form10-q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
R
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2009
OR
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£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from
to
Commission
file number 0-15327
CytRx
Corporation
(Exact
name of Registrant as specified in its charter)
|
Delaware
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58-1642740
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|
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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11726
San Vicente Blvd., Suite 650
Los
Angeles, CA
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90049
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(Address
of principal executive offices)
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(Zip
Code)
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(310)
826-5648
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer £
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Accelerated
filer R
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Non-accelerated
filer £
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Smaller
reporting company £
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|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12(b)-2 of the Exchange Act). Yes £ No
R
Number of
shares of CytRx Corporation common stock, $.001 par value, outstanding as of May
11, 2009: 93,978,448, exclusive of treasury shares.
CYTRX
CORPORATION
FORM
10-Q
TABLE
OF CONTENTS
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Page
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PART
I. — FINANCIAL INFORMATION
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3
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13
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19
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19
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PART
II. — OTHER INFORMATION
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19
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20
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21
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PART
I — FINANCIAL INFORMATION
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
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March
31,
2009
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December 31,
2008
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(Unaudited)
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ASSETS
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Current
assets:
|
|
|
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Cash
and cash equivalents
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$ |
21,900,292 |
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$ |
25,041,772 |
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Accounts
receivable
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25,215 |
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127,280 |
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Income
taxes recoverable
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215,623 |
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215,623 |
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Prepaid
expense and other current assets
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302,140 |
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486,609 |
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Total
current assets
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22,443,270 |
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25,871,284 |
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Equipment
and furnishings, net
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1,753,473 |
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1,835,052 |
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Molecular
library, net
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81,504 |
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103,882 |
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Goodwill
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183,780 |
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183,780 |
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Other
assets
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328,178 |
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330,032 |
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Total
assets
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$ |
24,790,205 |
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$ |
28,324,030 |
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ |
1,822,837 |
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$ |
668,422 |
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Accrued
expenses and other current liabilities
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2,771,442 |
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2,556,904 |
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Deferred
revenue, current portion
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1,067,589 |
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1,817,600 |
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Total
current liabilities
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5,661,868 |
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5,042,926 |
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Deferred
revenue, non-current portion
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6,849,981 |
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7,582,797 |
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Total
liabilities
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12,511,849 |
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12,625,723 |
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred
stock, $.01 par value, 5,000,000 shares authorized, including 15,000
shares of Series A Junior Participating Preferred Stock; no shares issued
and outstanding
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— |
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— |
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Common
stock, $.001 par value, 175,000,000 shares authorized; 93,978,448 shares
issued and outstanding at each of March 31, 2009 and December 31,
2008
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93,978 |
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93,978 |
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Additional
paid-in capital
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210,560,844 |
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210,007,468 |
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Treasury
stock, at cost (633,816 shares held at March 31, 2009 and December 31,
2008)
|
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(2,279,238 |
) |
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(2,279,238 |
) |
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Accumulated
deficit
|
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(196,097,228 |
) |
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(192,123,901 |
) |
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Total
stockholders’ equity
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12,278,356 |
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15,698,307 |
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Total
liabilities and stockholders’ equity
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$ |
24,790,205 |
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$ |
28,324,030 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three
Months Ended
March 31,
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2009
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2008
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Revenue:
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Service
revenue
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$ |
1,482,828 |
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$ |
2,181,088 |
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Expenses:
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Research
and development
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3,048,752 |
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3,191,713 |
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General
and administrative
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2,482,771 |
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4,473,149 |
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5,531,523 |
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7,664,862 |
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Loss
before other income
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(4,048,695 |
) |
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(5,483,774 |
) |
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Other
income:
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Interest
income
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68,287 |
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524,271 |
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Other
income, net
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7,081 |
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218,229 |
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Equity
in loss of unconsolidated subsidiary (see Note 9)
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— |
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(378,898 |
) |
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Minority
interest in loss of subsidiary
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|
— |
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88,374 |
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Net
loss before income taxes
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|
(3,973,327 |
) |
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|
(5,031,798 |
) |
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Provision
for income taxes
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— |
|
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(342,000 |
) |
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Net
loss
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(3,973,327 |
) |
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(5,373,798 |
) |
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Deemed
dividend for anti-dilution adjustment made to stock
warrants
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— |
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(756,954 |
) |
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Net
loss applicable to common stockholders
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$ |
(3,973,327 |
) |
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$ |
(6,130,752 |
) |
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Basic
and diluted loss per share
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$ |
(0.04 |
) |
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$ |
(0.07 |
) |
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Weighted-average
shares outstanding
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93,347,732 |
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90,280,449 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March
31,
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2009
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2008
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Cash
flows from operating activities:
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Net
loss
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$ |
(3,973,327 |
) |
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$ |
(5,373,798 |
) |
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Adjustments
to reconcile net loss to cash used in operating
activities:
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Depreciation
and amortization
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192,254 |
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133,052 |
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Equity
in loss of unconsolidated subsidiary
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|
— |
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|
378,898 |
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Minority
interest in loss of subsidiary
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|
— |
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(88,374 |
) |
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RXi
common stock transferred for services
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— |
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|
244,860 |
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Non-cash
earned on short-term investments
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— |
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(48,452 |
) |
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Non-cash
gain on transfer of RXi common stock
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— |
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(226,579 |
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Expense
related to employee and non-employee stock options
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553,376 |
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555,093 |
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Net
change in operating assets and liabilities
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174,513 |
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(2,898,342 |
) |
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Total
adjustments
|
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|
920,143 |
|
|
|
(1,949,844 |
) |
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Net
cash used in operating activities
|
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|
(3,053,184 |
) |
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(7,323,642 |
) |
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Cash
flows from investing activities:
|
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Purchases
of equipment and furnishings
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(88,296 |
) |
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(223,203 |
) |
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Deconsolidation
of subsidiary
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— |
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(10,359,278 |
) |
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Proceeds
from sale of short-term investments
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— |
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10,000,000 |
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Net
cash used in investing activities
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(88,296 |
) |
|
|
(582,481 |
) |
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Cash
flows from financing activities:
|
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|
|
|
|
|
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Proceeds
from exercise of stock options and warrants
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|
|
— |
|
|
|
946,808 |
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Net
cash provided by financing activities
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|
|
— |
|
|
|
946,808 |
|
|
|
|
|
|
|
|
|
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Net
decrease in cash and cash equivalents
|
|
|
(3,141,480 |
) |
|
|
(6,959,315 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
25,041,772 |
|
|
|
50,498,261 |
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Cash
and cash equivalents at end of period
|
|
$ |
21,900,292 |
|
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$ |
43,538,946 |
|
|
|
|
|
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|
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Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
received during the period as interest income
|
|
$ |
68,287 |
|
|
$ |
524,271 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements. See supplemental information on the following
page.
