e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission file number 0-15327
CYTRX CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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58-1642740 |
(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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11726 San Vicente Blvd. |
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Suite 650 |
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Los Angeles, CA
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90049 |
(Address of principal executive
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(Zip Code) |
offices) |
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(310) 826-5648
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the
Exchange Act). Yes o No þ
Number of shares of CytRx Corporation Common Stock, $.001 par value, issued and outstanding as of
November 9, 2007: 90,221,370, exclusive of treasury shares.
CYTRX CORPORATION
Form 10-Q
Table of Contents
2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
54,374,578 |
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$ |
30,381,393 |
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Short-term investments, at amortized cost |
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11,826,285 |
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Accounts receivable |
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105,930 |
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Prepaid expense and other current assets |
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925,769 |
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233,323 |
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Total current assets |
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67,126,632 |
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30,720,646 |
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Equipment and furnishings, net |
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362,779 |
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252,719 |
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Molecular library, net |
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216,324 |
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283,460 |
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Goodwill |
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183,780 |
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183,780 |
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Deposits and prepaid insurance expense |
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222,842 |
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195,835 |
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Total assets |
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$ |
68,112,357 |
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$ |
31,636,440 |
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LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
464,616 |
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$ |
955,156 |
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Accrued expenses |
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4,954,815 |
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2,722,478 |
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Deferred revenue, current portion |
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7,112,917 |
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6,733,350 |
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Total current liabilities |
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12,532,348 |
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10,410,984 |
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Deferred revenue, non-current portion |
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9,832,574 |
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16,075,117 |
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Total liabilities |
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22,364,922 |
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26,486,101 |
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Minority interest in losses of subsidiary |
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2,282,332 |
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Commitments and Contingencies |
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Stockholders equity: |
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Preferred Stock, $.01 par value, 5,000,000 shares authorized, including
5,000 shares of Series A Junior Participating Preferred Stock; no shares
issued and outstanding |
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Common stock, $.001 par value, 125,000,000 shares authorized; 89,008,366
and 70,789,000
shares issued at September 30, 2007 and December 31, 2006, respectively |
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89,008 |
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70,789 |
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Additional paid-in capital |
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200,864,589 |
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146,961,657 |
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Treasury stock, at cost (633,816 shares held at September 30, 2007 and
December 31, 2006,
respectively) |
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(2,279,238 |
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(2,279,238 |
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Accumulated deficit |
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(155,209,256 |
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(139,602,869 |
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Total stockholders equity |
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43,465,103 |
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5,150,339 |
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Total
liabilities, minority interest and stockholders equity |
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$ |
68,112,357 |
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$ |
31,636,440 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenue: |
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Service revenue |
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$ |
2,046,470 |
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$ |
775,000 |
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$ |
5,862,976 |
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$ |
835,831 |
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Grant revenue |
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116,070 |
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Licensing revenue |
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1,000 |
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1,000 |
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1,000 |
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2,046,470 |
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776,000 |
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5,980,046 |
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836,831 |
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Expenses: |
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Research and development (includes an
aggregate 462,112 shares of RXi common
stock valued at $2,310,560 issued in
exchange for licensing rights in the
second quarter of 2007) |
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3,907,514 |
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1,686,636 |
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14,800,183 |
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7,204,018 |
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General and administrative |
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3,669,361 |
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2,217,571 |
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10,261,042 |
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6,677,154 |
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7,576,875 |
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3,904,207 |
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25,061,225 |
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13,881,172 |
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Loss before other income |
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(5,530,405 |
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(3,128,207 |
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(19,081,179 |
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(13,044,341 |
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Other income: |
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Interest and dividend income |
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857,273 |
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296,086 |
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1,896,950 |
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580,483 |
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Other income (loss) |
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(1,250 |
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1,498,750 |
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Minority interest in losses of subsidiary |
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77,092 |
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255,228 |
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Net loss before income taxes |
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(4,597,290 |
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(2,832,121 |
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(15,430,251 |
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(12,463,858 |
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Provision for income taxes |
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(140,000 |
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(140,000 |
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Net loss applicable to common shareholders
before deemed dividend |
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(4,597,290 |
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(2,972,121 |
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(15,430,251 |
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(12,603,858 |
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Deemed dividend for anti-dilution adjustment
made to outstanding common stock warrants |
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(488,429 |
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Net loss applicable to common shareholders |
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$ |
(4,597,290 |
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$ |
(2,972,121 |
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$ |
(15,430,251 |
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$ |
(13,092,287 |
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Basic and diluted loss per common share |
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$ |
(0.05 |
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$ |
(0.04 |
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$ |
(0.19 |
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$ |
(0.19 |
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Weighted average shares outstanding |
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88,122,908 |
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67,421,958 |
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82,235,069 |
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67,463,477 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(15,430,251 |
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$ |
(12,603,858 |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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175,531 |
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192,184 |
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Non-cash interest earned on short-term investments |
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(69,145 |
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Minority interest in losses of subsidiary |
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(255,228 |
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Common stock, stock options and warrants issued for services |
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3,813,482 |
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228,432 |
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Expense related to employee stock options |
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1,664,876 |
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1,075,389 |
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Net change in operating assets and liabilities |
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(4,734,702 |
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23,856,908 |
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Total adjustments |
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594,814 |
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25,352,913 |
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Net cash provided by (used in) operating activities |
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(14,835,437 |
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12,749,055 |
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Cash flows from investing activities: |
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Purchase of short-term investments |
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(11,757,140 |
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Purchases of equipment and furnishings |
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(218,455 |
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(82,322 |
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Net cash used in investing activities |
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(11,975,595 |
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(82,322 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options and warrants |
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16,401,312 |
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339,194 |
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Net proceeds from issuances of common stock |
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34,250,905 |
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12,404,360 |
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Net proceeds from issuances of common stock in subsidiary |
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152,000 |
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Net cash provided by financing activities |
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50,804,217 |
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12,743,554 |
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Net increase in cash and cash equivalents |
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23,993,185 |
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25,410,287 |
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Cash and cash equivalents at beginning of period |
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30,381,393 |
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8,299,390 |
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Cash and cash equivalents at end of period |
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$ |
54,374,578 |
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$ |
33,709,677 |
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Supplemental disclosure of cash flow information: |
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Cash received during the period for interest received |
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$ |
1,829,646 |
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$ |
248,398 |
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Non-Cash Financing Activities:
In connection with the Companys adjustment to the terms of certain outstanding warrants on
March 2, 2006, the Company recorded a deemed dividend of approximately $488,000 in the nine months
ended September 30, 2006. The deemed dividend was recorded as a charge to retained earning and a
corresponding credit to additional paid-in capital.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CYTRX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
1. Description of Company and Basis of Presentation
CytRx Corporation (CytRx, the Company, we, our or us) is a biopharmaceutical
research and development company engaged in developing human therapeutic products based primarily
upon its small-molecule molecular chaperone amplification technology. The Company has completed a
three-month Phase IIa clinical trial and six-month open-label trial extension of that trial for its
lead small-molecule product candidate, arimoclomol, for the treatment of amyotrophic lateral
sclerosis, which is commonly known as ALS or Lou Gehrigs disease. Arimoclomol for the treatment of
ALS has received Orphan Drug and Fast Track designation from the U.S. Food and Drug Administration,
or FDA, and orphan medicinal product status from the European Commission. The Company plans to
initiate a Phase IIb efficacy trial of arimoclomol for this indication before the end of 2007,
subject to FDA clearance. Based on preliminary discussions with the FDA, CytRx also plans to
conduct a second efficacy clinical trial for ALS, possibly in parallel with the upcoming Phase IIb
trial, to provide additional efficacy data to support a possible approval decision by the FDA.
Additionally, the Company has announced plans to commence a Phase II clinical trial for arimoclomol
in stroke recovery in the first half of 2008, subject to FDA clearance. The Company has also
announced plans to commence a Phase II clinical trial with its next drug candidate, iroxanadine,
for diabetic ulcers in the first half of 2008, subject to FDA clearance. In addition, the Company
recently opened a research and development facility in San Diego, California to provide it with a
dedicated laboratory to accelerate its molecular chaperone drug development programs.
Prior to 2007, the Company also was engaged directly in developing therapeutic products based
upon ribonucleic acid interference, or RNAi, which has the potential to effectively treat a broad
array of diseases by interfering with (sometimes referred to as silencing) the expression of
targeted disease-associated genes. In order to fully realize the potential value of its RNAi
technologies, in January 2007, the Company transferred to RXi Pharmaceuticals Corporation (RXi),
its majority-owned subsidiary, substantially all of its RNAi-related technologies and assets in
exchange for equity in RXi. RXi is dedicated to developing and commercializing therapeutic
products based upon RNAi technologies for the treatment of human diseases, with an initial focus on
neurodegenerative diseases, cancer, type 2 diabetes and obesity. In furtherance of the Companys
strategy for RXi, the Company announced earlier this year its plan to distribute approximately 36%
of the outstanding shares of common stock of RXi to the CytRx stockholders.
