserted, or assessed by any Governmental Entity against
Adamis.
(g)
Adamis is
not a party to any tax-sharing agreement or similar arrangement with any other
party, and Adamis has not assumed any obligation to pay any Tax obligations of,
or with respect to any transaction relating to, any other person or agreed to
indemnify any other person with respect to any Tax.
(h)
Adamis
has not been a member of an affiliated group of corporations filing a
consolidated federal income tax return other than a group of which Adamis was
the parent.
(i)
Adamis
has not been at any time a United States Real Property Holding Corporation
within the meaning of Section 897(c)(2) of the Code.
2.13.
Employee Benefit
Plans
.
(a)
The
Adamis Disclosure Letter contains a complete and accurate list of each plan,
program, policy, practice, contract, agreement or other arrangement providing
for retirement, deferred compensation, severance, separation, visas, work
permits, termination pay, performance awards, bonus, incentive, stock option,
stock purchase, stock bonus, phantom stock, stock appreciation right,
supplemental retirement, fringe benefits, cafeteria benefits or other benefits,
whether written or unwritten, including without limitation each "employee
benefit plan" within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended (“
ERISA
”), which
is sponsored, maintained, contributed to, or required to be contributed to by
Adamis (or any subsidiary) and, with respect to any such plans which are subject
to Code Section 401(a), any trade or business (whether or not incorporated) that
is or at any relevant time was treated as a single employer with Adamis within
the meaning of Section 414(b), (c), (m) or (o) of the Code, (an “
ERISA
Affiliate
”) for
the benefit of any person who performs or who has performed services for Adamis
(or any subsidiary) or with respect to which Adamis or any ERISA Affiliate has
or may have any liability (including without limitation contingent liability) or
obligation (collectively, the “
Adamis Employee
Plans
”).
(b)
Compliance
. Each
Adamis Employee Plan has been administered in material compliance with its terms
and with the requirements of applicable law; and Adamis and each ERISA Affiliate
have performed all material obligations required to be performed by them under,
and are not in any material respect in default under or violation of, any of
Adamis Employee Plans. No Adamis Employee Plan is intended to be qualified under
Section 401(a) of the Code. No “prohibited transaction,” within the meaning of
Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise
exempt under Section 408 of ERISA, has occurred with respect to any Adamis
Employee Plan.
(c)
No Title IV or Multiemployer
Plan
. No
Adamis Employee Plan is a "multiemployer plan" (as defined in Section 3(37) of
ERISA) or a “pension plan” (as defined in Section 3(2) of ERISA) subject to
Title IV of ERISA.
(d)
Future
Commitments
. No
Adamis Employee Plan provides (except at no cost to Adamis), or reflects or
represents any liability of Adamis to provide, retiree life insurance, retiree
health benefits or other retiree employee welfare benefits to any Person for any
reason, except as may be required by COBRA or other applicable Legal
Requirements. Other than commitments made that involve no future costs to
Adamis, Adamis has never represented, promised or contracted (whether in oral or
written form) to any current or former employee of Adamis or any other Person
that such employee or other Person would be provided with retiree life
insurance, retiree health benefit or other retiree employee welfare benefits,
except to the extent required by applicable Legal Requirements.
(e)
Effect of
Transaction
. The
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or other service provider of Adamis or
any ERISA Affiliate to severance benefits or any other payment (including
without limitation unemployment compensation, golden parachute, bonus or
benefits under any Adamis Employee Plan), except as expressly provided in this
Agreement; or (ii) accelerate the time of payment or vesting of any such
benefits or increase the amount of compensation due any such employee or service
provider.
2.14.
Employee
Matters
. Adamis
is in material compliance with all currently applicable laws and regulations
respecting terms and conditions of employment. There are no proceedings pending
or, to Adamis’ Knowledge, threatened, between Adamis, on the one hand, and any
or all of its current or former employees, on the other hand, which would
reasonably be expected to have a Material Adverse Effect on Adamis. Adamis has
provided all employees with all wages, benefits, relocation benefits, stock
options, bonuses and incentives, and all other compensation that became due and
payable through the date of this Agreement.
2.15.
Insurance
.
The
Adamis Disclosure Letter sets forth all policies of insurance maintained by, at
the expense of or for the benefit of Adamis. There is no material claim pending
under any of such policies as to which coverage has been questioned, denied or
disputed by the underwriters of such policies. All premiums due and payable
under all such policies have been paid and, to Adamis’ Knowledge, Adamis is
otherwise in compliance with the terms of such policies. To Adamis’ Knowledge,
there is no threatened termination of, or material premium increase with respect
to, any of such policies.
2.16.
Compliance with Legal
Requirements
.
For all
periods of time during which the respective applicable statute of limitations
periods have not expired, (i) Adamis and each of its Subsidiaries has complied
in all material respects with, is not in material violation of, and has not
received any written or, to Adamis’ Knowledge, other notices of violation with
respect to, any applicable Legal Requirement or regulation with respect to the
conduct of its business, or the ownership or operation of its business; and (ii)
neither Adamis nor any of its Subsidiaries has received any written or, to
Adamis’ Knowledge, other notices or other communication from any Governmental
Entity regarding (A) any actual, alleged, possible, or potential violation of,
or failure to comply with, any applicable Legal Requirement, or (B) any actual,
alleged, possible, or potential obligation on the part of Adamis or any of its
Subsidiaries to undertake, or to bear all or any portion of the cost of, any
remedial action related to compliance or non-compliance with any applicable
Legal Requirement, in each of the above cases which if determined adversely to
Adamis or any of its Subsidiaries would reasonably be expected to have a
Material Adverse Effect on Adamis or its Subsidiaries, considered together.
2.17.
Environmental
Matters
. To the
Knowledge of Adamis, Adamis is, and at all times has been, in compliance in all
material respects with all Environmental Laws and is not subject to any material
liability under any Environmental Law. Adamis has not received, nor to Adamis’
Knowledge has any other Person for whose conduct it is or may be held
responsible, received, any order, written notice, or other written communication
from (i) any Governmental Entity or private citizen acting in the public
interest, or (ii) the current or prior owner or operator of any Facilities,
asserting or alleging any actual or potential violation of or failure to comply
with any Environmental Law, or any obligation to undertake or bear the cost of
any Environmental, Health, and Safety Liabilities.
2.18.
Legal
Proceedings
. There
is no pending Legal Proceeding that has been commenced by or against Adamis. To
Adamis’ Knowledge, no Person has threatened to commence any Legal Proceeding
against Adamis. There is no judgment, decree or order against Adamis, or, to
Adamis’ Knowledge, any of its directors or officers (in their capacities as
such), that could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement, or any Ancillary Agreement, or that
would reasonably be expected to have a Material Adverse Effect on Adamis. To
Adamis’ Knowledge, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that would reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding.
2.19.
Contracts; No
Defaults
.
(a)
Each
Material Contract of Adamis is enforceable against Adamis in accordance with its
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies; and
(b)
Adamis
has not violated or breached, or committed any material default under, any
Material Contract, in each of the above cases where such violation, beach or
default would have a Material Adverse Effect on Adamis.
(c)
The
Adamis Disclosure Letter sets forth a list of all material consents or waivers
of, or notifications to, any Governmental Entity or any third party that are
required or provided for under any Material Contract of Adamis or any of its
Subsidiaries in connection with the execution and delivery of this Agreement and
the Ancillary Agreements by Adamis and the consummation of the transactions
contemplated hereby and thereby.
2.20.
Labor
Matters
. Adamis
is not a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization.
Adamis is not the subject of any Legal Proceeding asserting that Adamis has
committed an unfair labor practice or seeking to compel it to bargain with any
labor organization as to wages or conditions of employment. There is no strike,
work stoppage or other labor dispute involving Adamis pending or, to Adamis’
Knowledge, threatened against Adamis.
2.21.
Unlawful
Payments
. To
Adamis’ Knowledge, none of Adamis, or any officer, director, employee, agent or
representative of Adamis has made, directly or indirectly, any bribe or
kickback, illegal political contribution, payment from corporate funds which was
incorrectly recorded on the books and records of Adamis, unlawful payment from
corporate funds to governmental or municipal officials in their individual
capacities for the purpose of affecting their action or the actions of the
jurisdiction which they represent to obtain favorable treatment in securing
business or licenses or to obtain special concessions of any kind whatsoever, or
illegal payment from corporate funds to obtain or retain any
business.
2.22.
Representations
Complete
. This
Agreement (as limited and qualified by the Adamis Disclosure Letter) does not
contain any representation, warranty or information that (i) contains an untrue
statement of a material fact, or (ii) omits to state any material fact necessary
in order to make the statements herein (in the light of the circumstances under
which such statements have been made) not misleading.
2.23.
Financial
Advisor
. No
broker, finder or investment banker is entitled to any commission or brokerage
or finder’s fee in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Adamis.
ARTICLE
III
REPRESENTATIONS AND
WARRANTIES OF CELLEGY AND MERGER SUB
.
Cellegy,
and Merger Sub (with respect to the representations, warranties and covenants of
Merger Sub), represent and warrant to Adamis that the statements contained in
this Article III are true and correct as set forth herein and as qualified by
the disclosure letter separately delivered to Adamis concurrently herewith (the
“
Cellegy Disclosure
Letter
”). The
disclosures set forth in Cellegy Disclosure Letter shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article III. The disclosures in any section or subsection of the Cellegy
Disclosure Letter shall qualify other sections and subsections in this Article
III to the extent it is reasonably clear from a reading of the disclosure that
such disclosure is applicable to such other sections and
subsections.
3.1.
Organization and Good
Standing
.
(a)
Cellegy
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with requisite corporate power
and authority to conduct its business as now being conducted and to own or use
its properties and assets. Except as set forth in Section 3.1 of the Cellegy
Disclosure Letter, Cellegy has not conducted any business under or otherwise
used, for any purpose or in any jurisdiction, any fictitious name, assumed name,
trade name or other name, other than the name “Cellegy Pharmaceuticals,
Inc.”
(b)
Cellegy
is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by them, or the nature of the
activities conducted by them, requires such qualification except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect on Cellegy.
(c)
Section
3.1 of the Cellegy Disclosure Letter accurately sets forth (i) the names of
the members of the board of directors of Cellegy, (ii) the names of the
members of each committee of such board of directors, and (iii) the names
and titles of the officers of Cellegy.
3.2.
Subsidiaries
.
(a)
The
Cellegy Disclosure Letter sets forth all direct and indirect Subsidiaries of
Cellegy. Cellegy owns all of the equity of each Subsidiary. Except as set forth
on the Cellegy Disclosure Letter, Cellegy does not have any Subsidiaries or
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any Entity. Except as set
forth in Section 3.2(a) of the Disclosure Letter, Cellegy has not agreed and is
not obligated to make any future investment in or capital contribution to any
Entity, and Cellegy has not guaranteed and is not responsible or liable for any
obligation of any of the Entities in which it owns or has owned any equity
interest.
(b)
Each
Subsidiary of Cellegy: (i) is a corporation duly organized and validly existing
under the laws of its jurisdiction of incorporation, (ii) has all requisite
corporate power and authority to own, operate or lease the properties and assets
owned, operated or leased by such Subsidiary and to carry on its business as it
has been and is currently conducted by such Subsidiary and (iii) is duly
qualified to do business and is in good standing in each jurisdiction in which
the properties owned or leased by it or the operation of its business makes such
license and qualification necessary, expect, in each of clauses (i), (ii) and
(iii), such failures which, when taken together with all other such failures,
would not have a Material Adverse Effect on Cellegy and its Subsidiaries, when
considered together.
(c)
Section
3.2 of the Cellegy Disclosure Letter accurately sets forth (i) the names of
the members of the boards of directors of each Subsidiary of Cellegy,
(ii) the names of the members of each committee of such boards of
directors, and (iii) the names and titles of the officers of each
Subsidiary of Cellegy.
3.3.
Authority
. Each of
Cellegy and Merger Sub has all requisite corporate power and authority to enter
into this Agreement and the Ancillary Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Ancillary Agreements and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Cellegy and Merger Sub, subject only to the approval of this
Agreement by the stockholders of Cellegy and Merger Sub. The Board of Directors
of Cellegy and Merger Sub have unanimously approved this Agreement and the
Merger. This Agreement has been (and the Ancillary Agreements will be at the
Closing) duly executed and delivered by Cellegy and Merger Sub, and this
Agreement constitutes and the Ancillary Agreements will constitute at the
Closing) the valid and binding obligations of Cellegy and Merger Sub enforceable
against each of Cellegy and Merger Sub in accordance with their terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to creditors' rights generally, and subject
to general principles of equity. Merger Sub has been formed solely for the
purpose of executing and delivering this Agreement and consummating the
transactions contemplated hereby. Since the date of its incorporation, Merger
Sub has neither engaged in nor transacted any business or activity of any nature
whatsoever other than activities related to its corporate organization and the
execution and delivery of this Agreement and the related documents and
instruments. Merger Sub has no assets or properties or debts, liabilities or
obligations of any kind whatsoever, and with the exception of this Agreement and
the related documents and instruments, is not a party to any contract, agreement
or undertaking of any nature.
3.4.
No
Conflict
. The
execution and delivery by Cellegy of this Agreement and the Ancillary Agreements
to which Cellegy is a party, does not, and the consummation of the transactions
contemplated hereby and thereby will not (i) conflict with, or result in any
violation of, any provision of the Cellegy Charter (in its current form and as
it may be amended immediately before the Effective Time) or the Cellegy Bylaws,
(ii) except as would not reasonably be expected to have a Material Adverse
Effect on Cellegy, result in any violation of or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under any
mortgage, indenture, lease, contract, grant, funding arrangement, or other
agreement or instrument, permit, concession, franchise or license of Cellegy,
(iii) subject to obtaining the approval of Cellegy’s stockholders and except as
would not reasonably be expected to have a Material Adverse Effect on Cellegy,
conflict with, or result in any violation of any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Cellegy or any of its
properties or assets or (iv) conflict with, or result in a violation of any
resolution adopted by Cellegy’s stockholders, Cellegy’s board of directors or
any committee of Cellegy’s board of directors.
3.5.
Consents
. No
consent, approval, order or authorization of or registration, declaration or
filing with, any Governmental Entity or any party to any Material Contract is
required by or with respect to Cellegy or any of its Subsidiaries in connection
with the execution and delivery of this Agreement by Cellegy and any Ancillary
Agreement to which Cellegy is a party or the consummation by Cellegy of the
transactions contemplated hereby, except (i) such consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable securities laws, (ii) the filing of the Certificate of
Merger with the Secretary of State and (iii) such consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings which, if not
obtained or made, would not have a Material Adverse Effect on Cellegy.
3.6.
Governmental
Authorizations.
Cellegy
has obtained each material federal, state, county, local or foreign governmental
consent, license, permit, grant, or other authorization of a Governmental Entity
(a) pursuant to which Cellegy currently operates or holds any interest in any of
its properties, or (b) that is required for the operation of Cellegy’s business
or the holding of any such interest, and all of such authorizations are in full
force and effect, except for such consents, licenses, permits, grants or other
authorizations, which if not obtained would not have a Material Adverse Effect
on Cellegy.
3.7.
Capitalization;
Integration
.
(a)
The
authorized capital stock of Cellegy consists of 50,000,000 shares of Common
Stock, $.0001 par value, and 5,000,000 shares of Preferred Stock, $.0001 par
value, of which there were issued and outstanding as of the date of this
Agreement, 29,834,796 shares of Common Stock and no shares of Preferred Stock.
The shares of Cellegy Common Stock to be issued pursuant to the Merger will be
duly authorized, validly issued, fully paid, and non-assessable, free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
by the holders thereof, and shall be issued in material compliance with all
applicable federal and state securities laws. To the Knowledge of Cellegy, all
of the outstanding shares of Cellegy Common Stock (i) have been duly authorized
and validly issued, and are fully paid and non-assessable, (ii) are not subject
to preemptive rights or rights of first refusal created by statue, Cellegy
Charter, Cellegy Bylaws or any agreement to which Cellegy is party or by which
it is bound and (iii) have been issued in compliance in all material respects
with federal and state securities laws. There are no declared or unpaid
dividends with respect to any shares of Cellegy Common Stock. To the Knowledge
of Cellegy, none of Cellegy’s debt could be classified as equity for tax
purposes.
(b)
Cellegy
has separately identified and delivered to Adamis a true and correct schedule
setting forth: (i) the number of outstanding options and warrants to purchase
shares of Cellegy Common Stock, (ii) the number of shares reserved for further
issuance under Cellegy’s 2005 Equity Incentive Plan and (iii) with respect to
each option and warrant outstanding as of the date of this Agreement, (A) the
name of the holder of such option or warrant, (B) the total number of shares of
Cellegy Common Stock that are subject to such option or warrant and the number
of shares of Cellegy Common Stock with respect to which such option or warrant
is immediately exercisable, (C) the date of which such option or warrant was
granted and the term of such option or warrant (D) the vesting schedule, if any,
of such option or warrant, (E) the exercise price per share of Cellegy Common
Stock purchasable under such option or warrant and (F) whether such option or
warrant has been designated an “incentive stock option” as defined in Section
422 of the Code, and (iv) an accurate and complete description of the terms of
each repurchase option which is held by Cellegy and to which any of such shares
is subject.
(c)
Except as
set forth in Section 3.7 of the Cellegy Disclosure Letter or in the schedule
referenced in the preceding paragraph, there is no:
(i)
outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of Cellegy;
(ii)
outstanding security, instrument or obligation that is or may become convertible
into or exchangeable for any shares of the capital stock or other securities of
Cellegy;
(iii)
contract
under which Cellegy is or may become obligated to sell or otherwise issue any
shares of its capital stock or any other securities; or
(iv)
to
Cellegy’s Knowledge, condition or circumstance that may give rise to or provide
a basis for the assertion of a claim by any Person to the effect that such
Person is entitled to acquire or receive any shares of capital stock or other
securities of Cellegy.
(d)
Neither
Cellegy, its Affiliates, nor any Person acting on its or their behalf, has,
either directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the issuance of Cellegy Common Stock in the Equity Financing to be integrated
with prior offerings by Cellegy for purposes of the Securities Act, or any
applicable stockholder approval provisions, which would impair the exemptions
relied upon in the Equity Financing.
3.8.
SEC Reports; Financial
Statements; Listing and Maintenance Requirements
.
(a)
As of
their respective filing dates, all annual, quarterly or current reports, filed
by Cellegy with the SEC since January 1, 2005 (including those that Cellegy may
file subsequent to the date hereof) (such reports, as amended “
Cellegy SEC
Reports
”) (i)
were prepared in accordance in all material respects with the requirements of
the Securities Act and the Exchange Act, as the case may be, and the rules and
regulations thereunder, except as may be reflected in any amendments to such
reports that Cellegy has filed with the SEC, (ii) as the same may have been
amended, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading and (iii) were all the forms, reports and other
documents required to be filed under the Exchange Act. Since January 1, 2005,
Cellegy has filed with the SEC all reports that are required to have been filed.
(b)
No
Subsidiary of Cellegy is or has been required to file any form, report,
registration statement or other document with the SEC. The consolidated
financial statements (including any related notes thereto) contained in the
Cellegy SEC Reports (in the form, as applicable, in any amendments to such
Cellegy SEC Reports) (the
“Cellegy Financial
Statements”
): (i)
complied as to form in all material respects with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered, except as may
be indicated in the notes to such financial statements and (in the case of
unaudited statements) as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are subject to
year-end audit adjustments; and (iii) fairly present in all material respects
the consolidated financial position of Cellegy and its Subsidiaries as of the
respective dates thereof and the consolidated results of operations and cash
flows of Cellegy and its Subsidiaries for the periods covered thereby.
(c)
Cellegy
maintains a system of internal accounting controls and disclosure controls and
procedures sufficient, in the judgment of Cellegy’s board of directors, to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(d)
Cellegy
has not, in the twelve (12) months preceding the date hereof, received notice
from the trading market or stock quotation system on which Cellegy Common Stock
is listed or quoted or any other trading market or stock quotation system on
which Cellegy Common Stock was previously listed or quoted to the effect that
Cellegy is not in compliance with the listing or maintenance requirements of
such trading market or stock quotation system. Cellegy is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements.
3.9.
Absence of Certain
Changes
. Since
September 30, 2007, and except as set forth in Section 3.9 of the Cellegy
Disclosure Letter, there has not occurred (a) any change, event or condition
(whether or not covered by insurance) that has resulted in, or would reasonably
be expected to result in, a Material Adverse Effect on Cellegy; (b) any
acquisition, sale or transfer of any material assets or material properties of
Cellegy or any creation of any security interest in such assets or properties;
(c) any change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Cellegy or any revaluation by
Cellegy of any of its assets; (d) any declaration, setting aside, or payment of
a dividend or other distribution with respect to the shares of Cellegy or any
direct or indirect redemption, purchase or other acquisition by Cellegy of any
of its shares of capital stock; (e) any Material Contract entered into by
Cellegy, or any material amendment or termination of, or default under, any
Material Contract to which Cellegy is a party or by which it is bound, in each
case that would reasonably be expected to result in a Material Adverse Effect on
Cellegy; (f) any amendment or change to Cellegy Charter or Cellegy Bylaws; (g)
any increase in or modification of the compensation or benefits payable or to
become payable by Cellegy to any of its directors or employees; (h) any sale,
issuance or authorization by Cellegy of (1) any capital stock or other security,
(2) any option or right to acquire any capital stock or any other security, or
(3) any Convertible Securities; (i) any amendment or waiver by Cellegy of any of
its rights under, or any consent by Cellegy of the acceleration of vesting under
(1) any provision of its 2005 Equity Incentive Plan, (2) any provision of any
agreement evidencing any outstanding company option or warrant, or (3) any
restricted stock purchase agreement; (j) any formation by Cellegy of any
Subsidiary or any acquisition of any equity interest or other interest in any
other Equity (other than Merger Sub); or (k) any agreement by Cellegy to do any
of the things described in the preceding clauses (a) through
(j).
3.10.
Intellectual
Property
.
(a)
To the
Knowledge of Cellegy, Cellegy and each of its Subsidiaries owns or possesses the
right to use the Intellectual Property that is owned by or licensed to Cellegy
or that is otherwise necessary to operate the business of Cellegy and each of
its Subsidiaries (the “
Cellegy Patent and Proprietary
Rights
”),
except where the failure to own or possess such rights would not have a Material
Adverse Effect on Cellegy or any of its Subsidiaries, considered
together.
(b)
Except as
set forth in Section 3.10(b) of the Cellegy Disclosure Letter, neither Cellegy
nor any of its Subsidiaries has received any notice of any asserted rights with
respect to any of Cellegy Patent and Proprietary Rights which, if determined
unfavorably with respect to the interests of Cellegy or any of its Subsidiaries
would have a Material Adverse Effect on Cellegy or any of its Subsidiaries,
considered together.
(c)
To
Cellegy’s Knowledge, neither Cellegy nor any of its Subsidiaries has ever
infringed (directly, contributorily, by inducement, or otherwise),
misappropriated, or otherwise violated or made unlawful use of any right to
Intellectual Property of any other Person or engaged in unfair competition. No
infringement, misappropriation, or similar claim or Legal Proceeding is pending
or, to Cellegy’s Knowledge, threatened against Cellegy, any of its Subsidiaries
or any other Person who is or may be entitled to be indemnified, defended, held
harmless, or reimbursed by the Company or any of its Subsidiaries with respect
to such claim or Legal Proceeding. Neither Cellegy nor any of its Subsidiaries
has received notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any of Cellegy Patent and
Proprietary Rights, which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding), individually or in the aggregate,
would result in a Material Adverse Effect on Cellegy or any of its Subsidiaries,
considered together.
(d)
To
Cellegy’s Knowledge, neither Cellegy nor any of its Subsidiaries has engaged in
patent or copyright misuse or any fraud or inequitable conduct in connection
with any Cellegy Patent and Proprietary Rights, and no trademark or trade name
owned, used, or applied for by Cellegy or any of its Subsidiaries conflicts or
interferes with any trademark or trade name owned, used, or applied for by any
other Person.
3.11.
Taxes
.
(a)
Cellegy
has prepared and timely filed all Tax Returns relating to any and all Taxes
concerning or attributable to Cellegy and such Tax Returns are true and correct
in all material respects and have been completed in accordance with applicable
law. Cellegy has delivered or made available to Adamis correct and complete
copies of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by Cellegy or any of its Subsidiaries
filed or received since January 1, 2002.
(b)
Cellegy
and each of its Subsidiaries (i) is not delinquent in the payment of any Taxes
due and owing by Cellegy and its Subsidiaries and (ii) has withheld and timely
paid all Taxes required to have been withheld and paid with respect to any
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.
(c)
There is
no Tax deficiency outstanding or assessed or, to Cellegy’ Knowledge, proposed
against Cellegy that is not reflected as a liability on the Cellegy Financial
Statements, nor has Cellegy executed any agreements or waivers extending any
statute of limitations on or extending the period for the assessment or
collection of any Tax (other than extensions which have expired). No claim has
ever been made by an authority in a jurisdiction where Cellegy does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction. There are
no liens for Taxes (other than Taxes not yet due and payable) upon any of the
assets of Cellegy.
(d)
To
Cellegy’s Knowledge, Cellegy has no liabilities for unpaid Taxes that have not
been accrued for or reserved on the Cellegy Financial Statements, whether
asserted or unasserted, contingent or otherwise.
(e)
Neither
Cellegy nor any of its Subsidiaries has received from any Governmental Entity
any (i) notice indicating an intent to open an audit or other review, (ii)
request for information related to Tax matters, or (iii) notice of deficiency or
proposed adjustment of or any amount of Tax proposed, asserted, or assessed by
any Governmental Entity against Cellegy.
(f)
Cellegy
is not a party to any tax-sharing agreement or similar arrangement with any
other party, and Cellegy has not assumed any obligation to pay any Tax
obligations of, or with respect to any transaction relating to, any other person
or agreed to indemnify any other person with respect to any Tax.
(g)
Cellegy
has not been a member of an affiliated group of corporations filing a
consolidated federal income tax return other than a group of which Cellegy was
the parent.
(h)
Cellegy
has not been at any time a United States Real Property Holding Corporation
within the meaning of Section 897(c)(2) of the Code.
(i)
Neither
Cellegy nor any of its Subsidiaries has filed a consent under section 341(f) of
the Code concerning collapsible corporations. Neither Cellegy nor any of its
Subsidiaries is a party to any contract, agreement, plan or arrangement,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of Cellegy or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of (i) any “excess
parachute payment” within the meaning of Section 280G of the Code (or any
corresponding
provisions of state, local or foreign Tax law)
and (ii)
any amount that will not be fully deductible as a result of Section 162(m) of
the Code (or any corresponding provisions of state, local or foreign Tax
law).
(j)
Cellegy
will not be required to include any item of income in, or exclude any item of
deduction from, taxable income for any taxable period (or portion there) ending
after the Closing Date as a result of any: (A) change in method of accounting
for taxable period ending on or prior to the Closing Date; (B) “closing
agreement” as described in section 7121 of the Code (or any corresponding or
similar provision of state, local or foreign income Tax law) executed on or
prior to the Closing Date; (C) intercompany transactions or any excess loss
account described in Treasury Regulations under section 1502 of the Code (or any
corresponding or similar provisions of state, local or foreign income Tax law);
(D) installment sale or open transaction disposition made on or prior to the
Closing Date; or (E) prepaid amount received on or prior to the Closing
Date.
(k)
Cellegy
has not distributed stock of another Person, or has had its stock distributed by
another Person, in a transaction that was purported or intended to be governed
in whole or in part by section 355 or section 361 of the Code.
3.12.
Employee Benefit
Plans
.
(a)
The
Cellegy Disclosure Letter contains a complete and accurate list of each Cellegy
Employee Agreement and each plan, program, policy, practice, contract, agreement
or other arrangement providing for retirement, deferred compensation, severance,
separation, visas, work permits, termination pay, performance awards, bonus,
incentive, stock option, stock purchase, stock bonus, phantom stock, stock
appreciation right, supplemental retirement, fringe benefits, cafeteria benefits
or other benefits, whether written or unwritten, including without limitation
each "employee benefit plan" within the meaning of Section 3(3) of ERISA, which
is sponsored, maintained, contributed to, or required to be contributed to by
Cellegy (or any subsidiary) and, with respect to any such plans which are
subject to Code Section 401(a), any trade or business (whether or not
incorporated) that is or at any relevant time was treated as a single employer
with Cellegy within the meaning of Section 414(b), (c), (m) or (o) of the Code
(an “
ERISA
Affiliate
”) for
the benefit of any person who performs or who has performed services for Cellegy
(or any subsidiary) or with respect to which Cellegy or any ERISA Affiliate has
or may have any liability (including without limitation contingent liability) or
obligation (collectively, the “
Cellegy Employee
Plans
”).
Cellegy does not currently intend nor has it committed to establish or enter
into any new Cellegy Employee Plan or Cellegy Employee Agreement, or to modify
any Cellegy Employee Plan or Cellegy Employee Agreement (except to conform any
such Cellegy Employee Plan or Cellegy Employee Agreement to the requirements of
any applicable Legal Requirements, in each case as previously disclosed to
Adamis in writing or as required by this Agreement). Cellegy has furnished or
made available to Adamis true and complete copies of documents embodying each of
Cellegy Employee Plans and, with respect to each Cellegy Employee Plan that is
subject to ERISA reporting requirements, Cellegy has provided copies of the Form
5500 reports filed for the last three plan years.
(b)
Compliance
. Each
Cellegy Employee Plan has been administered in material compliance with its
terms and with the requirements of applicable law; and Cellegy and each ERISA
Affiliate have performed all material obligations required to be performed by
them under, and are not in any material respect in default under or violation
of, any of the Cellegy Employee Plans. Any Cellegy Employee Plan that is
intended to be qualified under Section 401(a) of the Code has obtained from the
Internal Revenue Service a favorable determination letter as to its qualified
status under the Code, including all currently effective amendments to the Code.