Supplemental
schedule of non-cash investing and financing activities:
As a
result of the March 11, 2008 distribution by CytRx Corporation (the “Company”)
to its stockholders of approximately 36% of the outstanding shares of RXi
Pharmaceuticals Corporation, the Company deconsolidated that previously
majority-owned subsidiary. As part of the transaction, the Company
deconsolidated $3.7 million of total assets and $4.6 million of total
liabilities.
In
connection with applicable antidilution adjustments to the price of certain
outstanding warrants, the Company recorded a deemed dividend of approximately
$757,000 in the three months ended March 31, 2008. The deemed dividend was
recorded as a charge to accumulated deficit and a corresponding credit to
additional paid-in capital.
CYTRX
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
1. Description
of Company and Basis of Presentation
CytRx
Corporation (“CytRx” or the “Company”) is a biopharmaceutical research and
development company engaged in the development of high-value human therapeutics.
CytRx’s drug development pipeline includes two product candidates in clinical
development for cancer indications, including registration studies of
tamibarotene for the treatment of acute promyelocytic leukemia, or APL. In
addition to its core oncology programs, the Company is developing treatments for
neurodegenerative and other disorders based upon its small-molecule molecular
chaperone amplification technology. CytRx also has been engaged in
new-drug discovery research at its laboratory facility in San Diego, California,
utilizing its master chaperone regulator assay, or MaCRA, technology. In May 2009, the Company
substantially completed the initial phase of these activities, and it will
conduct its research and development activities through third parties for the
foreseeable future. Apart from its
drug development programs, CytRx maintains a 45% equity interest in RXi
Pharmaceuticals Corporation, or RXi (NASDAQ: RXII).
On
September 19, 2008, CytRx completed its merger acquisition of Innovive
Pharmaceuticals, Inc., or Innovive, and its clinical-stage oncology product
candidates, including tamibarotene. As a result of the merger, Innovive became a
wholly owned subsidiary of CytRx. On December 30, 2008, CytRx merged the
former Innovive subsidiary into CytRx. Prior to its acquisition of
Innovive, CytRx was focused on developing human therapeutics based primarily
upon its small-molecule molecular chaperone amplification technology, including
arimoclomol for ALS and iroxanadine for diabetic foot ulcers and other potential
indications. After acquiring Innovive, CytRx redirected its efforts
to developing Innovive’s former lead oncology product candidates, tamibarotene
for APL and INNO-206 for small cell lung cancer, SCLC, and other solid tumor
cancers, which the Company believes hold greater near-term revenue
potential. CytRx’s current business strategy is to seek one or more
strategic partnerships for the further development of arimoclomol and
iroxanadine.
To date,
the Company has relied primarily upon sales of its equity securities and upon
proceeds received upon the exercise of options and warrants and, to a much
lesser extent, upon payments from its strategic partners and licensees, to
generate funds needed to finance its business and operations. See Note 6
below.
In August
2006, the Company received approximately $24.3 million in proceeds from the
privately-funded ALS Charitable Remainder Trust (“ALSCRT”) in exchange for the
commitment to continue research and development of arimoclomol and other
potential treatments for ALS and a one percent royalty in the worldwide sales of
arimoclomol. Under the arrangement, the Company retains the rights to any
developments funded by the arrangement and the proceeds of the transaction are
non-refundable. The ALSCRT has no obligation to provide any further funding to
the Company. Management has concluded that due to the research and development
components of the transaction that it is properly accounted for under SFAS No.
68, Research and Development Arrangements
(“SFAS No. 68”). Accordingly, the Company has recorded the value received
under the arrangement as deferred revenue and will recognize service revenue
using the proportional performance method of revenue recognition, meaning that
service revenue is recognized on a dollar-for-dollar basis for each dollar of
expense incurred for the research and development of arimoclomol and other
potential ALS treatments.
The
accompanying condensed consolidated financial statements at March 31, 2009 and
for the three-month period ended March 31, 2009 and 2008 are unaudited, but
include all adjustments, consisting of normal recurring entries, that management
believes to be necessary for a fair presentation of the periods presented. Prior
period figures have been reclassified, wherever necessary, to conform to current
presentation. Interim results are not necessarily indicative of results for a
full year. Balance sheet amounts as of December 31, 2008 have been derived from
the Company’s audited financial statements as of that date.
The
consolidated financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements in its Annual Report on Form 10-K for the year ended
December 31, 2008. The Company’s operating results will fluctuate for the
foreseeable future. Therefore, period-to-period comparisons should not be relied
upon as predictive of the results in future periods.
2. Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 does not expand the use of fair value in any new
circumstances. In February 2008, the FASB issued Staff Position No. FAS 157-1,
which amended SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and
other accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under Statement 13. However,
this scope exception does not apply to assets acquired and liabilities assumed
in a business combination. Also in February 2008, the FASB issued Staff Position
No. FAS 157-2, which delayed the effective date of SFAS No. 157 for
non-financial assets and liabilities, except those items recognized at fair
value on an annual or more frequently recurring basis to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. In
October, 2008 the FASB issued Staff Position No. FAS 157-3 which clarified the
application of SFAS No. 157 in a market that is not
active. In April, 2009 the FASB issued Staff Position No. FAS 157-4 which
expands the application of SFAS No. 157 in situations where the volume and level
of activity for the asset or liability has significantly
decreased. In addition, this also provides guidance so that
transactions that are not orderly can be identified. We do not expect SFAS No.
157 will have a significant impact on our consolidated financial
statements.
In June
2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities (“EITF 07-3”), which requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
amortized over the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability. EITF 07-3 will be
effective for fiscal years beginning after December 15, 2007. The adoption of
EITF 07-3 did not have an impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial
Statements (“SFAS No. 160”) and a revision to SFAS No. 141, Business Combinations (“SFAS
No. 141R”). SFAS No. 160 modifies the accounting for noncontrolling interest in
a subsidiary and the deconsolidation of a subsidiary. SFAS No. 141R establishes
the measurements in a business combination of the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree. Both of
these related statements are effective for fiscal years beginning after December
15, 2008. The adoption of SFAS No. 141R and SFAS No. 160 did not have an impact
on our consolidated financial statements.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS No. 161”). The new
standard amends Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), and seeks to enhance
disclosure about how and why a company uses derivatives; how derivative
instruments are accounted for under SFAS 133 (and the interpretations of that
standard); and how derivatives affect a company’s financial position, financial
performance and cash flows. SFAS 161 will be effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application of the standard is encouraged, as well as
comparative disclosures for earlier periods at initial adoption. The
adoption of SFAS No. 161 did not have a material impact on our consolidated
financial statements.
In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible
Assets.” The Position will be effective for fiscal years
beginning after December 15, 2008 and will only apply prospectively to
intangible assets acquired after the effective date. Early adoption
is not permitted. The adoption of SFAS No. 142-3 did not have a material impact
on our consolidated financial statements.
