UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
|
£
|
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
|
58-1642740
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
11726
San Vicente Blvd., Suite 650
Los
Angeles, CA
|
90049
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(310)
826-5648
(Registrant’s
telephone number, including area code)
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: (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 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 £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
|
(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
November 5, 2009: 108,855,005 exclusive of treasury shares.
CYTRX
CORPORATION
FORM
10-Q
TABLE
OF CONTENTS
|
|
Page
|
|
PART
I. — FINANCIAL INFORMATION
|
|
|
Item
1.Financial Statements
|
3
|
|
Item
2.Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
15
|
|
Item
3.Quantitative and Qualitative Disclosures About Market
Risk
|
22
|
|
Item
4.Controls and Procedures
|
22
|
|
|
|
|
PART
II. — OTHER INFORMATION
|
|
|
Item
2.Unregistered Sales of Equity Securities and Use of
Proceeds
|
22
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|
Item
6.Exhibits
|
22
|
|
|
|
|
SIGNATURES
|
23
|
|
|
|
|
INDEX
TO EXHIBITS
|
24
|
PART
I — FINANCIAL INFORMATION
Item
1. — Financial Statements
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
7,766,783 |
|
|
$ |
25,041,772 |
|
|
Short
term investments
|
|
|
27,750,000 |
|
|
|
— |
|
|
Assets
held for sale
|
|
|
149,063 |
|
|
|
— |
|
|
Interest
receivable
|
|
|
114,874 |
|
|
|
— |
|
|
Income
taxes recoverable
|
|
|
313,619 |
|
|
|
215,623 |
|
|
Prepaid
expense and other current assets
|
|
|
387,046 |
|
|
|
613,889 |
|
|
Total
current assets
|
|
|
36,481,385 |
|
|
|
25,871,284 |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and furnishings, net
|
|
|
185,560 |
|
|
|
1,835,052 |
|
|
Molecular
library, net
|
|
|
— |
|
|
|
103,882 |
|
|
Goodwill
|
|
|
183,780 |
|
|
|
183,780 |
|
|
Other
assets
|
|
|
323,690 |
|
|
|
330,032 |
|
|
Total
assets
|
|
$ |
37,174,415 |
|
|
$ |
28,324,030 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
561,154 |
|
|
$ |
668,422 |
|
|
Accrued
expenses and other current liabilities
|
|
|
3,018,072 |
|
|
|
2,556,904 |
|
|
Warrant
liability
|
|
|
3,483,566 |
|
|
|
— |
|
|
Deferred
revenue, current portion
|
|
|
— |
|
|
|
1,817,600 |
|
|
Total
current liabilities
|
|
|
7,062,792 |
|
|
|
5,042,926 |
|
|
Deferred
revenue, non-current portion
|
|
|
— |
|
|
|
7,582,797 |
|
|
Total
liabilities
|
|
|
7,062,792 |
|
|
|
12,625,723 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
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
|
|
|
— |
|
|
|
— |
|
|
Common
stock, $.001 par value, 175,000,000 shares authorized; 109,488,821 and
93,978,448 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively.
|
|
|
109,489 |
|
|
|
93,978 |
|
|
Additional
paid-in capital
|
|
|
226,741,556 |
|
|
|
210,007,468 |
|
|
Treasury
stock, at cost (633,816 shares held at September 30, 2009 and December 31,
2008)
|
|
|
(2,279,238 |
) |
|
|
(2,279,238 |
) |
|
Accumulated
deficit
|
|
|
(194,460,184 |
) |
|
|
(192,123,901 |
) |
|
Total
stockholders’ equity
|
|
|
30,111,623 |
|
|
|
15,698,307 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
37,174,415 |
|
|
$ |
28,324,030 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
6,678,903 |
|
|
$ |
917,473 |
|
|
$ |
9,125,397 |
|
|
$ |
4,838,923 |
|
|
License
revenue
|
|
|
275,000 |
|
|
|
— |
|
|
|
275,000 |
|
|
|
— |
|
|
|
|
|
6,953,903 |
|
|
|
917,473 |
|
|
|
9,400,397 |
|
|
|
4,838,923 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,227,495 |
|
|
|
2,005,813 |
|
|
|
5,640,041 |
|
|
|
7,723,184 |
|
|
General
and administrative
|
|
|
2,576,187 |
|
|
|
1,600,986 |
|
|
|
6,987,313 |
|
|
|
9,266,218 |
|
|
In-process
research and development (See Note 13)
|
|
|
— |
|
|
|
8,012,154 |
|
|
|
— |
|
|
|
8,012,154 |
|
|
Impairment
loss on fixed assets
|
|
|
1,187,305 |
|
|
|
— |
|
|
|
1,187,305 |
|
|
|
— |
|
|
|
|
|
4,990,987 |
|
|
|
11,618,953 |
|
|
|
13,814,659 |
|
|
|
25,001,556 |
|
|
Income
(loss) before other income
|
|
|
1,962,916 |
|
|
|
(10,701,480 |
) |
|
|
(4,414,262 |
) |
|
|
(20,162,633 |
) |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
102,348 |
|
|
|
215,345 |
|
|
|
242,311 |
|
|
|
1,023,921 |
|
|
Other
income, net
|
|
|
28,316 |
|
|
|
— |
|
|
|
66,677 |
|
|
|
219,229 |
|
|
Gain
on warrant derivative liability
|
|
|
544,040 |
|
|
|
— |
|
|
|
544,040 |
|
|
|
— |
|
|
Equity
in loss of unconsolidated subsidiary
|
|
|
— |
|
|
|
(1,344,372 |
) |
|
|
— |
|
|
|
(3,857,227 |
) |
|
Gain
on sale of unconsolidated subsidiary shares
|
|
|
1,224,951 |
|
|
|
— |
|
|
|
1,224,951 |
|
|
|
— |
|
|
Minority
interest in losses of subsidiary
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
88,374 |
|
|
Net
income (loss) before income taxes
|
|
|
3,862,571 |
|
|
|
(11,830,507 |
) |
|
|
(2,336,283 |
) |
|
|
(22,688,336 |
) |
|
Provision
(benefit) for income taxes
|
|
|
— |
|
|
|
(485,000 |
) |
|
|
— |
|
|
|
(827,000 |
) |
|
Net
income (loss)
|
|
|
3,862,571 |
|
|
|
(12,315,507 |
) |
|
|
(2,336,283 |
) |
|
|
(23,515,336 |
) |
|
Deemed
dividend for anti-dilution adjustment made to stock
warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(756,954 |
) |
|
Net
income (loss) applicable to common stockholders