On October 30, 2007, RXi filed a registration statement on Form S-1 with the Securities and
Exchange Commission (SEC) to register the shares of RXi common stock that will be distributed to
CytRx stockholders. The registration statement filed by RXi also covers shares of RXi common stock
that will be awarded by the Company to some of its directors, officers and other employees.
Following the distribution and award transactions, CytRx will own
6,212,861 shares of
RXi common stock, or approximately 49% of the outstanding RXi shares, all of which have been
registered for resale by the Company pursuant to the registration statement filed by RXi.
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 5 Liquidity and Capital Resources.
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. Further, the ALS Charitable Remainder Trust has no obligation to provide any
further funding to the Company. Management has concluded that due to the research and development
components of the transaction that it is properly accounted for under SFAS No. 68, Research and
Development Arrangements (SFAS No. 68). Accordingly, the Company has recorded the value received
under the arrangement as deferred service revenue and will recognize service revenue using the
proportional performance method of revenue recognition, meaning that service revenue is recognized
on a dollar-for-dollar basis for each dollar of expense incurred for the research and development
of arimoclomol and other potential ALS treatments.
6
The accompanying condensed consolidated financial statements at September 30, 2007 and for the
three-month and nine-month periods ended September 30, 2007 and 2006 are unaudited, but include all
adjustments, consisting of normal recurring entries, which management believes to be necessary for
a fair presentation of the periods presented. Interim results are not necessarily indicative of
results for a full year. Balance sheet amounts as of December 31, 2006 have been derived from our
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 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 Companys
audited consolidated financial statements in its Form 10-K for the year ended December 31, 2006.
The Companys 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
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
No. 48), to create a single model to address accounting for uncertainty in tax positions. FIN No.
48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold in
which a tax position be reached before financial statement recognition. FIN No. 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Company adopted FIN No. 48 as of January 1, 2007, as required. The
adoption of FIN No. 48 did not have an impact on the Companys financial position and results of
operations.
On September 15, 2006, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The Company does not expect SFAS No. 157
will have a significant impact on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not expect SFAS No. 159 will
have a significant impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to additional paid-in capital.
EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The adoption is not
expected to have a significant impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3), which requires that nonrefundable advance payments for goods
or services that will be used or rendered for future research and development activities be
deferred and amortized over the period that the goods are delivered or the related services are
performed, subject to an assessment of recoverability. EITF 07-3 will be effective for fiscal years
beginning after December 15, 2007. The Company does not expect that the adoption of EITF 07-3 will
have an impact on the Companys consolidated financial statements.
3. Short-term Investments
The Company has purchased zero coupon U.S. Treasury Bills at a discount. These securities
mature within the next twelve months. They are classified as held-to-maturity and under Statement
of Financial Accounting Standards No. 115, Investments in Debt
7
Securities, are measured at amortized cost since the Company has the intent and ability to
hold these securities to maturity. The interest income has been amortized at the effective
interest rate.
4. Basic and Diluted Loss Per Common Share
Basic net loss per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted net loss per share is computed using the weighted-average
number of common shares and dilutive potential common shares outstanding during the period.
Dilutive potential common shares primarily consist of stock options and warrants. Common share
equivalents which potentially could dilute basic earnings per share in the future, and which were
excluded from the computation of diluted loss per share, as the effect would be anti-dilutive,
totaled approximately 27.3 million and 29.5 million shares at September 30, 2007 and 2006,
respectively.
In connection with the Companys adjustment to the exercise terms of certain outstanding
warrants to purchase common stock on March 2, 2006, the Company recorded a deemed dividend of
approximately $488,000. The deemed dividend is reflected as an adjustment to net loss for the first
quarter of 2006, to arrive at net loss applicable to common stockholders on the Condensed
Consolidated Statement of Operations and for purposes of calculating basic and diluted loss per
share.
5. Stock Based Compensation
CytRx Corporation
The Company has a stock option plan, the 2000 Stock Option Incentive Plan, under which, as of
September 30, 2007, an aggregate of 10,000,000 shares of common stock were reserved for issuance,
including approximately 6,303,000 shares subject to outstanding stock options and approximately 2.4 million shares available for future grant. Options
granted under these plans generally vest and become exercisable as to 33% of the option grants on
each anniversary of the grant date until fully vested. The options expire, unless previously
exercised, not later than ten years from the grant date.
The Companys stock-based employee compensation plans are described in Note 13 to our
financial statements contained in our Annual Report on Form 10-K filed for the year ended December 31, 2006.
The Company adopted the provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)),
which requires the measurement and recognition of compensation expense for all stock-based awards
made to employees and non-employee directors.
For stock options paid in consideration of services rendered by non-employees, the Company
recognizes compensation expense in accordance with the requirements of SFAS No. 123(R), Emerging
Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF
00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, as amended.
Non-employee option grants that do not vest immediately upon grant are recorded as an expense
over the performance 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, will be
determined, and compensation expense recognized during the period will be 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 are fully vested.
8
The following table sets forth the total stock-based compensation expense resulting from stock
options included in the Companys unaudited interim consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Research and development employee |
|
$ |
181,000 |
|
|
$ |
69,000 |
|
|
$ |
413,000 |
|
|
$ |
230,000 |
|
General and administrative employee |
|
|
593,000 |
|
|
|
310,000 |
|
|
|
1,252,000 |
|
|
|
845,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation |
|
$ |
774,000 |
|
|
$ |
379,000 |
|
|
$ |
1,665,000 |
|
|
$ |
1,075,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development non-employee |
|
$ |
111,000 |
|
|
$ |
92,000 |
|
|
$ |
1,426,000 |
|
|
$ |
196,000 |
|
General and administrative non-employee |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
32,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-employee stock-based compensation |
|
$ |
111,000 |
|
|
$ |
92,000 |
|
|
$ |
1,426,000 |
|
|
$ |
228,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2007, the Company issued stock options to purchase 1,188,000
shares of its common stock. 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, |
|
|
2007 |
|
2006 |
Risk-free interest rate |
|
|
4.07% 4.84 |
% |
|
|
4.27% 5.23 |
% |
Expected volatility |
|
|
108.7 |
% |
|
|
111.1 |
% |
Expected lives (years) |
|
|
6 |
|
|
|
6 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Companys 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, 2007 and 2006, the Company used a calculated volatility for each grant. The Companys
computation of expected life were estimated using the simplified method provided for under Staff
Accounting Bulletin 107, Share-Based Payment (SAB 107), which averages the contractual term of
the Companys 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, 2007 and 2006, the Company has estimated an annualized forfeiture rate
of 11.2% and 3.5%, respectively, for options granted to its employees and 1.0% for each period for
options granted to senior management and 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. Under provisions of SFAS 123(R), the Company recorded $368,000
and $931,000 of employee stock-based compensation for the three and nine month periods ended
September 30, 2007, respectively.