In May
2008, the FASB issued Staff Position No. Accounting Principles Board 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP No. APB 14-1”). FSP No. APB 14-1 requires
that the liability and equity components of convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an issuer’s nonconvertible
debt borrowing rate. FSP No. APB 14-1 is effective for us as of
January 1, 2009. The adoption of FSP No. APB 14-1 did not have an
impact on our consolidated financial statements.
In June
2008, the FASB ratified EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock. The objective
of this issue is to provide guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock.
This issue applies to any freestanding financial instrument or embedded feature
that has all the characteristics of a derivative instrument or an instrument
which may be potentially settled in an entity's own stock regardless of whether
the instrument possesses derivative characteristics. This issue provides a
two-step approach to assist in making these determinations and is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The adoption of EITF 07-05 did not have a material impact on our consolidated
financial statements.
In August
2008, the U.S. Securities and Exchange Commission, or SEC, announced that it
will issue for comment a proposed roadmap regarding the potential use by U.S.
issuers of financial statements prepared in accordance with International
Financial Reporting Standards, or IFRS. IFRS is a comprehensive series of
accounting standards published by the International Accounting Standards Board,
or IASB. Under the proposed roadmap, the Company could be required in fiscal
year 2014 to prepare financial statements in accordance with IFRS and the SEC
will make a determination in 2011 regarding mandatory adoption of IFRS. The
Company is currently assessing the impact that this potential change would have
on our consolidated financial statements and will continue to monitor the
development of the potential implementation of IFRS.
In April
2009, the FASB issued Financial Staff Position SFAS 107-1 and Accounting
Principles Board (APB) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial
Instruments (SFAS 107-1 and APB 28-1). This
statement amends FASB Statement No. 107, “Disclosures about Fair Values of
Financial Instruments,” to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. The statement also amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in all interim financial
statements. This statement is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The Company is currently assessing the impact that this
potential change would have on our consolidated financial
statements.
3. Short-term
Investments
RXi owned
zero coupon U.S Treasury Bills that were purchased at a discount and matured
within twelve months. They were classified as
held-to-maturity and under Statement of Financial Accounting Standards No. 115,
Investments in Debt
Securities, were valued
at amortized cost. The interest income was amortized at the effective interest
rate.
4. Basic
and Diluted Loss Per Common Share
Basic
loss per common share and diluted loss per common share are computed based on
the weighted-average number of common shares outstanding. Common share
equivalents (which consist of options and warrants) are excluded from the
computation of diluted loss per share where the effect would be antidilutive.
Common share equivalents which could potentially dilute basic earnings per share
in the future, and that were excluded from the computation of diluted loss per
share, totaled approximately 15.6 million and 16.2 million shares at March 31,
2009 and 2008, respectively.
In
connection with applicable antidilution adjustments to the terms of certain
outstanding warrants to purchase common stock in March 2008, the Company
recorded a deemed dividend of approximately $757,000. The deemed dividend is
reflected as an adjustment to net loss for the first quarter of 2008 to arrive
at net loss applicable to common stockholders on the consolidated statements of
operations and for purposes of calculating basic and diluted loss per
share.
5. Stock
Based Compensation
CytRx
Corporation
The
Company has a 2000 Long-Term Incentive Plan under which an aggregate of 10
million shares of common stock were originally reserved for
issuance. As of March 31, 2009, there were approximately 7.4 million
shares subject to outstanding stock options and approximately 0.7 million shares
available for future grant under the plan. The Company also has a 1994 Stock
Option Plan and a 1998 Long Term Incentive Plan under which 9,167 shares and
27,500 shares, respectively, were subject to outstanding stock options at March
31, 2009. However, no options are available for future grant under either of
these plans.
On
November 21, 2008, the Board of Directors of the Company adopted the 2008 Stock
Incentive Plan under which 10 million shares of common stock were reserved for
issuance. The plan will be submitted for approval by the Company’s
stockholders at the 2009 Annual Meeting of Stockholders. In the
meantime, the Company may make awards under the plan, the effectiveness of which
is conditional upon obtaining stockholder approval. As of March 31,
2009, there were 350,000 shares subject to outstanding stock options under the
plan.
The
Company’s stock-based employee compensation plans are described in Note 12 to
its financial statements contained in its Annual Report on Form 10-K filed for
the year ended December 31, 2008.
The
Company has adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and non-employees.
For stock
options and stock warrants paid in consideration of services rendered by
non-employees, the Company recognizes compensation expense in accordance with
the requirements of SFAS No. 123(R), Emerging Issues Task Force Issue No. 96-18
(“EITF 96-18”), Accounting for
Equity Instruments that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees, as amended.
Non-employee
option grants that do not vest immediately upon grant are recorded as an expense
over the vesting period. At the end of each financial reporting period prior to
performance, the value of these options, as calculated using the Black-Scholes
option-pricing model, is determined, and compensation expense recognized or
recovered during the period is adjusted accordingly. Since the fair market value
of options granted to non-employees is subject to change in the future, the
amount of the future compensation expense is subject to adjustment until the
common stock options or warrants are fully vested.
The
following table sets forth the total stock-based compensation expense (recovery)
resulting from stock options included in the Company’s unaudited interim
consolidated statements of operations:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Research
and development — employee
|
|
$ |
196,077 |
|
|
$ |
171,000 |
|
|
General
and administrative — employee
|
|
|
274,949 |
|
|
|
291,000 |
|
|
Total
employee stock-based compensation
|
|
$ |
471,026 |
|
|
$ |
462,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee (recovery)
|
|
$ |
8,350 |
|
|
$ |
(422,000 |
) |
|
General
and administrative — non-employee
|
|
|
74,000 |
|
|
|
— |
|
|
Total
non-employee stock-based compensation
|
|
$ |
82,350 |
|
|
$ |
(422,000 |
) |
During
the first three months of 2009, the Company issued stock options to purchase
50,000 shares of its common stock. The fair value of the stock options granted
in the three-month period listed in the table below was estimated using the
Black-Scholes option-pricing model, based on the following
assumptions:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Risk-free
interest rate
|
|
|
1.90 |
% |
|
|
2.84 |
% |
|
Expected
volatility
|
|
|
97.9 |
% |
|
|
93.8%
- 96.2 |
% |
|
Expected
lives (years)
|
|
|
6 |
|
|
|
6 |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
The
Company’s computation of expected volatility is based on the historical daily
volatility of its publicly traded stock. For option grants issued during the
three-month periods ended March 31, 2009 and 2008, the Company used a calculated
volatility for each grant. The Company’s computation of expected lives was
estimated using the simplified method provided for under Staff Accounting
Bulletin 107, Share-Based
Payment (“SAB 107”), which averages the contractual term of the Company’s
options of ten years with the average vesting term of three years for an average
of six years. The dividend yield assumption of zero is based upon the fact the
Company has never paid cash dividends and presently has no intention of paying
cash dividends. The risk-free interest rate used for each grant is equal to the
U.S. Treasury rates in effect at the time of the grant for instruments with a
similar expected life. Based on historical experience, for the three-month
periods ended March 31, 2009 and 2008, the Company has estimated an annualized
forfeiture rate of 12% and 10%, respectively, for options granted to its
employees, 3% and 1%, respectively, for options granted to senior
management and 0% for each period for options granted to directors. Compensation
costs will be adjusted for future changes in estimated forfeitures. The Company
will record additional expense if the actual forfeitures are lower than
estimated and will record a recovery of prior expense if the actual forfeiture
rates are higher than estimated. No amounts relating to employee stock-based
compensation have been capitalized.