|
|
$ |
3,862,571 |
|
|
$ |
(12,315,507 |
) |
|
$ |
(2,336,283 |
) |
|
$ |
(24,272,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
104,118,353 |
|
|
|
91,106,215 |
|
|
|
96,977,544 |
|
|
|
90,719,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
105,766,094 |
|
|
|
91,106,215 |
|
|
|
96,977,544 |
|
|
|
90,719,685 |
|
The accompanying notes are an integral
part of these condensed consolidated financial
statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,336,283 |
) |
|
$ |
(23,515,336 |
) |
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
451,383 |
|
|
|
442,282 |
|
|
Impairment
loss on fixed assets
|
|
|
1,187,305 |
|
|
|
— |
|
|
Fair
value adjustment on warrant liability
|
|
|
(544,040 |
) |
|
|
— |
|
|
Equity
in loss of unconsolidated subsidiary
|
|
|
— |
|
|
|
3,857,227 |
|
|
Minority
interest in loss of subsidiary
|
|
|
— |
|
|
|
(88,374 |
) |
|
RXi
common stock transferred for services
|
|
|
— |
|
|
|
244,860 |
|
|
Gain
on sale of shares of unconsolidated subsidiary
|
|
|
(1,224,951 |
) |
|
|
|
|
|
Non-cash
earned on short-term investments
|
|
|
— |
|
|
|
(48,452 |
) |
|
Non-cash
gain on transfer of RXi common stock
|
|
|
— |
|
|
|
(226,579 |
) |
|
Non-cash
expense for in-process research and development acquired
|
|
|
— |
|
|
|
8,012,154 |
|
|
Expense
related to employee and non-employee stock options
|
|
|
2,210,553 |
|
|
|
1,605,776 |
|
|
Net
change in operating assets and liabilities
|
|
|
(8,926,632 |
) |
|
|
(5,831,894 |
) |
|
Total
adjustments
|
|
|
(6,846,382 |
) |
|
|
7,967,000 |
|
|
Net
cash used in operating activities
|
|
|
(9,182,665 |
) |
|
|
(15,548,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
(27,750,000 |
) |
|
|
— |
|
|
Purchases
of equipment and furnishings
|
|
|
(178,426 |
) |
|
|
(963,999 |
) |
|
Cash
paid related to acquisition of Innovive
|
|
|
— |
|
|
|
(3,689,769 |
) |
|
Deconsolidation
of subsidiary
|
|
|
— |
|
|
|
(10,359,278 |
) |
|
Proceeds
from sale of shares of unconsolidated subsidiary
|
|
|
1,224,951 |
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
44,500 |
|
|
|
10,000,000 |
|
|
Net
cash used in investing activities
|
|
|
(26,658,975 |
) |
|
|
(5,013,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
293,083 |
|
|
|
976,808 |
|
|
Common
stock issued in accordance with the registered direct
offering
|
|
|
18,273,568 |
|
|
|
— |
|
|
Net
cash provided by financing activities
|
|
|
18,566,651 |
|
|
|
976,808 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(17,274,989 |
) |
|
|
(19,584,574 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
25,041,772 |
|
|
|
50,498,261 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
7,766,783 |
|
|
$ |
30,913,687 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
received during the period as interest income
|
|
$ |
113,372 |
|
|
$ |
1,023,921 |
|
|
Cash
paid during the period for income taxes
|
|
$ |
— |
|
|
$ |
195,000 |
|
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:
On
September 19, 2008, CytRx Corporation (the “Company”) acquired Innovive
Pharmaceuticals, Inc. in a merger transaction accounted for as an asset
acquisition. See Note 13 below. The fair value of
Innovive’s assets and liabilities at September 19, 2008, in millions of dollars,
are presented below:
|
In-process
research and development
|
|
$ |
8.0 |
|
|
Leasehold
interests
|
|
|
.1 |
|
|
Prepaid
expenses
|
|
|
.3 |
|
|
Accounts
payable
|
|
|
(6.1 |
) |
|
Net
assets acquired through issuance of common stock
|
|
$ |
2.3 |
|
|
|
|
|
|
|
As a
result of the March 11, 2008 distribution by 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 of RXi.
In
connection with applicable antidilution adjustments to the price of certain
outstanding warrants, the Company recorded a deemed dividend of approximately
$0.8 million in the nine months ended September 30, 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
September
30, 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 three product candidates in current
or planned clinical development for cancer indications, including 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. Apart from its drug development programs,
CytRx currently holds a 36% 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 amyotrophic lateral sclerosis, which is commonly known as ALS or
Lou Gehrig’s Disease, and for stroke recovery, 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, INNO-206 for small cell lung cancer
(“SCLC”), and other solid tumor cancers, and bafetinib, which the Company
believes hold greater near-term revenue potential. CytRx’s current
business strategy is to enter the next stage of clinical development with
arimoclomol for ALS, while seeking 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 8
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 ASC 730-20
(previously 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. Pursuant to an amendment signed
between the Company and the beneficiary of the ALSCRT on August 6, 2009, the
Company was released from all restrictions on the use of any proceeds previously
paid to the Company in connection with the arrangement. As a result,
the Company recognized $6.7 million as service revenue in the third quarter of
2009, which represents the remaining deferred revenue or the previously
un-recognized portion of the value received.