At September 30, 2007, there remained approximately $3.6 million of unrecognized compensation
expense related to unvested stock options granted to employees, directors, scientific advisory
board members and consultants, to be recognized as expense over a weighted-average period of 1.55
years. Presented below is the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2007 |
|
|
Number of Options |
|
Number of Options |
|
Total Number |
|
Weighted Average |
|
|
(Employees) |
|
(Non-Employees) |
|
of Options |
|
Exercise Price |
Outstanding at January 1, 2007 |
|
|
4,150,000 |
|
|
|
2,708,000 |
|
|
|
6,858,000 |
|
|
$ |
1.66 |
|
Granted |
|
|
1,188,000 |
|
|
|
|
|
|
|
1,188,000 |
|
|
$ |
4.15 |
|
Exercised |
|
|
(785,000 |
) |
|
|
(144,000 |
) |
|
|
(929,000 |
) |
|
$ |
2.00 |
|
Forfeited |
|
|
(150,000 |
) |
|
|
(582,000 |
) |
|
|
(732,000 |
) |
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
4,403,000 |
|
|
|
1,982,000 |
|
|
|
6,385,000 |
|
|
$ |
2.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2007 |
|
|
2,798,000 |
|
|
|
1,732,000 |
|
|
|
4,530,000 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
A summary of the activity for non-vested stock options as of September 30, 2007, is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Options |
|
Number of Options |
|
Total Number of |
|
Grant Date Fair |
|
|
(Employees) |
|
(Non-Employees) |
|
Options |
|
Value per Share |
Non-vested at January 1, 2007 |
|
|
1,183,000 |
|
|
|
917,000 |
|
|
|
2,100,000 |
|
|
$ |
1.19 |
|
Granted |
|
|
1,188,000 |
|
|
|
|
|
|
|
1,188,000 |
|
|
$ |
3.49 |
|
Forfeited |
|
|
(150,000 |
) |
|
|
(563,000 |
) |
|
|
(713,000 |
) |
|
$ |
1.52 |
|
Vested |
|
|
(616,000 |
) |
|
|
(104,000 |
) |
|
|
(720,000 |
) |
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2007 |
|
|
1,605,000 |
|
|
|
250,000 |
|
|
|
1,855,000 |
|
|
$ |
2.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes significant ranges of outstanding stock options under the
Companys plans at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Number of |
|
|
|
|
Range of |
|
|
|
|
|
Contractual Life |
|
Weighted Average |
|
Options |
|
Weighted Average |
|
Weighted Average |
Exercise Prices |
|
Number of Options |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Contractual Life |
|
Exercise Price |
$0.25 1.00
|
|
|
995,000 |
|
|
|
6.90 |
|
|
$ |
0.80 |
|
|
|
792,000 |
|
|
|
6.71 |
|
|
$ |
0.80 |
|
$1.01 2.00
|
|
|
3,039,000 |
|
|
|
7.22 |
|
|
$ |
1.53 |
|
|
|
2,472,000 |
|
|
|
6.87 |
|
|
$ |
1.58 |
|
$2.01 2.50
|
|
|
1,161,000 |
|
|
|
5.77 |
|
|
$ |
2.45 |
|
|
|
1,161,000 |
|
|
|
5.77 |
|
|
$ |
2.45 |
|
$2.51 3.00
|
|
|
2,000 |
|
|
|
1.69 |
|
|
$ |
2.63 |
|
|
|
2,000 |
|
|
|
1.69 |
|
|
$ |
2.63 |
|
$3.01 4.51
|
|
|
1,188,000 |
|
|
|
9.65 |
|
|
$ |
4.15 |
|
|
|
103,000 |
|
|
|
9.55 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,385,000 |
|
|
|
7.36 |
|
|
$ |
2.07 |
|
|
|
4,530,000 |
|
|
|
6.62 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding options as of September 30, 2007 was $9.7
million, of which $7.8 million was related to exercisable options. The aggregate intrinsic value
was calculated based on the positive difference between the closing fair market value of the
Companys common stock on September 30, 2007 ($3.44) and the exercise price of the underlying
options. The intrinsic value of options exercised was $1,123,000 for the nine-month period ended
September 30, 2007, and the intrinsic value of options that vested was approximately $1,438,000 for
the same period.
RXi Pharmaceuticals
RXi is a majority owned subsidiary of CytRx and has its own stock option plan named the RXi
Pharmaceuticals Corporation 2007 Incentive Plan. As of September 30, 2007, an aggregate of
2,750,000 shares of common stock were reserved for issuance under the Plan, including approximately
1,340,000 shares subject to outstanding stock options granted under this plan and approximately
1,410,000 shares available for future grant. The administrator of the plan determines the times
which an option may become exercisable. Vesting periods of options granted to date range from
immediate vesting upon grant to vesting at the end of a five year period.
RXi adopted SFAS No. 123(R), Share-Based Payments, which requires the measurement and
recognition of compensation expense for all stock-based payment awards made to employees and
non-employee directors. In March 2005, the SEC issued SAB 107, Share-Based Payment, relating to
SFAS 123(R). RXi has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
For stock options paid in consideration of services rendered by non-employees, the Company
recognizes compensation expense in accordance with the requirements of SFAS No. 123(R), Emerging
Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF
00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, as amended.
Non-employee option grants that do not vest immediately upon grant are recorded as an expense
over the performance 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, will be
determined and the compensation expense recognized during the period will be 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 are fully vested. Because RXi common stock is not yet publicly-traded, management
estimated the fair market value of RXi common stock and the fair market value of RXi options with
input from an independent third-party valuation firm. Based on those estimates, RXi recognized
approximately $31,000 and
10
$1,043,000 of stock based compensation expense related to non-employee stock options for the
three and nine-month periods ended September 30, 2007, respectively.
During the first nine months of 2007, RXi issued options to purchase 1,340,000 shares of its
common stock. 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, 2007 |
Risk-free interest rate |
|
|
4.39% 4.57 |
% |
Expected volatility |
|
|
108.7% 109.5 |
% |
Expected lives (years) |
|
|
6 |
|
Expected dividend yield |
|
|
0.00 |
% |
The fair value of RXis common stock and RXis expected common stock price volatility
assumption is based upon an independent third-party valuation that determined the RXi corporate
valuation and analyzed the volatility of a basket of comparable companies. The expected life
assumptions were based upon the simplified method provided for under SAB 107, which averages the
contractual term of RXis 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 that RXi 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 CytRxs historical experience, for the
nine-month period ended September 30, 2007, RXi has estimated an annualized forfeiture rate of 15%
for options granted to its employees, 8% for options granted to senior management and no forfeiture
rate for the directors. RXi 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. Under provisions of SFAS 123(R), RXi recorded $406,000 and $734,000 of employee
stock-based compensation for the three and nine-month periods ended September 30, 2007,
respectively. No amounts relating to employee stock-based compensation have been capitalized.
At September 30, 2007, there was $3,339,000 of unrecognized compensation expense related to
unvested common stock options granted to employees, directors, scientific advisory board members
and consultants is expected to be recognized as expense over a weighted-average period of 1.79
years. Presented below is RXis common stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
Number of Options |
|
Number of Options |
|
Total Number |
|
Weighted Average |
|
|
(Employees) |
|
(Non-Employees) |
|
of Options |
|
Exercise Price |
Outstanding at January 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
993,000 |
|
|
|
347,000 |
|
|
|
1,340,000 |
|
|
$ |
5.00 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
993,000 |
|
|
|
347,000 |
|
|
|
1,340,000 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2007 |
|
|
200,000 |
|
|
|
218,000 |
|
|
|
418,000 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity for non-vested stock options as of September 30, 2007, is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Number of Shares |
|
Total Number of |
|
Grant Date Fair |
|
|
(Employees) |
|
(Non-Employees) |
|
Shares |
|
Value per Share |
Non-vested at January 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
993,000 |
|
|
|
347,000 |
|
|
|
1,340,000 |
|
|
$ |
3.56 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(200,000 |
) |
|
|
(218,000 |
) |
|
|
(418,000 |
) |
|
$ |
3.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2007 |
|
|
793,000 |
|
|
|
129,000 |
|
|
|
922,000 |
|
|
$ |
3.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table summarizes significant ranges of outstanding common stock options under
the plan at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Number of |
|
|
|
|
Range of |
|
|
|
|
|
Contractual Life |
|
Weighted Average |
|
Options |
|
Weighted Average |
|
Weighted Average |
Exercise Prices |
|
Number of Options |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Contractual Life |
|
Exercise Price |
$5.00
|
|
|
1,340,000 |
|
|
|
9.64 |
|
|
$ |
5.00 |
|
|
|
418,000 |
|
|
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The aggregate intrinsic value of outstanding options as of September 30, 2007 is negligible.
The aggregate intrinsic value is calculated based on the positive difference between the closing
fair market value of RXis common stock on September 30, 2007 and the exercise price of the
underlying options.
6. Liquidity and Capital Resources
At September 30, 2007, the Company had cash, cash equivalents and short-term investments of
$66.2 million. Management believes that the Company has adequate financial resources to support its
currently planned level of operations into the second half of 2009, based, in part, upon projected
expenditures for the remainder of 2007 and the first nine months of 2008 of $30.1 million,
including $5.0 million for the Companys planned clinical program for arimoclomol for ALS and
related studies, $5.5 million for our other ongoing and planned clinical programs, including a
planned Phase II clinical trial of arimoclomol in stroke patients and a planned Phase II clinical
trial of iroxanadine for diabetic ulcers, $8.2 million for the operations of the Companys research
laboratory in San Diego and $8.8 million for other general and administrative expenses. The
Company estimates that RXi separately will expend approximately $9.1 million for the remainder of
2007 and the first nine months of 2008. The Company will be required to obtain additional funding
in order to execute its long-term business plans, although it does not currently have commitments
from any third parties to provide it with capital. The Company cannot assure that additional
funding will be available on favorable terms, or at all. If the Company fails to obtain additional
funding when needed, it may not be able to execute its business plans and its business may suffer,
which would have a material adverse effect on its financial position, results of operations and
cash flows.
7. Equity Transactions
On March 2, 2006, the Company completed a $13.4 million private equity financing in which it
issued 10.6 million shares of its common stock and warrants to purchase an additional 5.3 million
shares of its common stock at an exercise price of $1.54 per share. Net of investment banking
commissions, legal, accounting and other expenses related to the transaction, we received proceeds
of approximately $12.4 million.