At March
31, 2009, there remained approximately $2.2 million of unrecognized compensation
expense related to unvested stock options granted to current and former
employees, directors and consultants, to be recognized as expense over a
weighted-average period of 1.3 years. Presented below is the Company’s stock
option activity:
|
|
|
Three Months Ended March 31,
2009
|
|
|
|
|
Number
of Options
(Employees)
|
|
|
Number
of Options
(Non-Employees)
|
|
|
Total
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
at January 1, 2009
|
|
|
6,409,940 |
|
|
|
995,000 |
|
|
|
7,404,940 |
|
|
$ |
1.84 |
|
|
Granted
|
|
|
50,000 |
|
|
|
— |
|
|
|
50,000 |
|
|
$ |
0.30 |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
Forfeited
|
|
|
(96,300 |
) |
|
|
— |
|
|
|
(96,300 |
) |
|
$ |
2.75 |
|
|
Outstanding
at March 31, 2009
|
|
|
6,363,640 |
|
|
|
995,000 |
|
|
|
7,358,640 |
|
|
$ |
1.82 |
|
|
Options
exercisable at March 31, 2009
|
|
|
4,337,350 |
|
|
|
470,000 |
|
|
|
4,807,350 |
|
|
$ |
1.99 |
|
A summary
of the activity for non-vested stock options as of March 31, 2009 is presented
below:
|
|
|
Number
of Options
(Employees)
|
|
|
Number
of Options
(Non-Employees)
|
|
|
Total
Number
of Options
|
|
|
Weighted
Average
Grant
Date Fair
Value per Share
|
|
|
Non-vested
at January 1, 2009
|
|
|
2,300,100 |
|
|
|
550,000 |
|
|
|
2,850,100 |
|
|
$ |
1.51 |
|
|
Granted
|
|
|
50,000 |
|
|
|
— |
|
|
|
50,000 |
|
|
$ |
0.24 |
|
|
Forfeited
|
|
|
(96,300 |
) |
|
|
— |
|
|
|
(96,300 |
) |
|
$ |
2.30 |
|
|
Vested
|
|
|
(227,400 |
) |
|
|
(25,100 |
) |
|
|
(252,500 |
) |
|
$ |
1.60 |
|
|
Non-vested
at March 31, 2009
|
|
|
2,026,400 |
|
|
|
524,900 |
|
|
|
2,551,300 |
|
|
$ |
1.44 |
|
The
following table summarizes significant ranges of outstanding stock options under
the Company’s plans at March 31, 2009:
|
Range
of
Exercise Prices
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of
Options
Exercisable
|
|
|
Weighted
Average
Contractual Life
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
0.30
- 1.00 |
|
|
|
2,157,400 |
|
|
|
8.33 |
|
|
$ |
0.54 |
|
|
|
998,500 |
|
|
|
8.33 |
|
|
$ |
0.71 |
|
| $ |
1.01
- 2.00 |
|
|
|
2,639,000 |
|
|
|
6.94 |
|
|
$ |
1.35 |
|
|
|
1,834,100 |
|
|
|
6.94 |
|
|
$ |
1.40 |
|
| $ |
2.01
- 3.00 |
|
|
|
1,120,500 |
|
|
|
4.32 |
|
|
$ |
2.46 |
|
|
|
1,108,500 |
|
|
|
4.32 |
|
|
$ |
2.46 |
|
| $ |
3.01
- 4.00 |
|
|
|
463,300 |
|
|
|
8.47 |
|
|
$ |
3.44 |
|
|
|
301,700 |
|
|
|
8.47 |
|
|
$ |
3.40 |
|
| $ |
4.01
- 4.65 |
|
|
|
978,440 |
|
|
|
8.10 |
|
|
$ |
4.42 |
|
|
|
564,550 |
|
|
|
8.10 |
|
|
$ |
4.43 |
|
| |
|
|
|
|
7,358,640 |
|
|
|
7.20 |
|
|
$ |
1.82 |
|
|
|
4,807,350 |
|
|
|
7.20 |
|
|
$ |
1.98 |
|
There was
no aggregate intrinsic value of outstanding options as of March 31, 2009, since
there is no difference between the closing fair market value of the Company’s
common stock on March 31, 2009 ($0.35) and the exercise price of the underlying
options.
RXi
Pharmaceuticals
RXi has
its own stock option plan. RXi accounted for stock option expense in the same
manner as CytRx as described above.
As
discussed in Note 9, the Company started accounting for its investment in RXi
under the equity method in March 2008, and accordingly, the following table sets
forth the total stock-based compensation expense for January and February 2008
resulting from RXi stock options that is included in the Company’s unaudited
condensed consolidated statements of operations:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Research
and development — employee
|
|
$ |
— |
|
|
$ |
28,000 |
|
|
General
and administrative — employee
|
|
|
— |
|
|
|
369,000 |
|
|
Total
employee stock-based compensation
|
|
$ |
— |
|
|
$ |
397,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee
|
|
$ |
— |
|
|
$ |
121,000 |
|
|
General
and administrative — non-employee
|
|
|
— |
|
|
|
— |
|
|
Total
non-employee stock-based compensation
|
|
$ |
— |
|
|
$ |
121,000 |
|
6. Liquidity
and Capital Resources
At March
31, 2009, the Company had cash and cash equivalents of approximately $21.9
million and held 6,268,881 shares of restricted common stock of RXi
Pharmaceuticals Corporation with a market value of $31.9 million based upon the
closing price of the RXi common stock on that date. Management believes that the
Company’s current resources will be sufficient to support its currently planned
level of operations through July, 2011. This estimate is based, in part, upon
the Company’s currently projected expenditures for the remainder of 2009 and the
first three months of 2010 of approximately $10.7 million, includes approximately $0.7
million for its clinical program for tamibarotene, approximately $0.3 million
for its clinical program for INNO-206, approximately $0.3 million for its
clinical program for INNO-406, approximately $0.7 million for its animal
toxicology studies and related activities for arimoclomol, approximately $1.0
million for operating its clinical programs, approximately $1.1 million in
connection with the outsourcing of research activities at the Company’s
laboratory in San Diego, California, and approximately $6.6 million for other
general and administrative expenses. These projected expenditures are based upon
numerous assumptions and subject to many uncertainties, and actual expenditures
may be significantly different from these projections.