The
accompanying condensed consolidated financial statements at September 30, 2009
and for the three-month and nine-month periods ended September 30, 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
December 2007, the FASB issued guidance which is now part of ASC 810-10, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of Accounting Research Bulletin
No. 51 ” (formerly Statement of Financial Accounting Standards (SFAS)
160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51
). This guidance establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, changes in a
parent’s ownership of a noncontrolling interest, calculation and disclosure of
the consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment. The new guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. We
adopted this guidance on January 1, 2009, the beginning of our fiscal year 2009,
which had no impact on our consolidated financial statements.
In March
2008, the FASB issued guidance ASC 815-10 (formerly 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 revised guidance on determining the useful life of
intangible assets. The revised guidance, which is now part of ASC
350-30 General Intangibles Other than Goodwill (previously Staff Position No.
FAS 142-3, Determination of
the Useful Life of Intangible Asset)s, 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 revised guidance on Convertible Debt
Instruments. The revised guidance which is now part of ASC
470-20 (formerly 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 guidance which is now part of ASC 815-40, Contracts in Entity’s Own Equity
(formerly EITF (Emerging Issues Task Force) 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 possess 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 for the nine months ended September 30, 2009.
In August
2008, the 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 guidance which is now part of ASC 825-10 Financial
Instruments (formerly 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. The adoption of SFAS 107-1 and APB 28-1 did not have
an impact on the Company’s financial statements.
In
May 2009, the FASB issued new guidance for accounting for subsequent
events. The new guidance, which is now part of ASC 855-10, Subsequent Events (formerly,
SFAS No. 165, Subsequent
Events) is consistent with existing auditing standards in defining
subsequent events as events or transactions that occur after the balance sheet
date but before the financial statements are issued or are available to be
issued, but it also requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The new guidance
defines two types of subsequent events: “recognized subsequent events” and
“non-recognized subsequent events.” Recognized subsequent events provide
additional evidence about conditions that existed at the balance sheet date and
must be reflected in the company’s financial statements. Non-recognized
subsequent events provide evidence about conditions that arose after the balance
sheet date and are not reflected in the financial statements of a company.
Certain non-recognized subsequent events may require disclosure to prevent the
financial statements from being misleading. The new guidance was effective
on a prospective basis for interim or annual periods ending after June 15,
2009. We adopted the provisions of SFAS 165 as required.
In
June 2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140
(“SFAS 166”). SFAS 166 eliminates the concept of a "qualifying special-purpose
entity," changes the requirements for derecognizing financial assets, and
requires additional disclosures in order to enhance information reported to
users of financial statements by providing greater transparency about transfers
of financial assets, including securitization transactions, and an entity's
continuing involvement in and exposure to the risks related to transferred
financial assets. SFAS 166 is effective for fiscal years beginning after
November 15, 2009. The Company will adopt SFAS 166 in fiscal
2010. The Company does not expect that the adoption of SFAS 166 will
have a material impact on the Company’s financial statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards No.167, Amendments to FASB Interpretation
No. 46(R) (“SFAS 167”). The amendments include: (1) the
elimination of the exemption for qualifying special purpose entities, (2) a new
approach for determining who should consolidate a variable-interest entity, and
(3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. SFAS 167 is effective for the first annual
reporting period beginning after November 15, 2009 and for interim periods
within that first annual reporting period. The Company will adopt SFAS 167 in
fiscal 2010. The Company does not expect that the adoption of SFAS 167 will have
a material impact on the Company’s financial statements.
In June
2009, the FASB issued new guidance which is now part of ASC 105-10 (formerly
Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles), (“SFAS 168”). SFAS 168 replaces FASB Statement No. 162,
"The Hierarchy of Generally
Accepted Accounting Principles", and establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with generally accepted
accounting principles. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009. The adoption of SFAS 168 did not have a
material impact on the Company’s financial statements.
Fair Value Measurements—The
Company adopted new guidance which is now part of ASC 820-10 (formerly Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 157),
Fair Value Measurements (“FAS 157”), effective January 1, 2008. SFAS
157 does not require any new fair value measurements; instead it defines fair
value, establishes a framework for measuring fair value in accordance with
existing generally accepted accounting principles and expands disclosure about
fair value measurements. The adoption of SFAS 157 for our financial
assets and liabilities did not have an impact on our financial position or
operating results. Beginning January 1, 2008, assets and liabilities
recorded at fair value in consolidated balance sheets are categorized based upon
the level of judgment associated with the inputs used to measure the fair
value. Level inputs, as defined by SFAS 157, are as
follows:
-
Level 1
– quoted prices in active markets for identical assets or
liabilities.
-
Level 2
– other significant observable inputs for the assets or liabilities through
corroboration with market data at the measurement date.
-
Level 3
– significant unobservable inputs that reflect management’s best estimate of
what market participants would use to price the assets or liabilities at the
measurement date.
The
following table summarizes fair value measurements by level at September 30,
2009 for assets and liabilities measured at fair
value on a recurring basis:
|
(In
thousands)
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
|
|
Cash
and cash equivalents
|
|
$
|
7,760,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,760,483
|
|
|
Short
term investments
|
|
|
27,750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,750,000
|
|
|
Warrant
Liability
|
|
|
—
|
|
|
|
3,483,566
|
|
|
|
—
|
|
|
|
3,483,566
|
|
Liabilities
measured at market value on a recurring basis include warrant liabilities
resulting from recent debt and equity financing. In accordance with EITF
00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock (EITF 00-19), the warrant liabilities are being
marked to market each quarter-end until they are completely settled. The
warrants are valued using the Black-Scholes method, using assumptions consistent
with our application of ASC 718 (previously SFAS 123R). See Warrant Liabilities
below.
3. Short-term
Investments
The
Company held $27.75 million of short-term investments as at September 30,
2009. The Company has classified these investments as
held-to-maturity. These investments are comprised of six accounts
detailed as follows: $6 million with a maturity date of October 1, 2009; $1.75
million with a maturity date of October 1, 2009; $5 million with a maturity date
of October 29, 2009; $5 million with a maturity date of January 28, 2010; $5
million with a maturity date of April 1 2010; and $5 million with a maturity
date of July 29, 2010.