No “prohibited transaction,” within the meaning of Section 4975 of the Code or
Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of
ERISA, has occurred with respect to any Cellegy Employee Plan. There are no
claims or Legal Proceedings pending, or, to Cellegy’s Knowledge, threatened or
reasonably anticipated (other than routine claims for benefits), against any
Cellegy Employee Plan or against the assets of any Cellegy Employee Plan. Each
Cellegy Employee Plan (other than any Cellegy Employee Plan to be terminated
prior to the Closing in accordance with this Agreement) can be amended,
terminated or otherwise discontinued after the Closing in accordance with its
terms, without liability to Cellegy or any of its Subsidiaries (other than
ordinary administration expenses). There are no audits, inquiries or Legal
Proceedings pending or, to Cellegy’s Knowledge, threatened by any Governmental
Authority with respect to any Cellegy Employee Plan. For at least the three
years preceding the date of this Agreement, neither Cellegy nor any of its
Subsidiaries has incurred any penalty or tax with respect to any Cellegy
Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the
Code. Cellegy and each of its Subsidiaries have made all contributions and other
payments required by and due under the terms of each Cellegy Employee
Plan.
(c)
No Title IV or Multiemployer
Plan
. No
Cellegy Employee Plan is a "multiemployer plan" (as defined in Section 3(37) of
ERISA) or a “pension plan” (as defined in Section 3(2) of ERISA) subject to
Title IV of ERISA.
(d)
Future
Commitments
. No
Cellegy Employee Plan provides (except at no cost to Cellegy or any of its
Subsidiaries), or reflects or represents any liability of Cellegy or any of its
Subsidiaries to provide, retiree life insurance, retiree health benefits or
other retiree employee welfare benefits to any Person for any reason, except as
may be required by COBRA or other applicable Legal Requirements. Other than
commitments made that involve no future costs to Cellegy or any of its
Subsidiaries, neither Cellegy nor any of its Subsidiaries has ever represented,
promised or contracted (whether in oral or written form) to any current or
former employee of Cellegy or any of its Subsidiaries or any other Person that
such employee or other Person would be provided with retiree life insurance,
retiree health benefit or other retiree employee welfare benefits, except to the
extent required by applicable Legal Requirements.
(e)
Effect of
Transaction
. The
consummation of the transactions contemplated by this Agreement will not (i)
entitle any current or former employee or other service provider of Cellegy or
any ERISA Affiliate to severance benefits or any other payment (including
without limitation unemployment compensation, golden parachute, bonus or
benefits under any Cellegy Employee Plan), except as expressly provided in this
Agreement; or (ii) accelerate the time of payment or vesting of any such
benefits or increase the amount of compensation due any such employee or service
provider.
3.13.
Employee
Matters
.
(a)
Cellegy
has separately identified and delivered to Adamis a true and correct schedule
setting forth, with respect to each employee and independent contractor of
Cellegy and its Subsidiaries: (i) the name of such employee or independent
contractor and the date as of which such employee or independent contractor was
originally hired; (ii) if applicable, such employee’s title; and (iii) such
employee’s annualized compensation or, with respect to an independent
contractor, the terms of compensation of such independent contractor. The
employment of each such employee is terminable at will.
(b)
Cellegy
and each of its Subsidiaries is in material compliance with all currently
applicable laws and regulations respecting terms and conditions of employment.
There are no proceedings pending or, to Cellegy’s Knowledge, threatened, between
Cellegy or any of its Subsidiaries, on the one hand, and any or all of its
current or former employees, on the other hand. Cellegy has provided all
employees with all wages, benefits, relocation benefits, stock options, bonuses
and incentives, and all other compensation that became due and payable through
the date of this Agreement.
3.14.
Insurance
. The
Cellegy Disclosure Letter sets forth all policies of insurance maintained by, at
the expense of or for the benefit of Cellegy or any of its Subsidiaries. There
is no material claim pending under any of such policies as to which coverage has
been questioned, denied or disputed by the underwriters of such policies. All
premiums due and payable under all such policies have been paid and, to
Cellegy’s Knowledge, Cellegy is otherwise in compliance with the terms of such
policies. To Cellegy’s Knowledge, there is no threatened termination of, or
material premium increase with respect to, any of such policies.
3.15.
Compliance with Legal
Requirements
.
For all
periods of time during which the respective applicable statute of limitations
periods have not expired, and except as disclosed in Section 3.15 of the Cellegy
Disclosure Letter, (i) Cellegy and each of its Subsidiaries has complied in all
material respects with, is not in material violation of, and has not received
any written or, to Cellegy’s Knowledge, other notices of violation with respect
to, any applicable Legal Requirement or regulation with respect to the conduct
of its business, or the ownership or operation of its business, and (ii) neither
Cellegy nor any of its Subsidiaries has received any written or, to Cellegy’s
Knowledge, other notices or other communication from any Governmental Entity
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any applicable Legal Requirement, or (B) any actual,
alleged, possible, or potential obligation on the part of Cellegy or any of its
Subsidiaries to undertake, or to bear all or any portion of the cost of, any
remedial action related to compliance or non-compliance with any applicable
Legal Requirement, in each of the above cases which if determined adversely to
Cellegy or any of its Subsidiaries would reasonably be expected to have a
Material Adverse Effect on Cellegy or its Subsidiaries, considered together.
3.16.
Environmental
Matters
. To
Cellegy’s Knowledge, Cellegy is, and at all times has been, in compliance in all
material respects with all Environmental Laws and is not subject to any material
liability under any Environmental Law. Cellegy has not received, nor to
Cellegy’s Knowledge has any other Person for whose conduct it is or may be held
responsible, received, any order, written notice, or other written communication
from (i) any Governmental Entity or private citizen acting in the public
interest, or (ii) the current or prior owner or operator of any Facilities,
asserting or alleging any actual or potential violation of or failure to comply
with any Environmental Law, or any obligation to undertake or bear the cost of
any Environmental, Health, and Safety Liabilities.
3.17.
Legal
Proceedings
. There
is no pending Legal Proceeding that has been commenced by or against Cellegy. To
Cellegy’s Knowledge, no Person has threatened to commence any Legal Proceeding
against Cellegy or any of its Subsidiaries. There is no judgment, decree or
order against Cellegy or any of its Subsidiaries, or, to Cellegy’s Knowledge,
any of its directors or officers (in their capacities as such), that could
prevent, enjoin, or materially alter or delay any of the transactions
contemplated by this Agreement, or any Ancillary Agreement, or that would
reasonably be expected to have a Material Adverse Effect on Cellegy. To
Cellegy’s Knowledge, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that would reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding.
3.18.
Contracts; No
Defaults
.
(a)
Each
Material Contract of Cellegy and each of its Subsidiaries is set forth in
Section 3.18(a) of the Disclosure Letter and is enforceable against Cellegy and
each of its Subsidiaries in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies; and
(b)
Neither
Cellegy nor any of its Subsidiaries has violated or breached, or committed any
material default under, any Material Contract, in each of the above cases where
such violation, beach or default would have a Material Adverse Effect on
Cellegy. No event has occurred, and no circumstance or condition exists, that
(with or without notice or lapse of time) would reasonably be expected to, (i)
result in a violation or breach of any of the provisions of any Material
Contract of Cellegy or any of its Subsidiaries, (ii) give any Person the right
to declare a default or exercise any remedy under any Material Contract of
Cellegy or any of its Subsidiaries, (iii) give any Person the right to
accelerate the maturity or performance of any Material Contract of Cellegy or
any of its Subsidiaries, or (iv) give any Person the right to cancel, terminate
or modify any Material Contract, in each of the above cases where such
violation, beach or default would have a Material Adverse Effect on Cellegy or
any of its Subsidiaries. Neither Cellegy nor any of its Subsidiaries has
received any notice or other written or, to Cellegy’s Knowledge, oral
communication regarding any actual or possible violation or breach of, or
default under, any Material Contract of Cellegy or any of its Subsidiaries.
(c)
The
Cellegy Disclosure Letter sets forth a list of all material consents or waivers
of, or notifications to, any Governmental Entity or any third party that are
required or provided for under any Material Contract of Cellegy or any of its
Subsidiaries in connection with the execution and delivery of this Agreement and
the Ancillary Agreements by Cellegy and the consummation of the transactions
contemplated hereby and thereby.
3.19.
Labor
Matters
. Cellegy
is not a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization.
Cellegy is not the subject of any Legal Proceeding asserting that Cellegy has
committed an unfair labor practice or seeking to compel it to bargain with any
labor organization as to wages or conditions of employment. There is no strike,
work stoppage or other labor dispute involving Cellegy pending or, to Cellegy’s
Knowledge, threatened against Cellegy.
3.20.
Regulatory
Compliance
.
(a)
Each
Cellegy Product has been and is being manufactured, tested, distributed and/or
marketed in compliance in all material respects with all applicable requirements
under FDCA and similar Legal Requirements, including those relating to
investigational use, good manufacturing practices, labeling, advertising, record
keeping, and filing of report, except where failure to be in such compliance
would not have any Material Adverse Effect on Cellegy or any of its
Subsidiaries. Neither Cellegy nor any of its Subsidiaries has received any
notice or other written communication from the FDA, or any other Governmental
Entity having jurisdiction alleging any violation of any applicable Legal
Requirement by Cellegy or any of its Subsidiaries.
(b)
No
Cellegy Product has been recalled, withdrawn, suspended or discontinued by
Cellegy or any of its Subsidiaries in the United States or outside the United
States (whether voluntarily or otherwise) (other than as a result of decisions
made in the ordinary course of business for business or economic reasons not to
pursue research or development of one or more Cellegy Products). There are no
proceedings in the United States or outside the United States (whether completed
or pending) seeking the recall, withdrawal, suspension or seizure of any Cellegy
Product pending, nor have any such proceedings been pending at any time.
(c)
No
Governmental Authority has determined or notified Cellegy or any of its
Subsidiaries that any article of any biological or drug manufactured and/or
distributed by Cellegy is adulterated within the meaning of 21 U.S.C. section
351 (or similar applicable Legal Requirements) or misbranded within the meaning
of 21 U.S.C. section 352 (or similar applicable Legal Requirements), or is a
product that is in violation of 21 U.S.C. section 355 (or similar applicable
Legal Requirements), and, to Cellegy’s Knowledge, no such event or circumstances
exists. As to each Cellegy Product for which a human biological license
application, human establishment license application, human product license
application, new human drug application, investigational new human drug
application, abbreviated or supplemental new human drug application, or
abbreviated or supplemental new animal drug application, new animal drug
application, or similar state or foreign regulatory application has been
approved, Cellegy and each licensee of any such biological or drug (a
“
Product
Licensee
”) have
not been determined to be in violation of 21 U.S.C. sec. 355, 360b, 42 U.S.C.
sec. 351, and 21 U.S.C. sec. 822, and 21 C.F.R. Parts 312, 314, 511, 514, 601,
and 1301 et seq. Since January 1, 2005, as to each such application or other
submission that Cellegy or a Product Licensee has submitted to, but not yet
gained approval or other permission from the FDA or any other Governmental
Entity, Cellegy and to Cellegy’s Knowledge, each such licensee has responded to
all requests for information fully in accordance with such requests and taken
all additional actions reasonably required by the FDA or such other Governmental
Entity in connection with the application or submission.
(d)
All
manufacturing, warehousing, distributing, and testing operations conducted on
Cellegy Products for human use by or for the benefit of Cellegy or each Product
Licensee are not in violation of and have been and are being conducted in
material compliance with the good manufacturing practice regulations set forth
in 21 C.F.R. Parts 210 and 211 and similar applicable Legal
Requirements.
(e)
Neither
Cellegy, nor any officer, employee or agent of Cellegy has made an untrue
statement of a material fact or fraudulent statement to the FDA or other
Governmental Entity or failed to disclose a material fact required to be
disclosed to the FDA or any other Governmental Entity. Neither Cellegy, nor any
officer, employee or agent of Cellegy, has been convicted of any crime or
engaged in any conduct for which debarment is mandated by 21 U.S.C. section
335a(a) or any similar applicable
HIPPA
or
authorized by 21 U.S.C. section 335a(b) or any similar applicable Legal
Requirement.
(f)
Neither
Cellegy nor any of its Subsidiaries has received any written notice that the FDA
or any other Governmental Entity has commenced, or threatened to initiate, any
action to withdraw its approval relating to any activities concerning any
Cellegy Product, or request the recall of any Cellegy Product, or commenced, or
overtly threatened to initiate, any action to enjoin production at any facility
of Cellegy or any of its Subsidiaries or, to Cellegy’s Knowledge, at which any
of Cellegy Products or components thereof are manufactured.
3.21.
Representations
Complete
. This
Agreement (as limited and qualified by the Cellegy Disclosure Letter) does not
contain any representation, warranty or information that (i) contains an untrue
statement of a material fact, or (ii) omits to state any material fact necessary
in order to make the statements herein (in the light of the circumstances under
which such statements have been made) not misleading.
3.22.
Interested Party
Transactions
. Cellegy
is not indebted to any director, officer or employee of Cellegy (except for
amounts due as normal salaries and bonuses and in reimbursement of ordinary
expenses), and no such person is indebted to Cellegy. Except set forth in the
Cellegy SEC Reports, Cellegy is not a party to any transaction involving over
$60,000 in which any director, officer or 5% stockholder of Cellegy (or a member
of such person's immediate family) had a direct or indirect material interest,
except where such person's interest arises solely from his or her ownership of
Cellegy Capital Stock.
3.23.
Unlawful
Payments
. To
Cellegy’s Knowledge, none of Cellegy, or any officer, director, employee, agent
or representative of Cellegy has made, directly or indirectly, any bribe or
kickback, illegal political contribution, payment from corporate funds which was
incorrectly recorded on the books and records of Cellegy, unlawful payment from
corporate funds to governmental or municipal officials in their individual
capacities for the purpose of affecting their action or the actions of the
jurisdiction which they represent to obtain favorable treatment in securing
business or licenses or to obtain special concessions of any kind whatsoever, or
illegal payment from corporate funds to obtain or retain any
business.
3.24.
Financial
Advisor
.
No
broker, finder or investment banker is entitled to any commission or brokerage
or finder’s fee in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Cellegy.
3.25.
Certificate of Incorporation
and Bylaws; Records
.
Cellegy
has delivered to Adamis accurate and complete copies of:
(a)
Cellegy’s certificate of incorporation and bylaws, including all amendments
thereto;
and
(b)
the
minutes and other records of the meetings and other proceedings (including any
actions taken by written consent or otherwise without a meeting) of the
stockholders of Cellegy, the board of directors of Cellegy and all committees of
the board of directors of Cellegy. There have been no formal meetings or other
proceedings of the stockholders of Cellegy, the board of directors of Cellegy or
any committee of the board of directors of Cellegy that are not fully reflected
in such minutes or other records. There has not been any violation of any of the
provisions of Cellegy’s certificate of incorporation or bylaws, and Cellegy has
not taken any action that is inconsistent in any material respect with any
resolution adopted by Cellegy’s stockholders, Cellegy’s board of directors or
any committee of Cellegy’s board of directors.
3.26.
Title to Assets; No Real
Property
.
(a)
Cellegy
owns, and has good, valid and marketable title to, all assets purported to be
owned by it, including: (i) all assets reflected on its balance sheet as of
September 30, 2007; (ii) all equity interests of its Subsidiaries, all Cellegy
Patent and Proprietary Rights and all of Cellegy’s rights under the Material
Contracts required to be identified in Section 3.18 of the Cellegy Disclosure
Letter; and (iii) all other assets reflected in Cellegy’s books and records as
being owned by Cellegy. All of said assets are owned by Cellegy free and clear
of any liens or other Encumbrances, except for (x) any lien for current taxes
not yet due and payable, and (y) minor liens that have arisen in the ordinary
course of business and that do not (in any case or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair the
operations of Cellegy or any of its Subsidiaries.
(b)
Cellegy
does not own any real property and Cellegy is not party to any lease for real
property either as a lessee or lessor.
ARTICLE
IV
CONDUCT BEFORE THE EFFECTIVE
TIME
4.1.
Access and
Investigation
. Subject
to the terms of the Confidentiality Agreement which the Parties agree will
continue in full force following the date of this Agreement, during the period
commencing on the date of this Agreement and ending at the Effective Time,
unless this Agreement is earlier terminated pursuant to the terms hereof (the
“
Pre-Closing
Period
”), upon
reasonable notice each Party shall, and shall use commercially reasonable
efforts to cause such Party’s Representatives to: (a) provide the other Party
and such other Party’s Representatives with reasonable access during normal
business hours to such Party’s Representatives, personnel and assets and to all
existing books, records, Tax Returns, work papers and other documents and
information relating to such Party and its Subsidiaries; (b) provide the other
Party and such other Party’s Representatives with such copies of the existing
books, records, Tax Returns, work papers, product data, and other documents and
information relating to such Party and its Subsidiaries, and with such
additional financial, operating and other data and information regarding such
Party and its Subsidiaries as the other Party may reasonably request; and (c)
permit the other Party’s officers and other employees to meet, upon reasonable
notice and during normal business hours, with the chief financial officer and
other officers and managers of such Party responsible for such Party’s financial
statements and the internal controls of such Party to discuss such matters as
the other Party may deem necessary or appropriate. Notwithstanding the
foregoing, any Party may restrict the foregoing access to the extent that any
Legal Requirement applicable to such party requires such Party or its
Subsidiaries to restrict or prohibit access to any such properties or
information or if such restriction is needed to protect attorney-client
privilege. No information or knowledge obtained in any investigation pursuant to
Section 4.1 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the Merger.
4.2.
Operation of Cellegy’s
Business
.
(a)
Except as
contemplated or permitted by this Agreement or with the prior written consent of
Adamis, during the Pre-Closing Period, each of Cellegy and its Subsidiaries
shall: (i) use its commercially reasonable efforts to conduct its business and
operations: (A) in the Ordinary Course of Business; and (B) in compliance with
all applicable Legal Requirements and the requirements of all Contracts that
constitute Material Contracts of Cellegy or any of its Subsidiaries; (ii) use
its commercially reasonable efforts to preserve intact its current business
organization, use commercially reasonable efforts to keep available the services
of its current employees, officers and consultants and maintain its relations
and goodwill with all material suppliers, customers, landlords, creditors,
licensors, licensees, employees and other Persons having material business
relationships with Cellegy and its Subsidiaries; (iii) use its commercially
reasonable efforts to keep in full force all insurance policies identified in
the Cellegy Disclosure Letter; (iv) not declare, accrue, set aside or pay any
dividend or make any other distribution in respect of any shares of capital
stock, and shall not repurchase, redeem or otherwise reacquire any shares of
capital stock or other securities; (v) not sell, issue or authorize the issuance
of (A) any capital stock or other security, (B) any option or right to acquire
any capital stock or other security, or (C) any Convertible Securities except
pursuant to the terms of agreements already existing as of the date of this
Agreement; (vi) not amend or permit the adoption of any amendment to the its
articles of incorporation or bylaws, or effect or permit itself to become a
party to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction; (vii) not form
any Subsidiary or acquire any equity interest or other interest in any other
Entity; (viii) use its commercially reasonable efforts to not (A) enter into, or
permit any of the assets owned or used by it to become bound by, any contract
that is or would constitute a Material Contract, or (B) amend or prematurely
terminate, or waive any material right or remedy under, any of its Material
Contracts; (ix) not (A) acquire, lease or license any right or other asset from
any other Person, (B) sell or otherwise dispose of, or lease or license, any
right or other asset that is material to the business of Cellegy to any other
Person, or (C) waive or relinquish any right that is material to the business of
Cellegy; (x) not (A) lend money to any Person, or (B) incur or guarantee any
indebtedness for borrowed money; (xi) not change any of its methods of
accounting or accounting practices in any material respect; (xii) not make any
Tax election that would be material to Cellegy; (xiii) not commence or settle
any material Legal Proceeding; or (xiv) not agree or commit to take any of the
actions described in clauses (iv) through (xiii) above.
(b)
Cellegy
shall promptly notify Adamis of: (A) any notice or other communication from any
Person alleging that the Consent of such Person is or may be required in
connection with any of the Contemplated Transactions; (B) any material event or
occurrence not in the ordinary course of its business, and (C) any event that
would reasonably be expected to have a Material Adverse Effect on Cellegy.
4.3.
Operation of Adamis’
Business
.
(a)
Except as
contemplated by this Agreement, during the Pre-Closing Period, each of Adamis
and its Subsidiaries shall: (i) use commercially reasonable efforts to conduct
its business and operations in compliance with all applicable Legal Requirements
and the requirements of all Contracts that constitute Material Contracts of
Adamis; and (ii) use its commercially reasonable efforts to preserve intact its
current business organization, use commercially reasonable efforts to keep
available the services of its current Key Employees, officers and other
employees and maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons having
business relationships with Adamis or its Subsidiaries.
(b)
Adamis
shall promptly notify Cellegy of: (A) any notice or other communication from any
Person alleging that the Consent of such Person is or may be required in
connection with any of the Contemplated Transactions; and (B) any event that
would reasonably be expected to have a Material Adverse Effect on Cellegy.
4.4.
Disclosure Schedule
Updates
. During
the Pre-Closing Period, Adamis on the one hand, and Cellegy on the other, shall
promptly notify the other Party in writing, by delivery of an updated Adamis
Disclosure Letter or Cellegy Disclosure Letter, as the case may be, of: (i) the
discovery by such Party of any event, condition, fact or circumstance that
occurred or existed on or before the date of this Agreement and that caused or
constitutes a material inaccuracy in any representation or warranty made by such
Party in this Agreement; (ii) any event, condition, fact or circumstance that
occurs, arises or exists after the date of this Agreement and that would cause
or constitute a material inaccuracy in any representation or warranty made by
such Party in this Agreement if: (A) such representation or warranty had been
made as of the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance; or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or before the date of this
Agreement; (iii) any material breach of any covenant or obligation of such
Party; and (iv) any event, condition, fact or circumstance that could reasonably
be expected to make the timely satisfaction of any of the conditions set forth
in Articles VI, VII or VIII. No notification given pursuant to this Section
shall change, limit or otherwise affect any of the representations, warranties,
covenants or obligations of the notifying Party contained in this Agreement or
its Disclosure Schedule for purposes of Section 7.1 or 7.2, in the case of
Adamis, or Section 8.1 or 8.2 in the case of Cellegy.
4.5.
No
Solicitation
.
(a)
Each
Party agrees that neither it nor any of its Subsidiaries shall, nor shall it nor
any of its Subsidiaries authorize or permit any of their Representatives to
directly or indirectly:
(i)
solicit,
initiate, knowingly encourage, induce or facilitate the communication, making,
submission or announcement of any Acquisition Proposal or Acquisition Inquiry or
take any action that could reasonably be expected to lead to an Acquisition
Proposal or Acquisition Inquiry;
(ii)
furnish
any information regarding such Party to any Person in connection with or in
response to an Acquisition Proposal or Acquisition Inquiry;
(iii)
engage in
discussions or negotiations with any Person with respect to any Acquisition
Proposal or Acquisition Inquiry;
(iv)
approve,
endorse or recommend any Acquisition Proposal or, with respect to Cellegy effect
any Change in the Cellegy Board Recommendation or, with respect to Adamis,
effect any Change in the Adamis Board Recommendation; or
(v)
execute
or enter into any letter of intent or similar document or any Contract
contemplating or otherwise relating to any Acquisition Proposal or enter into
any agreement in principle requiring such Party to abandon, terminate or fail to
consummate the Merger or breach its obligations hereunder or propose or agree to
do any of the foregoing.
(b)
Notwithstanding
anything contained in this Section:
(i)
before
obtaining the Required Cellegy Stockholder Vote, Cellegy may furnish nonpublic
information regarding Cellegy to, and enter into discussions or negotiations
with, any Person in response to an unsolicited, bona fide written Acquisition
Proposal made or received after the date of this Agreement, which Cellegy’s
Board of Directors determines in good faith constitutes, or is reasonably likely
to result in, a Superior Proposal (and is not withdrawn) if: (A) neither Cellegy
nor any Representative of Cellegy shall have failed to comply with this Section;
(B) the Board of Directors of Cellegy concludes in good faith, after
consultation with outside counsel, that the failure to take such action would
result in a breach of the fiduciary duties of the Board of Directors of Cellegy
under applicable law; (C) within 24 hours following the furnishing of any such
nonpublic information to, or entering into discussions with, such Person,
Cellegy gives Adamis written notice of the identity of such Person and that
Cellegy intends to furnish nonpublic information to, or enter into discussions
with, such Person or has furnished, or entered into discussions with, such
Person; (D) Cellegy receives from such Person an executed confidentiality
agreement containing provisions (including nondisclosure provisions, use
restrictions, non-solicitation provisions, no hire provisions and “standstill”
provisions) at least as favorable to Cellegy as those contained in the
Confidentiality Agreement; and (E) within 24 hours following the furnishing of
any such nonpublic information to such Person, Cellegy furnishes such nonpublic
information to Adamis (to the extent such nonpublic information has not been
previously furnished by Cellegy to Adamis). Without limiting the generality of
the foregoing, Cellegy acknowledges and agrees that in the event any
Representative of Cellegy takes any action that, if take by Cellegy, would
constitutes a failure to comply with this Section by Cellegy, the taking of such
action by such Representative shall be deemed to constitute a failure to comply
with this Section by Cellegy for purposes of this Agreement; and
(ii)
Notwithstanding
anything to the contrary set forth in this Agreement, if at any time before
obtaining the Required Cellegy Stockholder Vote, Cellegy receives an unsolicited
bona fide written Acquisition Proposal that did not relate to a breach of this
Section and which the Board of Directors of Cellegy determines in good faith
constitutes a Superior Proposal, and each of Cellegy, its Subsidiaries and their
respective Representatives have otherwise complied with its obligations under
this Section 4.5, the Board of Directors of Cellegy may on five (5) Business
Days’ prior written Notice of Superior Proposal to Adamis (which notice shall
include the forms of agreements pursuant to which the Superior Proposal would be
implemented or, if no such agreements have been proposed, a written summary of
the material terms and conditions of such Superior Proposal) (it being
understood that Cellegy must deliver a new Notice of Superior Proposal and
thereafter negotiate as provided herein in the event of any modification to an
Acquisition Proposal if such modification results in the determination that such
Acquisition Proposal is a Superior Proposal), take any action otherwise
prohibited by Section 4.5(a)(i), (a)(ii), (a)(iii), (a)(iv) or (a)(v) and cause
Cellegy to terminate this Agreement pursuant to Section 9.1(i) if (i) the Board
of Directors of Cellegy shall have first determined in good faith, after
consultation with outside counsel, that there is a reasonable risk that the
failure to take such action would result in a breach of its fiduciary duties
under the DGCL, and (ii) Cellegy shall have notified Adamis of such
determination and offered to discuss in good faith with Adamis (and, if Adamis
accepts, thereafter negotiates in good faith), for a period of no less than five
(5) Business Days, any adjustments in the terms and conditions of this Agreement
proposed by Adamis, and the Board of Directors of Cellegy shall have resolved,
after taking into account the results of such discussions and proposals by
Adamis, if any, that the Acquisition Proposal remains a Superior Proposal.
(c)
If any
Party or any Representative of such Party receives an Acquisition Proposal or
Acquisition Inquiry at any time during the Pre-Closing Period, then such Party
shall promptly (and in no event later than 24 hours after such Party becomes
aware of such Acquisition Proposal or Acquisition Inquiry) advise the other
Party orally and in writing of such Acquisition Proposal or Acquisition Inquiry
(including the identity of the Person making or submitting such Acquisition
Proposal or Acquisition Inquiry, and the terms thereof). Such Party shall keep
the other Party fully informed with respect to the status and terms of any such
Acquisition Proposal or Acquisition Inquiry and any modification or proposed
modification thereto and related agreements, draft agreements and modifications
thereof.
(d)
Each
Party shall immediately cease and cause to be terminated any existing
discussions with any Person that relate to any Acquisition Proposal or
Acquisition Inquiry as of the date of this Agreement, and shall instruct its
Representatives accordingly. Each Party shall not terminate, release or permit
the release of any Person from, or waive or permit the waiver of any provision
of or right under, any confidentiality, non-solicitation, no hire, “standstill”
or similar agreement (whether entered into before or after the date of this
Agreement) to which such Party is a party or under which such Party has any
rights, and shall enforce or cause to be enforced each such agreement to the
fullest extent possible.
(e)
Nothing
contained in this Section or in Section 5.3 shall prohibit Cellegy from taking
and disclosing to its stockholders a position with respect to a tender offer
contemplated by Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act or
from making any disclosure to Cellegy’s stockholders if, in the good faith
judgment of the Board of Directors of Cellegy, after consultation with outside
counsel, that the failure to so disclose would result in a breach of its
fiduciary duties under the DGCL; provided that disclosure to stockholders
pursuant to Rule 14e-2 relating to an Acquisition Proposal or Acquisition
Inquiry shall be deemed to be a Change in the Cellegy Board Recommendation
unless the Board of Directors of Cellegy expressly, and without qualification,
concurrently with such disclosure reaffirms the Cellegy Board Recommendation.
ARTICLE
V
ADDITIONAL
AGREEMENTS
5.1.
Proxy Statement;
Registration Statement
.