If the
Company obtains marketing approval as currently planned and successfully
commercializes its current product candidates, it anticipates it will take a
minimum of three years, and possibly
longer, for it to generate significant recurring revenue, and the Company will
be dependent on future financing and possible asset sales until such time, if
ever, as it can generate significant recurring revenue. The Company has no
commitments from third parties to provide it with any additional financing, and
we may not be able to obtain future financing on favorable terms, or at all. If
the Company is unable to raise additional funding from outside sources, it may
have to sell some or all of its assets, including its RXi shares. If
the Company fails to obtain sufficient funding when needed, it may be forced to
delay or reduce the scope of or eliminate some portion or all of its development
programs or clinical trials, license to other companies its product candidates
or technologies that it would prefer to develop and commercialize itself, or
seek to merge with or be acquired by another company. For example, the Company
intends to assess periodically the costs and potential commercial value of our
new-drug discovery activities. Depending on these assessments, the Company may
determine to modify, out-source, partner or suspend these
activities.
7. Equity
Transactions
On March
11, 2008, the Company paid a dividend to its stockholders of approximately 36%
of the outstanding shares of RXi common stock. In connection with that dividend,
the Company adjusted the price of warrants to purchase approximately 10.6
million shares that had been issued in prior equity financings in October 2004,
January 2005 and March 2006. The adjustments were made as a result of
anti-dilution provisions in those warrants that were triggered by the Company’s
distribution of a portion of its assets to its stockholders. The Company
accounted for the anti-dilution adjustments as deemed dividends analogous with
the guidance in Emerging Issues Task Force Issue (“EITF”) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and EITF 00-27, Application of 98-5 to Certain
Convertible Instruments, and recorded an approximate $757,000 charge to
accumulated deficit and a corresponding credit to additional paid-in
capital.
During
the three-month period ended March 31, 2009, no options or warrants in the
Company’s common stock were exercised.
8. Minority
Interest in RXi
Through
February 2008, the Company owned approximately 85% of the outstanding shares of
common stock of RXi. While RXi was majority-owned, the Company’s consolidated
financial statements reflected 100% of the assets and liabilities and results of
operations of RXi, with the interests of the minority shareholders of RXi
recorded as “minority interests.” The Company offset $88,000 of minority
interest in losses of RXi against its net loss for the months of January and
February 2008.
On March
11, 2008, the Company distributed to its stockholders approximately 4.5 million
shares of RXi common stock, or approximately 36% of RXi’s outstanding shares,
which reduced CytRx’s ownership to less than 50% of RXi. As a result, CytRx
began to account for its investment in RXi using the equity method, under which
CytRx records only its pro-rata share of the financial results of RXi. Because
only a portion of RXi’s financial results for 2008 were recorded by CytRx under
the equity method, the Company’s results of operations for the first three
months of 2008 are not directly comparable to results of operations for the same
period in 2009. The future results of operations of the Company also will not be
directly comparable to corresponding periods in prior years during which our
financial statements reflected the consolidation of RXi.
9. Equity
Investment in RXi
Management
determined that the distribution of RXi common stock to stockholders of CytRx in
March 2008 represented a partial spin-off of RXi and accounted for the
distribution of the RXi common shares at cost. As a result of its reduced
ownership in RXi, CytRx began to account for its investment in RXi using the
equity method, under which CytRx records only its pro-rata share of the
financial results of RXi. The following table presents summarized financial
information for RXi for the three-month period ended March 31,
2009:
|
Income
Statement Data (unaudited, in thousands)
|
|
Three-Month
Period Ended March 31,
2009
|
|
|
Sales
|
|
$ |
— |
|
|
Gross
profit
|
|
|
— |
|
|
Loss from continuing
operations
|
|
|
(4,171 |
) |
|
Loss
|
|
|
(4,171 |
) |
|
Balance
Sheet Data (unaudited, in thousands)
|
|
March 31, 2009
|
|
|
Current
assets
|
|
$ |
7,563 |
|
|
Noncurrent
assets
|
|
|
400 |
|
|
Current
liabilities
|
|
|
1,492 |
|
|
Stockholders’
equity
|
|
|
6,471 |
|
At March
31, 2009, the fair value of CytRx’s 6,268,881 shares of RXi common stock was
$31.9 million based on the closing price of RXi common stock (NASDAQ: “RXII”) on
that date. As CytRx accounts for its investment in RXi using the equity method,
this value is not reflected in the “Investment in unconsolidated subsidiary” on
the CytRx balance sheet.
Item
2. — Management’s Discussion and Analysis of Financial
Condition And Results of Operations
Forward
Looking Statements
From time
to time, we make oral and written statements that may constitute
“forward-looking statements” (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1995 or by the SEC in its rules,
regulations and releases, including Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
We desire to take advantage of the “safe harbor” provisions in the Private
Securities Litigation Reform Act of 1995 for forward-looking statements made
from time to time, including, but not limited to, the forward-looking statements
made in this Quarterly Report, as well as those made in our other filings with
the SEC.
All
statements in this Quarterly Report, including statements in this section, other
than statements of historical fact are forward-looking statements for purposes
of these provisions, including statements of our current views with respect to
the recent developments regarding our business strategy, business plan and
research and development activities, our future financial results, and other
future events. These statements include forward-looking statements both with
respect to us, specifically, and the biotechnology industry, in general. In some
cases, forward-looking statements can be identified by the use of terminology
such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,”
“potential” or “could” or the negative thereof or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements.
All
forward-looking statements involve inherent risks and uncertainties, and there
are or will be important factors that could cause actual results to differ
materially from those indicated in these statements. We believe that these
factors include, but are not limited to, those factors discussed in this section
and under the caption “Risk Factors,” all of which should be reviewed carefully.
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we anticipate. Please consider our forward-looking statements in light
of those risks as you read this Quarterly Report. We undertake no obligation to
publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
Overview
CytRx
Corporation (“CytRx,” the “Company,” “we,” “us” or “our”) is a biopharmaceutical
research and development company engaged in the development of high-value human
therapeutics. Our drug development pipeline includes two product candidates in
clinical development for cancer indications, including registration studies of
tamibarotene for the treatment of acute promyelocytic leukemia, or APL. In
addition to our core oncology programs, we are developing treatments for
neurodegenerative and other disorders based upon our small-molecule molecular
chaperone amplification technology. We also have been engaged in new-drug
discovery research at our laboratory facility in San Diego, California,
utilizing our master chaperone regulator assay, or MaCRA, technology.
In
May 2009,
we substantially completed the initial phase of these activities, and we
will conduct our research and development activities through third parties
for the foreseeable future. Apart from our drug development programs,
we currently maintain a 45% equity interest in our former subsidiary, RXi
Pharmaceuticals Corporation, or RXi (NASDAQ: RXII). On September 19,
2008, we completed our merger acquisition of Innovive Pharmaceuticals, Inc., or
Innovive, and its clinical-stage cancer product candidates, including
tamibarotene. As a result of the merger, Innovive became a wholly owned
subsidiary of CytRx. On December 30, 2008, we merged the former Innovive
subsidiary into CytRx.