4.
Assets Held for Sale
In May
2009, the Company substantially completed the initial phase of its new-drug
discovery research at its laboratory facility in San Diego, California. The
Company concluded that it will conduct its research and development activities
through third parties for the foreseeable future. The Company is in the process
of seeking to sublet the laboratory facility and sell the laboratory
equipment. During the current quarter the fixed assets related to the
San Diego lab have been re-allocated from Equipment and Furnishings to Assets
Held for Sale and have been written down to their estimate net realizable value
as of September 30, 2009, which resulted in a charge of $1.2 million for the
current quarter. In November 2009, the Company signed sublease agreements with
two parties to sublet the facility for the remainder of the term of the lease,
which expires in October, 2010. The company recognized an onerous
lease accrual of $254,000 as of September 2009.
5. Basic
and Diluted Net Income (Loss) Per Common Share
Basic net
income (loss) per common share has computed using the weighted-average number of
common shares outstanding. Diluted net income (loss) per common share computed
using the weighted-average number of common share and common share equivalents
outstanding. Potentially dilutive stock options and warrants of 21.3 million and
17.6 million shares for the three month periods ending September 30, 2009 and
2008 respectively were excluded from the computation of diluted loss per share
where the effect would be anti-dilutive. Potentially dilutive stock options and
warrants of 23 million and 17.6 million shares for the nine month periods ended
September 30, 2009 and 2008, were excluded from the computation of diluted loss
per share where the effect would be anti-dilutive.
In March
2008, the Company recorded a deemed dividend of approximately $0.8 million in
connection with applicable antidilution adjustments to the terms of certain
outstanding warrants to purchase common stock. 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 net income (loss)
per share.
6.
Warrant Liabilities
Liabilities
measured at market value on a recurring basis include warrant liabilities
resulting from our recent equity financing. In accordance with the
guidance which is now ASC 815-40 (formerly EITF (Emerging Issues Task Force)
00-19, Accounting for Derivative Financial Instruments Indexed and Potentially
Settled in a Company’s Own Stock), the warrant liabilities are being marked to
market each quarter-end until they are completely settled. The
warrants are valued using the Black-Scholes method, using assumptions consistent
with our application of ASC 718 (previously SFAS 123R). The gain or
loss resulting form the marked to market calculation is shown on the
Consolidated Statements of Operations as Gain on warrant derivative
liability. The Company recognized a gain of $544k during the current
quarter.
7. 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 September 30, 2009, there were approximately 6.7
million shares subject to outstanding stock options and approximately 1.3
million shares available for future grant under the plan.
On July
1, 2009, the Company’s stockholders adopted a new 2008 Stock Incentive Plan
under which 10 million shares of common stock were reserved for
issuance. As of September 30, 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 ASC 718 (previously 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 ASC 718 (previously SFAS No. 123(R)), ASC 505-50 (previously
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 ASC 505 (previously 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.
At the
2009 Annual Meeting of Stockholders held on July 1, 2009, the Company’s
stockholders approved an amendment to the Company’s 2000 Long-Term Incentive
Plan to allow for a one-time stock option re-pricing program for employees and
officers. Pursuant to the re-pricing program, 3,265,500 eligible
stock options held by ten eligible employees and officers were amended to reduce
the exercise prices of the options to $1.15 per share, which was the closing
sale price of CytRx’s common stock as reported on the Nasdaq Capital Market on
the July 1, 2009 completion date of the re-pricing program, and to impose a
new option vesting schedule. None of the amended options vested
immediately. To the extent a participating employee’s or officer’s
eligible options were vested on the amendment date, the amended options will
vest, in full, on December 31, 2009, so long as the employee or officer
remains in the Company’s employ through that date. To the extent a participating
employee’s or officer’s eligible options were unvested as of July 1, 2009,
the original scheduled vesting will be suspended until December 31, 2009
and will resume after that date, so long as the employee or officer remains in
the Company’s employ through such date.
ASC 718
(previously SFAS No. 123(R)) requires the re-pricing of equity awards to be
treated as the repurchase of the old award for a new award of equal or greater
value, incurring additional compensation cost for any incremental value. This
incremental difference in value is measured as the excess of the fair value of
the modified award determined in accordance with the provisions of ASC 718 over
the
fair value of the original award immediately before its terms are modified,
measured based on the share price and other pertinent factors at that date. ASC
718 provides that this incremental fair value, plus the remaining
unrecognized compensation cost from the original measurement of the fair value
of the old option, must be recognized over the remaining vesting
period. The information presented below as of September 30, 2009
reflects the Company’s stock option re-pricing program.