(a)
As
promptly as practicable after the execution of this Agreement, Cellegy, in
cooperation with Adamis, shall prepare and file with the SEC the Registration
Statement, which may include the Proxy Statement, to register under the
Securities Act the issuance and resale (to the extent permitted by the SEC) of
shares of Cellegy Common Stock in connection with the Merger. The Proxy
Statement shall, among other things, include the Cellegy Board Recommendation
and (i) solicit the approval of and include the recommendation of the Board of
Directors of Cellegy to Cellegy’s stockholders that they vote in favor of the
Merger, (iii) solicit the approval of and include the recommendation of the
Board of Directors of Cellegy to Cellegy’s stockholders that they vote in favor
of the Cellegy Charter Amendment; and (iv) solicit the approval of and include
the recommendation of the Board of Directors of Cellegy to Cellegy’s
stockholders that they vote in favor of the Cellegy Name Change Amendment; and
(v) solicit the approval of and include the recommendation of the Board of
Directors of Cellegy to Cellegy’s stockholders that they vote in favor of the
Plan Amendment. Adamis shall promptly furnish to Cellegy all information
concerning Adamis and its Subsidiaries, and shall use its commercially
reasonable efforts to cause to be finished all information with respect to its
stockholders, that is required to be disclosed in the Registration Statement and
the Proxy Statement.
(b)
Cellegy
shall use all reasonable efforts to cause the Proxy Statement and the
Registration Statement to comply with the applicable rules and regulations
promulgated by the SEC, and shall respond promptly to any comments of the SEC or
its staff and shall use its reasonable best efforts to resolve any comments of
SEC on the Proxy Statement or the Registration Statement as promptly as
reasonably practicable. Cellegy shall use its commercially reasonable efforts to
cause the definitive Proxy Statement to be mailed to Cellegy’s stockholders and
the Registration Statement to be delivered to the stockholders of Adamis as
promptly as practicable after review by the SEC has been completed. Cellegy
shall notify Adamis promptly upon the receipt of any comments from the SEC or
its staff or any other government officials and of any request by the SEC or its
staff or any other government officials for amendments or supplements to the
Proxy Statement or Registration Statement and shall supply Adamis with copies of
all correspondence between Cellegy or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the other
hand, with respect to the Proxy Statement and the Registration Statement. Adamis
and its counsel shall be given a reasonable opportunity to review and comment
upon the Proxy Statement and Registration Statement and related materials, any
proposed amendment or supplement to the Proxy Statement or Registration
Statement and any response to any comments from the SEC or other correspondence
before its filing with the SEC or dissemination to Cellegy’s stockholders or
Adamis’ stockholders. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Proxy Statement or Registration
Statement, Adamis or Cellegy, as the case may be, shall promptly inform the
other of such occurrence and cooperate in filing with the SEC or its staff or
any other government officials, and/or mailing to stockholders of Cellegy or
Adamis, such amendment or supplement as promptly as possible. Without limiting
the foregoing, each of the parties shall promptly provide the other party with
corrections to any information provided by it for use in the Proxy Statement and
Registration Statement, if and to the extent any such information shall be or
have become false or misleading in any material respect, and Cellegy shall take
all reasonable steps necessary to correct the same and to cause the Proxy
Statement and Registration Statement as so corrected to be disseminated to
Cellegy’s stockholders and Adamis’ stockholders, in each case to the extent
required by applicable law or otherwise deemed appropriate by the parties.
(c)
Before
the Effective Time, Cellegy shall use reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after filing, and to obtain all regulatory approvals needed to
ensure that the Cellegy Common Stock to be issued and registered for resale in
the Merger will (to the extent required) be registered or qualified or exempt
from registration or qualification under the securities law of every state of
the United States in which any registered holder of Adamis Capital Stock has an
address of record; provided, however, that Cellegy shall not be required (i) to
qualify to do business as a foreign corporation in any jurisdiction in which it
is not now qualified or (ii) to file a general consent to service of process in
any jurisdiction.
5.2.
Adamis Stockholder
Approval
.
(a)
Adamis
shall take all action necessary under all applicable Legal Requirements to call,
give notice of and hold a meeting of the holders of Adamis Capital Stock to vote
on the approval of the Merger, adoption of this Agreement, and related matters
(in either case, the “
Adamis Stockholders
Meeting
”). The
Adamis Stockholders Meeting shall be held as promptly as reasonably practicable
after the effectiveness of the Registration Statement. Adamis shall ensure that
all proxies and consents solicited in connection with the Adamis Stockholders
Meeting are solicited in compliance with all applicable Legal Requirements.
Alternatively, the parties agree that the holders of Adamis Capital Stock may
take all action required under this Agreement by action by written consent as
permitted by the DGCL in lieu of an actual meeting of the holders of Adamis
Capital Stock.
(b)
Adamis
agrees that, subject to Section 4.5: (i) the Board of Directors of Adamis shall
recommend that the holders of Adamis Capital Stock vote to approve the Merger
and adopt this Agreement and such other matters contemplated by this Agreement,
and shall use commercially reasonable efforts to solicit such approval (the
recommendation of the board of directors of Adamis that the stockholders of
Adamis vote to adopt this Agreement and such other matters contemplated by this
Agreement being referred to as the “
Adamis Board
Recommendation
”); and
(ii) the Board of Directors of Adamis shall not make or effect any change,
withdrawal, qualification or modification of the Adamis Board Recommendation in
any manner that would reasonably be expected to prevent, delay or materially
impair the consummation of the Merger or any of the other Contemplated
Transactions.
5.3.
Cellegy Stockholder Meeting;
Change in the Cellegy Board Recommendation; Adoption of Agreement by Cellegy as
Sole Stockholder of Merger Sub
.
(a)
Cellegy
shall take all action necessary under applicable Legal Requirements to call,
give notice of and hold a meeting of the holders of Cellegy Common Stock to vote
on the Merger, the Cellegy Charter Amendment and the Cellegy Name Change
Amendment and the Stock Plan Amendment (such meeting, the “
Cellegy Stockholders
Meeting
”).
Cellegy shall use its commercially reasonable efforts to ensure that all proxies
solicited in connection with the Cellegy Stockholders Meeting are solicited in
compliance with all applicable Legal Requirements.
(b)
Cellegy
agrees that, subject to Sections 4.5 and 5.3(d): (i) the Board of Directors of
Cellegy shall recommend that the holders of Cellegy Common Stock vote to (A)
approve the Merger, (B) adopt the Cellegy Charter Amendment, (C) adopt the
Cellegy Name Change Amendment, (D) adopt the Plan Amendment, and (E) such other
matters as may be reasonably necessary to effect the Merger and the other
Contemplated Transactions, and shall use commercially reasonable efforts to
solicit such approval or adoption, as the case may be (proposals “(A)” through
“(E)” being the
“Proposals”
), (ii)
the Proxy Statement shall include a statement to the effect that the Board of
Directors of Cellegy recommends that the stockholders of Cellegy vote to (A)
approve the Merger, (B) adopt the Cellegy Charter Amendment, (C) adopt the
Cellegy Name Change Amendment, (D) adopt the Stock Plan Amendment, and (E)
approve such other matters as may be reasonably necessary to effect the Merger
and the other Contemplated Transactions (such recommendation being referred to
herein as the “
Cellegy Board
Recommendation
”); and
(iii) the Board of Directors of Cellegy shall not make or effect any Change in
the Cellegy Board Recommendation.
(c)
Subject
to Section 4.5, Cellegy shall take all action that is both reasonable and lawful
to solicit the approval of its stockholders of the Proposals and shall take all
other action reasonably necessary or advisable to secure the vote or consent of
the stockholders of Cellegy required by the DGCL to obtain such approvals. If,
on the date of Cellegy Stockholder Meeting or any subsequent adjournment thereof
pursuant to this Section, Cellegy has not received proxies representing a
sufficient number of shares of Cellegy Common Stock to approve the Proposals,
Cellegy shall, if requested by Adamis, adjourn Cellegy Stockholder Meeting until
such date or dates as Cellegy determines in good faith (subject to Adamis’ prior
approval not to be unreasonably withheld, delayed or conditioned) the Required
Cellegy Stockholder Vote is reasonably likely to be obtained, and shall continue
to use its commercially reasonable efforts, together with its proxy solicitor,
to assist in the solicitation of proxies from stockholders relating to Cellegy
stockholder approval.
(d)
Notwithstanding
anything to the contrary contained in Section 5.3(b), at any time before the
adoption of this Agreement by the Required Cellegy Stockholder Vote, the Board
of Directors of Cellegy may effect a Change in the Cellegy Board Recommendation
in accordance with the provisions of Section 4.5(b), provided that Adamis must
receive not less than five (5) Business Days prior written notice from Cellegy
confirming that Cellegy’s Board of Directors has determined to make a Change in
the Cellegy Board Recommendation. For purposes of this Agreement, “
Change in the Cellegy Board
Recommendation
” means
any: (i) withholding, withdrawal, qualification or modification of (or any
proposal or resolution to withhold, withdraw, qualify or modify) the Cellegy
Board Recommendation in any manner adverse to Adamis; (ii) action or statement
by Cellegy, any of its Subsidiaries or any of their respective Representatives
in connection with Cellegy Stockholder Meeting contrary to the Cellegy Board
Recommendation; (iii) taking any position other than opposition (including
making no recommendation), by Cellegy’s Board of Directors with respect to an
Acquisition Proposal that has been publicly disclosed or otherwise become known
to any Person other than Cellegy, Adamis and their respective Representatives
after a reasonable amount of time has elapsed for Cellegy’s Board of Directors
to review and make a recommendation with respect thereto (and in no event more
than ten Business Days after being publicly disclosed or otherwise become known
to any Person other than Cellegy, Adamis and their respective Representatives);
(iv) failure of Cellegy’s Board of Directors to (A) if a tender offer, take-over
bid or exchange offer that constitutes or would constitute an Acquisition
Proposal (other than by Adamis) is commenced, recommend that the Cellegy
stockholders not accept such tender offer, take-over bid or exchange offer after
a reasonable amount of time has elapsed for Cellegy’s Board of Directors to
review and make a recommendation with respect thereto (and in no event more than
ten Business Days following commencement of such tender offer, take-over bid or
exchange offer), or (B) reaffirm in writing the Cellegy Board Recommendation in
connection with a disclosure pursuant to Section 4.5(f) or otherwise within two
Business Days of a request by Adamis to do so; or (v) approval, adoption or
recommendation, or publicly disclosed proposal to approve, adopt or recommend,
an Acquisition Proposal.
(e)
Cellegy’s
obligation to call, give notice of and hold Cellegy Stockholder Meeting in
accordance with Section 5.3(a) shall not be limited or otherwise affected by any
Change in the Cellegy Board Recommendation or the commencement, disclosure,
announcement or submission of a Superior Proposal or Acquisition
Proposal.
(f)
Cellegy,
as sole stockholder of Merger Sub, shall adopt this Agreement as soon as
practicable following the Execution Date by action by written consent, as
permitted by the DGCL 228 in lieu of an actual meeting of the stockholders of
Merger Sub.
5.4.
Regulatory
Approvals
. Each
Party shall use commercially reasonable efforts to file or otherwise submit, as
soon as practicable after the date of this Agreement, all applications, notices,
reports and other documents reasonably required to be filed by such Party with
or otherwise submitted by such Party to any Governmental Entity with respect to
the Merger and the other Contemplated Transactions, and to submit promptly any
additional information requested by any such Governmental Entity.
5.5.
Indemnification of Officers
and Directors.
(a)
From and
after the Effective Time through the third anniversary of the date the Effective
Time occurs, Cellegy shall and shall cause the Surviving Corporation to, fulfill
and honor in all respects the obligations of Cellegy and Adamis pursuant to any
indemnification provisions under their respective certificates of incorporation
and bylaws as in effect on the date of this Agreement (the persons entitled to
be indemnified pursuant to such provisions being referred to collectively as the
“
D&O Indemnified
Parties
”).
(b)
The
certificate of incorporation and bylaws of Cellegy and the Surviving
Corporation, as the case may be, shall contain provisions no less favorable with
respect to indemnification, advancement of expenses and exculpation of present
and former directors and officers of Cellegy than are presently set forth in the
certificate of incorporation and bylaws of Cellegy, which provisions shall not
be amended, modified or repealed for a period of six (6) years time from the
Effective Time in a manner that would adversely affect the rights thereunder of
the D&O Indemnified Parties.
(c)
Cellegy,
at its election, may purchase “tail” coverage for up to six (6) years from the
Closing, relating to the current directors’ and officers’ liability insurance
policies maintained by Adamis or Cellegy (provided that Cellegy may substitute
therefor policies of at least the same coverage containing terms and conditions
that are not materially less favorable) with respect to matters occurring on or
before the Closing.
(d)
Cellegy
shall pay all expenses, including reasonable attorneys’ fees, that may be
incurred by the D&O Indemnified Parties in connection with their enforcement
of their rights provided in this Section 5.5 pursuant to any indemnification
provisions under their respective certificates of incorporation and bylaws as in
effect on the date of this Agreement.
(e)
The
provisions of this Section are intended to be in addition to the rights
otherwise available to the D&O Indemnified Parties by law, charter, statute,
by-law or agreement, and shall operate for the benefit of, and shall be
enforceable by, each of the D&O Indemnified Parties, their heirs and their
representatives.
(f)
Cellegy
shall cause the Surviving Corporation to perform all of the obligations of the
Surviving Corporation under this Section.
5.6.
Additional
Agreements
.
(a)
Subject
to Sections 4.5, 5.2(c), 5.3(d) and 5.6(b), the Parties shall use commercially
reasonable efforts to cause to be taken all actions necessary to consummate the
Merger and make effective the other Contemplated Transactions. Without limiting
the generality of the foregoing, but subject to Section 5.6(b), each Party to
this Agreement: (i) shall make all filings and other submissions (if any) and
give all notices (if any) reasonably required to be made and given by such Party
in connection with the Merger and the other Contemplated Transactions; (ii)
shall use commercially reasonable efforts to obtain each Consent (if any)
reasonably required to be obtained (pursuant to any applicable Legal Requirement
or Material Contract) by such Party in connection with the Merger or any of the
other Contemplated Transactions or for such Contract to remain in full force and
effect; (iii) shall use commercially reasonable efforts to lift any injunction
prohibiting, or any other legal bar to, the Merger or any of the other
Contemplated Transactions; and (iv) shall use commercially reasonable efforts to
satisfy the conditions precedent to the consummation of this Agreement. Each
Party shall provide to the other Party a copy of each proposed filing with or
other submission to any Governmental Entity relating to any of the Contemplated
Transactions, and shall give the other Party a reasonable time before making
such filing or other submission in which to review and comment on such proposed
filing or other submission. Each Party shall promptly deliver to the other Party
a copy of each such filing or other submission made, each notice given and each
Consent obtained by such Party during the Pre-Closing Period.
(b)
Notwithstanding
anything to the contrary contained in this Agreement, no Party shall have any
obligation under this Agreement: (i) to dispose of or transfer or cause any of
its Subsidiaries to dispose of or transfer any assets; (ii) to discontinue or
cause any of its Subsidiaries to discontinue offering any product or service;
(iii) to license or otherwise make available, or cause any of its Subsidiaries
to license or otherwise make available to any Person any Intellectual Property;
(iv) to hold separate or cause any of its Subsidiaries to hold separate any
assets or operations (either before or after the Closing Date); (v) to make or
cause any of its Subsidiaries to make any commitment (to any Governmental Entity
or otherwise) regarding its future operations; or (vi) to contest any Legal
Proceeding or any order, writ, injunction or decree relating to the Merger or
any of the other Contemplated Transactions if such Party determines in good
faith that contesting such Legal Proceeding or order, writ, injunction or decree
might not be advisable.
5.7.
Disclosure
. Without
limiting any of either Party’s obligations under the Confidentiality Agreement,
each Party shall not, and shall not permit any of its Subsidiaries or any
Representative of such Party to, issue any press release or make any public
disclosure regarding the Merger or any of the other Contemplated Transactions
unless: (a) the other Party shall have approved such press release or disclosure
(which approval shall not be unreasonably withheld); or (b) such Party shall
have determined in good faith, upon the advice of outside legal counsel, that
such disclosure is required by applicable Legal Requirements and, to the extent
practicable, before such press release or disclosure is issued or made, such
Party advises the other Party of, and consults with the other Party regarding,
the text of such press release or disclosure; provided, however, that each of
Adamis and Cellegy may make any public statement in response to specific
questions by the press, analysts, investors or those attending industry
conferences or financial analyst conference calls, so long as any such
statements are consistent with previous press releases, public disclosures or
public statements made by Adamis or Cellegy in compliance with this Section 5.7.
5.8.
Directors;
Officers
. Prior
to the Effective Time, and subject to the receipt of any required stockholder
vote, Cellegy shall take all action necessary (i) to cause the number of members
of the Board of Directors of Cellegy to be fixed at a number to be determined by
Adamis, effective at the Effective Time; (ii) to obtain the resignations,
effective at the Effective Time, of the directors of Cellegy determined by
Adamis, (iii) cause each of the individuals identified by Adamis to Cellegy in
writing to be appointed as a director of Cellegy, effective at the Effective
Time, and (iv) to have the Board of Directors of Cellegy appoint as officers of
Cellegy, effective at the Effective Time, such persons as Adamis identifies to
Cellegy.
5.9.
Tax
Matters
.
(a)
Cellegy,
Merger Sub and Adamis shall use their respective commercially reasonable efforts
to cause the Merger to qualify, and shall use their respective commercially
reasonable efforts not to, and not to permit or cause any affiliate or any
subsidiary to, take any actions or cause any action to be taken which would
prevent the Merger from qualifying, as a “reorganization” under Section 368(a)
of the Code.
(b)
This
Agreement is intended to constitute, and the parties hereto hereby adopt this
Agreement as, a “plan of reorganization” within the meaning Treasury Regulation
Sections 1.368-2(g) and 1.368-3(a). Cellegy, Merger Sub and Adamis shall report
the Merger as reorganization within the meaning of Section 368(a) of the Code,
unless otherwise required pursuant to a “determination” within the meaning of
Section 1313(a) of the Code.
5.10.
Cellegy
Amendment
. Subject
to Section 5.3(d), Cellegy agrees to recommend to its stockholders that the
Certificate of Incorporation of Cellegy be amended, by means of one of more
amendments to be mutually agreed upon by Cellegy and Adamis: (i) to change the
corporate name of Cellegy to a name designated by Adamis before the definitive
Cellegy Proxy Statement is mailed to its stockholders (the “
Cellegy Name Change
Amendment
”); (ii)
to increase the number of authorized shares of capital stock of Cellegy to
185,000,000 shares, consisting of 175,000,000 shares of Cellegy Common Stock and
10,000,000 shares of Cellegy Preferred Stock (the “
Charter
Amendment
”); and
(iii) to amend the Cellegy Stock Plan to increase the number of shares reserved
for issuance under the plan to a number of (post-Reverse Split) shares of
Cellegy Common Stock reasonably determined by Adamis and to make such other
changes thereto as may be reasonably determined by Adamis (the “
Stock Plan
Amendment
”).
5.11.
Adamis’
Auditors.
Adamis
will use its commercially reasonable efforts to cause its management and its
independent auditors to facilitate on a timely basis (i) the preparation of
financial statements (including pro forma financial statements if required) as
required by Cellegy to comply with Legal Requirements, and (ii) the review of
Adamis’ audit work papers for up to the past two years or such lesser period of
which Adamis has been in existence, including the examination of selected
interim financial statements and data.
5.12.
Cellegy’s
Auditors.
Cellegy
will use its commercially reasonable efforts to cause its management and its
independent auditors to facilitate on a timely basis (i) the preparation of
financial statements (including pro forma financial statements if required) as
required by Adamis to comply with Legal Requirements, and (ii) the review by
Adamis and its Representatives of Cellegy’s audit work papers for up to the past
two years, including the examination of selected interim financial statements
and data.
5.13.
Legends
. Cellegy
shall be entitled to place such appropriate legends on the certificates
evidencing any shares of Cellegy Common Stock to be received in the Merger by
equity holders of Adamis as Cellegy reasonably determines is required or
appropriate under applicable laws.
5.14.
Confidentiality
. Each of
Cellegy and Adamis hereby agrees that the information obtained in any
investigation pursuant to this Agreement, or pursuant to the negotiation and
execution of this Agreement or the effectuation of the transaction contemplated
hereby shall be governed by the terms of the Bilateral Confidential Disclosure
Agreement dated as of June 27, 2007, previously executed by and between Adamis
and Cellegy (the “
Confidentiality
Agreement
”
).
5.15.
FIRPTA
Compliance
. On the
Closing Date, Adamis shall deliver to Cellegy a properly executed statement in a
form reasonably acceptable to Cellegy for purposes of satisfying Cellegy’s
obligations under Treasury Regulation Section 1.1445-2(c)(3).
5.16.
Rule
16b-3
. The
Board of Directors of Cellegy, or a committee of non-employee directors thereof
(as such term is defined for purposes of Rule 16b-3(d) under the Exchange Act)
shall, reasonably promptly after the date hereof, and in any event before the
Effective Time, adopt a resolution providing that the receipt, by those officers
and directors of Adamis who may be subject to the reporting requirements of
Section 16(a) of the Exchange Act with respect to Cellegy Common Stock following
the Effective Time, of Cellegy Common Stock in the Merger is intended to be an
exempt transaction under such Rule 16b-3.
5.17.
Equity
Financing
. Cellegy
agrees to cooperate with Adamis to take mutually agreeable actions in connection
with any Equity Financing, including, without limitation, (a) executing and
delivering a mutually acceptable placement agent agreement or joinder thereto,
(b) executing a mutually acceptable Securities Purchase Agreement or other
documentation in connection with any Equity Financing, and (c) using its best
efforts to take all actions required to maintain the listing of the Cellegy
Common Stock on the OTC Bulletin Board and not take any actions that would cause
the removal of such listing. Prior to the Effective Time, Cellegy will not
conduct any offering other than the transactions contemplated hereby that will
be integrated with the offer or issuance of Cellegy Common Stock issued in
connection with any Equity Financing, which would impair the exemptions relied
upon in any Equity Financing.
5.18.
Termination of Retention
Plan
. Cellegy
agrees to take such actions as may be required to terminate its Retention Plan
for Executives before the Closing Date.
ARTICLE
VI
CONDITIONS PRECEDENT TO
OBLIGATIONS OF EACH PARTY
The
obligations of each Party to effect the Merger and otherwise consummate the
transactions to be consummated at the Closing are subject to the satisfaction
or, to the extent permitted by applicable law, the written waiver by each of the
Parties, at or before the Closing, of each of the following conditions:
6.1.
Stockholder
Approval
. This
Agreement and the Merger shall have been duly adopted by the Required Adamis
Stockholder Vote, and the Merger, the Cellegy Charter Amendment, and the Cellegy
Name Change Amendment and the Stock Plan Amendment and such other matters as may
be reasonably necessary to effect the Merger and the other Contemplated
Transactions shall have been duly approved or adopted, as the case may be, by
the Required Cellegy Stockholder Vote.
6.2.
No
Restraints
. No
temporary restraining order, preliminary or permanent injunction or other order
preventing the consummation of the Merger shall have been issued by any court of
competent jurisdiction or other Governmental Entity and remain in effect, and
there shall not be any Legal Requirement which has the effect of making the
consummation of the Merger illegal.
6.3.
Governmental
Authorization
. Any
Governmental Authorization or other Consent required to be obtained by any of
the Parties under any applicable antitrust or competition law or regulation or
other Legal Requirement shall have been obtained and shall remain in full force
and effect.
6.4.
No Governmental Proceedings
Relating to Contemplated Transactions or Right to Operate
Business
. There
shall not be any Legal Proceeding pending, or overtly threatened in writing by
an official of a Governmental Entity in which such Governmental Entity indicates
that it intends to conduct any Legal Proceeding or taking any other action: (a)
challenging or seeking to restrain or prohibit the consummation of the Merger or
any of the other Contemplated Transactions; (b) relating to the Merger and
seeking to obtain from Cellegy, Merger Sub or Adamis any damages or other relief
that would have a Material Adverse Effect on the Combined Company; (c) seeking
to prohibit or limit in any material and adverse respect a Party’s ability to
vote, transfer, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of Cellegy; (d) that could have a
Material Adverse Effect on the right or ability of the Combined Company to own
the assets or operate the business of the Combined Company; or (e) seeking to
compel Adamis, Cellegy or any Subsidiary of Cellegy to dispose of or hold
separate any assets that are material to the Combined Company as a result of or
following the Merger or any of the Contemplated Transactions.
6.5.
Registration
Statement
. The
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act, no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated by the SEC and not concluded or
withdrawn and all state securities or “blue sky” authorizations necessary to
carry out the transactions contemplated hereby shall have been obtained and be
in effect.
ARTICLE
VII
ADDITIONAL CONDITIONS PRECEDENT TO
OBLIGATIONS OF CELLEGY AND MERGER SUB
The
obligations of Cellegy and Merger Sub to effect the Merger and otherwise
consummate the transactions to be consummated at the Closing are subject to the
satisfaction or the written waiver by Cellegy, at or before the Closing, of each
of the following conditions:
7.1.
Accuracy of
Representations
. The
representations and warranties of Adamis contained in this Agreement shall have
been true and correct as of the date of this Agreement and shall be true and
correct on and as of the Closing Date with the same force and effect as if made
on the Closing Date except (A) in each case, or in the aggregate, where the
failure to be true and correct would not reasonably be expected to have a
Material Adverse Effect on the Combined Company, or (B) for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct, subject to the
qualifications as set forth in the preceding clause (A), as of such particular
date).
7.2.
Performance of
Covenants
. Each of
the covenants and obligations in this Agreement that Adamis is required to
comply with or to perform at or before the Closing shall have been complied with
and performed by Adamis in all material respects, except where the failure to
perform such covenants or obligations would not have a Material Adverse Effect
on the Combined Company.
7.3.
No Material Adverse
Effect
. From
the Execution Date through the Effective Time, there shall not have occurred any
Material Adverse Effect on Adamis that shall be continuing as of the Effective
Time and that would have a Material Adverse Effect on the Combined
Company.
7.4.
Agreements and Other
Documents
. Cellegy
shall have received the following agreements and other documents, each of which
shall be in full force and effect:
(a)
a
certificate of Adamis executed on its behalf by the Chief Executive Officer and
Chief Financial Officer of Adamis confirming that the conditions set forth in
Sections 7.1, 7.2, 7.3 and 7.4 have been duly satisfied; and
(b)
certificates
of good standing (or equivalent documentation) of Adamis in its jurisdiction of
incorporation and the various foreign jurisdictions in which it is qualified
(except where the failure to have obtained such certificates would not result in
a Material Adverse Effect on the Combined Company), certified charter documents,
a certificate as to the incumbency of officers and the adoption of resolutions
of the Board of Directors of Adamis authorizing the execution of this Agreement
and the consummation of the Contemplated Transactions to be performed by Adamis
hereunder.
ARTICLE
VIII
ADDITIONAL CONDITIONS PRECEDENT TO
OBLIGATION OF ADAMIS
The
obligations of Adamis to effect the Merger and otherwise consummate the
transactions to be consummated at the Closing are subject to the satisfaction or
the written waiver by Adamis, at or before the Closing, of each of the following
conditions:
8.1.
Accuracy of
Representations
. The
representations and warranties of Cellegy and Merger Sub contained in this
Agreement shall have been true and correct as of the date of this Agreement and
shall be true and correct on and as of the Closing Date with the same force and
effect as if made on the Closing Date except (A) in each case, or in the
aggregate, where the failure to be true and correct would not reasonably be
expected to have a Material Adverse Effect on the Combined Company, or (B) for
those representations and warranties which address matters only as of a
particular date (which representations shall have been true and correct, subject
to the qualifications as set forth in the preceding clause (A), as of such
particular date).
8.2.
Performance of
Covenants
. All of
the covenants and obligations in this Agreement that Cellegy or Merger Sub is
required to comply with or to perform at or before the Closing shall have been
complied with and performed in all material respects, except where the failure
to perform such covenants or obligations would not have a Material Adverse
Effect on the Combined Company .
8.3.
No Material Adverse
Effect
. From
the Execution Date through the Effective Time, there shall not have occurred any
Material Adverse Effect on Cellegy that continues as of the Effective Time and
that would have a Material Adverse Effect on the Combined Company.
8.4.
Documents
. Adamis
shall have received the following documents:
(a)
a
certificate of Cellegy executed on its behalf by the Chief Executive Officer and
Chief Financial Officer of Cellegy confirming that the conditions set forth in
Sections 8.1, 8.2 and 8.4 have been duly satisfied;
(b)
certificates
of good standing (or equivalent documentation) of each of Cellegy and Merger Sub
in Delaware, Pennsylvania (for Cellegy only) and the various foreign
jurisdictions in which it is qualified (except where the failure to have
obtained such certificates would not result in a Material Adverse Effect on the
Combined Company), certified charter documents, a certificate as to the
incumbency of officers and the adoption of resolutions of the Boards of
Directors of Cellegy and Merger Sub authorizing the execution of this Agreement
and the consummation of the Contemplated Transactions to be performed by Cellegy
and Merger Sub hereunder; and
(c)
Written
resignations in forms reasonably satisfactory to Adamis, dated as of the Closing
Date and effective as of the Closing, executed by the directors and officers of
Cellegy who are not to continue as directors or officers of
Cellegy.
8.5.
Sarbanes-Oxley
Certifications
. Neither
the principal executive officer nor the principal financial officer of Cellegy
shall have failed to provide, with respect to any Cellegy SEC Document filed (or
required to be filed) with the SEC on or after the date of this Agreement, any
necessary certification in the form required under Rule 13a-14 under the
Exchange Act and 18 U.S.C. §1350.
8.6.
Board of
Directors
. Cellegy
shall have caused the Board of Directors of Cellegy to be constituted as set
forth in Section 5.8 of this Agreement.
8.7.
Officers
. Each of
the individuals identified by Adamis prior to the Effective Time shall have been
appointed officers of Cellegy as of the Effective Time.
8.8.
Certificate of
Amendment
. The
amendments to the Cellegy Restated Certificate of incorporation, including the
increase in the number of authorized shares, the Reverse Stock Split, and the
name change (the “
Cellegy Charter
Amendment
”), as
contemplated by this Agreement, shall have become effective under the
DGCL.
8.9.
SEC
Reports
.
Cellegy
shall have timely filed with the SEC and/or the OTC Bulletin Board all reports
and other documents required to be filed under the Securities Act or Exchange
Act and to maintain its OTC Bulletin Board listing.