Prior to
our acquisition of Innovive, we were focused on developing human therapeutics
based primarily upon our small-molecule molecular chaperone amplification
technology, including arimoclomol for ALS and stroke recovery and iroxanadine
for diabetic foot ulcers and other potential indications. After
acquiring Innovive, we redirected our efforts from arimoclomol and iroxanadine
to developing Innovive’s former lead cancer product candidates, tamibarotene for
APL and INNO-206 for small cell lung cancer, SCLC, or other solid tumor cancers,
which we believe hold greater near-term revenue potential. Our
current business strategy is to seek one or more strategic partnerships for
the further
development of arimoclomol and iroxanadine.
Through
February 2008, we owned a majority of the outstanding shares of common stock of
RXi Pharmaceuticals Corporation, or RXi, which was founded in April 2006 by the
Company and four researchers in the field of RNAi, including Dr. Craig Mello,
recipient of the 2006 Nobel Prize for Medicine for his co-discovery of RNAi.
RNAi is a naturally occurring mechanism for the regulation of gene expression
that has the potential to selectively inhibit the activity of any human gene.
RXi is focused solely on developing and commercializing therapeutic products
based upon RNAi technologies for the treatment of human diseases, including
neurodegenerative diseases, cancer, type 2 diabetes and obesity. While RXi was
majority-owned, our consolidated financial statements reflected 100% of the
assets and liabilities and results of operations of RXi, with the interests of
the minority shareholders of RXi recorded as “minority interests.” In March
2008, we distributed to our stockholders approximately 36% of RXi’s outstanding
shares, which reduced our ownership to less than 50% of RXi. As a result of the
reduced ownership, we began to account for its investment in RXi using the
equity method, under which we record only our pro-rata share of the financial
results of RXi as “equity in loss of unconsolidated subsidiary” on the
consolidated statements of operations. Because only a portion of RXi’s financial
results for 2008 were recorded by us under the equity method, our results of
operations for the first three months of 2009 are not directly comparable to
results of operations for the same period in 2008. The future results of
operations of the Company also will not be directly comparable to corresponding
periods in prior years during which our financial statements reflected the
consolidation of RXi.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, impairment of long-lived assets,
including finite lived intangible assets, research and development expenses and
clinical trial expenses and stock-based compensation expense.
We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or
conditions.
Our
significant accounting policies are summarized in Note 2 to our financial
statements contained in our Annual Report on Form 10-K filed for the year
ended December 31, 2008. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:
Revenue
Recognition
Revenue
consists of license fees from strategic alliances with pharmaceutical companies
as well as service and grant revenues. Service revenue consists of contract
research and laboratory consulting. Grant revenues consist of government
and private grants.
Monies
received for license fees are deferred and recognized ratably over the
performance period in accordance with Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition.
Milestone payments will be recognized upon achievement of the milestone as long
as the milestone is deemed substantive and we have no other performance
obligations related to the milestone and collectability is reasonably assured,
which is generally upon receipt, or recognized upon termination of the agreement
and all related obligations. Deferred revenue represents amounts received prior
to revenue recognition.
Revenues
from contract research, government grants, and consulting fees are recognized
over the respective contract periods as the services are performed, provided
there is persuasive evidence or an arrangement, the fee is fixed or determinable
and collection of the related receivable is reasonably assured. Once all
conditions of the grant are met and no contingencies remain outstanding, the
revenue is recognized as grant fee revenue and an earned but unbilled revenue
receivable is recorded.
In August
2006, we received approximately $24.3 million in proceeds from the
privately-funded ALS Charitable Remainder Trust (“ALSCRT”) in exchange for the
commitment to continue research and development of arimoclomol and other
potential treatments for ALS and a one percent royalty in the worldwide sales of
arimoclomol. Under the arrangement, we retain the rights to any products or
intellectual property funded by the arrangement and the proceeds of the
transaction are non-refundable. The ALSCRT has no obligation to provide any
further funding to us. We have concluded that due to the research and
development components of the transaction that it is properly accounted for
under Statement of Financial Accounting Standards No. 68, Research and Development Arrangements.
Accordingly, we have recorded the value received under the arrangement as
deferred service revenue and will recognize service revenue using the
proportional performance method of revenue recognition, meaning that service
revenue is recognized on a dollar-for-dollar basis for each dollar of expense
incurred for the research and development of arimoclomol and other potential ALS
treatments. We believe that this method best approximates the efforts expended
related to the services provided. We adjust our estimates of expense incurred
for this research and development on a quarterly basis. For the three-month
periods ended March 31, 2009 and 2008, we recognized approximately $1.5 million
and $2.2 million, respectively, of service revenue related to this transaction.
Any significant change in ALS related research and development expense in any
particular quarterly or annual period will result in a change in the recognition
of revenue for that period and consequently affect the comparability or revenue
from period to period.
The
amount of “deferred revenue, current portion” is the amount of deferred revenue
that is expected to be recognized in the next twelve months and is subject to
fluctuation based upon management’s estimates. Management’s estimates include an
evaluation of what pre-clinical and clinical trials are necessary, the timing of
when trials will be performed and the estimated clinical trial expenses. These
estimates are subject to changes and could have a significant effect on the
amount and timing of when the deferred revenues are recognized.
Research
and Development Expenses
Research
and development expenses consist of costs incurred for direct and
overhead-related research expenses and are expensed as incurred. Costs to
acquire technologies, including licenses, that are utilized in research and
development and that have no alternative future use are expensed when incurred.
Technology developed for use in its products is expensed as incurred until
technological feasibility has been established.
Research
and development expenses include costs of our drug discovery research activities
at our San Diego laboratory. We periodically assess these activities,
and in May 2009, determined that these activities had substantially met our
initial objectives. We intend to outsource these activities during
the second quarter and may not to renew the lease of our San Diego facility,
which expires in July 2010.
Clinical
Trial Expenses
Clinical
trial expenses, which are included in research and development expenses, include
obligations resulting from our contracts with various clinical research
organizations in connection with conducting clinical trials for our product
candidates. We recognize expenses for these activities based on a variety of
factors, including actual and estimated labor hours, clinical site initiation
activities, patient enrollment rates, estimates of external costs and other
activity-based factors. We believe that this method best approximates the
efforts expended on a clinical trial with the expenses we record. We adjust our
rate of clinical expense recognition if actual results differ from our
estimates. If our estimates are incorrect, clinical trial expenses recorded in
any particular period could vary.
Stock-Based
Compensation
Our
stock-based employee compensation plans are described in Note 5 of the Notes to
Condensed Consolidated Financial Statements included in this Quarterly Report.
SFAS 123(R), Share-Based
Payment, requires the recognition of compensation expense associated with
stock option grants and other equity instruments to employees in the financial
statements. We adopted SFAS 123(R) using the modified-prospective method and use
the Black-Scholes valuation model for valuing share-based payments. We account
for transactions in which services are received in exchange for equity
instruments based on the fair value of such services received from
non-employees, in accordance with SFAS 123(R), Emerging Issues Task Force Issue
No. 96-18 (“EITF 96-18”), Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees, as amended.