In connection with the March 2006 financing, the Company adjusted the price and number of
underlying shares of warrants to purchase approximately 2.8 million shares that had been issued in
prior equity financings in May and September 2003. The adjustment was made as a result of
anti-dilution provisions in those warrants that were triggered by the Companys issuance of common
stock in that financing at a price below the closing market price on the date of the transaction.
The Company accounted for the anti-dilution adjustments as deemed dividends analogous with the
guidance in Emerging Issues Task Force Issue (EITF) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and
EITF 00-27, Application of 98-5 to Certain Convertible Instruments, and recorded an approximate
$488,000 charge to retained earnings and a corresponding credit to additional paid-in capital.
In connection with the March 2006 private equity financing, the Company entered into a
registration rights agreement with the purchasers of its common stock and warrants. That agreement
provides, among other things, for cash penalties, up to a maximum of 16% (approximately $2.1
million) of the purchase price paid for the securities in the event that the Company failed to
initially register or maintain the effective registration of the securities until the sooner of two
years or the date on which the securities could be sold pursuant to Rule 144 of the Securities Act
of 1933, as amended. The Company has evaluated the penalty provisions of the March 2006
registration rights agreement in light of FASB Staff Position No. EITF 00-19-2, Accounting for
Registration Payment Arrangements, which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies, pursuant to which a contingent obligation must be accrued only if it is reasonably
estimable and probable. In managements estimation, the contingent payments related to the
registration payment arrangement are not probable to occur, and thus no amount need be accrued.
12
On April 19, 2007, the Company completed a $37.0 million private equity financing in which it
issued approximately 8.6 million shares of its common stock at a price of $4.30 per share. Net of
investment banking commissions, legal, accounting and other expenses related to the transaction,
the Company received proceeds of approximately $34.2 million. On April 30, 2007, the Company
contributed $15.0 million, net of reimbursed expenses estimated at $2.0 million paid by RXi to the
Company, in exchange for equity in RXi, to satisfy the initial funding requirements under its
agreements with the University of Massachusetts Medical School (UMMS). In September 2007, the
actual reimbursed expenses paid by RXi to the Company were finally determined to be approximately
$3.0 million, and on September 25, 2007, RXi issued to CytRx additional equity as reimbursement of
the excess expenses. Following those transaction, CytRx owned as of September 30, 2007
approximately 86% of the outstanding capital stock of RXi.
In connection with the private equity financing, the Company adjusted the price and number of
underlying shares of warrants to purchase approximately 1.4 million shares that had been issued in
prior equity financings in May and September 2003. The adjustment was made as a result of
anti-dilution provisions in those warrants that were triggered by the Companys issuance of common
stock in the April 2007 financing at a price below the closing market price on the date of the
transaction. For the reasons described above, the Company accounted for the anti-dilution
adjustments as deemed dividends. Because the fair value of the outstanding warrants decreased as a
result of the anti-dilution adjustment, no deemed dividend was recorded, and thus the Company did
not record a charge to retained earnings or a corresponding credit to additional paid-in capital.
In connection with the April 2007 private equity financing, the Company entered into a
registration rights agreement with the purchasers of its common stock and warrants. That agreement
provides, among other things, for cash penalties, up to a maximum of 16% (approximately $5.9
million) of the purchase price paid for the securities in the event that the Company failed to
initially register or maintain the effective registration of the securities until the sooner of two
years or the date on which the securities could be sold pursuant to Rule 144 of the Securities Act
of 1933, as amended. The Company has evaluated the penalty provisions of the April 2007
registration rights agreement in light of FASB Staff Position No. EITF 00-19-2, Accounting for
Registration Payment Arrangements, which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies, pursuant to which a contingent obligation must be accrued only if it is reasonably
estimable and probable. In managements estimation, the contingent payments related to the
registration payment arrangement are not probable to occur, and thus no amount need be accrued.
During the three-month period ended September 30, 2007, the Company issued 434,351 shares of
its common stock, and received $491,350, upon the exercise of stock options and warrants. During
the three-month period ended September 30, 2006, the Company issued no common stock, and no stock
options and warrants were exercised. During the nine-month period ended September 30, 2007, the
Company issued 9,954,780 shares of its common stock, and received $16,401,312, upon the exercise of
stock options and warrants. For the comparative 2006 period, the Company issued 683,903 shares of
its common stock and received $339,193 upon the exercise of stock options and warrants.
RXi issued 45,000 shares of its common stock at $5.00 per share in the third quarter of 2007.
In the nine-month period ended September 30, 2007, RXi has issued at total of approximately 507,000
shares of its common stock, 462,000 in connection with licensing agreements with UMMS. The shares
issued to UMMS were valued at $2.3 million, which was recorded as a charge to research and
development expense in the second quarter. In the third quarter of 2007, RXi granted options to
purchase 163,000 shares of RXi common stock at an exercise price of $5.00 per share to certain
officers, employees, directors and scientific advisory board members. For the nine-month period
ended September 30, 2007, RXi has granted a total of 1,340,000 options to purchase shares of common
stock at an exercise price of $5.00 per share.
8. Other Income
In June 2007, we recognized $1.5 million of income arising from a fee received pursuant to a
change-in-control provision included in the purchase agreement for our 1998 sale of our animal
pharmaceutical unit. Management concluded that the fee did not represent revenue generated from our
normal course of our business, and accordingly we recorded this fee as other income.
13
9. Minority Interest
The Company offset $77,092 and $255,228 of minority interest in losses of its subsidiary, RXi,
against its net loss in the three-month and nine-month periods ended September 30, 2007,
respectively. During 2006, no comparable entry was necessary. This loss was the minority
shareholders portion of the loss attributed to RXi.
10. Subsequent Events
As of November 1, 2007, the Company had received approximately $2.2 million in connection with
the exercise of warrants and options since September 30, 2007.
On October 30, 2007, RXi filed a registration statement with the SEC on Form S-1 to register
the shares of RXi common stock that will be distributed to CytRx stockholders. The registration
statement filed by RXi also covers shares of RXi common stock that will be awarded by the Company
to some of its directors, officers and other employees. Following the planned distribution and
award transactions, CytRx will own 6,212,861 shares of RXi common stock, or
approximately 49% of the outstanding RXi shares, all of which have been registered for resale by
the Company pursuant to the registration statement filed by RXi.
Item 2. Managements 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
majority-owned subsidiary, RXi Pharmaceuticals Corporation, 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 set
forth in this Quarterly Report under the captions Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations, all of which you should review
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
We are a biopharmaceutical research and development company engaged in developing human
therapeutic products based primarily upon our small-molecule molecular chaperone amplification
technology. We have completed a three-month Phase IIa clinical trial and six-month open-label trial
extension of that trial for our lead small-molecule product candidate, arimoclomol, for the
treatment of amyotrophic lateral sclerosis, which is commonly known as ALS or Lou Gehrigs disease.
Arimoclomol for the treatment of ALS has received Orphan Drug and Fast Track designation from the
U.S. Food and Drug Administration, or FDA, and orphan medicinal product status from the European
Commission. We plan to initiate a Phase IIb efficacy trial of arimoclomol for this indication
before the end of 2007, subject to FDA clearance. Based on preliminary discussions with the FDA, we
also plan to conduct a second efficacy clinical trial for ALS, possibly in parallel with the
upcoming Phase IIb trial, to provide additional efficacy data to support a possible approval
decision by the FDA. Additionally, we have announced plans to commence a Phase II clinical trial
for arimoclomol in stroke recovery in the first half of 2008, subject to FDA clearance. We have
also announced plans to commence a Phase II clinical trial with our next drug candidate,
iroxanadine, for diabetic ulcers in the first half of 2008, subject to FDA clearance.
14
In addition, we recently opened a research and development facility in San Diego, California
to provide us with a dedicated laboratory to accelerate our molecular chaperone drug development
programs.
We also were engaged directly in developing therapeutic products based upon ribonucleic acid
interference, or RNAi, which has the potential to effectively treat a broad array of diseases by
interfering with (sometimes referred to as silencing) the expression of targeted disease-associated
genes. In order to fully realize the potential value of our RNAi technologies, in January 2007, we
transferred to RXi Pharmaceuticals Corporation (RXi), our majority-owned subsidiary,
substantially all of our RNAi-related technologies and assets in exchange for equity in RXi. RXi
is dedicated to developing and commercializing therapeutic products based upon RNAi technologies
for the treatment of human diseases, with an initial focus on neurodegenerative diseases, cancer,
type 2 diabetes and obesity. In furtherance of our strategy for RXi, we announced earlier this
year our plan distribute approximately 36% of the outstanding shares of common stock of RXi to
CytRxs stockholders.