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 September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Research
and development — employee
|
|
$ |
136,870 |
|
|
$ |
187,000 |
|
|
$ |
504,885 |
|
|
$ |
540,000 |
|
|
General
and administrative — employee
|
|
|
719,801 |
|
|
|
365,000 |
|
|
|
1,291,913 |
|
|
|
972,000 |
|
|
Total
employee stock-based compensation
|
|
$ |
856,671 |
|
|
$ |
552,000 |
|
|
$ |
1,796,798 |
|
|
$ |
1,512,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee (recovery)
|
|
$ |
20,575 |
|
|
$ |
— |
|
|
$ |
39,088 |
|
|
$ |
(422,000 |
) |
During
the first nine months of 2009, the Company issued stock options to purchase
450,000 shares of its common stock (excluding all re-priced options). The fair
value of the stock options granted in the nine-month period listed in the table
below was estimated using the Black-Scholes option-pricing model, based on the
following assumptions:
| |
|
Nine Months Ended September
30,
|
|
| |
|
2009
|
|
|
2008
|
|
|
Risk-free
interest rate
|
|
|
1.90% - 2.86 |
% |
|
|
2.72% – 3.84 |
% |
|
Expected
volatility
|
|
|
93.3% - 97.9 |
% |
|
|
93.8% – 96.8 |
% |
|
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
nine-month periods ended September 30, 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 ASC 718
(previously 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 nine-month periods ended
September 30, 2009 and 2008, the Company has estimated an annualized forfeiture
rate of 16% 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
September 30, 2009, there remained approximately $1.6 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 0.94 years. Presented below is the Company’s stock
option activity (excluding re-priced options):
|
|
|
Nine Months Ended September 30,
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
|
|
|
450,000 |
|
|
|
— |
|
|
|
450,000 |
|
|
$ |
0.81 |
|
|
Exercised
|
|
|
(8,333 |
) |
|
|
— |
|
|
|
(8,333 |
) |
|
$ |
0.37 |
|
|
Forfeited
or Expired
|
|
|
(722,183 |
) |
|
|
— |
|
|
|
(722,183 |
) |
|
$ |
2.45 |
|
|
Outstanding
at September 30, 2009
|
|
|
6,129,424 |
|
|
|
995,000 |
|
|
|
7,124,424 |
|
|
$ |
1.18 |
|
|
Options
exercisable at September 30, 2009
|
|
|
4,674,146 |
|
|
|
520,091 |
|
|
|
5,194,237 |
|
|
$ |
1.30 |
|
A summary
of the activity for non-vested stock options (excluding re-priced options) as of
September 30, 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
|
|
|
450,000 |
|
|
|
— |
|
|
|
450,000 |
|
|
$ |
0.62 |
|
|
Forfeited
or expired
|
|
|
(722,183 |
) |
|
|
— |
|
|
|
(722,183 |
) |
|
$ |
2.08 |
|
|
Vested
|
|
|
(572,639 |
) |
|
|
(75,091 |
) |
|
|
(647,730 |
) |
|
$ |
2.19 |
|
|
Non-vested
at September 30, 2009
|
|
|
1,455,278 |
|
|
|
474,909 |
|
|
|
1,930,187 |
|
|
$ |
0.86 |
|
The
following table summarizes significant ranges of outstanding stock options under
the Company’s plans at September 30, 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 |
|
|
|
2,097,607 |
|
|
|
7.94 |
|
|
$ |
0.53 |
|
|
|
1,143,079 |
|
|
|
7.94 |
|
|
$ |
0.65 |
|
| $ |
1.01
- 2.00 |
|
|
|
4,608,483 |
|
|
|
6.19 |
|
|
$ |
1.22 |
|
|
|
3,692,681 |
|
|
|
6.19 |
|
|
$ |
1.24 |
|
| $ |
2.01
- 3.00 |
|
|
|
50,000 |
|
|
|
4.03 |
|
|
$ |
2.35 |
|
|
|
50,000 |
|
|
|
4.03 |
|
|
$ |
2.35 |
|
| $ |
3.01
- 4.00 |
|
|
|
168,334 |
|
|
|
7.85 |
|
|
$ |
3.37 |
|
|
|
151,667 |
|
|
|
7.85 |
|
|
$ |
3.34 |
|
| $ |
4.01
- 4.65 |
|
|
|
200,000 |
|
|
|
7.55 |
|
|
$ |
4.47 |
|
|
|
156,810 |
|
|
|
7.55 |
|
|
$ |
4.51 |
|
| |
|
|
|
|
7,124,424 |
|
|
|
6.78 |
|
|
$ |
1.17 |
|
|
|
5,194,237 |
|
|
|
6.78 |
|
|
$ |
1.29 |
|
There was
no aggregate intrinsic value of outstanding options as of September 30, 2009,
since the exercise price of the underlying options exceeded the closing fair
market value of the Company’s common stock on September 30, 2009 of
$1.12.
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 11, the Company has accounted for its investment in RXi under
the equity method since 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:
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
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 |
|
8. Liquidity
and Capital Resources
At
September 30, 2009, the Company had cash and cash equivalents of approximately
$7.8 million, short-term investments of $27.8 million and held 5,768,881 shares
of restricted common stock of RXi Pharmaceuticals Corporation, or RXi, with a
market value of $14.1 million based upon the closing price of the RXi common
stock on that date. On July 27, 2009, the Company raised approximately $18.3
million, net of fees and expenses, in a registered direct offering, and on
September 23, 2009, the Company raised approximately $1.2 million, net of fees,
from the sale of 500,000 shares of its common stock of RXi. Management believes
that the Company’s current cash on hand, together with its short-term
investments and proceeds from possible future shares of RXi common stock, will
be sufficient to fund its operations for the foreseeable future. The
estimate is based, in part, upon the Company’s currently projected expenditures
for the remainder of 2009 and the first nine months of 2010 of approximately
$14.8 million,
which includes approximately
$2.0 million for its clinical program for tamibarotene, approximately $2.0
million for its clinical program for INNO-206, approximately $1.1 million for
its clinical program for INNO-406, approximately $0.6 million for its activities
for arimoclomol, approximately $2.2 million for general operation of its
clinical programs, and approximately $6.7 million for other general and
administrative expenses. These projected expenditures
are also based upon numerous other assumptions and subject to many
uncertainties, and actual expenditures may be significantly different from these
projections.
The
Company anticipates it will take a minimum of three years, and possibly
longer, for it to obtain marketing approval and successfully commercializes its
current product candidates and generate significant recurring
revenue. 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
any additional financing, and it may not be able to obtain future financing on
favorable terms, or at all. 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 sell some or all of its RXi shares or other
assets or 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.
9. 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 ASC 470 (previously Emerging Issues Task Force Issue (“EITF”)
No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio)s, and ASC 470 (previously 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.