ARTICLE
IX
TERMINATION
9.1.
Termination
. This
Agreement may be terminated before the Effective Time (whether before or after
receipt of the Required Adamis Stockholder Vote or Required Cellegy Stockholder
Vote, unless otherwise specified below):
(a)
by mutual
written consent duly authorized by the Boards of Directors of Cellegy and
Adamis;
(b)
by either
Cellegy or Adamis if the Merger shall not have been consummated by (i) August
31, 2008, if the SEC does not review the Registration Statement, and (ii) if the
SEC does review the Registration Statement then September 30, 2008 (the
“
Outside
Date
”);
provided, however, that the right to terminate this Agreement under this Section
9.1(b) shall not be available to any Party whose failure to fulfill or
diligently pursue fulfillment of any material obligation under this Agreement
has been a principal cause of or resulted in the failure of the Merger to occur
on or before the Outside Date;
(c)
by either
Cellegy or Adamis if a court of competent jurisdiction or other Governmental
Entity shall have issued a nonappealable final order, decree or ruling or taken
any other nonappealable final action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger;
provided, however, that neither Party may terminate this Agreement pursuant to
this Section 9.1(c) unless that party first shall have used its reasonable best
efforts to procure the removal, reversal, dissolution, setting aside or
invalidation of any such order, decree, ruling or action;
(d)
by either
Cellegy or Adamis if (i) Cellegy Stockholder Meeting (including any adjournments
and postponements thereof) shall have been held and completed and Cellegy’s
stockholders shall have taken a final vote on the Merger, the Cellegy Charter
Amendment and (ii) any of the Merger or the Cellegy Charter Amendment shall not
have been approved or adopted at Cellegy Stockholder Meeting (and shall not have
been approved or adopted at any adjournment or postponement thereof) by the
Required Cellegy Stockholder Vote; provided, however, that the right to
terminate this Agreement under this Section 9.1(d) shall not be available to
Cellegy where the failure to obtain the Required Cellegy Stockholder Vote shall
have been caused by the action or failure to act of Cellegy and such action or
failure to act constitutes a breach by Cellegy of this Agreement;
(e)
by Adamis
(at any time before the receipt of the Required Cellegy Stockholder Vote) if a
Cellegy Triggering Event shall have occurred;
(f)
by
Cellegy (at any time before the receipt of the Required Cellegy Stockholder
Vote) if an Adamis Triggering Event shall have occurred;
(g)
by
Adamis, upon a material breach of any representation, warranty, covenant or
agreement on the part of Cellegy or Merger Sub set forth in this Agreement, or
if any representation or warranty of Cellegy or Merger Sub shall have become
inaccurate, in either case such that the conditions set forth in Section 8.1 or
Section 8.2 would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become inaccurate, provided that
if such inaccuracy in Cellegy’s or Merger Sub’s representations and warranties
or breach by Cellegy or Merger Sub is curable by Cellegy or Merger Sub, then
this Agreement shall not terminate pursuant to this Section 9.1(g) as a result
of such particular breach or inaccuracy until the earliest of (i) the Outside
Date; (ii) the expiration of a thirty (30) day period commencing upon delivery
of written notice from Adamis to Cellegy or Merger Sub of such breach or
inaccuracy; and (iii) Cellegy or Merger Sub (as applicable) ceasing to exercise
commercially reasonable efforts to cure such breach (it being understood that
this Agreement shall not terminate pursuant to this Section 9.1(g) as a result
of such particular breach or inaccuracy if such breach by Cellegy or Merger Sub
is cured before such termination becoming effective);
(h)
by
Cellegy, upon a material breach of any representation, warranty, covenant or
agreement on the part of Adamis set forth in this Agreement, or if any
representation or warranty of Adamis shall have become inaccurate, in either
case such that the conditions set forth in Section 7.1 or Section 7.2 would not
be satisfied as of the time of such breach or as of the time such representation
or warranty shall have become inaccurate, provided that if such inaccuracy in
Adamis’ representations and warranties or breach by Adamis is curable by Adamis
then this Agreement shall not terminate pursuant to this Section 9.1(h) as a
result of such particular breach or inaccuracy until the earlier of (i) the
Outside Date; (ii) the expiration of a thirty (30) day period commencing upon
delivery of written notice from Cellegy to Adamis of such breach or inaccuracy;
and (iii) Adamis ceasing to exercise commercially reasonable efforts to cure
such breach (it being understood that this Agreement shall not terminate
pursuant to this Section 9.1(h) as a result of such particular breach or
inaccuracy if such breach by Adamis is cured before such termination becoming
effective); or
(i)
by
Cellegy in accordance with the terms and subject to the conditions of Section
4.5(b)(ii).
9.2.
Effect of
Termination
. In the
event of the termination of this Agreement as provided in Section 9.1, this
Agreement shall be of no further force or effect; provided, however, that (i)
Section 5.9, this Section 9.2, Section 9.3, and Section 10 and the
Confidentiality Agreement shall survive the termination of this Agreement and
shall remain in full force and effect, and (ii) the termination of this
Agreement shall not relieve any Party from any liability for any breach of any
representation, warranty, covenant, obligation or other provision contained in
this Agreement.
9.3.
Expenses; Termination
Fees
.
(a)
Except as
set forth in this Section 9.3, all fees and expenses incurred in connection with
this Agreement and the Contemplated Transactions shall be paid by the Party
incurring such expenses, whether or not the Merger is consummated.
(b)
Cellegy
shall pay Adamis a nonrefundable, fee in an amount equal to $150,000 (the
“
Cellegy Termination
Fee
”) in the
event that this Agreement is terminated: (i) by Cellegy or Adamis pursuant to
Section 9.1(d); (ii) by Adamis pursuant to Section 9.1(e); or (iii) by Cellegy
pursuant to Section 9.1(i). Any Cellegy Termination Fee due under this Section
shall be paid to Adamis by wire transfer of same-day funds within five Business
Days of termination.
(c)
Adamis
shall pay Cellegy a nonrefundable, fee in an amount not to exceed $150,000 (the
“
Adamis Termination
Fee
”) in the
event that this Agreement is terminated by Cellegy pursuant to Section 9.1(f).
Any Adamis Termination Fee due under this Section 9.3(c) shall be paid to
Cellegy by wire transfer of same-day funds within five Business Days of
termination.
(d)
If either
Party fails to pay when due any amount payable by such Party under Section
9.3(b) or 9.3(c), as applicable then (i) such Party shall reimburse the other
Party for reasonable costs and expenses (including reasonable fees and
disbursements of counsel) incurred in connection with the collection of such
overdue amount and the enforcement by the other Party of its rights under this
Section, and (ii) such Party shall pay to the other Party interest on such
overdue amount (for the period commencing as of the date such overdue amount was
originally required to be paid and ending on the date such overdue amount is
actually paid to the other Party in full) at a rate per annum equal to the
“prime rate” (as announced by Bank of America or any successor thereto) in
effect on the date such overdue amount was originally required to be paid.
ARTICLE
X
MISCELLANEOUS
PROVISIONS
10.1.
Non-Survival of
Representations and Warranties
. The
representations and warranties of Adamis, Merger Sub and Cellegy contained in
this Agreement or any certificate or instrument delivered pursuant to this
Agreement shall terminate at the Effective Time, and only the covenants that by
their terms survive the Effective Time and this Article 10 shall survive the
Effective Time.
10.2.
Amendment
. This
Agreement may be amended with the approval of the respective Boards of Directors
of Adamis and Cellegy at any time (whether before or after the receipt of the
Required Adamis Stockholder Vote or Required Cellegy Stockholder Vote);
provided, however, that after any such adoption and approval of this Agreement
by a Party’s stockholders, no amendment shall be made which by law requires
further approval of the stockholders of such Party without the further approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of Adamis and Cellegy.
10.3.
Waiver
.
(a)
No
failure on the part of any Party to exercise any power, right, privilege or
remedy under this Agreement, and no delay on the part of any Party in exercising
any power, right, privilege or remedy under this Agreement, shall operate as a
waiver of such power, right, privilege or remedy; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude any other
or further exercise thereof or of any other power, right, privilege or remedy.
(b)
No Party
shall be deemed to have waived any claim arising out of this Agreement, or any
power, right, privilege or remedy under this Agreement, unless the waiver of
such claim, power, right, privilege or remedy is expressly set forth in a
written instrument duly executed and delivered on behalf of such Party; and any
such waiver shall not be applicable or have any effect except in the specific
instance in which it is given.
10.4.
Entire Agreement;
Counterparts; Exchanges by Facsimile
. This
Agreement and the other agreements referred to in this Agreement constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among or between any of the Parties with respect to the
subject matter hereof and thereof; provided, however, that the Confidentiality
Agreement shall not be superseded and shall remain in full force and effect in
accordance with its terms. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument. The exchange of a fully executed
Agreement (in counterparts or otherwise) by all Parties by facsimile shall be
sufficient to bind the Parties to the terms and conditions of this Agreement.
10.5.
Applicable Law;
Jurisdiction
. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California (except to the extent that the DGCL governs the
procedures relating to the Merger), regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws. In any action or suit
between any of the parties arising out of or relating to this Agreement or any
of the Contemplated Transactions: (a) each of the parties irrevocably and
unconditionally consents and submits to the exclusive jurisdiction and venue of
the state and federal courts located in the State of California; (b) if any such
action or suit is commenced in a state court, then, subject to applicable Legal
Requirements, no Party shall object to the removal of such action or suit to any
federal court located in the county of San Diego, and (c) the parties agree that
service of progress may be made in the manner provided for in this Agreement for
delivery of notices.
10.6.
Waiver of Jury
Trial
. EACH
PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT
IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A)
NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (B) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS
WAIVER, (C) IT MAKES THIS WAIVER VOLUNTARILY AND (D) IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 10.6.
10.7.
Notices
. Any
notice or other communication required or permitted to be delivered to any party
under this Agreement shall be in writing and shall be given by means of hand
delivery, registered mail, courier or express delivery service, or facsimile.
Notices shall be deemed delivered and received (i) upon delivery by hand, (ii)
three (3) Business Days after deposit in the U.S. mails, certified or registered
mail, (iii) one (1) Business Day after delivery to a reputable overnight courier
service for next business-day delivery (with confirmation of delivery), or (iv)
one (1) Business Day after transmission by facsimile to the number set forth
beneath the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in written notice given to
the other parties here), with confirmation of successful
transmission:
|
if
to Cellegy :
|
|
|
|
2085B
Quaker Point Road
|
|
Quakertown,
PA 18951
|
|
Attention:
Chief Executive Officer
|
|
Telephone
No.: (215) 529-6084
|
|
Facsimile
No.: (215) 529-6086
|
|
|
|
with
a copy to:
|
|
|
|
C.
Kevin Kelso
|
|
Weintraub
Genshlea Chediak
|
|
400
Capitol Mall, 11
th
Floor
|
|
Sacramento,
California 95814
|
|
Telephone:
(916) 558-6000
|
|
Fax:
(916) 446-1611
|
|
Email:
kkelso@weintraub.com
|
|
|
|
if
to Adamis:
|
|
|
|
Adamis
Pharmaceuticals Corporation
|
|
2658
Del Mar Heights Road, #555
|
|
Del
Mar, CA 92014
|
|
Attention:
President
|
|
Telephone
No.: (858) 401-3984
|
|
with
a copy to:
|
|
|
|
Cooley
Godward Kronish LLP
|
|
4401
Eastgate Mall
|
|
San
Diego, CA 92121
|
|
Attention:
Patrick Loofbourrow, Esq.
|
|
Telephone
No.: (858) 550-6000
|
|
Facsimile
No.: (858) 550-6420
|
|
Email:
loof@cooley.com
|
10.8.
Cooperation
. Each
Party agrees to cooperate fully with the other Party and to execute and deliver
such further documents, certificates, agreements and instruments and to take
such other actions as may be reasonably requested by the other Party to evidence
or reflect the Contemplated Transactions and to carry out the intent and
purposes of this Agreement.
10.9.
Severability
. Any
term or provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability of
the remaining terms and provisions of this Agreement or the validity or
enforceability of the offending term or provision in any other situation or in
any other jurisdiction. If a final judgment of a court of competent jurisdiction
declares that any term or provision of this Agreement is invalid or
unenforceable, the Parties hereto agree that the court making such determination
10.10.
Other Remedies; Specific
Performance
. Except
as otherwise provided herein, any and all remedies herein expressly conferred
upon a Party will be deemed cumulative with and not exclusive of any other
remedy conferred hereby, or by law or equity upon such Party, and the exercise
by a Party of any one remedy will not preclude the exercise of any other remedy.
The Parties hereto agree that irreparable damage would occur in the event that
any of the material provisions of the Confidentiality Agreement, as modified by
Section 5.14 of this Agreement, were not performed in material respects or were
otherwise breached in material respects (a
“Confidentiality
Action”
). It is
accordingly agreed that the Parties shall be entitled to seek an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being the addition to any other remedy to which they
are entitled at law or in equity, without, solely with respect to a
Confidentiality Action, the necessity of proving actual damages and without
posting bond or other security. Notwithstanding the foregoing, in the event that
this Agreement is terminated by Adamis pursuant to Section 9.1(e) or by Cellegy
pursuant to Section 9.1(f) or 9.1(i) above, Adamis’ or Cellegy’s sole and
exclusive remedy hereunder shall be that provided in Section 9.3(b) or (c),
respectively.
10.11.
Construction
.
(a)
For
purposes of this Agreement, whenever the context requires: the singular number
shall include the plural, and vice versa; the masculine gender shall include the
feminine and neuter genders; the feminine gender shall include the masculine and
neuter genders; and the neuter gender shall include masculine and feminine
genders.
(b)
The
Parties hereto agree that any rule of construction to the effect that
ambiguities are to be resolved against the drafting Party shall not be applied
in the construction or interpretation of this Agreement.
(c)
As used
in this Agreement, the words “include” and “including,” and variations thereof,
shall not be deemed to be terms of limitation, but rather shall be deemed to be
followed by the words “without limitation.”
(d)
Except as
otherwise indicated, all references in this Agreement to “Sections,” “Exhibits”
and “Schedules” are intended to refer to Sections of this Agreement and Exhibits
and Schedules to this Agreement.
(e)
The
bold-faced headings contained in this Agreement are for convenience of reference
only, shall not be deemed to be a part of this Agreement and shall not be
referred to in connection with the construction or interpretation of this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT
BLANK]
IN
WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Reorganization to be executed as of the date first above written.
|
CELLEGY
PHARMACEUTICALS, INC.
|
|
|
|
By:
/s/ Richard C. Williams
|
|
|
|
Name:
Richard C. Williams
|
|
Title:
Chief Executive Officer
|
|
|
|
CELLEGY
HOLDINGS, INC.
|
|
|
|
By:
/s/ Richard C. Williams
|
|
|
|
Name:
Richard C. Williams
|
|
Title:
Chief Executive Officer
|
|
|
|
ADAMIS
PHARMACEUTICALS
|
|
CORPORATION
|
|
|
|
By:
/s/ Dennis J. Carlo
|
|
|
|
Name:
Dennis J. Carlo
|
|
Title:
President/CEO
|
EXHIBIT A
CERTAIN
DEFINITIONS
For
purposes of this Agreement:
“Acquisition
Inquiry”
shall
mean, with respect to a Party, an inquiry, indication of interest or request for
information (other than an inquiry, indication of interest or request for
information made or submitted by Adamis, on the one hand or Cellegy, on the
other hand, to the other Party) that would reasonably be expected to lead to an
Acquisition Proposal from such Party.
“Acquisition
Proposal”
shall
mean any offer or proposal (other than an offer or proposal made or submitted by
Adamis, on the one hand or Cellegy, on the other hand to the other Party)
contemplating or otherwise relating to any Acquisition Transaction with such
Party.
“Acquisition
Transaction”
shall
mean any transaction or series of transactions (except for the Contemplated
Transactions) involving:
(a) any
merger, consolidation, amalgamation, share exchange, business combination,
issuance of securities, acquisition of securities, reorganization,
recapitalization, tender offer, exchange offer or other similar transaction in
which (i) a Person or “group” (as defined in the Exchange Act and the rules
promulgated thereunder) of Persons directly or indirectly acquires beneficial or
record ownership of securities representing more than 50% of the outstanding
securities of any class of voting securities of a Party or any of its
Subsidiaries; or (ii) a Party or any of its Subsidiaries issues securities
representing more than 50% of the outstanding securities of any class of voting
securities of such Party or any of its Subsidiaries (other than, solely with
respect to Adamis, through any capital raising transaction);
(b) any
sale, lease, exchange, transfer, license, acquisition or disposition of any
business or businesses or assets that constitute or account for: (i) 50% or more
of the consolidated book value of the assets of a Party and its Subsidiaries,
taken as a whole; or (ii) 50% or more of the fair market value of the assets of
a Party and its Subsidiaries, taken as a whole, excluding, solely with respect
to Adamis, any transfer or lien to a creditor of Adamis;
(c) any
liquidation or dissolution of a Party; or
(d) with
respect to Cellegy only, any acquisition or purchase by any Person or “group”
(as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of a 10% or more interest in the total voting power of
Cellegy or any of its Subsidiaries or any tender offer or exchange offer that if
consummated would result in any Person or “group” (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder) beneficially
owning 10% or more of the total outstanding voting securities of Cellegy or any
of its Subsidiaries.
“
Adamis
”
shall
have the meaning set forth in the Preamble.
“
Adamis
Bylaws
” shall
mean the bylaws of Adamis as currently in effect.
“
Adamis Capital
Stock
” shall
mean shares of Adamis Common Stock and, if any, Adamis Preferred
Stock.
“
Adamis
Charter
” shall
mean the certificate of incorporation of Adamis, as in effect on the date of
this Agreement.
“
Adamis Common
Stock
”
shall
have the meaning set forth in the Recitals.
“
Adamis Disclosure
Letter
”
shall
have the meaning set forth in the first paragraph of Article II.
“
Adamis Employee
Plan
”
shall
have the meaning set forth in Section 2.13(a).
“Adamis Financial
Statements”
shall
have the meaning set forth in Section 2.8.
“
Adamis’
Knowledge
”
shall
mean (a) the actual knowledge, after reasonable diligence, of the officers and
directors of Adamis and (b) such facts and circumstances each of the officers
and directors of Adamis should have known given his involvement in Adamis and
the information available to him.
“Adamis Options”
shall
mean all options, warrants or other rights, if any, that may be outstanding to
purchase, acquire or otherwise receive shares of Adamis Capital Stock (whether
or not vested) held by current or former employees or directors of or
consultants to Adamis.
“
Adamis
Note
” shall
have the meaning set forth in the Recitals.
“Adamis Patent and Proprietary
Rights”
shall
have the meaning set forth in Section 2.11.
“
Adamis Preferred
Stock
” shall
mean shares of preferred stock of Adamis.
“
Adamis Restricted
Stock
”
shall
have the meaning set forth in Section 1.6(c).
“Adamis Stock
Certificate”
shall
have the meaning set forth in Section 1.6(f).
“
Adamis
Stockholder
”
shall mean each holder of
any Adamis Capital Stock immediately before the Effective Time.
“Adamis Termination
Fee”
shall
have the meaning set forth in Section 9.3(c).
“
Adamis Triggering
Event
”
shall be
deemed to have occurred if (i) Adamis or any of its Subsidiaries or
Representatives shall have failed to comply with the provisions set forth in
Section 4.5 of the Agreement in any material respect, or (ii) Adamis or any of
its Representatives shall change the Adamis Board Recommendation
or not
convene the Adamis Stockholders Meeting (or obtain the Required Adamis
Stockholder Vote by written consent).
“
Agreement
” shall
mean the Agreement and Plan of Reorganization to which this
Exhibit A
is
attached, as it may be amended from time to time.
“
Ancillary
Agreements
” shall
have the meaning as set forth in Section 2.3.
“Base Date
” shall
have the meaning as set forth in Section 2.9.
“Business
” shall
mean the business and operations of a party.
“Business
Day”
shall
mean any day other than a day on which banks in the State of California are
authorized or obligated to be closed.
“Cellegy ”
shall
have the meaning set forth in the Preamble.
“Cellegy Board
Recommendation”
shall
have the meaning set forth in Section 5.3.
“
Cellegy
Bylaws
” shall
mean the bylaws of Cellegy as currently in effect.
“
Cellegy
Charter
” shall
mean the certificate of incorporation of Cellegy, as in effect on the date of
this Agreement.
“Cellegy Charter
Amendment”
shall
have the meaning set forth in Section 8.9.
“Cellegy Common
Stock”
shall
have the meaning set forth in the Recitals.
“Cellegy Disclosure
Letter”
shall
have the meaning set forth in the first paragraph of Article III.
“Cellegy Employee Agreement”
shall
mean each management, employment, severance, consulting, relocation,
repatriation or expatriation agreement or other contract between Cellegy or any
of its Subsidiaries and any current employee thereof, other than any such
management, employment, severance, consulting, relocation, repatriation or
expatriation agreement or other contract with such employee which is terminable
“at will” without any obligation on the part of Cellegy or any of its
Subsidiaries to make any payments or provide any benefits in connection with
such termination.
“Cellegy Employee
Plan”
shall
have the meaning set forth in Section 3.12.
“Cellegy Financial Statements”
shall
have the meaning set forth in Section 3.8(b).
“Cellegy’s
Knowledge”
shall
mean (a) the actual knowledge, after reasonable diligence, of Cellegy’s officers
and directors and (b) such facts and circumstances each of the officers and
directors of Cellegy should have known given his involvement in Cellegy and the
information available to him.
“Cellegy Name Change
Amendment”
shall
have the meaning set forth in Section 5.12.
“Cellegy Net Working Capital”
shall
mean the amount of Cellegy’s current assets minus current liabilities (not
including the Adamis Note), as reflected in Cellegy’s financial records as of
the end of the month immediately before the month in which the Closing
occurs.
“Cellegy
Options”
shall
mean options or other rights to purchase or acquire shares of Cellegy Common
Stock issued by Cellegy.
“Cellegy Patent and Proprietary
Rights”
shall
have the meaning as set forth in
Section
3.10 of
this Agreement.
“Cellegy Preferred
Stock”
shall
mean shares of preferred stock, par value $0.0001 per share, of Cellegy.
“Cellegy
Product”
shall
mean those products, compounds, proteins or other biological materials that are
manufactured, tested, the subject of trials or studies, distributed and/or
marketed by or on behalf of Cellegy or any of its Subsidiaries.
“Cellegy
Products”
shall
have the meaning set forth in Section 3.20.
“Cellegy Restated
Certificate”
shall
have the meaning set forth in Section 1.5(a).
“Cellegy SEC
Reports”
shall
have the meaning as set forth in Section 3.8.
“Cellegy Stock
Plan”
shall
have the meaning set forth in Section 5.12.
“Cellegy Stockholder
Meeting”
shall
have the meaning set forth in Section 5.3.
“Cellegy Termination
Fee”
shall
have the meaning set forth in Section 9.3.
“Cellegy Triggering
Event”
shall be
deemed to have occurred if: (i) there shall have occurred a Change in the
Cellegy Board Recommendation; (ii) Cellegy shall have failed to hold the Cellegy
Stockholder Meeting within sixty (60) days after the definitive Proxy Statement
is filed with the SEC (other than to the extent that Cellegy determines, in good
faith, that the Required Cellegy Stockholder Vote will not be obtained at a
meeting held within such time, in such case the sixty (60) day period shall be
tolled until such time as Cellegy determines, in good faith, that the Required
Cellegy Stockholder Vote can be obtained at a meeting, in each case in
accordance with Section 5.3(d)), (iii) Cellegy or any of its Subsidiaries or
Representatives shall have failed to comply with the provisions set forth in
Section 4.5 of the Agreement in any material respect, or (iv) Cellegy shall have
delivered a Notice of Superior Proposal under Section 4.5(b).
“
Certificate of
Merger
” shall
have the meaning as set forth in Section 1.3.
“Change in the Cellegy Board
Recommendation”
shall
have the meaning set forth in Section 5.3.
“
Closing
” shall
have the meaning as set forth in Section 1.3.
“Closing
Date”
shall
have the meaning set forth in Section 1.3.
“Code”
shall
mean the Internal Revenue Code of 1986, as amended.
“Combined
Company”
shall
mean Cellegy and Adamis and their respective Subsidiaries (and, after the
Closing, the Surviving Corporation), taken together as a whole.
“Confidentiality Action”
shall
have the meaning set forth in Section 10.10 of this Agreement.
“
Confidentiality
Agreement
” shall
have the meaning as set forth in Section 5.17 of this Agreement.
“
Consent
” shall
mean any approval, consent, ratification, permission, waiver or authorization
(including any necessary Governmental Authorization).
“Contemplated
Transactions”
shall
mean the Merger and the other transactions and actions expressly contemplated by
the Agreement.
“Contract”
shall,
with respect to any Person, mean any written, oral or other agreement, contract,
subcontract, lease (whether real or personal property), mortgage, understanding,
arrangement, instrument, note, option, warranty, purchase order, license,
sublicense, insurance policy, benefit plan or legally binding commitment or
undertaking of any nature to which such Person is a party or by which such
Person or any of its assets are bound or affected under applicable law.
“Convertible
Securities”
shall
mean and include options, warrants and other rights for the purchase of common
stock or any stock or security convertible into or exchangeable for common
stock.
“Costs”
shall
have the meaning set forth in Section 5.7.
“
Current Balance
Sheet
” shall
have the meaning as set forth in Section 2.8.
“D&O Indemnified
Parties”
shall
have the meaning set forth in Section 5.7.
“DGCL”
shall
mean the General Corporation Law of the State of Delaware.
“
Dissenting
Shares
” shall
have the meaning as set forth in Section 1.8.
“Dissenting
Stockholder”
shall
have the meaning set forth in Section 1.8.
“Encumbrances”
shall
mean any lien, pledge, hypothecation, charge, mortgage, security interest,
encumbrance, claim, infringement, interference, option, right of first refusal,
preemptive right, community property interest or restriction of any nature
(including any restriction on the voting of any security, any restriction on the
transfer of any security or other asset, any restriction on the receipt of any
income derived from any asset, any restriction on the use of any asset and any
restriction on the possession, exercise or transfer of any other attribute of
ownership of any asset).
“Entity”
shall
have the meaning set forth in Section 2.2.
“Exchange
Agent”
shall
have the meaning set forth in Section 1.10(a).
“
Exchange
Ratio
” shall
have the meaning set forth in Section 1.7.
“Exchange
Shares”
shall
have the meaning set forth in Section 1.10(b).
“
Effective
Time
” shall
have the meaning as set forth in Section 1.3.
“
Environment
” shall
mean soil, land surface or subsurface strata, surface waters (including
navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands),
ground waters, drinking water supply, stream sediments, ambient air (including
indoor air), plant and animal life, and any other environmental medium or
natural resource.
“
Environmental, Health, and Safety
Liabilities
” shall
mean any cost, damages, expense, liability, obligation, or other responsibility
arising out of any Environmental Law or Occupational Safety and Health Law and
consisting of or relating to:
(i)
any
fines, penalties, judgments, awards, settlements, legal or administrative Legal
Proceedings, damages, losses, claims, demands and response, investigative,
remedial, compliance, corrective or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law (including on-site or
off-site contamination, occupational safety and health, and regulation of
chemical substances or products); or
(iii)
financial
responsibility under Environmental Law or Occupational Safety and Health Law for
cleanup costs or corrective action, including any investigation, cleanup,
removal, containment, or other remediation or response actions ("Cleanup")
required by applicable Environmental Law or Occupational Safety and Health Law
(whether or not such Cleanup has been required or requested by any Governmental
Entity or any other Person) and for any natural resource damages.
The terms
“removal,” “remedial,” and “response action,” include the types of activities
covered by the United States Comprehensive Environmental Response, Compensation,
and Liability Act, 42 U.S.C. Section 9601 et seq., as amended
("CERCLA").
“
Environmental
Law
” shall
mean all federal, state and local laws, statutes, regulations, ordinances,
codes, rules and other governmental restrictions and requirements relating to
the discharge of air pollutants, water pollutants or processed waste water or
otherwise relating in any manner to the environment, pollutants or hazardous
substances or materials, including but not limited to the Federal Solid Waste
Disposal Act; the Federal Clean Air Act including, without limitation, the Clean
Air Act Amendments of 1990; the Federal Water Pollution Control Act; the
Hazardous Materials Transportation Act; the Federal Toxic Substances Control
Act; the Federal Resource Conservation and Recovery Act of 1976; the National
Environmental Policy Act; the Federal Comprehensive Environmental
Responsibility, Cleanup and Liability Act of 1980 (“CERCLA”), all amendments to
any of the foregoing statutes, and all regulations promulgated by any federal or
state agencies, including the Environmental Protection Agency, regulations of
the Nuclear Regulatory Agency, and regulations of any state department of
natural resources or state environmental protection agency previously, now or at
any time hereafter in effect.
“Equity
Financing”
shall
mean one or more private placement offerings exempt from registration under the
Securities Act or other capital raising transactions approved by the Adamis
Board of Directors.
“
ERISA
” shall
have the meaning as set forth in Section 2.13(a).
“
ERISA
Affiliate
” shall
have the meaning as set forth in Section 2.13(a).
“
Exchange
Act
”
shall
mean the Securities Exchange Act of 1934, as amended.
“
Exchange
Agent
”
shall
have the meaning as set forth in Section 1.10
.
“Exchange Shares
”
shall
have the meaning as set forth in Section 1.10(b).
“
Exchange
Ratio
”
shall
have the meaning set forth in Section 1.7.
“
Facilities”
shall
mean any real property, leaseholds, or other interests currently or formerly
owned or operated by a Party and any buildings, plants, structures, or equipment
(including motor vehicles, tank cars, and rolling stock) currently or formerly
owned or operated by any Party.
“
FDA
”
shall
mean the U.S. Food and Drug Administration.