On October 30, 2007, RXi filed a registration statement with the SEC on Form S-1 to register
the shares of RXi common stock that will be distributed to our stockholders. The registration
statement filed by RXi also covers shares of RXi common stock that will be awarded by us to some of
our directors, officers and other employees. Following the distribution and award transactions, we
will own 6,212,861 shares of RXi common stock, or approximately 49% of the
outstanding RXi shares, all of which have been registered for resale by us pursuant to the
registration statement filed by RXi.
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, 2007,
we had cash, cash equivalents and short-term investments of $66.2 million, and as of November 1,
2007, we had received approximately $2.2 million in connection with the exercise of warrants and
options since September 30, 2007. We believe that we have adequate financial resources to support
our currently planned level of operations into the second half of 2009, based, in part, upon
projected expenditures for the remainder of 2007 and the first nine months of 2008 of $30.1
million, including $5.0 million for our planned clinical program for arimoclomol for ALS and
related studies, $5.5 million for our other ongoing and planned clinical programs, including a
planned Phase II clinical trial of arimoclomol in stroke patients and a planned Phase II clinical
trial of iroxanadine for diabetic ulcers, $8.2 million for the operations of our research
laboratory in San Diego and $8.8 million for other general and administrative expenses. We
estimate that RXi separately will expend approximately $9.1 million for the remainder of 2007 and
the first nine months of 2008. We will be required to obtain additional funding in order to execute
our long-term business plans, although we do not currently have commitments from any third parties
to provide us with capital. We cannot assure that additional funding will be available on favorable
terms, or at all. If we fail to obtain additional funding when needed, we may not be able to
execute our business plans and our business may suffer, which would have a material adverse effect
on our financial position, results of operations and cash flows.
RXi began operating as a stand-alone company with its own management, business, and operations
in January 2007. On October 30, 2007, RXi filed a registration statement with the SEC on Form S-1
to register the shares of RXi common stock that will be distributed to CytRx stockholders. The
registration statement filed by RXi also covers shares of RXi common stock that will be awarded by
us to some of our directors, officers and other employees. Following the planned distribution and
award transactions, CytRx will own 6,212,861 shares of RXi common stock, or
approximately 49% of the outstanding RXi shares. During the time that RXi is majority-owned (i.e.
until the planned distribution and award transactions are consummated), the consolidated
financial statements of CytRx will include 100% of the assets and liabilities of RXi and the
ownership of the interests of the minority shareholders will be recorded as minority interests.
In the future, if CytRx owns more than 20% but less than 50% of the outstanding shares of RXi,
CytRx would account for its investment in RXi using the equity method. Under the equity method,
CytRx would record its pro-rata share of the gains or losses of RXi against its historical basis
investment in RXi. For the year ending December 31, 2007, we expect RXis expenses will be
approximately $10.0 million.
Critical Accounting Policies and Estimates
Managements 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.
15
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, 2006. 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
Biopharmaceutical revenues consist of license fees from strategic alliances with
pharmaceutical companies as well as service and grant revenues. Service revenues consist 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. Further, the ALSCRT has no obligation to provide any further funding to us. We have
concluded that due to the research and development components of the transaction that it is
properly accounted for under Statement of Financial Accounting Standards No. 68, Research and
Development Arrangements. Accordingly, we have recorded the value received under the arrangement as
deferred service revenue and will recognize service revenue using the proportional performance
method of revenue recognition, meaning that service revenue is recognized on a dollar-for-dollar
basis for each dollar of expense incurred for the research and development of arimoclomol and other
potential ALS treatments. We believe that this method best approximates the efforts expended
related to the services provided. We adjust our estimates of expense incurred for this research and
development on a quarterly basis. As of December 31, 2006, we recognized approximately $1.8 million
of service revenue related to this transaction. For three-month and nine-month periods ended
September 30, 2007, we recognized approximately $2.0 million and $5.9 million, respectively, in
service revenue. Any significant change in ALS related research and development expense in any
particular quarterly or annual period will result in a change in the recognition of revenue for
that period and consequently affect the comparability or revenue from period to period.
The amount of deferred revenue, current portion is the amount of deferred revenue that is
expected to be recognized in the next twelve months and is subject to fluctuation based upon
managements estimates. Managements estimates include an evaluation of what pre-clinical and
clinical trials are necessary, the timing of when trials will be performed and the estimated
clinical trial expenses. These estimates are subject to changes and could have a significant effect
on the amount and timing of when the deferred revenues are recognized.
Research and Development Expenses
Research and development expenses consist of costs incurred for direct and overhead-related
research expenses and are expensed as incurred. Costs to acquire technologies, including licenses,
that are utilized in research and development and that have no alternative future use are expensed
when incurred. Technology developed for use in its products is expensed as incurred until
technological feasibility has been established.
16
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.
Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS 123(R), Share-Based Payment.
SFAS 123(R) requires that companies recognize compensation expense associated with stock option
grants and other equity instruments to employees in the financial statements. SFAS 123(R) applies
to all grants after the effective date and to the unvested portion of stock options outstanding as
of the effective date. We adopted SFAS 123(R) using the modified-prospective method and use the
Black-Scholes valuation model for valuing share-based payments. We will continue to account for
transactions in which services are received in exchange for equity instruments based on the fair
value of such services received from non-employees, in accordance with SFAS 123(R), Emerging Issues
Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued to
other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF
00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, as amended.
Non-employee share-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 share-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.
Earnings Per Share
Basic and diluted loss per common share are computed based on the weighted-average number of
common shares outstanding. Common share equivalents (which consist of options and warrants) are
excluded from the computation of diluted loss per share since the effect would be anti-dilutive.
Common share equivalents which could potentially dilute basic earnings per share in the future, and
which were excluded from the computation of diluted loss per share, totaled approximately 27.3
million shares and 29.5 million shares at September 30, 2007 and 2006, respectively. In connection
with our adjustment to the exercise terms of certain outstanding warrants to purchase common stock
on March 2, 2006, we recorded a deemed dividend of $488,000. The deemed dividend was reflected as
an adjustment to net loss for the first quarter of 2006, to arrive at net loss applicable to common
stockholders on the consolidated statement of operations and for purposes of calculating basic and
diluted loss per shares.
17
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, 2007,
we had cash and cash equivalents and short-term investments of $66.2 million and total assets of
$68.1 million, compared to $30.4 million and $31.6 million, respectively, at December 31, 2006.
Working capital totaled $54.6 million at September 30, 2007, compared to $20.3 million at December
31, 2006. As of November 1, 2007, we had received approximately $2.2 million in connection with the
exercise of warrants and options since September 30, 2007. We believe that we have adequate
financial resources to support our currently planned level of operations into the second half of
2009, based, in part, upon projected expenditures for the remainder of 2007 and the first nine
months of 2008 of $30.1 million, including $5.0 million for our planned clinical program for
arimoclomol for ALS and related studies, $5.5 million for our other ongoing and planned clinical
programs, including a planned Phase II clinical trial of arimoclomol in stroke patients and a
planned Phase II clinical trial of iroxanadine for diabetic ulcers, $8.2 million for the operation
of our research laboratory in San Diego and $8.8 million for other general and administrative
expenses. We estimate that RXi separately will expend approximately $9.1 million for the remainder
of 2007 and the first nine months of 2008. We have no significant revenue, and we expect to have no
significant revenue and to continue to incur significant losses over the next several years. Our
net losses may increase from current levels primarily due to expenses related to our ongoing and
planned clinical trials, research and development programs, possible technology acquisitions, and
other general corporate activities. In the event that actual costs of our clinical program for ALS,
or any of our other ongoing research activities, are significantly higher than our current
estimates, we may be required to significantly modify our planned level of operations.
In the future, we will be dependent on obtaining financing from third parties in order to
maintain our operations, including completion of the clinical development arimoclomol for ALS and
our ongoing research and development efforts related to our other small-molecule drug candidates.
We cannot assure that additional funding will be available to us on favorable terms, or at all. If
we fail to obtain additional funding when needed in the future, we would be forced to scale back,
or terminate, our operations, or to seek to merge with or to be acquired by another company.
Our net loss, which includes non-cash charges relating to (1) common stock, stock option and
warrants issued for services (2) common stock issued related to the acquisition of licensing rights
and (3) expenses related to employee stock options, increased by
approximately $1.6 million from
the quarter ended September 30, 2006 to the quarter ended September 30, 2007. This increase was due
to several factors, including an additional $2.2 million in research and development expenditures
associated with our clinical programs, increased professional fees of $716,000 associated with
compliance with provisions of the Sarbanes-Oxley Act and professional fees related to RXis
recently filed registration statement on Form S-1 to register RXis common stock, and option
expense of $437,000 related to the issuance of options to purchase RXi common stock to RXis
employees, members of its board of directors and scientific advisory board. These charges were
offset in part by the recognition of $1.3 million in deferred revenue relating to our $24.3 million
sale to the ALSCRT of a 1% royalty interest in worldwide sales of arimoclomol in August 2006.