On July
27, 2009, the Company completed a $20.0 million registered direct public
offering in which it issued approximately 15.3 million shares of its common
stock at a price of $1.31 per share, and warrants to purchase an additional
approximately 3.8 million shares of common stock at an exercise price of $1.70
per share. Net of investment banking commissions, advisory fees, legal,
accounting and other fees related to the transaction, the Company received
proceeds of approximately $18.3 million (without giving effect to any proceeds
that may in the future be received by the Company upon exercise of warrants sold
in the offering). Immediately after the sale, the Company had
approximately 109.3 million shares of common stock outstanding, without giving
effect to the possible exercise of the warrants sold in the offering or any of
our other outstanding warrants or stock options.
During
the nine-month period ended September 30, 2009, 8,333 options in the Company’s
common stock were exercised, and the Company received approximately $3,100 upon
their exercise. Warrant holders also exercised their rights to acquire common
shares for a total cash consideration of $290,000.
10. 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 the Company’s ownership to less than 50% of RXi. As a result, the
Company began to account for its investment in RXi using the equity method,
under which the Company 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 the Company 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.
11. Equity
Investment in RXi
Management
determined that the distribution of RXi common stock to stockholders of the
Company 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, the Company began to account for its investment in RXi using
the equity method, under which the Company records only its pro-rata share of
the financial results of RXi. The following table presents summarized financial
information for RXi as of September 30, 2009:
|
Balance
Sheet Data (unaudited, in thousands)
|
|
September 30, 2009
|
|
|
Current
assets
|
|
$ |
9,233 |
|
|
Noncurrent
assets
|
|
|
401 |
|
|
Current
liabilities
|
|
|
2,010 |
|
|
Stockholders’
equity
|
|
|
7,605 |
|
At
September 30, 2009, the market value of the Company’s 5,768,881 shares of RXi
common stock was $14.1 million based on the closing price of RXi common stock on
that date. As the Company accounts for its investment in RXi using
the equity method, this value it not reflected on the Company’s balance
sheet. On September 28, 2009 the Company sold 500,000 of the RXi
investment for total proceeds of $1.2 million.
12.
ALSCRT Amendment
Pursuant
to an amendment signed between the Company and the beneficiary of the ALSCRT on
August 6, 2009, the Company was released from all restrictions on the use of any
proceeds previously paid to the Company in connection with the
arrangement. As a result, the Company recognized $6.7 million as
service revenue in the third quarter of 2009, which represented the remaining
deferred revenue and previously un-recognized portion of the value
received.
13.
Acquisition of Innovive Pharmaceuticals
On
September 19, 2008, the Company completed the merger of Innovive with CytRx
Merger Subsidiary, Inc., the Company’s wholly owned subsidiary, with Innovive
continuing as the surviving corporation. As a result, Innovive became a wholly
owned subsidiary of CytRx and changed its name to CytRx Oncology Corporation.
Because Innovive was a development stage company, under accounting principles
generally accepted in the United States and the SEC regulations,
it was not considered a business. Accordingly, CytRx accounted for
the merger in accordance with ASC 350 (previously Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets), for
transactions other than a business combination. The initial merger
consideration, together with direct costs incurred to effect the merger, were
allocated to the individual assets acquired, including identifiable intangible
assets and liabilities assumed based on the relative fair value. No
goodwill was recorded. The Company’s consolidated financial
statements reflect these fair values and were not restated retroactively to
reflect the historical financial position or results of operations of Innovive.
In connection with the merger, the Company recorded a one-time expense for
acquired in-process research and development.
14.
Subsequent events
Management
has evaluated subsequent events, and the impact on the reported results and
disclosures through November 9, 2009 which is the date these financial
statements were issued and filed with the SEC.
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,” in our Annual Report on Form 10-K for the
year ended December 31, 2008, 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 three product candidates in
current or planned clinical development for cancer indications, including
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. Apart from our drug development programs,
CytRx currently holds a 36% equity interest in 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 amyotrophic lateral sclerosis, which is commonly known as ALS or
Lou Gehrig’s disease, and for stroke recovery, and iroxanadine for diabetic foot
ulcers and other potential indications. After acquiring Innovive, we
redirected our efforts to developing Innovive’s lead oncology product
candidates, tamibarotene for APL, INNO-206 for small cell lung cancer, SCLC, or
other solid tumor cancers, and bafetinib, which we believe hold greater
near-term revenue potential. Our current business strategy is to
enter the next stage of clinical development with arimoclomol for ALS, while
seeking 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. 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 nine-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 ASC 730-20 (previously Statement of Financial Accounting Standards No. 68,
Research and Development Arrangements).
Accordingly, we recorded the value received under the arrangement as deferred
service revenue and recognized service revenue using the proportional
performance method of revenue recognition, meaning that service revenue was
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 adjusted our estimates of expense incurred for this
research and development on a quarterly basis.
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.
Pursuant
to an amendment signed between the Company and the beneficiary of the ALSCRT on
August 6, 2009, we were released from all restrictions on the use of any
proceeds previously paid to us in connection with the arrangement. As
a result, we recognized $6.7 million as service revenue in the third quarter of
2009, which represented the remaining deferred revenue and previously
un-recognized portion of the value received. We recognized $0.9 million of
service revenue related to the ALSCRT transaction for the same quarter in
2008. For the nine-month periods ended September 30, 2009 and 2008,
we recognized approximately $9.1 million and $4.8 million, respectively, of
service revenue related to this transaction.
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
previously conducted at our San Diego laboratory. In May 2009, we
substantially completed the initial phase of those activities and announced that
we will conduct any research and development activities through third parties
for the foreseeable future. We recently decided to sublet our laboratory
facility and sell the lab equipment. The fixed assets available for sale have
been re-allocated from Equipment and Furnishings to Assets Held for Sale and
have been written down to their net realizable value as at September 30, 2009.
In November, 2009, we signed sublease agreements with two parties to sublet the
facility for the remainder of the term of the lease, which expires in October,
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 7 of the Notes to
Condensed Consolidated Financial Statements included in this Quarterly Report.