“
FDCA
”
shall
mean the Federal Food, Drug and Cosmetic Act and the regulations
thereunder.
“
GAAP
”
shall
mean United States generally accepted accounting principles.
“
Governmental
Authorization
”
shall
mean any: (a) permit, license, certificate, franchise, grant, funding
arrangement, permission, variance, clearance, registration, qualification,
approval or authorization issued, granted, given or otherwise made available by
or under the authority of any Governmental Entity or pursuant to any applicable
Legal Requirement; or (b) right under any Contract with any Governmental
Entity.
“
Governmental
Entity
”
shall
mean any: (a) nation, state, commonwealth, province, territory, county,
municipality, district or other jurisdiction of any nature; (b) federal, state,
local, municipal, foreign or other government; or (c) governmental or
quasi-governmental authority of any nature (including any governmental division,
department, agency, commission, instrumentality, official, ministry, fund,
foundation, center, organization, unit, body or Entity and any court or other
tribunal, and for the avoidance of doubt, any Taxing authority).
“
Hazardous
Materials
”
shall
mean any pollutant, chemical, substance and any toxic, infectious, carcinogenic,
reactive, corrosive, ignitable or flammable chemical, or chemical compound, or
hazardous substance, material or waste, whether solid, liquid or gas, that is
subject to regulation, control or remediation under any Environmental Law
Requirement, including without limitation, crude oil or any fraction thereof,
and petroleum products or by-products.
“
Intellectual
Property
”
shall
mean all domestic and foreign intellectual property and proprietary rights,
including but not limited to all (i) inventions (whether or not patentable and
whether or not reduced to practice), all improvements thereto, and all patents
and patent applications, (ii) trademarks, service marks, trade names, domain
names, trade dress, logos, corporate names and brand names, together will all
goodwill associated therewith, and all applications and registrations in
connection therewith, (iii) all works of authorship (whether or not published),
copyrights and designs, and all applications and registrations in connection
therewith, (iv) source code and object code versions of computer software
(including data and related documentation) and website content, and (v) trade
secrets and confidential business information (including ideas, know-how,
formulas, compositions, processes and techniques, research and development
information, technical data, designs, drawings, specifications, research
records, records of inventions, test information, financial, marketing and
business data, pricing and cost information, business and marketing plans and
proposals and customer and supplier lists and information, including all
membership lists and databases and related information and profiles).
“
IRS
”
shall
mean the United States Internal Revenue Service.
“
Legal
Proceeding
”
shall
mean any action, suit, litigation, arbitration, proceeding (including any civil,
criminal, administrative, investigative or appellate proceeding), hearing,
inquiry, audit, examination or investigation commenced, brought, conducted or
heard by or before, or otherwise involving, any court or other Governmental
Entity or any arbitrator or arbitration panel.
“
Legal
Requirement
”
shall
mean any federal, state, foreign, material local or municipal or other law,
statute, constitution, ordinance, code, rule, or regulation issued, enacted,
adopted, promulgated, implemented or otherwise put into effect by or under the
authority of any Governmental Entity.
“
Material Adverse
Effect
” shall
mean any fact, change, event, factor, condition, circumstance, development or
effect that, individually or in the aggregate, has, or would reasonably be
expected to have, a material adverse effect on the business, assets,
liabilities, condition (financial or otherwise) or results of operations of a
Party and its Subsidiaries (including, following the Merger, the Surviving
Corporation and its Subsidiaries), taken as a whole, other than to the extent
such effects are due to: (a) the announcement of the transactions contemplated
by this Agreement; (b) economic factors affecting the national, regional or
world economy; (c) any act or threat of terrorism or war anywhere in the world,
any armed hostilities or terrorist activities anywhere in the world, any threat
or escalation or armed hostilities or terrorist activities anywhere in the world
or any governmental or other response or reaction to any of the foregoing; (d)
factors generally affecting the industry or market in which a Party operates;
(e) changes in law, rules or regulations applicable to a Party or its
Subsidiaries; (f) changes in GAAP or the interpretation thereof, in each case to
the extent required by GAAP; (g) the Reverse Stock Split; (h) any change in the
stock price or trading volume of Cellegy Common Stock (it being understood that
the facts and circumstances giving rise to such change may be deemed to
constitute, and may be taken into account in determining whether there has been,
a Material Adverse Effect if such facts and circumstances are not otherwise
excluded by clauses (a) – (g) of this definition); or (i) any failure of Adamis
to obtain additional financing or commitments for additional financing before
the closing date.
“
Merger
”
shall
have the meaning set forth in the Recitals.
“
Merger Sub
”
shall
have the meaning set forth in the Preamble.
“
Material
Contract
”
shall
mean any agreement, instrument or document now in effect (including any
amendment to any of the foregoing):
(i)
with any
director, officer or affiliate of Adamis or Cellegy, as the case may
be;
(ii)
evidencing,
governing or relating to indebtedness for borrowed money or which provides for
the imposition of any lien on any of its assets;
(iii)
that
involves expenditures or receipts in excess of $50,000;
(iv)
that in
any material way purports to restrict the business activity of a party or any of
its affiliates or to limit the freedom of a party or any of its affiliates to
engage in any line of business or to compete with any Person or in any
geographic area or to hire or retain any Person;
(v)
relating
to the employment of, or the performance of services by, any employee or
consultant; or pursuant to which a party is or may become obligated to make any
severance, termination or similar payment to any employee or director; or
pursuant to which a party is or may become obligated to make any bonus or
similar payment (other than payments constituting base salary) to any employee
or director;
(vii)
(A)
relating to the acquisition, issuance, voting, registration, sale or transfer of
any securities of a party, (B) providing any Person with any preemptive right,
right of participation, right of maintenance or any similar right with respect
to any securities of a Party, or (C) providing a Person with any right of first
refusal with respect to, or right to repurchase or redeem, any securities,
except for Contracts pursuant to Cellegy Stock Option Plan, the Adamis Stock
Option Plan and Contracts between Adamis and any Person that provide a right of
first refusal, right of repurchase or cancellation or similar right in favor of
Adamis;
(viii)
incorporating
or relating to any guaranty or any indemnity or similar obligation;
(ix)
relating
to any currency hedging;
(x)
(A)
imposing any confidentiality obligation on a party (other than under agreements
entered into in the Ordinary Course of Business that are not material to the
Party), or (B) containing "standstill" provisions;
(xi)
(A) to
which any Governmental Entity is a party or under which any Governmental Entity
has any rights or obligations, or (B) directly or indirectly benefiting any
Governmental Entity (including any subcontract or other Contract between Adamis
and any contractor or subcontractor to any Governmental Entity), or (C) relating
to any funding, grant or similar agreement, proposal or commitment relating to
product of the party; and
(xii)
that if
terminated or breached would reasonably be expected to have a Material Adverse
Effect on the Party or on any of the transactions contemplated by this Agreement
or any of the Ancillary Agreements.
“
Notice of Superior
Proposal
” shall
have the meaning set forth in Section 4.5.
“
Ordinary Course of
Business
”
shall
mean, in the case of each of Adamis and Cellegy, such actions taken in the
ordinary course of its normal operations and consistent with its past practices.
“Original Cellegy
Securityholders”
shall
mean Persons who were holders of Cellegy Common Stock, Cellegy Preferred Stock
or Cellegy Convertible Securities immediately before the Effective
Time.
“Outside
Date”
shall
have the meaning set forth in Section 9.1(b).
“
Party
”
or
“
Parties
” shall
mean Adamis, Merger Sub and Cellegy.
“
Person
”
shall
mean any individual, Entity or Governmental Entity.
“Post-Effective Cellegy Shareholder
Shares”
shall be
(i) 3,000,000, plus (ii) Cellegy Net Working Capital divided by 0.50.
“
Pre-Closing
Period
”
shall
have the meaning as set forth in Section 4.1.
“Pre-Effective Cellegy
Shares”
shall be
the sum of all shares of Cellegy Common Stock prior to the Effective Date that
are: (a) issued and outstanding and (b) issuable upon conversion of any
preferred stock of Cellegy.
“
Product
Licensee
”
shall
have the meaning as set forth in Section 3.20(c).
“Proposals”
shall
have the meaning set forth in Section 5.3(b).
“
Proxy
Statement
”
shall
mean the Proxy Statement to be filed with the SEC by Cellegy in connection with
the Merger, as said statement may be amended, and mailed to The Cellegy
stockholders in connection with Cellegy Stockholder Meeting.
“
PTO
”
shall
have the meaning as set forth in Section 5.16.
“
Registration
Statement
”
shall
mean the registration statement on Form S-4 (the “S-4”) to be filed with the SEC
by Cellegy, together with all amendment and supplements thereto and including
the exhibits thereto.
“
Representatives
”
shall
mean officers, directors, employees, agents, attorneys, accountants, investment
bankers, advisors and representatives.
“
Required Cellegy Stockholder
Vote
”
shall
mean the vote of the Cellegy stockholders that is required under the DGCL or
other applicable law to approve the Proposals.
“
Required Adamis Stockholder
Vote
”
shall
mean the vote or written consent of the Adamis Stockholders that is required
under applicable law to approve the Merger and the transactions contemplated by
this Agreement.
“
Reverse Stock
Split
”
shall
have the meaning set forth in Section 1.5(a)(i).
“Reverse Stock Split
Ratio”
shall be
equal to the Pre-Effective Cellegy Shares divided by the Post-Effective Cellegy
Shareholder Shares.
“
Sarbanes-Oxley
Act
”
shall
mean the Sarbanes-Oxley Act of 2002, as it may be amended from time to time.
“
SEC
”
shall
mean the United States Securities and Exchange Commission.
“
Securities
Act
”
shall
mean the Securities Act of 1933, as amended.
“
Subsidiary
”
An
Entity shall be deemed to be a “Subsidiary” of another Person if such Person
directly or indirectly owns, beneficially or of record, (a) an amount of voting
securities of other interests in such Entity that is sufficient to enable such
Person to elect at least a majority of the members of such Entity’s board of
directors or other governing body, or (b) at least 50% of the outstanding
equity, voting, beneficial or financial interests in such Entity.
“Superior
Proposal”
means an
Acquisition Proposal that the board of directors of a Party determines, in its
reasonable judgment, to be more favorable to such Party’s stockholders than the
terms of the transactions contemplated by this Agreement.
“
Surviving
Corporation
”
shall
have the meaning set forth in Section 1.1.
“
Tax
”
shall
have the meaning set forth in Section 2.12.
“
Tax Return
”
shall
mean any return (including any information return), report, statement,
declaration, estimate, schedule, notice, notification, form, election,
certificate or other document or information filed with or submitted to, or
required to be filed with or submitted to, any Governmental Entity in connection
with the determination, assessment, collection or payment of any Tax or in
connection with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
“
Treasury
Regulations
”
shall
mean the official interpretations of the Code promulgated by the United States
Department of the Treasury.
“Voting
Agreement”
shall
have the meaning set forth in the Recitals.
§ 262
APPRAISAL RIGHTS.
(a)
Any stockholder of a corporation of this State who holds shares of stock on the
date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to § 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder’s shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this
section, the word “stockholder” means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
“stock” and “share” mean and include what is ordinarily meant by those words and
also membership or membership interest of a member of a nonstock corporation;
and the words “depository receipt” mean a receipt or other instrument issued by
a depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b)
Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to § 251 (other than a merger effected pursuant to § 251(g) of
this title), § 252, § 254, § 257, § 258, § 263 or § 264 of this
title:
(1)
Provided; however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of
§ 251 of this title.
(2)
Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258,
263 and 264 of this title to accept for such stock anything except:
b.
Shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository receipts
in respect thereof;
c.
Shares of stock of any other
corporation, or depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
d.
Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing subparagraphs a. and
b. of this paragraph; or
e.
Any combination of the shares of
stock, depository receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3)
In the event all of the stock of a subsidiary Delaware corporation party to a
merger effected under § 253 of this title is not owned by the parent corporation
immediately before the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c)
Any corporation may provide in its certificate of incorporation that appraisal
rights under this section shall be available for the shares of any class or
series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is
practicable.
(d)
Appraisal rights shall be perfected as follows:
(1)
If a proposed merger or consolidation for which appraisal rights are provided
under this section is to be submitted for approval at a meeting of stockholders,
the corporation, not less than 20 days before the meeting, shall notify each of
its stockholders who was such on the record date for such meeting with respect
to shares for which appraisal rights are available pursuant to subsection
(b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder’s shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder’s shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder’s shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2)
If the merger or consolidation was approved pursuant to § 228 or § 253 of this
title, then either a constituent corporation before the effective date of the
merger or consolidation or the surviving or resulting corporation within 10 days
thereafter shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of the
merger or consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such holder’s shares.
Such demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder’s shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date; provided;
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded appraisal
of such holder’s shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days before the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given before the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is
given.
(e)
Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder’s demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder’s written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f)
Upon the filing of any such petition by a stockholder, service of a copy thereof
shall be made upon the surviving or resulting corporation, which shall within 20
days after such service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names and addresses
of all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting
corporation.
(g)
At the hearing on such petition, the Court shall determine the stockholders who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h)
After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal before
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted such stockholder’s certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i)
The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court’s decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any
state.
(j)
The costs of the proceeding may be determined by the Court and taxed upon the
parties as the Court deems equitable in the circumstances. Upon application of a
stockholder, the Court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney’s fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k)
From and after the effective date of the merger or consolidation, no stockholder
who has demanded appraisal rights as provided in subsection (d) of this
section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is before
the effective date of the merger or consolidation); provided; however, that if
no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder’s
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l)
The shares of the surviving or resulting corporation to which the shares of such
objecting stockholders would have been converted had they assented to the merger
or consolidation shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
Annex C
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELLEGY PHARMACEUTICALS INC.
Cellegy
Pharmaceuticals Inc., a corporation organized under and existing under the laws
of the State of Delaware (the “Corporation”), certifies that:
FIRST:
The name of the Corporation is Cellegy Pharmaceuticals Inc.
SECOND:
The Board of Directors of the Corporation, acting in accordance with the
provisions of Sections 141 and 242 of the Delaware General Corporation Law,
adopted resolutions to amend Article FOURTH of the Amended and Restated
Certificate of Incorporation of the Corporation by inserting the following
paragraph at the end of such Article:
“Effective
upon the filing of this Certificate of Amendment to the Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware, each one (1) share of the Corporation’s Common Stock outstanding
immediately before the filing of this Certificate of Amendment (“Old Common
Stock”) shall be combined and reclassified (the “Reverse Split”), without any
action by the holder thereof, as follows: every _________ shares of Old Common
Stock will be combined and reclassified (the “Reverse Stock Split”) as one share
issued and outstanding Common Stock (“New Common Stock”). The Corporation shall
not issue fractional shares on account of the Reverse Stock Split. Any
fractional share resulting from such change (after aggregating all fractional
shares held by a stockholder) will be rounded upward to the next higher whole
share of New Common Stock.
THIRD:
This Certificate of Amendment to the Restated Certificate of Incorporation was
submitted to the stockholders of the Corporation and was duly approved by the
required vote of stockholders of the Corporation in accordance with Sections 222
and 242 of the Delaware General Corporation Law.
IN
WITNESS WHEREOF, said Certificate of Amendment to the Restated Certificate of
Incorporation has been duly executed by its authorized officer this
day of
200_.
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CELLEGY PHARMACEUTICALS INC.
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Richard C. Williams,
Interim Chief Executive Officer
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Annex D
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELLEGY PHARMACEUTICALS INC.
Cellegy
Pharmaceuticals Inc., a corporation organized under and existing under the laws
of the State of Delaware (the “Corporation”), certifies that:
FIRST:
The name of the Corporation is Cellegy Pharmaceuticals Inc.
SECOND:
The Board of Directors of the Corporation, acting in accordance with the
provisions of Sections 141 and 242 of the Delaware General Corporation Law,
adopted resolutions to amend and restate Article FIRST of the Amended and
Restated Certificate of Incorporation of the Corporation to read in its entirety
as follows:
“The name
of this corporation is Adamis Pharmaceuticals Corporation (hereinafter the
“Corporation”).
THIRD:
This Certificate of Amendment to the Amended and Restated Certificate of
Incorporation was submitted to the stockholders of the Corporation and was duly
approved by the required vote of stockholders of the Corporation in accordance
with Sections 222 and 242 of the Delaware General Corporation Law.
IN
WITNESS WHEREOF, said Certificate of Amendment has been duly executed by its
authorized officer on this
day of
200_.
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CELLEGY PHARMACEUTICALS INC.
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By:
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Richard C. Williams
Interim Chief Executive Officer
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Annex E
CERTIFICATE OF AMENDMENT
TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELLEGY PHARMACEUTICALS, INC.
Cellegy
Pharmaceuticals Inc., a corporation organized under and existing under the laws
of the State of Delaware (the “Corporation”), certifies that:
FIRST:
The name of the Corporation is Cellegy Pharmaceuticals Inc.
SECOND:
The Board of Directors of the Corporation, acting in accordance with the
provisions of Sections 141 and 242 of the Delaware General Corporation Law,
adopted resolutions to amend Article FOURTH of the Amended and Restated
Certificate of Incorporation of the Corporation by amending and restating the
first paragraph within such Article to read in its entirety as follows:
“The
total number of shares of stock which the Corporation shall have authority to
issue is 185,000,000 shares, consisting of 175,000,000 shares of Common Stock
having a par value of $0.0001 per share (“Common Stock”) and 10,000,000 shares
of Preferred Stock having a par value of $0.0001 per share (“Preferred Stock”).”
THIRD:
This Certificate of Amendment to the Amended and Restated Certificate of
Incorporation was submitted to the stockholders of the Corporation and was duly
approved by the required vote of stockholders of the Corporation in accordance
with Sections 222 and 242 of the Delaware General Corporation Law.
IN
WITNESS WHEREOF, said Certificate of Amendment of the Restated Certificate of
Incorporation has been duly executed by its authorized officer this
day of
200_.
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CELLEGY PHARMACEUTICALS INC.
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By:
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Richard C. Williams
Interim Chief Executive Officer
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Annex F
AMENDED AND
RESTATED
CERTIFICATE OF INCORPORATION
OF
ADAMIS PHARMACEUTICALS CORPORATION
Adamis
Pharmaceuticals Corporation, a corporation organized and existing under the laws
of the State of Delaware, hereby certifies as follows:
FIRST:
The name
of this corporation is Adamis Pharmaceuticals Corporation.
SECOND:
The
original name of this corporation was Cellegy Pharmaceuticals, Inc. and the date
of filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was __________.
THIRD:
The
Certificate of Incorporation of said corporation shall be amended and restated
to read in full as follows:
I.
The name
of this corporation is Adamis Pharmaceuticals Corporation (the
"Company"
).
II.
The
address of the registered office of the Company in the State of Delaware is 2711
Centerville Road, Suite 400, Wilmington, DE 19808. The name of the
registered agent at that address is Corporation Service Company.
III.
The
purpose of the Company is to engage in any lawful act or activity for which a
corporation may be organized under the Delaware General Corporation Law
(
"DGCL"
).
IV.
A.
The
Company is authorized to issue two classes of stock to be designated,
respectively, "Common Stock" and "Preferred Stock." The total number of shares
of all classes of capital stock which the Company shall have authority to issue
is one hundred eighty-five million (185,000,000), of which one hundred
seventy-five million (175,000,000) shares shall be Common Stock, having a par
value of $0.0001 per share (the
"Common
Stock"
), and
ten million (10,000,000) shares shall be Preferred Stock, having a par value of
$0.001 (the
"Preferred
Stock"
).
B.
The
Preferred Stock may be issued from time to time in one or more series. The Board
of Directors of the Company (the
"Board of
Directors"
) is
hereby expressly authorized to provide for the issue of any or all of the
unissued and undesignated shares of the Preferred Stock in one or more series,
and to fix the number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and such designation,
preferences, and relative, participating, optional, or other rights and such
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such shares and as may be permitted by the DGCL.
The Board of Directors is also expressly authorized to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the
adoption
of the resolution originally fixing the number of shares of such series. The
number of authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the Common Stock, without a vote of the
holders of the Preferred Stock, or of any series thereof, unless a vote of any
such holders is required pursuant to the terms of any certificate of designation
filed with respect to any series of Preferred Stock.
C.
Each
outstanding share of Common Stock shall entitle the holder thereof to one vote
on each matter properly submitted to the stockholders of the Company for their
vote;
provided, however
, that,
except as otherwise required by law, holders of Common Stock shall not be
entitled to vote on any amendment to this Amended and Restated Certificate of
Incorporation (including any certificate of designation filed with respect to
any series of Preferred Stock) that relates solely to the terms of one or more
outstanding series of Preferred Stock if the holders of such affected series of
Preferred Stock are entitled, either separately or together as a class with the
holders of one or more other series of Preferred Stock, to vote thereon by law
or pursuant to this Amended and Restated Certificate of Incorporation (including
any certificate of designation filed with respect to any series of Preferred
Stock).
V.
For the
management of the business and for the conduct of the affairs of the Company,
and in further definition, limitation and regulation of the powers of the
Company, of its directors and of its stockholders or any class thereof, as the
case may be, it is further provided that:
A.
The
management of the business and the conduct of the affairs of the Company shall
be vested in its Board of Directors. The number of directors that shall
constitute the Board of Directors shall be fixed exclusively by resolutions
adopted by a majority of the authorized number of directors constituting the
Board of Directors.
B.
No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
C.
Subject
to the rights of the holders of any series of Preferred Stock that may be
designated from time to time, any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other causes and any newly
created directorships resulting from any increase in the number of directors,
shall, unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote of a
majority of the directors then in office, even though less than a quorum of the
Board of Directors, and not by the stockholders. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified.
D.
Subject
to the rights of the holders of any series of Preferred Stock that may be
designated from time to time, the Board of Directors is expressly empowered to
adopt, amend or repeal the Bylaws of the Company. Any adoption, amendment or
repeal of the Bylaws of the Company by the Board of Directors shall require the
approval of a majority of the authorized number of directors. The stockholders
shall also have power to adopt, amend or repeal the Bylaws of the Company,
subject to any restrictions which may be set forth in this Amended and Restated
Certificate of Incorporation (including any certificate of designation that may
be filed from time to time.
E.
The
directors of the Company need not be elected by written ballot unless the Bylaws
of the Company so provide.
F.
No
action shall be taken by the stockholders of the Company except at an annual or
special meeting of stockholders called in accordance with the Bylaws of the
Company. No action shall be taken by the stockholders of the Company by written
consent or electronic transmission.
G.
Advance
notice of stockholder nominations for the election of directors and of business
to be brought by stockholders before any meeting of the stockholders of the
Company shall be given in the manner provided in the Bylaws of the Company.
VI.
A.
The
liability of a director of the Company for monetary damages shall be eliminated
to the fullest extent under applicable law. If the DGCL is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
to the fullest extent permitted by the DGCL, as so amended.
B.
Any
repeal or modification of this Article shall be prospective and shall not
affect the rights under this Article in effect at the time of the alleged
occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
* * * *
FOURTH:
This
Amended and Restated Certificate of Incorporation has been duly adopted and
approved by the Board of Directors.
FIFTH:
This
Amended and Restated Certificate of Incorporation has been duly adopted and
approved by written consent of the stockholders in accordance with
sections 228, 245 and 242 of the DGCL and written notice of such action has
been given as provided in section 228.
IN WITNESS WHEREOF
, Adamis
Pharmaceuticals Corporation has caused this Amended and Restated Certificate of
Incorporation to be signed by its Chief Executive Officer in _____________, this
[ ] day of
[ ],
200_.
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ADAMIS PHARMACEUTICALS
CORPORATION
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Annex G
Cellegy Pharmaceuticals,
Inc.
Audit Committee
Charter
Revised: December 13, 2002; April 16,
2004
ORGANIZATION
This
charter governs the operations of the Audit Committee (“Committee”) of Cellegy
Pharmaceuticals, Inc. (“Cellegy” or “Company”). The Committee shall review and
reassess the charter at least annually and submit the charter for review by the
Company’s Board of Directors (“Board”). The Committee shall be appointed by the
Board on the recommendation of the Nominating and Governance Committee, and
shall comprise at least three directors, each of whom is independent, as defined
by applicable law (including rules and regulations of the Securities and
Exchange Commission), and by the listing requirements of any stock exchange or
market on which the Company’s Common Stock is traded (“Listing Requirements”),
of Management and the Company; provided, however, that the Committee may include
one member who is not considered independent under applicable Listing
Requirements, only in the circumstances and subject to the provisions described
in such Listing Requirements. All Committee members shall be financially
literate and shall satisfy any required criteria under applicable Listing
Requirements relating to understanding of financial statements, and at least one
member shall have accounting or related financial management expertise and shall
be considered to be a financial expert, as those criteria may be defined by the
rules of the Securities and Exchange Commission and by applicable Listing
Requirements.
STATEMENT OF
POLICY
The
Committee shall provide assistance to the Board in fulfilling their oversight
responsibility to the shareholders, potential shareholders, the investment
community, and others relating to the Company’s financial statements and the
financial reporting process, the systems of internal accounting and financial
controls, the internal audit function, the annual independent audit of the
Company’s financial statements, and the legal compliance and ethics programs as
established by Management and the Board. In so doing, it is the responsibility
of the Committee to maintain free and open communication between the Committee
members, independent auditors, and Management. The Company’s independent
auditors shall have unrestricted access at any time to Committee members. In
discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities, and personnel of the Company and the power to retain outside
counsel, accounting experts or other advisors as it determines necessary to
carry out its duties.
RESPONSIBILITIES AND
PROCESSES
The
primary responsibility of the Audit Committee is to oversee the Company’s
financial reporting process on behalf of the Board and report the results of
their activities to the Board. Management is responsible for preparing Cellegy’s
financial statements and for the appropriateness of the accounting principles
and reporting policies that are used by the Company. The independent auditors
are responsible for auditing those statements and for reviewing the Company’s
unaudited interim financial statements. The Committee in carrying out its
responsibilities believes its policies and procedures should remain flexible, in
order to best react to changing conditions and circumstances and requirements
applicable to the Company. To the extent that responsibilities of the Committee
relate specifically to applicable Listing Requirements or provisions of the
Securities Exchange Act of 1934, as amended, or the rules and regulations
promulgated thereunder (the “Exchange Act”), such responsibilities shall be
subject to the effective date of such requirements and any subsequent amendment
to, or interpretation of, such requirements. The Committee will take the
appropriate actions to set the overall corporate “tone” for quality financial
reporting, sound business risk practices, and ethical behavior.
The
following shall be the principal recurring processes of the Committee in
carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate.
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The
Committee shall have a clear understanding with Management and the
independent auditors that the independent auditors are ultimately
accountable to the Board and the Audit Committee, as representatives of
the Company’s shareholders. The Committee shall discuss with the auditors
their independence from Management and the Company and the matters
included in the written disclosures required by the Independence Standards
Board, and shall consider the compatibility of non-audit services with the
auditors’ independence. The Committee shall have direct responsibility for
appointing, compensating, overseeing the work of, and replacing the
external independent auditors.
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The
Committee shall pre-approve all audit and non-audit services to be
provided by the external independent auditors (subject to any
de minimus
exceptions for non-audit services described in Section 10A of the Exchange
Act, which are to approved by the Committee prior to the completion of the
Audit), and shall not engage the independent auditors to perform the
specific non-audit services proscribed by law or regulation. The Chair of
the Committee may grant pre-approval of audit and non-audit services (and
the Committee may delegate such authority to one or more other members of
the Committee), provided that the pre-approval decision and related
services are presented to the Committee at its next regularly scheduled
meeting.
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The
Committee shall discuss with the independent auditors the overall scope
and plans for their respective audits including the adequacy of staffing
and compensation. Also, the Committee shall discuss with Management, and
the independent auditors, the adequacy and effectiveness of the accounting
and financial controls, including the Company’s policies and procedures to
assess, monitor and manage business risk, and legal and ethical compliance
programs. The Committee shall periodically meet separately, in executive
session, with Management, the outside auditors and the Company’s internal
audit personnel, and report regularly to the Board with respect to its
activities. Further, the Committee shall meet separately with the
independent auditors, with and without Management present, to discuss the
results of their examinations and any issues or concerns warranting
Committee attention. The Committee shall resolve any disagreements between
management and the independent auditors regarding financial reporting. The
Committee shall review with the independent auditors any audit problems or
difficulties and Management’s response. The Committee shall discuss with
Management the Company’s major financial risk exposures and the steps
Management has taken to monitor and control such exposures, including the
Company’s risk assessment and risk management
policies.
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The
Committee shall review and approve all transactions between the Company
and any related party (as that term is defined under applicable Nasdaq
listing standards).
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The
Committee shall establish procedures to receive and process complaints
regarding accounting, internal auditing controls or auditing matters, and
for employees to make confidential, anonymous complaints regarding
questionable accounting or auditing
matters.
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The
Committee shall establish procedures to receive and process communications
concerning possible violations of the Company’s Code of Business Conduct
and Ethics or other potential improper conduct at the
Company.
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The
Committee shall review the interim financial statements (and the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section of the Company’s periodic reports to be filed with the
Securities and Exchange Commission) with Management and the independent
auditors prior to the filing of the Company’s Quarterly Report on Form
10-Q. The Committee shall discuss with management and the independent
auditors the Company’s selection, application and disclosure of critical
accounting policies, including as appropriate, all GAAP alternative
treatments of financial information that were discussed with Management,
their ramifications and the treatment preferred by the independent
auditors and other material written communications between the independent
auditors and Management. Also, the Committee shall discuss the results of
the quarterly review and any other matters required to be communicated to
the Committee by the independent auditors under generally accepted
auditing standards. The chair of the Committee may represent the entire
Committee for the purposes of this review.