In the nine-month periods ended September 30, 2007 and 2006, net cash used in investing
activities consisted of approximately $11.8 million and $0, respectively, for the purchase of
short-term investments, and approximately $218,000 and $82,000, respectively, for the purchase of
equipment. We manage our cash, cash equivalents and short-term investments interchangeably and at
the present time do not anticipate any significant changes to our holdings in investments and cash
equivalents. We expect capital spending to increase due to additional laboratory equipment
necessary for our new San Diego, California laboratory.
Cash provided by financing activities in the
nine months ended September 30, 2007 was $50.8 million.
During the 2007 period, we raised $34.2 million, net of offering expenses of $2.8 million,
from the issuance of 8.6 million shares of common stock in a private equity financing in April of
2007, and received proceeds from the exercise of stock options and warrants of approximately $16.4
million. Cash provided by financing activities in the nine months ended September 30, 2006 was
approximately $12.7 million. During the 2006 period, we raised $12.4 million, net of expenses, from
the issuance of common stock in a private equity financing in March of 2006, and received proceeds
from the exercise of stock options and warrants of approximately $339,000.
We are evaluating other potential future sources of capital as we do not currently have
commitments from any third parties to provide us with capital. The results of our technology
licensing efforts and the actual proceeds of any fund-raising activities will determine our ongoing
ability to operate as a going concern. Our ability to obtain future financings through joint
ventures, product licensing arrangements, royalty sales, equity financings, gifts, and grants or
otherwise is subject to market conditions and our ability to
18
identify parties that are willing and able to enter into such arrangements on terms that are
satisfactory to us. Depending upon the outcome of our fundraising efforts, the accompanying
consolidated financial information may not necessarily be indicative of future operating results or
future financial condition.
We expect to incur significant losses for the foreseeable future and there can be no assurance
that we will become profitable. Even if we become profitable, we may not be able to sustain that
profitability.
Results of Operations
We recorded a net loss applicable to common shareholders of approximately $4.6 million and
$15.4 million for the three-month and nine-month periods ended September 30, 2007, respectively, as
compared to $3.0 million and $13.1, respectively, for the same periods in 2006.
We
recognized $2.0 million and $6.0 million of revenue for the three-month and nine-month
periods ended September 30, 2007, respectively, and $0.8 million and $0.8 million, respectively,
for the same periods in 2006. We recognized $2.0 million and $5.9 million during those periods,
respectively, from our $24.3 million sale to the ALSCRT of a 1% royalty interest in worldwide sales
of arimoclomol in August 2006. Additionally during the three-month and nine-month periods ended
September 30, 2007, we recognized $0 and $1.5 million, respectively, of other income related to a
change-in-control provision included in the purchase agreement for our 1998 sale of our animal
pharmaceutical unit. There was no comparable other income in 2006. All future licensing fees under
our current licensing agreements are dependent upon successful development milestones being
achieved by the licensor. During 2007, we do not anticipate receiving any significant service or
licensing fees. We will continue to recognize the balance of the deferred revenue recorded from the
royalty transaction with the ALSCRT over the development period of our arimoclomol research.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period |
|
|
Nine Month Period |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Research and development expense |
|
$ |
3,566 |
|
|
$ |
1,472 |
|
|
$ |
10,496 |
|
|
$ |
6,637 |
|
Non-cash research and development expense |
|
|
111 |
|
|
|
92 |
|
|
|
3,736 |
|
|
|
197 |
|
Employee stock option expense |
|
|
181 |
|
|
|
69 |
|
|
|
413 |
|
|
|
230 |
|
Depreciation and amortization |
|
|
49 |
|
|
|
53 |
|
|
|
155 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,907 |
|
|
$ |
1,686 |
|
|
$ |
14,800 |
|
|
$ |
7,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 first three-month and nine-month periods
of 2007 and 2006 related primarily to (i) our Phase II clinical program for arimoclomol in ALS,
(ii) our ongoing research and development related to other molecular chaperone drug candidates,
(iii) our acquisition of technologies covered by the UMMS license agreements acquired by RXi, (iv)
our prior collaboration and invention disclosure agreement pursuant to which UMMS had agreed to
disclose certain inventions to us and provide us with the right to acquire an option to negotiate
exclusive licenses for those disclosed technologies, and (v) the small-molecule drug discovery and
development operations at our Massachusetts and California laboratories. All research and
development costs related to the activities of RXi and our laboratories were expensed.
As compensation to members of our scientific advisory board and consultants, and in connection
with the acquisition of technology, we and RXi sometimes issue shares of common stock, stock
options and warrants to purchase shares of common stock. For financial statement purposes, we value
these shares of common stock, stock options, and warrants at the fair value of the common stock,
stock options or warrants granted, or the services received, whichever is more reliably measurable.
We recorded non-cash charges of $111,000 and $3.7 million, respectively, for the three month and
nine-month periods ended September 30, 2007, and $92,000 and $197,000, respectively, for the same
periods ended September 30, 2006. Included in the non-cash research and development charges for the
2007 nine-month period were $2.3 million of expense related to RXis issuance of 462,112 shares of
common stock to UMMS related for certain license agreement rights and the new invention disclosure
agreement and $1.0 million for
19
non-qualifying stock options to scientific advisory board members (SAB) of RXi. We recorded
$181,000 and $413,000 of employee stock option expense during the three-month and nine-month
periods ended September 30, 2007, respectively, as compared with $69,000 and $230,000,
respectively, for the related periods in 2006.
Over the coming twelve months, we expect our research and development expenses to increase
primarily as a result of our ongoing Phase II clinical program for arimoclomol and related studies
for the treatment of ALS, our potential Phase II clinical trial of arimoclomol for stroke recovery,
our further development of iroxanadine for diabetic ulcers and the continued development of our
RNAi assets by our majority-owned subsidiary RXi.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period |
|
|
Nine Month Period |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
(In thousands) |
|
General and administrative expenses |
|
$ |
3,071 |
|
|
$ |
1,908 |
|
|
$ |
8,989 |
|
|
$ |
5,747 |
|
Non-cash general and administrative expenses |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
32 |
|
Employee stock option expense |
|
|
593 |
|
|
|
310 |
|
|
|
1,252 |
|
|
|
846 |
|
Depreciation and amortization |
|
|
5 |
|
|
|
0 |
|
|
|
20 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,669 |
|
|
$ |
2,218 |
|
|
$ |
10,261 |
|
|
$ |
6,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses include all salaries and general corporate expenses,
including legal expenses associated with the prosecution and acquisition of our intellectual
property. General and administrative expenses increased by
approximately $1.5 million and $3.6
million for the three-month and nine-month periods ended September 30, 2007, respectively, as
compared to the same time periods in 2006. The increase in general and administrative expenses for
the three month period ended September 30, 2007 is attributable primarily to additional audit fees
of $716,000 due to compliance with provisions of the Sarbanes-Oxley Act and professional fees
related to RXis recently filed registration statement on Form S-1 to register RXis common stock,
$294,000 in increased employee stock option expense associated with new hires, $158,000 in
consulting expenses related primarily to RXis registration statement on Form S-1, $134,000 in
legal fees associated with the Form S-1, as well as ongoing patent-related costs, and increased
Board of Director fees primarily attributable to the addition of RXis director costs. The $3.6
million increase for the nine month period in 2007 relates primarily to additional audit fees
associated with our annual audit, compliance with provisions of the Sarbanes-Oxley Act and
professional fees related to RXis registration statement on Form S-1 totaling $1.1 million,
additional legal costs associated with RXis registration statement on Form S-1, increased patent
work, license negotiation fees and other significant projects totaling $1.1 million, a $448,000
increase in employee stock option expense relating to new hires, increased consulting and
recruiting fees of $574,000 relating to the registration statement on Form S-1 and an increase in
Board fees of $206,000.
We recorded approximately $593,000 and $1,252,000 of employee stock option expense during the
three month and nine month periods ended September 30, 2007, respectively, as compared to
approximately $310,000 and $846,000, respectively during the three month and nine month periods
ended September 30, 2006. The increase in employee stock option expense relates primarily to stock
option grants by RXi and the overall increase in our common share price.
Depreciation and Amortization
Depreciation and amortization expenses for the three-month and nine-month periods ended
September 30, 2007 were approximately $54,000 and $175,000, as compared to $53,000 and $192,000 for
the three-month and nine-month periods ended September 30, 2006, respectively. The depreciation
expense reflects the depreciation of our equipment and furnishings and the amortization expenses
related to our molecular library, which was placed in service in March 2005. These expenses are
classified as Research and Development or General and Administrative expenses depending upon the
associated business activity.