ASC 718 (previously 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 ASC 718 (previously 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 ASC 505-50 (previously
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 ASC 505-50 (previously 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. The fixed assets, from our San Diego laboratory and the
molecular library, available for sale have been re-allocated from Equipment and
Furnishings to Assets Held for Sale and have been written down to their
estimated net realizable value at September 30, 2009.
Net
Income (Loss) Per Share
Basic net
income (loss) per common share has computed using the weighted-average number of
common shares outstanding. Diluted net income (loss) per common share computed
using the weighted-average number of common share and common share equivalents
outstanding. Potentially dilutive stock options and warrants of 21.3 million and
17.6 million shares for the three month periods ending September 30, 2009 and
2008 respectively were excluded from the computation of diluted loss per share
where the effect would be anti-dilutive. Potentially dilutive stock options and
warrants of 23 million and 17.6 million shares for the nine month periods ended
September 30, 2009 and 2008, were excluded from the computation of diluted loss
per share where the effect would be anti-dilutive.
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 $0.8 million.
The deemed dividend was reflected as an adjustment to net income (loss) for the
first quarter of 2008, to arrive at net loss income (loss) applicable to common
stockholders on the consolidated statement of operations and for purposes of
calculating basic and diluted net income (loss) per share.
Warrant Liabilities
Liabilities
measured at market value on a recurring basis include warrant liabilities
resulting from our recent equity financing. In accordance with ASC 815-40
(formerly EITF (Emerging Issues Task Force) 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
the warrant liabilities are being marked to market each quarter-end until they
are completely settled. The warrants are valued using the Black-Scholes method,
using assumptions consistent with our application of ASC 718 (formerly SFAS
123R). The gain or loss resulting from the marked to market calculation is shown
on the Consolidated Statements of Operations as Gain on warrant derivative
liability.
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
September 30, 2009, we had cash and cash equivalents of approximately $7.8
million, short-term investments of $27.8 million and held 5,768,881 shares of
restricted common stock of RXi with a market value of $14.1 million based upon
the closing price of the RXi common stock on that date. On July 27, 2009, we
raised approximately $18.3 million, net of fees and expenses, in a registered
direct offering, and on September 23, 2009, we raised approximately $1.2
million, net of fees, from the sale of 500,000 shares of common stock of RXi.
Management believes that our current cash on hand, together with our short-term
investments and proceeds from possible future sales of RXi shares, will be
sufficient to fund our operations for the foreseeable future. The
estimate is based, in part, upon our currently projected expenditures for the
remainder of 2009 and the first nine months of 2010 of approximately $14.9
million, which includes approximately
$2.0 million for our clinical program for tamibarotene, approximately $2.0
million for our clinical program for INNO-206, approximately $1.1 million for
our clinical program for INNO-406, approximately $0.6 million for our activities
for arimoclomol, approximately $2.3 million for general operation of our
clinical programs, and approximately $6.9 million for other general and
administrative expenses. These projected expenditures are also based upon
numerous other assumptions and subject to many uncertainties, and actual
expenditures may be significantly different from these projections.
We
anticipate it will take a minimum of three years, and possibly
longer, for us to obtain marketing approval and successfully commercializes our
current product candidates and generate significant recurring revenue. 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 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 sell some or all of our RXi shares or other assets or 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.
We
realized net income in the quarter ended September 30, 2009 of $3.9 million as
compared to net loss of $12.3 million in the comparative quarter ended September
30, 2008, or a difference of $16.0 million. Service revenues in the quarter
increased by $6.0 million due to the revenue recognition from the amendment of
the ALSCRT arrangement discussed previously. Our research and development
expenditures were approximately $0.7 million lower in the current quarter as
compared to the quarter ended September 30, 2008, due to the reduction in
our arimoclomol clinical development expenses caused by the FDA’s clinical hold
on our clinical trial. The 2008 comparative period included an in-process
research and development expense of $8.0 million, resulting from the purchase of
Innovive and a loss of $1.3 million for the equity in loss of our unconsolidated
subsidiary, RXi. In 2009 we did not recognize a corresponding loss,
since the carrying amount of our investment in RXi was reduced to zero in the
third quarter of 2008. In the quarter ended September 30, 2009,
we recognized a gain on warrant derivative liability of $0.5 million and a gain
of $1.2 million resulting from the sale of 500,000 RXi shares, which was offset
by an impairment loss on our laboratory equipment of $1.2 million. We
had no similar items in the 2008 comparative period.
In the
nine-month period ended September 30, 2009, we used $26.7 million of cash in
investing activities, compared to $5.0 million used in the comparable 2008
period. The 2008 period included net funds provided in the three months ended
March 31, 2008 attributable to RXi’s conversion of short-term investments to
cash equivalents. The 2008 period also
included $3.7 million in cash paid related to the acquisition of Innovive. In
2009, the Company purchased $27.8 million in short-term investments, which was
primarily cash received from the issuance of common shares and the sale of RXi
shares. We do not expect any significant capital expenditures spending during
the next 12 months.
Cash
provided by financing activities in the nine months ended September 30, 2009 of
$18.6 million was as a consequence of the registered direct offering and $0.3
million from the exercise of warrants. The 2008 period consisted of
$1.0 million of funds received from the exercise of stock options and
warrants. We continue to evaluate potential future sources of
capital, as we do not currently have commitments from any third parties to
provide us with additional 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 income applicable to common stockholders of approximately $3.9
million and a net loss of $2.4 million for the three-month and nine-month
periods ended September 30, 2009, respectively, as compared to net losses of
$12.3 million and $24.3 million, respectively, for the same periods in
2008.
We
recognized $7.0 million and $9.4 million of revenue for the three-month and
nine-month periods ended September 30, 2009, respectively, and $0.9 million and
$4.8 million, respectively, for the same periods 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 and licensing fees. Pursuant to an
amendment signed between us and the beneficiary of the ALSCRT on August 6, 2009,
we were released from all restrictions on the use of any proceeds previously
paid to us in connection with the arrangement. As a result, we
recognized $6.7 million as service revenue in the third quarter of 2009, which
represented the remaining deferred revenue and previously un-recognized portion
of the value received. 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.