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The
Committee shall review with Management and the independent auditors the
financial statements (and the Management’s Discussion and Analysis of
Financial Condition and Results of Operations section of the Company’s
periodic reports to be filed with the Securities and Exchange Commission)
to be included in the Company’s Annual Report on Form 10-K, including
their judgment about the quality, not just acceptability, of accounting
principles, the reasonableness of significant judgments, and the clarity
of the disclosures in the financial statements. Also, the Committee shall
discuss the results of the annual audit and any other matters required to
be communicated to the Committee by the independent auditors under
generally accepted auditing standards. The Committee shall recommend to
the Board of Directors whether the audited financial statements should be
included in the Company’s Annual Report on Form
10-K.
|
|
·
|
The
Committee shall review any disclosures made to the Committee by the
Company’s principal executive officer and principal financial officer
during their certification process for the Company’s periodic reports
about any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management
or other employees who have a significant role in the Company’s internal
controls.
|
|
·
|
The
Committee shall set clear hiring policies for employees or former
employees of the independent auditors that meet the SEC regulations and
stock exchange listing standards.
|
|
·
|
The
Committee shall review and discuss the Company’s earnings press releases
with Management and, if available, the auditors. The Chair of the
Committee may represent the entire Committee for the purposes of this
review.
|
|
·
|
The
Committee shall receive corporate attorneys’ reports of evidence of a
material violation of securities laws or breaches of fiduciary
duty.
|
|
·
|
The
Committee shall prepare its report to be included in the Company’s annual
proxy statement, as required by SEC
regulations.
|
|
·
|
The
Committee shall perform an evaluation of its performance at least annually
to determine whether it is functioning
effectively.
|
|
·
|
The
Committee shall perform any other activities required by applicable law,
rules or regulations, including the rules of the Securities and Exchange
Commission and any applicable Listing Requirements, and perform other
activities that are consistent with this charter, the Company’s bylaws and
governing laws, as the Committee or the Board deems necessary or
appropriate.
|
Annex H
CELLEGY PHARMACEUTICALS,
INC.
COMPENSATION COMMITTEE
CHARTER
Purpose
.
The
Compensation Committee is appointed by the Board of Directors (
"
Board
"
) of
Cellegy Pharmaceuticals, Inc. (
"
Company
"
) to
discharge the Board's responsibilities relating to compensation of the Company's
executive officers.
Committee
Membership
.
The
Committee will be composed of at least two (2) directors (or, if the common
stock of the Company is traded on a Nasdaq market, then three (3) directors or
such other number as may be required by the applicable Nasdaq listing rules),
all of whom satisfy the definition of "independent" under the listing standards
of The Nasdaq Stock Market (
"
Nasdaq
"
), except
as otherwise permitted by applicable listing rules of Nasdaq. All Committee
members shall be "non-employee directors" as defined by Rule 16b-3 under the
Securities Exchange Act of 1934 and "outside directors" as defined by Section
162(m) of the Internal Revenue Code. The Committee members will be appointed by
the Board and may be removed by the Board in its discretion. The Committee shall
have the authority to delegate any of its responsibilities to subcommittees as
the Committee may deem appropriate, provided the subcommittees are composed
entirely of independent directors.
Members
.
The
Committee shall meet as often as its members deem necessary to perform the
Committee's responsibilities.
Committee Authority and
Responsibilities
.
Responsibilities
of the Committee shall include:
|
·
|
reviewing
and recommending approval of compensation arrangements (including
severance provisions) of the Chief Executive Officer of the Company
(
"
CEO
")
and the Company’s other executive
officers;
|
|
·
|
to
the extent the Board delegates such authority to the Committee,
administering the Company’s 1995 Equity Incentive Plan, the 1995
Directors’ Option Plan and the Company’s other equity incentive plans and
agreements, including granting options and other awards under the terms of
such plans and making decisions that the administrator of such plans has
the authority to make under the terms of the applicable plan, including
providing for acceleration of vesting of outstanding
options;
|
|
·
|
reviewing
and making recommendations to the Board with respect to incentive
compensation and equity plans;
|
|
·
|
on
at least an annual basis, reviewing all compensation and awards to the CEO
and other executive officers, subject to the provisions of any applicable
employment agreements; and
|
|
·
|
performing
other duties regarding compensation for employees and consultants as the
Board may from time to time delegate to the
Committee.
|
The
Committee will have the authority, to the extent it deems necessary or
appropriate, to retain a compensation consultant to assist in the evaluation of
compensation. The Committee shall have sole authority to retain and terminate
any such consulting firm, including sole authority to approve the firm's fees
and other retention terms. The Committee shall also have authority, to the
extent it deems necessary or appropriate, to retain other advisors. The Company
will provide for appropriate funding, as determined by the Committee, for
payment of compensation to any consulting firm or other advisors employed by the
Committee.
The
Committee will make regular reports to the Board and will propose actions to the
Board that it believes are necessary or appropriate. The Committee will review
and reassess the adequacy of this charter annually and recommend any proposed
changes to the Board for approval. The Committee will annually evaluate the
Committee's own performance.
Annex I
Cellegy Pharmaceuticals,
Inc.
CHARTER OF THE NOMINATING AND
CORPORATE GOVERNANCE COMMITTEE OF THE BOARD OF DIRECTORS
I.
Purpose
The
purpose of the Nominating and Corporate Governance Committee (the “Committee”)
of the Board of Directors (the “Board”) of Cellegy Pharmaceuticals, Inc. (the
“Company”) is (1) to recruit, evaluate and nominate candidates to be presented
for appointment or election to serve as members of the Board; (2) to recommend
nominees for Board committees; (3) to recommend corporate governance guidelines
applicable to the Company; and (4) to review the Board’s
performance.
II.
Committee Authority and
Responsibilities
|
·
|
The
Committee shall identify a slate of nominees to be proposed by the Company
for election at each annual meeting of stockholders and the Committee
shall develop a process for considering stockholder suggestions for Board
nominees;
|
|
·
|
The
Committee shall consider the performance and qualifications of each
potential nominee not only for their individual strengths but for their
contribution to the Board as a group;
|
|
·
|
The
Committee shall identify potential candidates to fill Board vacancies that
may be created by expansion of the number of members of the Board and by
resignation, retirement or other termination of service of incumbent Board
members;
|
|
·
|
The
Committee shall have sole authority to retain and terminate any search
firm to be used to identify director candidates, including sole authority
to approve such firm’s fees and other retention
terms;
|
|
·
|
The
Committee shall have recommend to the Board nominees for Board
committees;
|
|
·
|
The
Committee shall recommend a set of corporate governance principles
applicable to the Company and review and assess the adequacy of such
guidelines;
|
|
·
|
The
Committee may establish subcommittees and delegate authority to such
subcommittees;
|
|
·
|
The
Committee may obtain advice from internal or external legal, accounting or
other advisors; and
|
|
·
|
The
Committee shall annually review the performance of the Board and the
Committee.
|
III.
Membership
All
members of the Committee will be appointed by, and shall serve at the discretion
of, the Board. The Board may elect a member of the Committee to serve as the
Chair of the Committee. If the Board does not elect a Chair, the members of the
Committee may designate a Chair by majority vote of the Committee
membership.
The
Committee shall consist of three members of the Board, each of which shall be
persons who are not officers or employees of the Company or any subsidiary and
who, in the opinion of the Board, have no other relationship or interest that
would interfere with the exercise of independent judgment in carrying out the
responsibilities of Committee members.
IV.
Meetings and
Reports
Meetings
of the Committee shall be held from time to time as determined by the Board or
the Committee. In accordance with the Bylaws of the Company, the Committee may
take action by unanimous written consent.
The
Committee shall keep minutes of its proceedings, which minutes shall be retained
with the minutes of the proceedings of the Board.
The
Committee shall make regular reports to the Board.
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 20. Indemnification of Directors
and Officers
Section 145(a) of
the Delaware General Corporation Law, or the DGCL, provides in relevant part
that “[a] corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person’s conduct was unlawful.” With respect to derivative actions,
Section 145(b) of the DGCL provides in relevant part that “[a]
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its
favor...by reason of the person’s service in one of the capacities specified in
the preceding sentence against expenses (including attorneys’ fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.”
Cellegy
has adopted provisions in its certificate of incorporation that eliminate the
personal liability of its directors to Cellegy or Cellegy’s stockholders for
monetary damages arising from a breach of their fiduciary duties in certain
circumstances to the fullest extent permitted by Delaware law. Cellegy’s amended
and restated certificate of incorporation also provides that no amendment or
repeal of such provision shall apply to or have any effect on the right to
indemnification permitted thereunder with respect to claims arising from acts or
omissions occurring in whole or in part before the effective date of such
amendment or repeal whether asserted before or after such amendment or
repeal.
Cellegy
bylaws, as amended, provide for the indemnification of officers, directors and
third parties acting on Cellegy’s behalf to the fullest extent permissible under
Delaware law, permit Cellegy to enter into indemnification agreements with such
individuals and to advance expenses to any such individual who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, before the final disposition of such action, suit or
proceeding. Cellegy’s bylaws, as amended, also permit Cellegy to secure
insurance on behalf of any of its officers, directors, employees or agents for
any liability arising out of his or her actions in such capacity.
In
addition to the indemnification provisions contained in Cellegy’s amended and
restated certificate of incorporation and amended bylaws, Cellegy has entered
into indemnification agreements with its directors and executive officers and
intends to enter into indemnification agreements with any new directors and
executive officers in the future. These agreements, among other things, allow
for the advancement of expenses and indemnify Cellegy’s directors and officers
for certain expenses (including attorney’s fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by Cellegy or in its right, arising out of such person’s
services as a director or officer of Cellegy, any subsidiary of Cellegy or any
other company or enterprise to which the person provides services at Cellegy’s
request. Cellegy carries officer and director liability insurance with respect
to certain matters, including matters arising under the Securities
Act.
Item 21. Exhibits and Financial
Statement Schedules
(a)
Exhibits
Exhibits
The
following exhibits are attached hereto or incorporated herein by reference.
Exhibit
Number
|
|
Exhibit Title
|
2.1
|
|
Agreement
and Plan of Share Exchange dated as of October 7, 2004, by and
between the Company and Biosyn, Inc. (Incorporated by reference to
Exhibit 2.1 to the Form 8-K filed October 26,
2004.)
|
2.2
|
|
Share
Purchase Agreement dated as of March 31, 2006 by and between the
Registrant and Epsilon Pharmaceuticals Pty. Ltd. (Incorporated by
reference to Exhibit 2.1 to the Company’s Form 10-Q for the quarter ended
June 30, 2006).
|
2.3
|
|
Asset
Purchase Agreement dated September 26, 2006, between the Registrant and
Strakan International Limited (Incorporated by reference to Exhibits filed
with the Registrant’s Schedule 14A, which includes a Report on Form 8-K,
filed September 27, 2006, with the SEC.)
|
2.4
|
|
Agreement
and Plan of Reorganization, dated as of February 12, 2008, by and among
Cellegy, Cellegy Holdings, and Adamis. (Incorporated by reference to
Exhibit 2.1 filed with the Company’s Report on Form 8-K filed on February
13, 2008.)
|
++2.5
|
|
Form of
Voting Agreement, dated February 12, 2008, by and between Adamis and
certain stockholders of Cellegy.
|
2.6
|
|
Agreement
dated November 11, 2008, between the Registrant and Adamis Pharmaceuticals
Corporation amending the Agreement and Plan of Reorganization dated as of
February 12, 2008, by and among Cellegy, Adamis and Cellegy Holdings, Inc.
(Incorporated by reference to Exhibit 2.1 to the Report on Form 8-K filed
with the SEC on November 12, 2008.)
|
2.7
|
|
Agreement
dated January 8, 2009, between the Registrant and Adamis Pharmaceuticals
Corporation amending the Agreement and Plan of Reorganization dated as of
February 12, 2008 as amended on November 11, 2008, by and among Cellegy,
Adamis and Cellegy Holdings, Inc. (Incorporated by reference to Exhibit
2.1 to the Report on Form 8-K filed with the SEC on January 8,
2009.)
|
3.1
|
|
Amended
and Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to Cellegy’s Company’s Report on Form 8-K filed on
September 3, 2004.)
|
3.2
|
|
Bylaws
of Cellegy. (Incorporated by reference to Exhibit 3.2 to Cellegy’s
Report on Form 8-K filed with the SEC on September 3,
2004.)
|
3.3
|
|
Proposed
Forms of Certificate of Amendment to Restated Certificate of
Incorporation. (Incorporated by reference to Annexes C, D and E to the
joint proxy statement/prospectus included in this registration
statement.)
|
3.4
|
|
Proposed
Form of Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Annex F to the joint proxy
statement/prospectus included in this registration
statement.)
|
3.5
|
|
Proposed
Bylaws of the Registrant.
|
4.1
|
|
Specimen
Common Stock Certificate. (Incorporated by reference to Exhibit 4.1
to Cellegy’s Report on Form 8-K filed with the SEC on September 3,
2004.)
|
5.1
|
|
Opinion
of Weintraub Genshlea Chediak regarding securities to be
issued.
|
8.1
|
|
Opinion
of Counsel Regarding Tax Matters.
|
*10.1
|
|
1995
Equity Incentive Plan. (Incorporated by reference to Exhibit 4.03 to
Cellegy’s Registration Statement on Form S-8, file no. 333-91588,
filed on June 28, 2002.)
|
*10.2
|
|
Form of
Option Agreement under the 1995 Equity Incentive Plan. (Incorporated by
reference to Exhibit 4.05 to Cellegy’s Post-effective Amendment
No. 1 to Registration Statement on Form S-8, file no. 333-91588,
filed on September 7, 2004 (the “2004
Form S-8”).)
|
*10.3
|
|
1995
Directors’ Stock Option Plan. (Incorporated by reference to
Exhibit 10.8 to Cellegy’s Quarterly Report on Form 10-Q for the
fiscal quarter ended filed June 30, 2002.)
|
*10.4
|
|
Form of
option agreement under the 1995 Directors’ Stock Option Plan.
(Incorporated by reference to Exhibit 4.07 to the 2004 Form S-8.
(Incorporated by reference to Exhibit 10.6 to Cellegy’s Annual Report on
Form 10-K for the year ended December 31, 2004 (the "2004 Form
10-K").)
|
*10.5
|
|
Employment
Agreement, effective January 1, 2003, between Cellegy and K. Michael
Forrest. (Incorporated by reference to Exhibit 10.24 to Cellegy’s Annual
Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form
10-K”).)
|
10.6
|
|
Exclusive
License Agreement dated as of December 31, 2002, by and between
Cellegy and PDI, Inc. (Confidential treatment has been requested with
respect to portions of this agreement.) (Incorporated herein by reference
to Exhibit 10.10 to Cellegy’s Annual Report on Form 10-K for the
year ended December 31, 2002.)
|
*10.7
|
|
Retention
and Severance Plan. (Incorporated by reference to Exhibit 10.01 to
the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2003.)
|
*10.8
|
|
Form of
Agreement of Plan Participation under Retention and Severance Plan.
(Incorporated by reference to Exhibit 10.01 to Cellegy’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31,
2003.)
|
*10.9
|
|
Letter
agreement dated November 6, 2003 between Cellegy and Richard C.
Williams. (Incorporated by reference to Exhibit 10.14 to the 2003
Form 10-K.)
|
*10.10
|
|
Stock
option agreement dated November 6, 2003 between Cellegy and Richard
C. Williams. (Incorporated by reference to Exhibit 10.15 to the 2003
Form 10-K.)
|
*10.11
|
|
Form of
Indemnity Agreement between Cellegy and its directors and executive
officers. (Incorporated by reference to Appendix B to Cellegy’s definitive
proxy statement filed on April 28, 2004.)
|
10.12
|
|
Registration
Rights Agreement dated as of October 1, 2004 between Cellegy and
certain former stockholders of Biosyn, Inc. (Incorporated by
reference to Exhibit 10.1 to Cellegy’s Report on Form 8-K filed
October 26, 2004.)
|
10.13
|
|
Agreement
dated as of October 8, 1996 by and among Biosyn, Inc., Edwin B.
Michaels and E.B. Michaels Research Associates, Inc.
(Confidential treatment has been requested with respect to portions of
this agreement.) (Incorporated by reference to Exhibit 10.21 to Cellegy’s
2004 Annual Report on Form 10-K.)
|
10.14
|
|
Patent
License Agreement by and among Biosyn, Inc., and certain agencies of
the United States Public Health Service. (Confidential treatment has been
requested with respect to portions of this agreement.) (Incorporated by
reference to Exhibit 10.22 to Cellegy’s 2004 Annual Report on Form
10-K.)
|
10.15
|
|
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.) (Incorporated by reference to
Exhibit 10.23 to Cellegy’s 2004 Annual Report on Form
10-K.)
|
*10.16
|
|
2005
Equity Incentive Plan. (Incorporated by reference to Exhibit 10.24 to
Cellegy’s Annual Report on Form 10-K for the year ended December 31,
2005).
|
*10.17
|
|
Forms
of Option Agreements under the 2005 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.25 to Cellegy’s 2005 Annual Report on Form
10-K.)
|
10.18
|
|
First
Amended and Restated Exclusive License and Distribution Agreement
dated as of November 9, 2005, between Cellegy and ProStrakan International
Limited. (Confidential treatment has been requested for portions of this
exhibit.) (Incorporated by reference to Exhibit 10.30 to Cellegy’s 2005
Annual Report on Form 10-K.)
|
10.19
|
|
First
Amended and Restated Exclusive License Agreement dated as of January 16,
2006, between Cellegy and ProStrakan International Limited. (Confidential
treatment has been requested for portions of this exhibit.) (Incorporated
by reference to Exhibit 10.31 to Cellegy’s 2005 Annual Report on Form
10-K.)
|
|
|
Termination
Agreement and Release of Claims dated as of September 22, 2006, by and
between the Registrant and Stephen R. Gorfine, M.D., as representative.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September 27,
2006, with the SEC.)
|
10.21
|
|
Letter
Agreement dated September 20, 2006, between the Registrant and PDI, Inc.
(Incorporated by reference to Exhibits filed with the Registrant’s
Schedule 14A, which includes a Report on Form 8-K, filed September 27,
2006, with the SEC.)
|
10.22
|
|
Promissory
Note dated September 26, 2006, in favor of Strakan International Limited.
(Incorporated by reference to Exhibit 10.3 to Cellegy’s Quarterly Report
on Form 10-Q for the period ended September 30, 2006.)
|
10.23
|
|
Patent
Collateral Assignment and Security Agreement dated September 26, 2006,
between the Registrant and Strakan International Limited. (Incorporated by
reference to Exhibit 10.4 to Cellegy’s Quarterly Report on Form 10-Q for
the period ended September 30, 2006.)
|
10.24
|
|
License
Agreement dated January 30, 2006, by and between CONRAD, Eastern Virginia
Medical School, and Biosyn, Inc. (Confidential treatment has been
requested for portions of this agreement) (Incorporated by reference to
Exhibit 10.36 to Cellegy’s Annual Report on form 10-K for the year ended
December 31, 2006).
|
*10.25
|
|
Retention
Letter Agreement dated November 14, 2007, between Cellegy and Robert J.
Caso. (Incorporated by reference to Exhibit 10.1 to Cellegy’s Report on
Form 8-K filed on November 14, 2007.)
|
10.26
|
|
2009
Equity Incentive Plan.
|
10.27
|
|
Form
of Option Agreement under 2009 Equity Incentive Plan.
|
10.28
|
|
Convertible
Promissory Note dated February 12, 2008, between the Registrant and Adamis
Pharmaceuticals Corporation.
|
10.29
|
|
Amendment
to License Agreement dated as of March 15, 2006, by and between
Crompton Corporation and Biosyn, Inc.
|
10.30
|
|
Funding
Agreement dated October 12, 1992, by and between Ben Franklin Technology
Center of Southeastern Pennsylvania and Biosyn,
Inc.
|
10.31
|
|
License
Agreement dated July 28, 2006, by and between Nevagen, LLC and Adamis
Pharmaceuticals Corporation.
|
10.32
|
|
Amendment
to License Agreement dated December 29, 2008, by and between Nevagen, LLC
and Adamis Pharmaceuticals Corporation.
|
10.33
|
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Richard Aloi
and Adamis Pharmaceuticals Corporation.
|
10.34
|
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Dennis J.
Carlo and Adamis Pharmaceuticals Corporation.
|
10.35
|
|
Stock
Repurchase Agreement dated November 3, 2008, by and between Robert Hopkins
and Adamis Pharmaceuticals Corporation.
|
10.36
|
|
Stock
Repurchase Agreement dated November 3, 2008, by and between David J.
Marguglio and Adamis Pharmaceuticals Corporation.
|
10.37
|
|
Amendment
to License Agreement dated October 18, 2007, by and between CONRAD,
Eastern Virginia Medical School, and Biosyn, Inc.
|
|
|
Lease
Agreement dated January 1, 2007, by and between HRM II Ltd and Healthcare
Ventures Group.
|
10.39
|
|
Amendment
to lease Agreement dated October 30, 2007, by and between HRM II Ltd and
Healthcare Ventures
Group.
|
++21.1
|
|
Subsidiaries
of the Registrant
|
23.1
|
|
Consent
of Mayer Hoffman McCann P.C., Independent Registered Public Accounting
Firm.
|
23.2
|
|
Consent
of
Goldstein
Lewin & Co.
, Independent Registered Public Accounting
Firm.
|
23.2
|
|
Consent
of Weintraub Genshlea Chediak (included in Exhibit 5.1
above).
|
23.6
|
|
Consent
of Weintraub Genshlea Chediak (included in Exhibit 8.1
above).
|
++24.1
|
|
Power
of Attorney (See signature page.)
|
|
|
|
99.1
|
|
Form
of Cellegy proxy card.
|
99.2
|
|
Form
of Adamis proxy card.
|
++99.3
|
|
Consent
of Dennis J. Carlo to serve as director.
|
++99.4
|
|
Consent
of Richard J. Aloi to serve as director.
|
++99.5
|
|
Consent
of David J. Marguglio to serve as director.
|
*
|
Represents
a management contract or compensatory plan or
arrangement.
|
+
|
To
be filed by amendment .
|
++Previously
filed
Item 22.
Undertakings
(A)
|
The
undersigned registrant hereby
undertakes:
|
|
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation Registration Fee” table in
the effective registration
statement;
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement;
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial, bona fide offering
thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
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(4)
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If
the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any
delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (A)(4) and other information
necessary to ensure that all other information in the prospectus is at
least as current as the date of those financial statements.
Notwithstanding the foregoing, with respect to registration statements on
Form F-3, a post-effective amendment need not be filed to include
financial statements and information required by
Section 10(a)(3) of the Act or Rule 3-19 of this chapter if
such financial statements and information are contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Form F-3.
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(B)
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The
undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant’s
annual report pursuant to Sections 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering
thereof.
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(C)(1)
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The
undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration
form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
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(2)
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The
registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the
Securities Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as part of an amendment to the
registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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(D)
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Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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(E)
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The
undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference in the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.
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(F)
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The
undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became
effective.
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Pursuant
to the requirements of the Securities Act, the registrant has duly caused
this Amendment No.1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boyertown,
Commonwealth of Pennsylvania, on January 12, 2009.
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CELLEGY, INC.
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By:
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/s/ RICHARD C. WILLIAMS
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Name: Richard C. Williams
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Title:
Interim
Chief Executive Officer
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Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/
RICHARD C. WILLIAMS
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Principal
Executive Officer
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January
12, 2009
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Richard
C. Williams
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/s/
ROBERT J. CASO
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Principal
Financial officer and
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Robert
J. Caso
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Principal
Accounting Oficer
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*
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Director
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John
Q. Adams
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Director
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Tobi
B. Klar, M.D.
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Director
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Robert
B. Rothermel
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Director
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Thomas
M. Steinberg
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*
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/s/
RICHARD C. WILLIAMS
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By:
Richard C. Williams
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Attorney-In-Fact
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ADAMIS
PHARMACEUTICALS CORPORATION
2009
EQUITY INCENTIVE PLAN
APPROVED
BY BOARD ON: _______________, 2009
APPROVED
BY STOCKHOLDERS: ____________, 2009
TERMINATION
DATE: __________________, 2019
1. GENERAL.
(a) Successor
to Prior Plan.
The Plan is intended as the
successor to the Company's 2005 Equity Incentive Plan (the
"Prior
Plan"
). Following the Effective Date, no additional stock awards shall be
granted under the Prior Plan. Any shares remaining available for issuance
pursuant to the exercise of stock awards under the Prior Plan shall become
available for issuance pursuant to Stock Awards granted hereunder. Any shares
subject to outstanding stock awards granted under the Prior Plan that expire or
terminate for any reason prior to exercise or settlement shall become available
for issuance pursuant to Stock Awards granted hereunder. On the Effective Date,
all outstanding stock awards granted under the Prior Plan shall be deemed to be
stock awards granted pursuant to the Plan, but shall remain subject to the terms
of the Prior Plan with respect to which they were originally granted. All Stock
Awards granted subsequent to the Effective Date shall be subject to the terms of
the Plan.
(b) Eligible
Award Recipients.
The persons eligible to receive
Awards are Employees, Directors and Consultants.
(c) Available
Awards.
The Plan provides for the grant of the
following Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) Restricted Stock Awards, (iv) Restricted Stock Unit
Awards, (v) Stock Appreciation Rights, (vi) Performance Stock Awards,
(vii) Performance Cash Awards, and (viii) Other Stock
Awards.
(d) General
Purpose.
The Company, by means of the Plan, seeks
to secure and retain the services of the group of persons eligible to receive
Awards as set forth in Section 1(b), to provide incentives for such persons
to exert maximum efforts for the success of the Company and any Affiliate and to
provide a means by which such eligible recipients may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of
Stock Awards.
2. ADMINISTRATION.
(a) Administration
by Board.
The Board shall administer the Plan
unless and until the Board delegates administration of the Plan to a Committee
or Committees, as provided in Section 2(c).
(b) Powers
of Board.
The Board shall have the power, subject
to, and within the limitations of, the express provisions of the
Plan:
(i)
To
determine from time to time (A) which of the persons eligible under the
Plan shall be granted Awards; (B) when and how each Award shall be granted;
(C) what type or combination of types of Award shall be granted;
(D) the provisions of each Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive cash or
Common Stock pursuant to a Stock Award; and (E) the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii)
To
construe and interpret the Plan and Awards granted under it, and to establish,
amend and revoke rules and regulations for its administration. The Board, in the
exercise of this power, may correct any defect, omission or inconsistency in the
Plan or in any Stock Award Agreement or in the written terms of a Performance
Cash Award, in a manner and to the extent it shall deem necessary or expedient
to make the Plan or Award fully effective.
(iii)
To settle all
controversies regarding the Plan and Awards granted under it.
(iv)
To accelerate
the time at which a Stock Award may first be exercised or the time during which
an Award or any part thereof will vest in accordance with the Plan,
notwithstanding the provisions in the Award stating the time at which it may
first be exercised or the time during which it will vest.
(v)
To
suspend or terminate the Plan at any time. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect except with the written consent of the affected
Participant.
(vi)
To amend the
Plan in any respect the Board deems necessary or advisable, including, without
limitation, relating to Incentive Stock Options and certain nonqualified
deferred compensation under Section 409A of the Code and to bring the Plan
and/or Stock Awards granted under the Plan into compliance therewith, subject to
the limitations, if any, of applicable law. However, except as provided in
Section 9(a) relating to Capitalization Adjustments, stockholder approval
shall be required for any amendment of the Plan that either (A) materially
increases the number of shares of Common Stock available for issuance under the
Plan, (B) materially expands the class of individuals eligible to receive
Awards under the Plan, (C) materially increases the benefits accruing to
Participants under the Plan or materially reduces the price at which shares of
Common Stock may be issued or purchased under the Plan, (D) materially
extends the term of the Plan, or (E) expands the types of Awards available
for issuance under the Plan, but in each of (A) to (E) only to the
extent required by applicable law or listing requirements. Except as provided
above, rights under any Award granted before amendment of the Plan shall not be
impaired by any amendment of the Plan unless (1) the Company requests the
consent of the affected Participant, and (2) such Participant consents in
writing.
(vii)
To submit any
amendment to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of
(A) Section 162(m) of the Code and the regulations thereunder
regarding the exclusion of performance-based compensation from the limit on
corporate deductibility of compensation paid to Covered Employees,
(B) Section 422 of the Code regarding Incentive Stock Options or
(C) Rule 16b-3.
(viii)
To approve forms
of Award Agreements for use under the Plan and to amend the terms of any one or
more Awards or stock awards granted under the Prior Plan, including, but not
limited to, amendments to provide terms more favorable to the Participant than
previously provided in the Award Agreement, subject to any specified limits in
the Plan that are not subject to Board discretion;
provided however,
that the
Participant's rights under any Award shall not be impaired by any such amendment
unless (A) the Company requests the consent of the affected Participant,
and (B) such Participant consents in writing. Notwithstanding the
foregoing, subject to the limitations of applicable law, if any, the Board may
amend the terms of any one or more Awards without the affected Participant's
consent if necessary to maintain the qualified status of the Award as an
Incentive Stock Option or to bring the Award into compliance with
Section 409A of the Code and Department of Treasury regulations and other
interpretive guidance issued thereunder, including without limitation any such
regulations or other guidance that may be issued or amended after the Effective
Date.
(ix)
Generally, to
exercise such powers and to perform such acts as the Board deems necessary or
expedient to promote the best interests of the Company and that are not in
conflict with the provisions of the Plan or Awards.
(x)
To adopt
such procedures and sub-plans as are necessary or appropriate to permit or
facilitate participation in the Plan by Employees, Directors or Consultants who
are foreign nationals or employed outside the United States.
(xi)
To effect, at
any time and from time to time, with the consent of any adversely affected
Optionholder, (A) the reduction of the exercise price of any outstanding
Option under the Plan; (B) the cancellation of any outstanding Option under
the Plan and the grant in substitution therefor of (1) a new Option under
the Plan or another equity plan of the Company covering the same or a different
number of shares of Common Stock, (2) a Restricted Stock Award (including a
stock bonus), (3) a Stock Appreciation Right, (4) Restricted Stock
Unit, (5) an Other Stock Award, (6) cash and/or (7) other
valuable consideration (as determined by the Board, in its sole discretion); or
(C) any other action that is treated as a repricing under generally
accepted accounting principles.