Interest Income
Interest
income was $857,000 and $1,897,000 for the three and nine months ended September 30,
2007, respectively, compared to $296,000 and $580,000, respectively for the comparable periods of
2006. The differences between periods is attributable primarily to the cash available for
investment each year and, to a lesser extent, changes in prevailing market rates.
20
Minority Interest in Losses of Subsidiary
We offset $77,092 and $255,228 of minority interest in losses of our subsidiary, RXi, against
our net loss in the three-month and nine-month periods ended September 30, 2007, respectively.
During 2006, no comparable entry was necessary. This loss was the minority shareholders portion of
the loss attributed to RXi.
Related Party Transactions
RXi was incorporated jointly in April 2006 by CytRx and the four current members of RXis
scientific advisory board for the purpose of pursuing the possible development or acquisition of
RNAi-related technologies and assets.
We have entered into several agreements and arrangements with RXi, including the following:
Contribution Agreement of January 8, 2007
On January 8, 2007, we entered into a contribution agreement with RXi under which we assigned
and contributed to RXi substantially all of our RNAi-related technologies and assets consisting
primarily of licenses from UMMS and the Carnegie Institution of Washington relating to fundamental
RNAi technologies, as well as equipment situated at our Worcester, Massachusetts, laboratory. In
exchange for the contribution, RXi assumed primary responsibility for all payments to UMMS and
other obligations under the licenses and other assets contributed by
us and issued to us 7,040,318 shares of RXi common stock, which represented approximately 85% of RXis outstanding shares
immediately following the issuance.
Reimbursement Agreement
On January 8, 2007, we also entered into a letter agreement with RXi under which RXi agreed to
reimburse us for organizational and operational expenses incurred by us in connection with RXis
formation and initial operations, and to bear or reimburse us for an allocable share of any
investment banking fees, placement agent fees and other offering expenses incurred by us in
connection with RXis fundraising activities.
Stockholder and Preemptive Rights Agreement
On February 15, 2007, we entered into a letter agreement with CytRx and some of RXis current
stockholders under which RXi agreed to grant to us preemptive rights to acquire any new
securities (as defined) that RXi proposes to sell or issue so that we may maintain our percentage
ownership in RXi. The preemptive rights will become effective at any time that we own less than
50% of the outstanding shares of RXi common stock and will expire on January 8, 2012 or such
earlier time at which we own less than 10% of RXis outstanding common stock.
Under this letter agreement, we also undertake, during the term of RXis licenses with UMMS,
to vote our shares of stock of RXi in the election of RXis directors to ensure that a majority of
the board of directors of RXi are independent of us and to reduce our ownership of shares of RXi
stock to less than a majority as soon as reasonably practicable. We intend to satisfy this
obligation by undertaking the distribution to CytRx stockholders of a portion of our RXi shares
pursuant to the registration statement on Form S-1 filed with the SEC by RXi on October 30, 2007.
We further agree in this letter agreement to approve of actions that may be adopted and recommended
by the RXi board of directors to facilitate any future financing by RXi.
Contribution Agreement of April 30, 2007
On April 30, 2007, we entered into another contribution agreement with RXi under which we
contributed to RXi $17.0 million in exchange for 3,273,292 shares of RXi common stock. RXi used
$2.0 million of this amount to reimburse us for the estimated amount of expenses that we had
incurred as of April 30, 2007 pursuant to the January 8, 2007 reimbursement agreement described
above. In September 2007, the actual expenses incurred by us were determined to be approximately
$3.0 million, and on September 25, 2007, RXi issued to us 188,387 shares of RXi common stock as
reimbursement of the excess expenses.
21
Registration Rights Agreement
On April 30, 2007, we entered into a registration rights agreement with RXi under which RXi
agrees, upon our request, to use its best efforts to cause to be registered under the Securities
Act all of the RXi shares issued to us pursuant to our contribution agreements with RXi and to bear
expenses incurred in connection with any such registration. Pursuant to the registration rights
agreement, all of our RXi shares have been included as part of the registration statement filed on
Form S-1 with the SEC by RXi on October 30, 2007.
Relationship with Tod Woolf, Ph.D.
Tod Woolf, Ph.D., the President and Chief Executive Officer of RXi, is one of our executive
officers. Under the terms of Dr. Woolfs employment agreement he is entitled to base annual
compensation and other employee benefits. Additionally, he received a grant by RXi of options to
purchase 317,000 shares of RXi common stock. Dr. Woolf may be deemed to have a material interest in
our transactions with RXi described above, and in its future dealings with RXi, by reason of his
status as RXis President and Chief Executive Officer and in light of the stock options granted to
him by RXi.
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 United States interest rates, particularly because a
significant portion of our investments are in short-term debt securities issued by the U.S.
government and institutional money market funds. The primary objective of our investment activities
is to preserve principal. Due to the nature of our short-term investments, we believe that we are
not subject to any material market risk exposure. We do not have any derivative financial
instruments or foreign currency instruments. If interest rates had varied by 10% in the three-month
period ended September 30, 2007, 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 and identified deficiencies, discussed below,
that it considered to be material weaknesses in the effectiveness of our internal controls over
financial reporting related to the recording of journal entries and our accounting for equity
transactions. Pursuant to standards established by the Public Company Accounting Oversight Board,
a material weakness is a deficiency or combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the companys annual or interim financial statements will not be prevented or detected on a timely
basis.
For the quarter ended June 30, 2007, we originally reported additional paid-in capital of $2.3
million attributable to RXis issuance to the University of Massachusetts Medical School, or UMMS,
of approximately 462,000 shares of RXi common stock in payment for RXis acquisition of four
technology licenses and an invention disclosure agreement entered into with UMMS in January 2007
that should have been accounted for on our consolidated balance sheet as minority interest in RXi.
This accounting correction resulted in a corresponding reduction of $2.3 million in our additional
paid-in capital and stockholders equity as of June 30, 2007, as well as an increase in loss
attributable to minority interests and a decrease in our consolidated net loss of $176,000 for both
the three-month and six-month periods ended June 30, 2007. Additionally, for the quarter ended
June 30, 2007, we originally reported $227,000 in amounts withheld from employees for income taxes
on compensation derived from exercises of options to purchase our common stock as an offset to
general and administrative expenses in our consolidated statement of operations for the three-month
and six-month periods ended June 30, 2007. The $227,000 is properly classified as a current
liability as of June 30, 2007, which correction resulted in an increase in our consolidated net
loss by the same amount for both the three-month and six-month periods ended June 30, 2007. The
net effect of the correction of both of these items was a $51,000 increase in our consolidated net
loss for the three-month and six-month periods ended June 30, 2007. Our reported earnings per
share for these periods were not affected by these corrections.
Based on the evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, our Chief Executive
Officer and new Chief Financial Officer concluded that our disclosure
22
controls and procedures related to the recording of journal entries and our accounting for
equity transactions were not effective as of September 30, 2007.
Changes in Controls over Financial Reporting
During the quarterly period covered by this Quarterly Report, we made changes to our internal
controls designed to strengthen our financial reporting in light of a material weakness in that
regard reported in our original Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
During the quarterly period covered by this Quarterly Report, we hired a new Chief Financial
Officer who has extensive SEC reporting experience, and on October 26, 2007, we hired a Chief
Accounting Officer, to bolster our accounting and financial reporting functions, including the
closing of our books and records for purposes of preparing our quarterly financial statements and
our internal review of transactions relating to the business and operations of RXi.
We are continuing our efforts in these regards in order to fully remedy the material
weaknesses described above and to ensure 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 SECs 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 1A Risk Factors
We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable
Future
We have operated at a loss due to substantial expenditures for research and development of our
product candidates and for general and administrative purposes and our lack of significant
recurring revenue. We incurred net losses of $16.8 million, $15.1 million and $16.4 million for
the years ended December 31, 2006, 2005 and 2004, respectively. Our net losses applicable to
common shareholders for the three-month and nine-month periods ended September 30, 2007 were $4.6 million and $15.4 million, respectively, as compared to $3.0 million and $13.1 million,
respectively, for the same periods in 2006. We had an accumulated deficit as of September 30, 2007
of approximately $155 million, and we are likely to continue to incur losses unless and until we
are able to commercialize one or more of our products. There is no assurance that we will ever
become profitable.