Non-employee
stock-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances, option grants to
non-employees are immediately vested and have no future performance requirements
by the non-employee and the total stock-based compensation charge is recorded in
the period of the measurement date.
The fair
value of each CytRx and RXi common stock option grant is estimated using the
Black-Scholes option-pricing model, which uses certain assumptions related to
risk-free interest rates, expected volatility, expected life of the common stock
options and future dividends. Compensation expense is recorded based upon the
value derived from the Black-Scholes option-pricing model, based on an expected
forfeiture rate that is adjusted for actual experience. If our Black-Scholes
option-pricing model assumptions or our actual or estimated forfeiture rate are
different in the future, that could materially affect compensation expense
recorded in future periods.
Impairment
of Long-Lived Assets
We review
long-lived assets, including finite lived intangible assets, for impairment on
an annual basis, as of December 31, or on an interim basis if an event occurs
that might reduce the fair value of such assets below their carrying values. 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.
If our estimates used in the determination of either discounted future cash
flows or other appropriate fair value methods are not accurate as compared to
actual future results we may be required to record an impairment
charge.
Earnings
Per Share
Basic
earnings per share and diluted loss per common share are computed based on the
weighted-average number of common shares outstanding. Common share equivalents
(which consist of options and warrants) are excluded from the computation of
diluted loss per share where the effect would be anti-dilutive. Common share
equivalents that were excluded from the computation of diluted loss per share
totaled approximately 15.6 million shares and 16.2 million shares at March 31,
2009 and 2008, respectively. In connection with the dividend of 36% of the
outstanding shares of RXi paid to our stockholders on March 11, 2008, we
recorded a deemed dividend of $757,000. The deemed dividend was reflected as an
adjustment to net loss for the first quarter of 2008, to arrive at net loss
applicable to common stockholders on the consolidated statement of operations
and for purposes of calculating basic and diluted loss per share.
Liquidity
and Capital Resources
We have
relied primarily upon proceeds from sales of our equity securities and the
exercise of options and warrants, and to a much lesser extent upon payments from
our strategic partners and licensees, to generate funds needed to finance our
business and operations.
At March
31, 2009, we had cash and cash equivalents of approximately $21.9 million and
held 6,268,881 shares of restricted common stock of RXi Pharmaceuticals
Corporation with a market value of $31.9 million based upon the closing price of
the RXi common stock on that date. We currently project expenditures
for the remainder of 2009 and the first three months of 2010 of approximately
$10.7 million,
including approximately $0.7 million for our clinical program for tamibarotene,
approximately $0.3 million for our clinical program for INNO-206, approximately
$0.3 million for our clinical program for INNO-406, approximately $0.7 million
for our animal toxicology studies and related activities for arimoclomol,
approximately $1.0 million for operating our clinical programs, approximately
$1.1 million in connection with winding up research activities at our laboratory
in San Diego, California, and approximately $6.6 million for other general and
administrative expenses. In May 2009, we substantially completed the
initial phase of these activities, and we will conduct our research and
development activities through third parties for the foreseeable
future. These projected expenditures are based upon numerous
assumptions and subject to many uncertainties, and actual expenditures may be
significantly different from these projections.
If we
obtain marketing approval as currently planned and successfully commercialize
our current product candidates, we anticipate it will take a minimum of
three years, and
possibly longer, for us to generate significant recurring revenue, and we will
be dependent on future financing and possible asset sales until such time, if
ever, as we can generate significant recurring revenue. We have no commitments
from third parties to provide us with any additional financing, and we may not
be able to obtain future financing on favorable terms, or at all. If we are
unable to raise additional funding from outside sources, we may have to sell
some or all of our assets, including our RXi shares. If we fail to
obtain sufficient funding when needed, we may be forced to delay or reduce the
scope of or eliminate some portion or all of our development programs or
clinical trials, license to other companies our product candidates or
technologies that we would prefer to develop and commercialize ourselves, or
seek to merge with or be acquired by another company. For example, we intend to
assess periodically the costs and potential commercial value of our new-drug
discovery activities. Depending on these assessments, we may determine to
modify, out-source, partner or suspend these activities.
Our net
loss decreased by approximately $1.4 million during the quarter ended March 31,
2009 compared to the quarter ended March 31, 2008. The net expenses
of RXi in the 2008 comparative period were approximately $1.9 million, which
accounts for most of the decrease. Our accounts payable increased by
approximately $1.1 million from December 31, 2008 to March 31, 2009, reflecting
several significant invoices from service providers, including auditors and
attorneys, that were received in the first quarter but not paid until the second
quarter, as well as our use of the payment
periods permitted by the provisions of certain of our accounts payable.
In
the three-month period ended March 31, 2009, we used $0.1 million of cash in
investing activities, compared to $0.6 million used in the comparable 2008
period. The 2008 period included net funds provided by RXi converting short-term
investments to cash equivalents. The remainder of the
investing activity for both the 2008 and 2007 periods primarily related to cash
used for the purchase of equipment. We do not expect significant capital
spending for additional equipment to be necessary during the next 12
months.
Cash
provided by financing activities in the three months ended March 31, 2009 and
2008 was $0 and $1.0 million, respectively. The 2008 period consisted
of $1.0 million of funds received from the exercise of stock options and
warrants.
We are
evaluating other potential future sources of capital, as we do not currently
have commitments from any third parties to provide us with capital. The results
of our technology licensing efforts and the actual proceeds of any fund-raising
activities will determine our ongoing ability to operate as a going concern. Our
ability to obtain future financings through joint ventures, product licensing
arrangements, royalty sales, equity financings, sales of RXi shares, grants or
otherwise is subject to market conditions and our ability to identify parties
that are willing and able to enter into such arrangements on terms that are
satisfactory to us. Depending upon the outcome of our fundraising efforts, the
accompanying consolidated financial information may not necessarily be
indicative of future operating results or future financial
condition.
We expect
to incur significant losses for the foreseeable future, and there can be no
assurance that we will become profitable. Even if we become profitable, we may
not be able to sustain that profitability.
Results
of Operations
We
recorded a net loss applicable to common stockholders of approximately $4.0
million for the three-month period ended March 31, 2009, as compared to $6.1
million for the same period in 2008.
We
recognized $1.5 million of revenue for the three-month period ended March 31,
2009, and $2.2 million for the same period in 2008. These revenues relate to our
$24.3 million sale to the ALSCRT of a one percent royalty interest in worldwide
sales of arimoclomol in August 2006. All future licensing fees under our current
licensing agreements are dependent upon successful development milestones being
achieved by the licensor. During 2009, we do not anticipate receiving any
significant licensing fees. We will continue to recognize the balance of the
deferred revenue recorded from the royalty transaction with the ALSCRT over the
development period of our arimoclomol research.