(c) Delegation
to Committee.
(i)
General.
The
Board may delegate some or all of the administration of the Plan to a Committee
or Committees. If administration of the Plan is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the
powers theretofore possessed by the Board that have been delegated to the
Committee, including the power to delegate to a subcommittee of the Committee
any of the administrative powers the Committee is authorized to exercise (and
references in the Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may retain the authority to concurrently administer the Plan with the
Committee and may, at any time, revest in the Board some or all of the powers
previously delegated to the Committee, Committees, subcommittee or
subcommittees.
(ii)
Section 162(m) and
Rule 16b-3 Compliance.
In the sole discretion
of the Board, the Committee may consist solely of two (2) or more Outside
Directors, in accordance with Section 162(m) of the Code, or solely of two
(2) or more Non-Employee Directors, in accordance with Rule 16b-3. In
addition, the Board or the Committee, in its sole discretion, may
(A) delegate to a Committee which need not consist of Outside Directors the
authority to grant Awards to eligible persons who are either (1) not then
Covered Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award, or (2) not persons
with respect to whom the Company wishes to comply with Section 162(m) of
the Code, or (B) delegate to a Committee which need not consist of
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
(d) Delegation
to an Officer.
The Board may delegate to one or
more Officers the authority to do one or both of the following
(i) designate Employees who are not Officers to be recipients of Options
(and, to the extent permitted by applicable law, other Stock Awards) and the
terms thereof, and (ii) determine the number of shares of Common Stock to
be subject to such Stock Awards granted to such Employees;
provided, however,
that the
Board resolutions regarding such delegation shall specify the total number of
shares of Common Stock that may be subject to the Stock Awards granted by such
Officer and that such Officer may not grant a Stock Award to himself or herself.
Notwithstanding anything to the contrary in this Section 2(d), the Board
may not delegate to an Officer authority to determine the Fair Market Value
pursuant to Section 13(v)(ii) below. The Board may delegate
to one of more officers the authority to renew and resolve disputes with respect
to Awards held by Participants who are not an officer or director of the Company
or any other person whose transactions in the Company’s common stock are subject
to Section 16 of the Exchange Act.
(e) Effect
of Board's Decision.
All determinations,
interpretations and constructions made by the Board in good faith shall not be
subject to review by any person and shall be final, binding and conclusive on
all persons.
3. SHARES
SUBJECT TO THE PLAN.
(a) Share
Reserve.
Subject to the provisions of
Section 9(a) relating to Capitalization Adjustments, the aggregate number
of shares of Common Stock that may be issued pursuant to Stock Awards shall
consist of the sum of the seven million (7,000,000) of Common Stock (the
"Share
Reserve"
). In addition, the number of shares of Common Stock available
for issuance under Stock Awards pursuant to the Plan shall automatically
increase on January 1st of each year commencing in 2010 and ending on (and
including) January 1, 2019, in an amount equal to the lesser of
(i) five percent (5%) of the total number of shares of Common Stock
outstanding on December 31st of the preceding calendar year, or (ii) a
lessor number of shares of Common Stock determined by the Board before the start
of a calendar year for which and increase applies. For clarity, the limitation
in this Section 3(a) is a limitation in the number of shares of the
Company's common stock that may be issued pursuant to the Plan. Accordingly,
this Section 3(a) does not limit the granting of Stock Awards except as
provided in Section 7(a). Shares may be issued in connection with a merger
or acquisition as permitted by NASD Rule 4350(i)(1)(A)(iii) or, if
applicable, NYSE Listed Company Manual Section 303A.08, or AMEX Company
Guide Section 711 and such issuance shall not reduce the number of
shares.
(b) Reversion
of Shares to the Share Reserve.
If a Stock Award
(i) expires or otherwise terminates without having been exercised in full,
(ii) are forfeited back to the Company because of the failure to meet a
contingency or condition required to vest such shares in the Participant or
(iii) is settled in cash (i.e., the holder of the Stock Award receives cash
rather than stock), the shares not issued under such Stock Award shall remain
available for issuance under the Plan, and such expiration, termination,
forfeiture or settlement shall not reduce (or otherwise offset) the number of
shares of the Company's common stock that may be issued pursuant to the Plan.
Also, any shares reacquired by the Company pursuant to subsection 8(g) or as
consideration for the exercise of an Option shall again become available for
issuance under the Plan.
(c) Incentive
Stock Option Limit.
No more than 70,000,000 shares
of common stock shall be issued pursuant to the exercise of Incentive Stock
Options.
(d) Section 162(m)
Limitation on Annual Grants.
Subject to the
provisions of Section 9(a) relating to Capitalization Adjustments, at such
time as the Company may be subject to the applicable provisions of
Section 162(m) of the Code, no Employee shall be eligible to be granted
during any calendar year Stock Awards whose value is determined by reference to
an increase over an exercise or strike price of at least one hundred percent
(100%) of the Fair Market Value on the date the Stock Award is granted covering
more than _______ (_______) shares of Common Stock.
(e) Source
of Shares.
The stock issuable under the Plan shall
be shares of authorized but unissued or reacquired shares of Common Stock,
including shares repurchased by the Company on the open market.
4. ELIGIBILITY.
(a) Eligibility
for Specific Stock Awards.
Incentive Stock Options
may be granted only to employees of the Company or a parent corporation or
subsidiary corporation thereof (as such terms are defined in Sections 424(e) and
424(f) of the Code). Stock Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants.
(b) Ten
Percent Stockholders.
A Ten Percent Stockholder
shall not be granted an Incentive Stock Option unless the exercise price of such
Option is at least one hundred ten percent (110%) of the Fair Market Value on
the date of grant and the Option is not exercisable after the expiration of five
(5) years from the date of grant.
(c) Consultants.
A
Consultant shall be eligible for the grant of a Stock Award only if, at the time
of grant, a Form S-8 Registration Statement under the Securities Act (
"Form S-8"
)
is available to register either the offer or the sale of the Company's
securities to such Consultant because of the nature of the services that the
Consultant is providing to the Company, because the Consultant is a natural
person, or because of any other rule governing the use of
Form S-8.
5. OPTION
PROVISIONS.
Each
Option shall be in such form and shall contain such terms and conditions as the
Board shall deem appropriate. All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and,
if certificates are issued, a separate certificate or certificates shall be
issued for shares of Common Stock purchased on exercise of each type of Option.
If an Option is not specifically designated as an Incentive Stock Option, then
the Option shall be a Nonstatutory Stock Option. The provisions of separate
Options need not be identical;
provided, however
, that each
Option Agreement shall conform to (through incorporation of provisions hereof by
reference in the Option Agreement or otherwise) the substance of each of the
following provisions:
(a) Term.
Subject to the provisions of Section 4(b) regarding Ten Percent
Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date of its grant or such shorter period specified in
the Option Agreement.
(b) Exercise
Price.
Subject to the provisions of
Section 4(b) regarding Ten Percent Stockholders, the exercise price of each
Option shall be not less than one hundred percent (100%) of the Fair Market
Value subject to the Option on the date the Option is granted. Notwithstanding
the foregoing, an Option may be granted with an exercise price lower than one
hundred percent (100%) of the Fair Market Value subject to the Option if such
Option is granted pursuant to an assumption or substitution for another option
in a manner consistent with the provisions of Section 424(a) of the Code
(whether or not such options are Incentive Stock Options).
(c) Consideration.
The
purchase price of Common Stock acquired pursuant to the exercise of an Option
shall be paid, to the extent permitted by applicable law and as determined by
the Board in its sole discretion, by any combination of the methods of payment
set forth below. The Board shall have the authority to grant Options that do not
permit all of the following methods of payment (or otherwise restrict the
ability to use certain methods) and to grant Options that require the consent of
the Company to utilize a particular method of payment. The methods of payment
permitted by this Section 5(c) are:
(i)
by
cash, check, bank draft or money order payable to the Company;
(ii)
pursuant
to a program developed under Regulation T as promulgated by the Federal
Reserve Board that, prior to the issuance of the stock subject to the Option,
results in either the receipt of cash (or check) by the Company or the receipt
of irrevocable instructions to pay the aggregate exercise price to the Company
from the sales proceeds;
(iii)
by delivery to the
Company (either by actual delivery or attestation) of shares of Common
Stock;
(iv)
by a "net
exercise" arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issuable upon exercise by the largest whole number of
shares with a Fair Market Value that does not exceed the aggregate exercise
price;
provided,
however,
that the Company shall accept a cash or other payment from the
Participant to the extent of any remaining balance of the aggregate exercise
price not satisfied by such reduction in the number of whole shares to be
issued;
provided,
further,
that shares of Common Stock will no longer be subject to an
Option and will not be exercisable thereafter to the extent that (A) shares
issuable upon exercise are reduced to pay the exercise price pursuant to the
"net exercise", (B) shares are delivered to the Participant as a result of
such exercise, and/or (C) shares are withheld to satisfy tax withholding
obligations; or
(v)
in any
other form of legal consideration that may be acceptable to the Board in its
sole discretion and permissible under applicable law.
(d) Transferability
of Options.
The Board may, in its sole discretion,
impose such limitations on the transferability of Options as the Board shall
determine. In the absence of such a determination by the Board to the contrary,
the following restrictions on the transferability of Options shall
apply:
(i)
Restrictions on
Transfer.
An Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder;
provided, however, that the Board may, in its sole discretion, permit transfer
of the Option in a manner that is not prohibited by applicable tax and/or
securities laws upon the Optionholder's request.
(ii)
Domestic Relations
Orders.
Notwithstanding the foregoing, an Option
may be transferred pursuant to a domestic relations order,
provided, however,
that if an
Option is an Incentive Stock Option, such Option may be deemed to be a
Nonstatutory Stock Option as a result of such transfer.
(iii)
Beneficiary
Designation.
Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
provided by or otherwise satisfactory to the Company, designate a third party
who, in the event of the death of the Optionholder, shall thereafter be entitled
to exercise the Option. In the absence of such a designation, the executor or
administrator of the Optionholder's estate shall be entitled to exercise the
Option.
(e) Vesting
of Options Generally.
The total number of shares
of Common Stock subject to an Option may vest and therefore become exercisable
in periodic installments that may or may not be equal. The Option may be subject
to such other terms and conditions on the time or times when it may or may not
be exercised (which may be based on the satisfaction of Performance Goals or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary. The provisions of this Section 5(e) are
subject to any Option provisions governing the minimum number of shares of
Common Stock as to which an Option may be exercised.
(f) Termination
of Continuous Service.
Except as otherwise
provided in the applicable Option Agreement or any other written agreement
between the Optionholder and the Company, in the event that an Optionholder's
Continuous Service terminates (other than for Cause or upon the Optionholder's
death or Disability), the Optionholder may exercise his or her Option (to the
extent that the Optionholder was entitled to exercise such Option as of the date
of termination of Continuous Service) but only within such period of time ending
on the earlier of (i) the date three (3) months following the
termination of the Optionholder's Continuous Service (or such longer or shorter
period specified in the Option Agreement), or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, after termination
of Continuous Service, the Optionholder does not exercise his or her Option
within the time specified herein or in the Option Agreement (as applicable), the
Option shall terminate.
(g) Extension
of Termination Date.
An Optionholder's Option
Agreement may provide that if the exercise of the Option following the
termination of the Optionholder's Continuous Service (other than for Cause or
upon the Optionholder's death or Disability) would be prohibited at any time
solely because the issuance of shares of Common Stock would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of a period of three
(3) months after the termination of the Optionholder's Continuous Service
during which the exercise of the Option would not be in violation of such
registration requirements, or (ii) the expiration of the term of the Option
as set forth in the Option Agreement.
(h) Disability
of Optionholder.
In the event that an
Optionholder's Continuous Service terminates as a result of the Optionholder's
Disability, the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination of Continuous Service), but only within such period of time ending
on the earlier of (i) the date twelve (12) months following such
termination of Continuous Service (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination of Continuous Service,
the Optionholder does not exercise his or her Option within the time specified
herein or in the Option Agreement (as applicable), the Option shall
terminate.
(i) Death
of Optionholder.
In the event that (i) an
Optionholder's Continuous Service terminates as a result of the Optionholder's
death, or (ii) the Optionholder dies within the period (if any) specified
in the Option Agreement after the termination of the Optionholder's Continuous
Service for a reason other than death, then the Option may be exercised (to the
extent the Optionholder was entitled to exercise such Option as of the date of
death) by the Optionholder's estate, by a person who acquired the right to
exercise the Option by bequest or inheritance or, if applicable, by a person
designated as the beneficiary of the option upon the Optionholder's death, but
only within the period ending on the earlier of (A) the date eighteen
(18) months following the date of death (or such longer or shorter period
specified in the Option Agreement), or (B) the expiration of the term of
such Option as set forth in the Option Agreement. If, after the Optionholder's
death, the Option is not exercised within the time specified herein or in the
Option Agreement (as applicable), the Option shall terminate. If the
Optionholder designates a third party beneficiary of the Option in accordance
with Section 5(d)(iii), then upon the death of the Optionholder such
designated beneficiary shall have the sole right to exercise the Option and
receive the Common Stock or other consideration resulting from an Option
exercise.
(j) Termination
for Cause.
Except as explicitly provided otherwise
in an Optionholder's Option Agreement or any other written agreement between the
Optionholder and the Company, in the event that an Optionholder's Continuous
Service is terminated for Cause, the Option shall terminate upon the termination
date of such Optionholder's Continuous Service, and the Optionholder shall be
prohibited from exercising his or her Option from and after the time of such
termination of Continuous Service.
(k) Non-Exempt
Employees.
No Option granted to an Employee that
is a non-exempt employee for purposes of the Fair Labor Standards Act shall be
first exercisable for any shares of Common Stock until at least six months
following the date of grant of the Option. The foregoing provision is intended
to operate so that any income derived by a non-exempt employee in connection
with the exercise or vesting of an Option will be exempt from his or her regular
rate of pay.
6. PROVISIONS
OF STOCK AWARDS OTHER THAN OPTIONS.
(a) Restricted
Stock Awards.
Each Restricted Stock Award
Agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. To the extent consistent with the Company's
Bylaws, at the Board's election, shares of Common Stock may be (x) held in
book entry form subject to the Company's instructions until any restrictions
relating to the Restricted Stock Award lapse; or (y) evidenced by a
certificate, which certificate shall be held in such form and manner as
determined by the Board. The terms and conditions of Restricted Stock Award
Agreements may change from time to time, and the terms and conditions of
separate Restricted Stock Award Agreements need not be identical,
provided, however
, that each
Restricted Stock Award Agreement shall include (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i)
Consideration.
A
Restricted Stock Award may be awarded in consideration for (A) past or
future services actually or to be rendered to the Company or an Affiliate, or
(B) any other form of legal consideration that may be acceptable to the
Board in its sole discretion and permissible under applicable law.
(ii)
Vesting.
Shares
of Common Stock awarded under the Restricted Stock Award Agreement may be
subject to forfeiture to the Company in accordance with a vesting schedule to be
determined by the Board.
(iii)
Termination of Participant's
Continuous Service.
In the event a Participant's
Continuous Service terminates, the Company may receive via a forfeiture
condition or a repurchase right, any or all of the shares of Common Stock held
by the Participant which have not vested as of the date of termination of
Continuous Service under the terms of the Restricted Stock Award
Agreement.
(iv)
Transferability.
Rights
to acquire shares of Common Stock under the Restricted Stock Award Agreement
shall be transferable by the Participant only upon such terms and conditions as
are set forth in the Restricted Stock Award Agreement, as the Board shall
determine in its sole discretion, so long as Common Stock awarded under the
Restricted Stock Award Agreement remains subject to the terms of the Restricted
Stock Award Agreement.
(b) Restricted
Stock Unit Awards.
Each Restricted Stock Unit
Award Agreement shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The terms and conditions of
Restricted Stock Unit Award Agreements may change from time to time, and the
terms and conditions of separate Restricted Stock Unit Award Agreements need not
be identical,
provided,
however,
that each Restricted Stock Unit Award Agreement shall conform to
(through incorporation of the provisions hereof by reference in the Agreement or
otherwise) the substance of each of the following provisions:
(i)
Consideration.
At
the time of grant of a Restricted Stock Unit Award, the Board will determine the
consideration, if any, to be paid by the Participant upon delivery of each share
of Common Stock subject to the Restricted Stock Unit Award. The consideration to
be paid (if any) by the Participant for each share of Common Stock subject to a
Restricted Stock Unit Award may be paid in any form of legal consideration that
may be acceptable to the Board in its sole discretion and permissible under
applicable law.
(ii)
Vesting.
At
the time of the grant of a Restricted Stock Unit Award, the Board may impose
such restrictions or conditions to the vesting of the Restricted Stock Unit
Award as it, in its sole discretion, deems appropriate.
(iii)
Payment.
A
Restricted Stock Unit Award may be settled by the delivery of shares of Common
Stock, their cash equivalent, any combination thereof or in any other form of
consideration, as determined by the Board and contained in the Restricted Stock
Unit Award Agreement.
(iv)
Additional
Restrictions.
At the time of the grant of a
Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such
restrictions or conditions that delay the delivery of the shares of Common Stock
(or their cash equivalent) subject to a Restricted Stock Unit Award to a time
after the vesting of such Restricted Stock Unit Award.
(v)
Dividend
Equivalents.
Dividend equivalents may be credited
in respect of shares of Common Stock covered by a Restricted Stock Unit Award,
as determined by the Board and contained in the Restricted Stock Unit Award
Agreement. At the sole discretion of the Board, such dividend equivalents may be
converted into additional shares of Common Stock covered by the Restricted Stock
Unit Award in such manner as determined by the Board. Any additional shares
covered by the Restricted Stock Unit Award credited by reason of such dividend
equivalents will be subject to all the terms and conditions of the underlying
Restricted Stock Unit Award Agreement to which they relate.
(vi)
Termination of Participant's
Continuous Service.
Except as otherwise provided
in the applicable Restricted Stock Unit Award Agreement, such portion of the
Restricted Stock Unit Award that has not vested will be forfeited upon the
Participant's termination of Continuous Service.
(vii)
Compliance with Section 409A of
the Code.
Notwithstanding anything to the contrary
set forth herein, any Restricted Stock Unit Award granted under the Plan that is
not exempt from the requirements of Section 409A of the Code shall
incorporate terms and conditions necessary to avoid the consequences of
Section 409A(a)(1) of the Code. Such restrictions, if any, shall be
determined by the Board and contained in the Restricted Stock Unit Award
Agreement evidencing such Restricted Stock Unit Award. For example, such
restrictions may include, without limitation, a requirement that any Common
Stock that is to be issued in a year following the year in which the Restricted
Stock Unit Award vests must be issued in accordance with a fixed pre-determined
schedule.
(c) Stock
Appreciation Rights.
Each Stock Appreciation Right
Agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. Stock Appreciation Rights may be granted as
stand-alone Stock Awards or in tandem with other Stock Awards. The terms and
conditions of Stock Appreciation Right Agreements may change from time to time,
and the terms and conditions of separate Stock Appreciation Right Agreements
need not be identical;
provided, however
, that each
Stock Appreciation Right Agreement shall conform to (through incorporation of
the provisions hereof by reference in the Agreement or otherwise) the substance
of each of the following provisions:
(i)
Term.
No
Stock Appreciation Right shall be exercisable after the expiration of ten
(10) years from the date of its grant or such shorter period specified in
the Stock Appreciation Right Agreement.
(ii)
Strike
Price.
Each Stock Appreciation Right will be
denominated in shares of Common Stock equivalents. The strike price of each
Stock Appreciation Right shall not be less than one hundred percent (100%) of
the Fair Market Value equivalents subject to the Stock Appreciation Right on the
date of grant.
(iii)
Calculation of
Appreciation.
The appreciation distribution
payable on the exercise of a Stock Appreciation Right will be not greater than
an amount equal to the excess of (A) the aggregate Fair Market Value (on
the date of the exercise of the Stock Appreciation Right) of a number of shares
of Common Stock equal to the number of shares of Common Stock equivalents in
which the Participant is vested under such Stock Appreciation Right, and with
respect to which the Participant is exercising the Stock Appreciation Right on
such date, over (B) the strike price that will be determined by the Board
at the time of grant of the Stock Appreciation Right.
(iv)
Vesting.
At
the time of the grant of a Stock Appreciation Right, the Board may impose such
restrictions or conditions to the vesting of such Stock Appreciation Right as
it, in its sole discretion, deems appropriate.
(v)
Exercise.
To
exercise any outstanding Stock Appreciation Right, the Participant must provide
written notice of exercise to the Company in compliance with the provisions of
the Stock Appreciation Right Agreement evidencing such Stock Appreciation
Right.
(vi)
Payment.
The
appreciation distribution in respect to a Stock Appreciation Right may be paid
in Common Stock, in cash, in any combination of the two or in any other form of
consideration, as determined by the Board and set forth in the Stock
Appreciation Right Agreement evidencing such Stock Appreciation
Right.
(vii)
Termination of Continuous
Service.
In the event that a Participant's
Continuous Service terminates other than for Cause, the Participant may exercise
his or her Stock Appreciation Right (to the extent that the Participant was
entitled to exercise such Stock Appreciation Right as of the date of termination
of Continuous Service) but only within such period of time ending on the earlier
of (A) the date three (3) months following the termination of the
Participant's Continuous Service (or such longer or shorter period specified in
the Stock Appreciation Right Agreement), or (B) the expiration of the term
of the Stock Appreciation Right as set forth in the Stock Appreciation Right
Agreement. If, after termination of Continuous Service, the Participant does not
exercise his or her Stock Appreciation Right within the time specified herein or
in the Stock Appreciation Right Agreement (as applicable), the Stock
Appreciation Right shall terminate.
(viii)
Termination for
Cause.
Except as explicitly provided otherwise in
an Participant's Stock Appreciation Right Agreement, in the event that a
Participant's Continuous Service is terminated for Cause, the Stock Appreciation
Right shall terminate upon the termination date of such Participant's Continuous
Service, and the Participant shall be prohibited from exercising his or her
Stock Appreciation Right from and after the time of such termination of
Continuous Service.
(ix)
Compliance with Section 409A of
the Code.
Notwithstanding anything to the contrary
set forth herein, any Stock Appreciation Rights granted under the Plan that are
not exempt from the requirements of Section 409A of the Code shall
incorporate terms and conditions necessary to avoid the consequences specified
in Section 409A(a)(1) of the Code. Such restrictions, if any, shall be
determined by the Board and contained in the Stock Appreciation Right Agreement
evidencing such Stock Appreciation Right. For example, such restrictions may
include, without limitation, a requirement that a Stock Appreciation Right that
is to be paid wholly or partly in cash must be exercised and paid in accordance
with a fixed pre-determined schedule.
(d) Performance
Awards.
(i)
Performance Stock
Awards.
A Performance Stock Award is a Stock Award
that may be granted, may vest, or may be exercised based upon the attainment
during a Performance Period of certain Performance Goals. A Performance Stock
Award may, but need not, require the completion of a specified period of
Continuous Service. The length of any Performance Period, the Performance Goals
to be achieved during the Performance Period, and the measure of whether and to
what degree such Performance Goals have been attained shall be conclusively
determined by the Committee in its sole discretion. The maximum number of shares
that may be granted to any Participant in a calendar year attributable to
Performance Stock Awards described in this Section 6(d)(i) shall not
exceed _______ (_______) shares of Common Stock. In addition, to the extent
permitted by applicable law and the applicable Award Agreement, the Board may
determine that cash may be used in payment of Performance Stock
Awards.
(ii)
Performance Cash
Awards.
A Performance Cash Award is a cash award
that may be granted upon the attainment during a Performance Period of certain
Performance Goals. A Performance Cash Award may also require the completion of a
specified period of Continuous Service. The length of any Performance Period,
the Performance Goals to be achieved during the Performance Period, and the
measure of whether and to what degree such Performance Goals have been attained
shall be conclusively determined by the Committee in its sole discretion. The
maximum value that may be granted to any Participant in any calendar year
attributable to cash awards described in this Section 6(d)(ii) shall
not exceed one million dollars ($1,000,000). The Board may provide for or,
subject to such terms and conditions as the Board may specify, may permit a
Participant to elect for, the payment of any Performance Cash Award to be
deferred to a specified date or event. The Committee may specify the form of
payment of Performance Cash Awards, which may be cash or other property, or may
provide for a Participant to have the option for his or her Performance Cash
Award, or such portion thereof as the Board may specify, to be paid in whole or
in part in cash or other property. In addition, to the extent permitted by
applicable law and the applicable Award Agreement, the Board may determine that
Common Stock authorized under the Plan may be used in payment of Performance
Cash Awards, including additional shares in excess of the Performance Cash Award
as an inducement to hold shares of Common Stock.
(e)
Other Stock
Awards.
Other forms of Stock Awards valued in
whole or in part by reference to, or otherwise based on, Common Stock may be
granted either alone or in addition to Stock Awards provided for under
Section 5 and the preceding provisions of this Section 6. Subject to
the provisions of the Plan, the Board shall have sole and complete authority to
determine the persons to whom and the time or times at which such Other Stock
Awards will be granted, the number of shares of Common Stock (or the cash
equivalent thereof) to be granted pursuant to such Other Stock Awards and all
other terms and conditions of such Other Stock Awards.
7. COVENANTS
OF THE COMPANY.
(a)
Availability of
Shares.
During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b)
Securities Law
Compliance.
The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards;
provided, however,
that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority that counsel for the
Company deems necessary for the lawful issuance and sale of Common Stock under
the Plan, the Company shall be relieved from any liability for failure to issue
and sell Common Stock upon exercise of such Stock Awards unless and until such
authority is obtained.
(c)
No Obligation to
Notify.
The Company shall have no duty or
obligation to any holder of a Stock Award to advise such holder as to the time
or manner of exercising such Stock Award. Furthermore, the Company shall have no
duty or obligation to warn or otherwise advise such holder of a pending
termination or expiration of a Stock Award or a possible period in which the
Stock Award may not be exercised. The Company has no duty or obligation to
minimize the tax consequences of a Stock Award to the holder of such Stock
Award.
8. MISCELLANEOUS.
(a) Use
of Proceeds from Sales of Common Stock.
Proceeds
from the sale of shares of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
(b) Corporate
Action Constituting Grant of Stock
Awards.
Corporate action constituting a grant by
the Company of a Stock Award to any Participant shall be deemed completed as of
the date of such corporate action, unless otherwise determined by the Board,
regardless of when the instrument, certificate, or letter evidencing the Stock
Award is communicated to, or actually received or accepted by, the
Participant.
(c) Stockholder
Rights.
No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
of Common Stock subject to such Stock Award unless and until (i) such
Participant has validly exercised the Stock Award pursuant to its terms and
(ii) the issuance of the Common Stock pursuant to such exercise has been
entered into the books and records of the Company.
(d) No
Employment or Other Service Rights.
Nothing in the
Plan, any Stock Award Agreement or other instrument executed thereunder or in
connection with any Award granted pursuant to the Plan shall confer upon any
Participant any right to continue to serve the Company or an Affiliate in the
capacity in effect at the time the Stock Award was granted or shall affect the
right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service
of a Consultant pursuant to the terms of such Consultant's agreement with the
Company or an Affiliate, or (iii) the service of a Director pursuant to the
Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.
(e) Incentive
Stock Option $100,000 Limitation.
To the extent
that the aggregate Fair Market Value (determined at the time of grant) of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionholder during any calendar year (under all plans of the
Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the
Options or portions thereof that exceed such limit (according to the order in
which they were granted) shall be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of the applicable Option
Agreement(s).
(f) Investment
Assurances.
The Company may require a Participant,
as a condition of exercising or acquiring Common Stock under any Stock Award,
(i) to give written assurances satisfactory to the Company as to the
Participant's knowledge and experience in financial and business matters and/or
to employ a purchaser representative reasonably satisfactory to the Company who
is knowledgeable and experienced in financial and business matters and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and
(ii) to give written assurances satisfactory to the Company stating that
the Participant is acquiring Common Stock subject to the Stock Award for the
Participant's own account and not with any present intention of selling or
otherwise distributing the Common Stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if
(x) the issuance of the shares upon the exercise or acquisition of Common
Stock under the Stock Award has been registered under a then currently effective
registration statement under the Securities Act, or (y) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the Common
Stock.
(g) Withholding
Obligations.
Unless prohibited by the terms of a
Stock Award Agreement, the Company may, in its sole discretion, satisfy any
federal, state or local tax withholding obligation relating to an Award by any
of the following means (in addition to the Company's right to withhold from any
compensation paid to the Participant by the Company) or by a combination of such
means: (i) causing the Participant to tender a cash payment;
(ii) withholding shares of Common Stock from the shares of Common Stock
issued or otherwise issuable to the Participant in connection with the Award;
provided, however, that no shares of Common Stock are withheld with a value
exceeding the minimum amount of tax required to be withheld by law (or such
lower amount as may be necessary to avoid classification of the Stock Award as a
liability for financial accounting purposes); (iii) withholding cash from
an Award settled in cash; (iv) withholding payment from any amounts
otherwise payable to the Participant; or (v) by such other method as may be
set forth in the Award Agreement.
(h) Electronic
Delivery.
Any reference herein to a "written"
agreement or document shall include any agreement or document delivered
electronically or posted on the Company's intranet.
(i) Deferrals.
To
the extent permitted by applicable law, the Board, in its sole discretion, may
determine that the delivery of Common Stock or the payment of cash, upon the
exercise, vesting or settlement of all or a portion of any Award may be deferred
and may establish programs and procedures for deferral elections to be made by
Participants. Deferrals by Participants will be made in accordance with
Section 409A of the Code. Consistent with Section 409A of the Code,
the Board may provide for distributions while a Participant is still an
employee. The Board is authorized to make deferrals of Stock Awards and
determine when, and in what annual percentages, Participants may receive
payments, including lump sum payments, following the Participant's termination
of employment or retirement, and implement such other terms and conditions
consistent with the provisions of the Plan and in accordance with applicable
law.