Research
and Development
| |
|
Three-Month
Period Ended September
30,
|
|
|
Nine-Month
Period Ended
September 30,
|
|
| |
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
Research
and development expenses
|
|
$ |
1,017 |
|
|
$ |
1,671 |
|
|
$ |
4,712 |
|
|
$ |
7,020 |
|
|
Non-cash
research and development expenses (recovery)
|
|
|
20 |
|
|
|
— |
|
|
|
39 |
|
|
|
(243 |
) |
|
Employee
stock option expense
|
|
|
137 |
|
|
|
187 |
|
|
|
505 |
|
|
|
568 |
|
|
Depreciation
and amortization
|
|
|
53 |
|
|
|
148 |
|
|
|
384 |
|
|
|
378 |
|
|
|
|
$ |
1,227 |
|
|
$ |
2,006 |
|
|
$ |
5,640 |
|
|
$ |
7,723 |
|
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 and nine-month periods
ended September 30, 2009 relate to our various development programs.
Research and development expenses for the nine-month period ended
September 30, 2008 also included RXi’s expenses of approximately $0.6 million
for the months of January and February 2008. In the three-month period ended
September 30, 2009, the development costs of our program for tamibarotene were
$0.2 million, the costs of our program for INNO-206 were $0.1 million, and the
cost of operations in our former research laboratory was $0.7
million.
As
compensation to our consultants and in 2008 to members of RXi’s scientific
advisory board, 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 of $0 and approximately
$243,000 respectively, in the three-month and nine-month periods ended September
30, 2008. We recorded $0.1 million and $0.6 million of employee stock option
expense both during the three-month and nine-month periods ended September 30,
2009 and 2008, respectively.
General
and Administrative Expenses
| |
|
Three-Month
Period Ended September
30,
|
|
|
Nine-Month
Period Ended
September 30,
|
|
| |
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
|
General
and administrative expenses
|
|
$ |
1,640 |
|
|
$ |
1,904 |
|
|
$ |
5,254 |
|
|
$ |
7,673 |
|
|
Non-cash
general and administrative expenses
|
|
|
194 |
|
|
|
(690 |
) |
|
|
374 |
|
|
|
189 |
|
|
Employee
stock option expense
|
|
|
720 |
|
|
|
365 |
|
|
|
1,292 |
|
|
|
1,340 |
|
|
Depreciation
and amortization
|
|
|
22 |
|
|
|
22 |
|
|
|
67 |
|
|
|
64 |
|
|
|
|
$ |
2,576 |
|
|
$ |
1,601 |
|
|
$ |
6,987 |
|
|
$ |
9,266 |
|
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 $1.6
million and $5.2 million for the three-month and nine-month periods ended
September 30, 2009, respectively, as compared to $1.9 million and $7.7 million
during the same periods in 2008. General and administrative expenses decreased
by $0.3 million in the third quarter of 2009 as compared to 2008, primarily as a
result of a reduction of personnel in 2009 compared to
2008. Additionally, there was a reduction in professional fees and
consulting fees of approximately $0.1 million in 2009 as compared to the
comparable period in 2008.
Employee
stock option expense relates to options granted to recruit and retain directors,
officers and other employees. We recorded approximately $0.7 million
in the three-month period ended September 30, 2009, which included approximately
$0.5 million of expense resulting from the re-pricing of stock options, as
compared to $0.4 million of employee stock option expense during the three-month
period ended September 30, 2008. We incurred stock-based compensation expense of
$1.3 million and $1.3 million for the nine-month periods ended September 30,
2009 and 2008, respectively.
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. The fixed assets, from our San Diego
laboratory and the molecular library, available for sale have been re-allocated
from Equipment and Furnishings to Assets Held for Sale and have been written
down to their estimated net realizable value at September 30, 2009.
Interest
Income
Interest
income was $0.1 and $0.2 million, respectively, for the three-month and
nine-month periods ended September 30, 2009, compared to $0.2 million and $1.0
million, respectively, for the same periods in 2008. The difference between
periods is attributable primarily to the reduced amount of cash on hand during
2009 compared to 2008, as well as a decline in interest rates.
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 were 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 ended September 30, 2009, it would
not have had a material effect on our results of operations or cash flows for
that period.
Item
4. — Controls and Procedures
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 September 30, 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
Item
2. — Unregistered Sales of Equity Securities and Use of Proceeds
During
the quarterly period covered by this Report, we issued a total of 250,000 shares
of our common stock in unregistered sales of our equity securities. The 250,000
shares were issued to three warrant holders in connection with the exercise of
outstanding common stock purchase warrants upon the payment of a warrant
exercise price of $1.16 per share. The warrants were issued by us in
private placements exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
under the Act. The issuance of the foregoing shares of common stock upon
exercise of the warrants also was exempt from registration under
Section 4(2) and Regulation D.
Item
6. — Exhibits
The
exhibits listed in the accompanying Index to Exhibits are filed as part of this
Quarterly Report and incorporated herein by reference.
SIGNATURES
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:
November 9, 2009
|
By:
|
/s/ JOHN
Y. CALOZ
|
|
|
|
|
John
Y. Caloz
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
INDEX
TO EXHIBITS
|
Exhibit
Number
|
|
Description
|
|
4.1(a)
|
|
Securities
Purchase Agreement, dated July 24, 2009, by and among CytRx Corporation
and the purchasers listed on the signature pages
thereto
|
|
4.2(a)
|
|
Form
of Common Stock Purchase Warrant to be issued by CytRx Corporation to
purchasers under the Securities Purchase Agreement
|
|
10.1*
|
|
Employment
Agreement dated October 12, 2009 between CytRx Corporation and Daniel
Levitt, M.D., Ph.D.
|
|
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
|
________________
* Indicates
a management contract or compensatory plan or arrangement
(a) Incorporated
by reference to the CytRx Corporation Current Report on Form 8-K filed on June
27, 2009.