Research
and Development
|
|
|
Three-Month
Period Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In thousands)
|
|
|
Research
and development expenses
|
|
$ |
2,676 |
|
|
$ |
3,125 |
|
|
Non-cash
research and development expenses (recovery)
|
|
|
8 |
|
|
|
(243 |
) |
|
Employee
stock option expense
|
|
|
196 |
|
|
|
199 |
|
|
Depreciation
and amortization
|
|
|
169 |
|
|
|
111 |
|
|
|
|
$ |
3,049 |
|
|
$ |
3,192 |
|
Research
expenses are expenses incurred by us in the discovery of new information that
will assist us in the creation and the development of new drugs or treatments.
Development expenses are expenses incurred by us in our efforts to commercialize
the findings generated through our research efforts.
Research
and development expenses incurred during the three-month period ended March 31,
2009 relate to our various development programs. The three-month period ended
March 31, 2009 excludes any RXi-related research and development expenses and in
the three-month period ended March 31, 2008, RXi’s expenses of approximately
$0.6 million were only included for the months of January and February 2008.
Excluding expenses of RXi from the three-month period ended March 31, 2008
results in an increase in research and development expenses of $0.2 million in
the current period as compared to the same period in 2008. In the
three-month period ended March 31, 2009, our development costs associated with
our program for arimoclomol in ALS were $0.7 million, the costs of our program
for iroxanadine for diabetic complications were $0.1 million, the costs of our
program for tamibarotene were $0.6 million, the costs of our other programs
totaled $0.6 million and the cost of operations in our research laboratory were
$0.7 million. In May 2009, we substantially completed the initial phase of our
San Diego research laboratory activities and will conduct our research and
development activities through third parties for the foreseeable
future.
As
compensation to members of RXi’s scientific advisory board and our consultants,
and in connection with the acquisition of technology, we and RXi sometimes issue
shares of common stock, stock options and warrants to purchase shares of common
stock. For financial statement purposes, we value these shares of common stock,
stock options, and warrants at the fair value of the common stock, stock options
or warrants granted, or the services received, whichever is more reliably
measurable. The value of the non-employee option grants are marked to market
using the Black-Scholes option-pricing model and most of the compensation
expense recognized or recovered during the period is adjusted accordingly. This
resulted in a recovery of expenses in the three-month period ended March 31,
2008 totaling approximately $0.2 million, all attributable to RXi. We recorded
$0.2 million of employee stock option expense both during the three-month
periods ended March 31, 2009 and 2008.
General
and Administrative Expenses
|
|
|
Three-Month
Period Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
thousands)
|
|
|
General
and administrative expenses
|
|
$ |
2,111 |
|
|
$ |
3,603 |
|
|
Non-cash
general and administrative expenses
|
|
|
74 |
|
|
|
189 |
|
|
Employee
stock option expense
|
|
|
275 |
|
|
|
659 |
|
|
Depreciation
and amortization
|
|
|
23 |
|
|
|
22 |
|
|
|
|
$ |
2,483 |
|
|
$ |
4,473 |
|
General
and administrative expenses include all administrative salaries and general
corporate expenses, including legal expenses associated with the prosecution of
our intellectual property. Our general and administrative expenses, excluding
stock option expense, non-cash expenses and depreciation expense, were $2.1
million for the three-month periods ended March 31, 2009, compared to $3.6
million for the same period in 2008. General and administrative expenses
decreased by $1.5 million in the first quarter of 2009 as compared to 2008,
primarily due to the 2008 period including approximately $1.3 million of RXi
expenses. Additionally, there was a reduction in professional fees of
approximately $0.5 million, which largely related to fees incurred in effecting
the partial spinoff of RXi in the first quarter of 2008.
Employee
stock option expense relates to options granted to recruit and retain directors,
officers and other employees. We recorded approximately $0.3 million of employee
stock option expense during the three-month period ended March 31, 2009 as
compared to approximately $0.7 million during the same period in 2008. The
decrease relates primarily to the exclusion of RXi’s expenses in the
three-months ended March 31, 2009. In March 2008, we awarded RXi common stock to
our directors and certain employees and recorded the $189,000 fair value as
non-cash compensation expense which is the total for the three-months ended
March 31, 2008. There were no comparable awards in the 2009 period. Non-cash
expenses of $74,000 relate to warrants issued to consultants in the three-month
period ended March 31, 2009.
Depreciation
and Amortization
The
depreciation expense reflects the depreciation of our equipment and furnishings
and the amortization expenses related to our molecular library, which was placed
in service in March 2005. These expenses are classified as research and
development or general and administrative expenses depending upon the associated
business activity.
Interest
Income
Interest
income was $0.1 million for the three-month period ended March 31, 2009,
compared to $0.5 million for the same period in 2008. The difference between
periods is attributable primarily to the cash available for investment each
year.
Minority
Interest in Losses of Subsidiary
We offset
$88,000 of minority interest in losses of RXi against our net loss for the
months of January and February 2008. Since March 2008, we have not
recorded a minority interest in the losses of RXi, as RXi’s gain and losses have
been accounted for under the equity method as a result of the deconsolidation of
RXi.
Income
Taxes
On March
11, 2008, we distributed to our stockholders approximately 4.5 million shares of
RXi common stock. We recognized approximately a $32.9 million gain for income
tax purposes on the distribution of shares of RXi common stock, which was the
amount equal to the excess of the fair market value of the stock distributed
over our tax basis.
Item
3. — Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to market risk is limited primarily to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates,
particularly because a significant portion of our investments are in short-term
debt securities issued by the U.S. government and institutional money market
funds. The primary objective of our investment activities is to preserve
principal. Due to the nature of our short-term investments, we believe that we
are not subject to any material market risk exposure. We do not have any
derivative financial instruments or foreign currency instruments. If interest
rates had varied by 10% in the three-month period ended March 31, 2009, it would
not have had a material effect on our results of operations or cash flows for
that period.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in
Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period
covered by this Quarterly Report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
Changes
in Controls over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the quarter ended March 31, 2009 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. We
continually seek to assure that all of our controls and procedures are adequate
and effective. Any failure to implement and maintain improvements in the
controls over our financial reporting could cause us to fail to meet our
reporting obligations under the SEC’s rules and regulations. Any failure to
improve our internal controls to address the weaknesses we have identified could
also cause investors to lose confidence in our reported financial information,
which could have a negative impact on the trading price of our common
stock.
PART
II — OTHER INFORMATION
The
exhibits listed in the accompanying Index to Exhibits are filed as part of this
Quarterly Report and incorporated herein by reference.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
CytRx
Corporation
|
|
|
|
|
|
|
|
Date:
May 11, 2009
|
By:
|
/s/ JOHN
Y. CALOZ
|
|
|
|
|
John
Y. Caloz
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
10.1
|
|
Employment
Agreement dated May 4, 2009 between CytRx Corporation and Jaisim
Shah |
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to 17 CFR
240.13a-14(a)
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to 17 CFR
240.13a-14(a)
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|