(j) Compliance
with Section 409A of the Code.
To the extent
that the Board determines that any Award granted under the Plan is subject to
Section 409A of the Code, the Award Agreement evidencing such Award shall
incorporate the terms and conditions necessary to avoid the consequences
described in Section 409A(a)(1) of the Code. To the extent applicable, the
Plan and Award Agreements shall be interpreted in accordance with
Section 409A of the Code and related Department of Treasury guidance.
Notwithstanding any provision of the Plan to the contrary, in the event that
following the Effective Date the Board determines that any Award may be subject
to Section 409A of the Code and related Department of Treasury guidance,
the Board may adopt such amendments to the Plan and the applicable Award
Agreement or adopt other policies and procedures (including amendments, policies
and procedures with retroactive effect), or take any other actions, that the
Board determines are necessary or appropriate to (i) exempt the Award from
Section 409A of the Code and/or preserve the intended tax treatment of the
benefits provided with respect to the Award, or (ii) comply with the
requirements of Section 409A of the Code and related Department of Treasury
guidance.
9. ADJUSTMENTS
UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization
Adjustments.
In the event of a Capitalization
Adjustment, the Board shall appropriately and proportionately adjust:
(i) the class(es) and maximum number of securities subject to the Plan
pursuant to Section 3(a), (ii) the class(es) and maximum number of
securities that may be issued pursuant to the exercise of Incentive Stock
Options pursuant to Section 3(c), (iii) the class(es) and maximum
number of securities that may be awarded to any person pursuant to
Section 3(d) and 6(d)(i), and (iv) the class(es) and number of
securities and price per share of stock subject to outstanding Stock Awards. The
Board shall make such adjustments, and its determination shall be final, binding
and conclusive.
(b) Dissolution
or Liquidation.
Except as otherwise provided in
the Stock Award Agreement, in the event of a dissolution or liquidation of the
Company, all outstanding Stock Awards (other than Stock Awards consisting of
vested and outstanding shares of Common Stock not subject to a forfeiture
condition or the Company's right of repurchase) shall terminate immediately
prior to the completion of such dissolution or liquidation, and the shares of
Common Stock subject to the Company's repurchase rights may be repurchased by
the Company notwithstanding the fact that the holder of such Stock Award is
providing Continuous Service,
provided, however,
that the
Board may, in its sole discretion, cause some or all Stock Awards to become
fully vested, exercisable and/or no longer subject to repurchase or forfeiture
(to the extent such Stock Awards have not previously expired or terminated)
before the dissolution or liquidation is completed but contingent on its
completion.
(c) Corporate
Transaction.
The following provisions shall apply
to Stock Awards in the event of a Corporate Transaction unless otherwise
provided in the instrument evidencing the Stock Award or any other written
agreement between the Company or any Affiliate and the holder of the Stock
Award.
(i)
Stock Awards May Be
Assumed.
Except as otherwise stated in the Stock
Award Agreement, in the event of a Corporate Transaction, any surviving
corporation or acquiring corporation (or the surviving or acquiring
corporation's parent company) may assume or continue any or all Stock Awards
outstanding under the Plan or may substitute similar stock awards for Stock
Awards outstanding under the Plan (including but not limited to, awards to
acquire the same consideration paid to the stockholders of the Company pursuant
to the Corporate Transaction), and any reacquisition or repurchase rights held
by the Company in respect of Common Stock issued pursuant to Stock Awards may be
assigned by the Company to the successor of the Company (or the successor's
parent company, if any), in connection with such Corporate Transaction. A
surviving corporation or acquiring corporation (or its parent) may choose to
assume or continue only a portion of a Stock Award or substitute a similar stock
award for only a portion of a Stock Award. The terms of any assumption,
continuation or substitution shall be set by the Board in accordance with the
provisions of Section 2.
(ii)
Stock Awards Held by Current
Participants.
Except as otherwise stated in the
Stock Award Agreement, in the event of a Corporate Transaction in which the
surviving corporation or acquiring corporation (or its parent company) does not
assume or continue such outstanding Stock Awards or substitute similar stock
awards for such outstanding Stock Awards in accordance with subsection
(i) above, then with respect to Stock Awards that have not been assumed,
continued or substituted and that are held by Participants whose Continuous
Service has not terminated prior to the effective time of the Corporate
Transaction (referred to as the
"Current
Participants"
), the vesting of such Stock Awards (and, with respect to
Options and Stock Appreciation Rights, the time at which such Stock Awards may
be exercised) shall (contingent upon the effectiveness of the Corporate
Transaction) be accelerated in full to a date prior to the effective time of
such Corporate Transaction as the Board shall determine (or, if the Board shall
not determine such a date, to the date that is five (5) days prior to the
effective time of the Corporate Transaction), and such Stock Awards shall
terminate if not exercised (if applicable) at or prior to the effective time of
the Corporate Transaction, and any reacquisition or repurchase rights held by
the Company with respect to such Stock Awards shall lapse (contingent upon the
effectiveness of the Corporate Transaction).
(iii)
Stock Awards Held by Persons other
than Current Participants.
Except as otherwise
stated in the Stock Award Agreement, in the event of a Corporate Transaction in
which the surviving corporation or acquiring corporation (or its parent company)
does not assume or continue such outstanding Stock Awards or substitute similar
stock awards for such outstanding Stock Awards in accordance with subsections
(i) or (ii) above, respectively, then with respect to Stock Awards
that have not been assumed, continued or substituted and that are held by
persons other than Current Participants, the vesting of such Stock Awards (and,
if applicable, the time at which such Stock Award may be exercised) shall not be
accelerated and such Stock Awards (other than a Stock Award consisting of vested
and outstanding shares of Common Stock not subject to a forfeiture condition or
the Company's right of repurchase) shall terminate if not exercised (if
applicable) prior to the effective time of the Corporate Transaction;
provided, however,
that any
reacquisition or repurchase rights held by the Company with respect to such
Stock Awards shall not terminate and may continue to be exercised
notwithstanding the Corporate Transaction.
(iv)
Payment for Stock Awards in Lieu of
Exercise.
Notwithstanding the foregoing, in the
event a Stock Award will terminate if not exercised prior to the effective time
of a Corporate Transaction, the Board may provide, in its sole discretion, that
the holder of such Stock Award may not exercise such Stock Award but will
receive a payment, in such form as may be determined by the Board, equal in
value to the excess, if any, of (A) the value of the property the holder of
the Stock Award would have received upon the exercise of the Stock Award
(including, at the discretion of the Board, any unvested portion of such Stock
Award), over (B) any exercise price payable by such holder in connection
with such exercise.
(d) Change
in Control.
A Stock Award may be subject to
additional acceleration of vesting and exercisability upon or after a Change in
Control as may be provided in the Stock Award Agreement for such Stock Award or
as may be provided in any other written agreement between the Company or any
Affiliate and the Participant, but in the absence of such provision, no such
acceleration shall occur.
10. TERMINATION
OR SUSPENSION OF THE PLAN.
(a) Plan
Term.
Unless sooner terminated by the Board
pursuant to Section 2, the Plan shall automatically terminate on the day
before the tenth (10th) anniversary of the date the Plan is adopted by the Board
or approved by the stockholders of the Company, whichever is earlier. No Awards
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) No
Impairment of Rights.
Suspension or termination of
the Plan shall not impair rights and obligations under any Award granted while
the Plan is in effect except with the written consent of the affected
Participant.
11. EFFECTIVE
DATE OF PLAN.
The
Plan shall become effective on the Effective Date. Prior to the Effective Date,
the Prior Plan is unaffected by the Plan, and Stock Awards shall continue to be
granted from the Prior Plan. If the Plan has not been approved by the
stockholders of the Company within twelve (12) months before or after the
date the Plan is adopted by the Board, the adoption of the Plan shall be null
and void and the Prior Plan shall continue unaffected by the adoption of the
Plan.
12. CHOICE
OF LAW.
The
law of the State of California shall govern all questions concerning the
construction, validity and interpretation of the Plan, without regard to such
state's conflict of laws rules.
13. AUTOMATIC GRANTS TO NON-EMPLOYEE
DIRECTORS
.
13.1
Eligibility
.
Non-Employee Directors are eligible for Options granted pursuant to this
Section 13. Notwithstanding the foregoing, this Section 13 does not
limit the ability of the Board to grant discretionary Awards to Non-Employee
Directors.
13.2
Initial Grant
.
Each Non-Employee Director who has not received an option to purchase Common
Stock in the twelve (12) month period immediately preceding the Effective
Date (the “Initial Twelve Month Period”) and who is or who becomes a member of
the Board on the Effective Date will automatically be granted an Option to
purchase fifty thousand (50,000) Shares on the Effective Date. Each
Non-Employee Director who first becomes a member of the Board after the
Effective Date will automatically be granted an Option to purchase fifty
thousand (50,000) Shares on the date such Non-Employee Director first
becomes a member of the Board. Each Option granted pursuant to this
Section 13.2 shall be called an “Initial Grant.”
13.3
Succeeding
Grant
. On the first business day following the annual meeting of the
Company’s Stockholders, each Non-Employee Director who is continuing in service
as a member of the Board will on the first business day following such annual
meeting of stockholders automatically be granted an Option to purchase twenty
five thousand (25,000) Shares. Each Option granted pursuant to this
Section 13.3 shall be called a “Succeeding Grant”. Notwithstanding the
foregoing, in the event a Non-Employee Director received an Initial Grant within
the twelve (12) month period preceding the annual meeting of the Company’s
stockholders, then the number of Shares subject to such Director’s first
Succeeding Grant shall be the number of Shares equal to the product of
(a) twenty five thousand (25,000) and (b) a fraction, the
numerator of which is the number of full calendar months such Non-Employee
Director has been a member of the Board prior to the Company’s annual meeting of
stockholders and the denominator of which is twelve (12).
13.4
Vesting and
Exercisability
.
(a)
Initial Grants
.
Initial Grants shall vest 50% on the grant date. The remaining 50%
shall become exercisable as to 1/36 of the remaining Shares on each monthly
anniversary of the date of grant, such that Initial Grants are fully vested and
exercisable on the third anniversary of the date of grant, so long as the
Non-Employee Director continuously remains a director, consultant or employee of
the Company.
(b)
Succeeding Grants
.
Succeeding Grants shall vest and become exercisable as to 1/36 of the total
Shares subject to the Succeeding Grant on each monthly anniversary of the date
of grant, such that Succeeding Grants are fully vested and exercisable on the
third anniversary of the date of grant, so long as the Non-Employee Director
continuously remains a director, consultant or employee of the
Company.
(c)
Change In Control
. In
the event of a Change In Control, the vesting of all Options granted to
Non-Employee Directors pursuant to this Section 13 shall accelerate and
such Options will become exercisable in full immediately prior to the
consummation of the Change In Control at such time and on such conditions as the
Committee determines, and if such Options are not exercised on or prior to the
consummation of the Change In Control, they shall terminate immediately
following the consummation of the Change In Control.
13.5
Form of Option
Grant
. Each Option granted under this Section 13 shall be a NSO and
shall be evidenced by a Non-Employee Director Stock Award Agreement in such form
as the Board from time to time approve and which shall comply with and be
subject to the terms and conditions of this Plan.
13.6
Exercise Price.
The Exercise Price per Share of each Option granted under this Section 13
shall be the Fair Market Value of the Share on the date the Option is
granted.
13.7
Termination of
Option
. Except as provided in Section 13.4(c) or this
Section 13.7, each Option granted under this Section 13 shall expire
ten (10) years after its date of grant. The date on which the Non-Employee
Director ceases to be a member of the Board, a consultant or employee of the
Company shall be referred to as the “Non-Employee Director Termination Date” for
purposes of this Section 13.7. An Option may be exercised after the
Non-Employee Director Termination Date only as set forth below:
(a)
Termination
Generally
. If the Non-Employee Director ceases to be a member of the
Board, consultant or employee of the Company for any reason except death,
Disability or Change In Control, each Initial Grant and Succeeding Grant, to the
extent then vested pursuant to Section 13.4 above, then held by such
Non-Employee Director may be exercised by the Non-Employee Director within three
(3) months after the Non-Employee Director Termination Date, but in no
event later than the Expiration Date.
(b)
Death
. If the
Non-Employee Director ceases to be a member of the Board, consultant or employee
of the Company because of his or her death, then each Initial Grant and
Succeeding Grant, to the extent then vested pursuant to Section 13.4 above,
then held by such Non-Employee Director, may be exercised by the Non-Employee
Director or his or her legal representative within twelve (12) months after
the Non-Employee Director Termination Date, but in no event later than the
Expiration Date.
(c)
Disability
. If the
Non-Employee Director ceases to be a member of the Board, consultant or employee
of the Company because of his or her Disability, then each Initial Grant and
Succeeding Grant, to the extent then vested pursuant to Section 13.4 above,
then held by such Non-Employee Director, may be exercised by the Non-Employee
Director or his or her legal representative within twelve (12) months after
the Non-Employee Director Termination Date, but in no event later than the
Expiration Date.
(d)
Change In
Control
. If the Non-Employee Director ceases to be a member of
the Board, consultant or employee of the Company because of a Change In Control,
then each Initial Grant and Succeeding Grant, to the extent then vested pursuant
to Section 13.4 above, then held by such Non-Employee Director, may be
exercised by the Non-Employee Director or his or her legal representative within
twelve (12) months after the Non-Employee Director Termination Date, but in
no event later than the Expiration Date.
14. DEFINITIONS.
As
used in the Plan, the definitions contained in this Section 14 shall apply
to the capitalized terms indicated below:
(a)
"Affiliate"
means,
at the time of determination, any "parent" or "subsidiary" of the Company as
such terms are defined in Rule 405 of the Securities Act. The Board shall
have the authority to determine the time or times at which "parent" or
"subsidiary" status is determined within the foregoing definition.
(b)
"Award"
means
a Stock Award or a Performance Cash Award.
(c)
"Board"
means
the Board of Directors of the Company.
(d)
"Capitalization
Adjustment"
means any change that is made in, or
other events that occur with respect to, the Common Stock subject to the Plan or
subject to any Stock Award after the Effective Date without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company. Notwithstanding the foregoing, the
conversion of any convertible securities of the Company shall not be treated as
a transaction "without receipt of consideration" by the Company.
(e)
"Cause"
means
with respect to a Participant, the occurrence of any of the following events:
(i) such Participant's commission of any felony or any crime involving
fraud, dishonesty or moral turpitude under the laws of the United States or any
state thereof; (ii) such Participant's attempted commission of, or
participation in, a fraud or act of dishonesty against the Company;
(iii) such Participant's intentional, material violation of any contract or
agreement between the Participant and the Company or of any statutory duty owed
to the Company; (iv) such Participant's unauthorized use or disclosure of
the Company's confidential information or trade secrets; or (v) such
Participant's gross misconduct. The determination that a termination of the
Participant's Continuous Service is either for Cause or without Cause shall be
made by the Company in its sole discretion. Any determination by the Company
that the Continuous Service of a Participant was terminated by reason of
dismissal without Cause for the purposes of outstanding Awards held by such
Participant shall have no effect upon any determination of the rights or
obligations of the Company or such Participant for any other
purpose.
(f)
"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
Exchange Act Person becomes the Owner, directly or indirectly, of securities of
the Company representing more than fifty percent (50%) of the combined voting
power of the Company's then outstanding securities other than by virtue of a
merger, consolidation or similar transaction. Notwithstanding the foregoing, a
Change in Control shall not be deemed to occur (A) on account of the
acquisition of securities of the Company by an investor, any affiliate thereof
or any other Exchange Act Person from the Company in a transaction or series of
related transactions the primary purpose of which is to obtain financing for the
Company through the issuance of equity securities or (B) solely because the
level of Ownership held by any Exchange Act Person (the "
Subject Person
") exceeds the
designated percentage threshold of the outstanding voting securities as a result
of a repurchase or other acquisition of voting securities by the Company
reducing the number of shares outstanding, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting
securities that, assuming the repurchase or other acquisition had not occurred,
increases the percentage of the then outstanding voting securities Owned by the
Subject Person over the designated percentage threshold, then a Change in
Control shall be deemed to occur;
(ii)
there is
consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, immediately after the consummation of such
merger, consolidation or similar transaction, the stockholders of the Company
immediately prior thereto do not Own, directly or indirectly, either
(A) outstanding voting securities representing more than fifty percent
(50%) of the combined outstanding voting power of the surviving Entity in such
merger, consolidation or similar transaction or (B) more than fifty percent
(50%) of the combined outstanding voting power of the parent of the surviving
Entity in such merger, consolidation or similar 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 prior to 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 fifty percent (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 prior to such sale,
lease, license or other disposition; or
(v)
individuals
who, immediately following the Effective Time, are members of the Board (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 Incumbent
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 or any other provision of the Plan, the definition of Change in
Control (or any analogous term) in an individual written agreement between the
Company or any Affiliate and the Participant shall supersede the foregoing
definition with respect to Awards subject to such agreement;
provided, however,
that if no
definition of Change in Control or any analogous term is set forth in such an
individual written agreement, the foregoing definition shall apply.
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 Code and related Department of Treasury
guidance.
(g)
"Code"
means
the Internal Revenue Code of 1986, as amended.
(h)
"Committee"
means
a committee of one (1) or more Directors to whom authority has been
delegated by the Board in accordance with Section 2(c).
(i)
"Common
Stock"
means the common stock of the
Company.
(j)
"Company"
means
Adamis Pharmaceuticals Corporation (formerly Cellegy Pharmaceuticals, Inc.), a
Delaware corporation.
(k)
"Consultant"
means
any person, including an advisor, who is (i) engaged by the Company or an
Affiliate to render consulting or advisory services and is compensated for such
services, including employees of Cartesian Medical Group, Inc. who provide
bona-fide services to the Company, or (ii) serving as a member of the board
of directors of an Affiliate and is compensated for such services. However,
service solely as a Director, or payment of a fee for such service, shall not
cause a Director to be considered a "Consultant" for purposes of the
Plan.
(l)
"Continuous
Service"
means that the Participant's service with
the Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. A change in the capacity in which the Participant
renders service to the Company or an Affiliate as an Employee, Consultant or
Director or a change in the entity for which the Participant renders such
service, provided that there is no interruption or termination of the
Participant's service with the Company or an Affiliate, shall not terminate a
Participant's Continuous Service. For example, a change in status from an
employee of the Company to a Consultant (whether to the Company or to an
Affiliate) or to a Director shall not constitute an interruption of Continuous
Service. To the extent permitted by law, the Board or the chief executive
officer of the Company, in that party's sole discretion, may determine whether
Continuous Service shall be considered interrupted in the case of any leave of
absence approved by that party, including sick leave, military leave or any
other personal leave. Notwithstanding the foregoing, a leave of absence shall be
treated as Continuous Service for purposes of vesting in a Stock Award only to
such extent as may be provided in the Company's leave of absence policy, in the
written terms of any leave of absence agreement or policy applicable to the
Participant, or as otherwise required by law.
(m)
"Corporate
Transaction"
means the occurrence, in a single
transaction or in a series of related transactions, of any one or more of the
following events:
(i)
a
sale or other disposition of all or substantially all, as determined by the
Board in its sole discretion, of the consolidated assets of the Company and its
Subsidiaries;
(ii)
a sale
or other disposition of at least ninety percent (90%) of the outstanding
securities of the Company;
(iii)
the consummation of
a merger, consolidation or similar transaction following which the Company is
not the surviving corporation; or
(iv)
the
consummation of a merger, consolidation or similar transaction following which
the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger, consolidation or
similar transaction into other property, whether in the form of securities, cash
or otherwise.
(n)
"Covered
Employee"
shall have the meaning provided in
Section 162(m)(3) of the Code and the regulations promulgated
thereunder.
(o)
"Director"
means
a member of the Board.
(p)
"Disability"
means,
with respect to a Participant, the inability of such Participant to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months, as
provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the
Code.
(q) "
Effective
Date"
means the date of the closing of the merger
transaction contemplated by the Agreement and Plan of Reorganization dated as of
February 12, 2008, entered into by and among Cellegy Pharmaceuticals, Inc.,
Cellegy Holdings, Inc., and Adamis Pharmaceuticals Corporation.
(r)
"Employee"
means
any person employed by the Company or an Affiliate. However, service solely as a
Director, or payment of a fee for such services, shall not cause a Director to
be considered an "Employee" for purposes of the Plan.
(s)
"Entity"
means
a corporation, partnership, limited liability company or other
entity.
(t)
"Exchange
Act"
means the Securities Exchange Act of 1934, as
amended.
(u)
"Exchange Act
Person"
means any natural person, Entity or
"group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act),
except that "Exchange Act Person" shall not include (i) the Company or any
Subsidiary of the Company, (ii) any employee benefit plan of the Company or
any Subsidiary of the Company or any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any Subsidiary of
the Company, (iii) an underwriter temporarily holding securities pursuant
to an offering of such securities, (iv) an Entity Owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their Ownership of stock of the Company; or (v) any natural
person, Entity or "group" (within the meaning of Section 13(d) or 14(d) of
the Exchange Act) that, as of the Effective Date, is the Owner, directly or
indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power of the Company's then outstanding
securities.
(v)
"Fair Market
Value"
means, as of any date, the value of the
Common Stock determined as follows:
(i)
If
the Common Stock is listed on any established stock exchange or traded on any
established market, the Fair Market Value of a share of Common Stock shall be
the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the Common Stock) on the date of
determination, as reported in
The Wall Street Journal
or
such other source as the Board deems reliable. Unless otherwise provided by the
Board, if there is no closing sales price (or closing bid if no sales were
reported) for the Common Stock on the date of determination, then the Fair
Market Value shall be the closing selling price (or closing bid if no sales were
reported) on the last preceding date for which such quotation
exists.
(ii)
In the
absence of such markets for the Common Stock, the Fair Market Value shall be
determined by the Board in good faith and in a manner that complies with
Section 409A of the Code.
(w)
"Incentive Stock
Option"
means an Option granted pursuant to
Section 5 of the Plan that is intended to be, and qualifies as, an
"incentive stock option" within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(x)
"Non-Employee
Director"
means a Director who either (i) is
not a current Employee or Officer of the Company or an Affiliate, does not
receive compensation, either directly or indirectly, from the Company or an
Affiliate for services rendered as a Consultant or in any capacity other than as
a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities
Act ("
Regulation S-K
")),
does not possess an interest in any other transaction for which disclosure would
be required under Item 404(a) of Regulation S-K, and is not engaged in a
business relationship for which disclosure would be required pursuant to Item
404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(y)
"Nonstatutory
Stock Option"
means any Option granted pursuant to
Section 5 of the Plan that does not qualify as an Incentive Stock
Option.
(z)
"Officer"
means
a person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated
thereunder.
(aa)
"Option"
means
an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of
Common Stock granted pursuant to the Plan.
(bb)
"Option
Agreement"
means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(cc)
"Optionholder"
means
a person to whom an Option is granted pursuant to the Plan or, if permitted
under the terms of the Plan, such other person who holds an outstanding
Option.
(dd)
"Other Stock
Award"
means an award based in whole or in part by
reference to the Common Stock which is granted pursuant to the terms and
conditions of Section 6(e).
(ee)
"Other Stock
Award Agreement"
means a written agreement between
the Company and a holder of an Other Stock Award evidencing the terms and
conditions of an Other Stock Award grant. Each Other Stock Award Agreement shall
be subject to the terms and conditions of the Plan.
(ff)
"Outside
Director"
means a Director who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
who receives compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the taxable year, has not been an officer
of the Company or an "affiliated corporation," and does not receive remuneration
from the Company or an "affiliated corporation," either directly or indirectly,
in any capacity other than as a Director, or (ii) is otherwise considered
an "outside director" for purposes of Section 162(m) of the
Code.
(gg)
"Own," "Owned,"
"Owner," "Ownership"
A person or Entity shall be
deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired
"Ownership" of securities if such person or Entity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power, which includes the power to vote or to direct the
voting, with respect to such securities.
(hh)
"Participant"
means
a person to whom an Award is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Stock Award.
(ii)
"Performance Cash
Award"
means an award of cash granted pursuant to
the terms and conditions of Section 6(d)(ii).
(jj)
"Performance
Criteria"
means the one or more criteria that the
Board shall select for purposes of establishing the Performance Goals for a
Performance Period. The Performance Criteria that shall be used to establish
such Performance Goals may be based on any one of, or combination of, the
following: (i) earnings per share; (ii) earnings before interest,
taxes and depreciation; (iii) earnings before interest, taxes, depreciation
and amortization; (iv) total stockholder return; (v) return on equity;
(vi) return on assets, investment, or capital employed;
(vii) operating margin; (viii) gross margin; (ix) operating
income; (x) net income (before or after taxes); (xi) net operating
income; (xii) net operating income after tax; (xiii) pre-tax profit;
(xiv) operating cash flow; (xv) sales or revenue targets;
(xvi) increases in revenue or product revenue; (xvii) expenses and
cost reduction goals; (xviii) improvement in or attainment of working
capital levels; (xix) economic value added (or an equivalent metric);
(xx) market share; (xxi) cash flow; (xxii) cash flow per share;
(xxiii) share price performance; (xxiv) debt reduction;
(xxv) implementation or completion of projects or processes;
(xxvi) customer satisfaction; (xxvii) completion of regulatory or
development milestones; (xxviii) stockholders' equity; and (xxix) to
the extent that an Award is not intended to comply with Section 162(m) of
the Code, other measures of performance selected by the Board. Partial
achievement of the specified criteria may result in the payment or vesting
corresponding to the degree of achievement as specified in the Stock Award
Agreement or the written terms of a Performance Cash Award. The Board shall, in
its sole discretion, define the manner of calculating the Performance Criteria
it selects to use for such Performance Period.
(kk)
"Performance
Goals"
means, for a Performance Period, the one or
more goals established by the Board for the Performance Period based upon the
satisfaction of the Performance Criteria. Performance Goals may be based on a
Company-wide basis, with respect to one or more business units, divisions,
Affiliates, or business segments, and in either absolute terms or relative to
the performance of one or more comparable companies or the performance of one or
more relevant indices. At the time of the grant of any Award, the Board is
authorized to determine whether, when calculating the attainment of Performance
Goals for a Performance Period: (i) to exclude restructuring and/or other
nonrecurring charges; (ii) to exclude exchange rate effects, as applicable,
for non-U.S. dollar denominated net sales and operating earnings; (iii) to
exclude the effects of changes to generally accepted accounting standards
required by the Financial Accounting Standards Board; (iv) to exclude the
effects of any statutory adjustments to corporate tax rates; and (v) to
exclude the effects of any "extraordinary items" as determined under generally
accepted accounting principles. In addition, the Board retains the discretion to
reduce or eliminate the compensation or economic benefit due upon attainment of
Performance Goals.
(ll)
"Performance
Period"
means the period of time selected by the
Board over which the attainment of one or more Performance Goals will be
measured for the purpose of determining a Participant's right to and the payment
of a Stock Award or a Performance Cash Award. Performance Periods may be of
varying and overlapping duration, at the sole discretion of the
Board.
(mm)
"Performance
Stock Award"
means a Stock Award granted under the
terms and conditions of Section 6(d)(i).
(nn)
"Plan"
means
this Genoptix, Inc. 2007 Equity Incentive Plan.
(oo)
"Restricted Stock
Award"
means an award of shares of Common Stock
which is granted pursuant to the terms and conditions of
Section 6(a).
(pp)
"Restricted Stock
Award Agreement"
means a written agreement between
the Company and a holder of a Restricted Stock Award evidencing the terms and
conditions of a Restricted Stock Award grant. Each Restricted Stock Award
Agreement shall be subject to the terms and conditions of the Plan.
(qq)
"Restricted Stock
Unit Award"
means an unfunded right to receive
shares of Common Stock at a future date which is granted pursuant to the terms
and conditions of Section 6(b).
(rr)
"Restricted Stock
Unit Award Agreement"
means a written agreement
between the Company and a holder of a Restricted Stock Unit Award evidencing the
terms and conditions of a Restricted Stock Unit Award grant. Each Restricted
Stock Unit Award Agreement shall be subject to the terms and conditions of the
Plan.
(ss)
"Rule 16b-3"
means
Rule 16b-3 promulgated under the Exchange Act or any successor to
Rule 16b-3, as in effect from time to time.
(tt)
"Securities
Act"
means the Securities Act of 1933, as
amended.
(uu)
"Stock
Appreciation Right"
means a right to receive the
appreciation on Common Stock that is granted pursuant to the terms and
conditions of Section 6(c).
(vv)
"Stock
Appreciation Right Agreement"
means a written
agreement between the Company and a holder of a Stock Appreciation Right
evidencing the terms and conditions of a Stock Appreciation Right grant. Each
Stock Appreciation Right Agreement shall be subject to the terms and conditions
of the Plan.
(ww)
"Stock
Award"
means any right to receive Common Stock
granted under the Plan, including an Incentive Stock Option, a Nonstatutory
Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock
Appreciation Right, a Performance Stock Award or any Other Stock
Award.
(xx)
"Stock Award
Agreement"
means a written agreement between the
Company and a Participant evidencing the terms and conditions of a Stock Award
grant. Each Stock Award Agreement shall be subject to the terms and conditions
of the Plan.
(yy)
"Subsidiary"
means,
with respect to the Company, (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether, at the time, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, Owned by the Company, and
(ii) any partnership, limited liability company or other entity in which
the Company has a direct or indirect interest (whether in the form of voting or
participation in profits or capital contribution) of more than fifty percent
(50%).
(zz)
"Ten Percent
Stockholder"
means a person who Owns (or is deemed
to Own pursuant to Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Affiliate.