We Have No Source of Significant Recurring Revenue, Which Makes Us Dependent on Financing to
Sustain Our Operations
Our revenue was $2.0 million and $6.0 million, respectively, for three-month and nine-month
periods ended September 30, 2007, of which $2.0 and $5.9, respectively, was deferred revenue
recognized from our sale in August 2006 of a one-percent royalty interest in worldwide sales of
arimoclomol. We will have no other significant recurring revenue until at least one of the
following occurs:
|
|
|
We are able to commercialize one or more of our products in development, which may
require us to first enter into license or other arrangements with third parties. |
|
|
|
|
One or more of our licensed products is commercialized by our licensees, thereby
generating royalty revenue for us. |
|
|
|
|
We are able to acquire products from third parties that are already being marketed
or are approved for marketing. |
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, 2007,
we had cash, cash equivalents and short-term investments of $66.2 million, and as of November 1,
2007, we had received approximately $2.2 million in connection with the exercise of warrants and
options since September 30, 2007. We believe that we have adequate financial resources to support
our currently planned level of operations into the second half of 2009, based, in part, upon
projected expenditures for the remainder of 2007 and the first nine months of 2008 of $30.1
million, including $5.0 million for our planned clinical program for arimoclomol for ALS and
related studies, $5.5 million for our other ongoing and planned clinical programs, including a
planned Phase II clinical trial of arimoclomol in stroke patients and a planned Phase II clinical
trial of iroxanadine for diabetic ulcers, $8.2 million for the operations of our research
laboratory in San Diego and
23
$8.8 million for other general and administrative expenses. We estimate that RXi separately
will expend approximately $9.1 million for the remainder of 2007 and the first nine months of 2008.
We anticipate it will take a minimum of three years, and possibly longer, for us to generate
significant recurring revenue, and we will be dependent on future financing until such time, if
ever, as we can generate significant recurring revenue. We have no commitments from third parties
to provide us with any additional financing, and we may not be able to obtain future financing on
favorable terms, or at all. If we are unable to obtain needed future financing, we may have to
modify our long-term business plans.
Our Current Financial Resources May Be Diminished If We Elect To Provide RXi with Additional
Future Funding
We have no obligation to provide any additional funding to RXi, but we might seek to do so in
order to protect our investment in RXi if RXi is unable to obtain sufficient funding on its own.
We have the right to provide additional funding to RXi only in connection with the exercise of our
preemptive rights to purchase any new securities that may be sold or issued by RXi. If we provide
RXi with any additional funding, we will have less funds available for our own business and
operations.
We Will Be Reliant Upon Third Parties for the Development and Eventual Marketing of Our Products
Our business plan is to enter into strategic alliances, license agreements or other
collaborative arrangements with other pharmaceutical companies under which those companies will be
responsible for the commercial development and eventual marketing of our products. We currently
plan to continue the development of arimoclomol for the treatment of ALS under our Master Agreement
for clinical trials management services with Pharmaceutical Research Associates (PRA), and we may
seek to market it ourselves if it is approved by the FDA; however, the completion of the
development of arimoclomol and our other product candidates, as well as the marketing of these
products, will likely require us to enter into strategic arrangements with other pharmaceutical or
biotechnology companies.
There can be no assurance that any of our products will have sufficient potential commercial
value to enable us to secure strategic arrangements with suitable companies on attractive terms, or
at all. If we are unable to enter into such arrangements, we may not have the financial or other
resources to complete the development of any of our products. We do not have a commercial
relationship with the company that provided an adjuvant for the vaccine for the Phase I clinical
trial of our HIV vaccine candidate conducted by UMMS and Advanced BioScience Laboratories. If we
are not able to enter into such a relationship, we may be unable to use some or all of the results
of the clinical trial as part of our clinical data for obtaining FDA approval of this vaccine,
which would delay the development of the vaccine.
To the extent we enter into collaborative arrangements, we will be dependent upon the
timeliness and effectiveness of the development and marketing efforts of our contractual partners.
If these companies do not allocate sufficient personnel and resources to these efforts or encounter
difficulties in complying with applicable FDA and other regulatory requirements, the timing of
receipt or amount of revenue from these arrangements may be materially and adversely affected. By
entering into these arrangements rather than completing the development and then marketing these
products on our own, we may suffer a reduction in the ultimate overall profitability for us of
these products. In addition, if we are unable to enter into these arrangements for a particular
product, we may be required to either sell our rights in the product to a third party or abandon it
unless we are able to raise sufficient capital to fund the substantial expenditures necessary for
development and marketing of the product.
We Will Incur Substantial Expenses and May Be Required to Pay Substantial Milestone Payments
Relating to Our Product Development Efforts
We estimate that during the next two to three years we will incur significant expenses in
connection with our planned Phase IIb clinical trial for arimoclomol for the treatment of ALS,
including the completion of our planned Phase IIb efficacy trial and related activities. We are
also planning to undertake a second efficacy clinical trial of arimoclomol for ALS, possibly in
parallel with our planned Phase IIb trial, in order to provide additional efficacy data to support
a possible approval decision by the FDA. The actual costs of our planned Phase IIb efficacy trial
and any additional efficacy trial we undertake could significantly exceed our current estimates due
to a variety of factors associated with the conduct of clinical trials generally, including those
described below in this section below under If Our Products Are Not Successfully Developed and
Approved by the FDA, We May Be Forced to Reduce or Curtail Our Operations.
24
Our agreement by which we acquired arimoclomol and our other molecular chaperone co-induction
product candidates provides for milestone payments by us based on the occurrence of certain
regulatory filings and approvals related to the acquired products. In the event that we
successfully develop arimoclomol or any of these other product candidates, these milestone payments
could aggregate as much as $3.7 million, with the most significant payments due upon the first
commercialization of any of these products.
If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to
Reduce or Curtail Our Operations
All of our products in development must be approved by the FDA or similar foreign governmental
agencies before they can be marketed. The process for obtaining FDA and foreign government
approvals is both time-consuming and costly, with no certainty of a successful outcome. This
process typically includes the conduct of extensive pre-clinical and clinical testing, which may
take longer or cost more than we or our licensees anticipate, and may prove unsuccessful due to
numerous factors. Product candidates that may appear to be promising at early stages of
development may not successfully reach the market for a number of reasons. The results of
preclinical and initial clinical testing of these products may not necessarily indicate the results
that will be obtained from later or more extensive testing. Companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials.
Numerous factors could affect the timing, cost or outcome of our drug development efforts,
including the following:
|
|
|
Difficulty in securing centers to conduct trials. |
|
|
|
|
Difficulty in enrolling patients in conformity with required protocols or projected
timelines. |
|
|
|
|
Unexpected adverse reactions by patients in trials. |
|
|
|
|
Difficulty in obtaining clinical supplies of the product. |
|
|
|
|
Changes in FDA or foreign governmental product testing, manufacturing or marketing
requirements. |
|
|
|
|
Inability to generate statistically significant data confirming the efficacy of the
product being tested. |
|
|
|
|
Modification of the product during testing. |
|
|
|
|
Inability to generate statistically significant data confirming the efficacy of the
product being tested. |
|
|
|
|
Reallocation of our limited financial and other resources to other clinical programs. |
It is possible that none of the products we develop will obtain the appropriate regulatory
approvals necessary for us to begin selling them. The time required to obtain FDA and foreign
governmental approvals is unpredictable but often can take years following the commencement of
clinical trials, depending upon the complexity of the drug candidate. Any analysis we perform of
data from clinical activities is subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory approval. Any delay or failure in
obtaining required approvals could have a material adverse effect on our ability to generate
revenue from the particular drug candidate.
Our Molecular Chaperone Co-Induction Drug Candidates May Not Receive Regulatory Marketing
Approvals
Our Phase IIa clinical trial and open-label trial extension of arimoclomol for the treatment
of ALS indicated that arimoclomol was safe and well-tolerated in patients. We plan to initiate a
Phase IIb efficacy trial of arimoclomol for this indication before the end of 2007, and plan to
undertake a second efficacy trial of arimoclomol for ALS, possibly in parallel with our planned
Phase IIb trial, to provide additional data to support a possible approval decision by the FDA. In
addition, we are planning to conduct a Phase II clinical trial of arimoclomol in stroke patients,
and we plan to conduct clinical development of iroxanadine for diabetic ulcers, both of which would
require significant and costly additional testing. There is no guarantee that additional clinical
testing of our product candidates will be successful, or that the FDA will approve marketing of any
of our products and allow them to be sold in the United States.
25
We Have Recently Identified Material Weaknesses in Our Internal Controls Over Financial Reporting
In this Quarterly Report, we identify material weaknesses in the effectiveness of our internal
controls over financial reporting related to our accounting for an equity transaction by our RXi
subsidiary and our tax withholding in connection with exercises of employee stock options that
prompted us to restate our financial statements for the quarter ended June 30, 2007. In our
original Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, we identified a
material weakness related to our process for closing our quarterly books and records. In our
amended Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, we restated our
financial statements for the first three quarters of fiscal 2006 to reflect the proper accounting
for transactions at our former laboratory facility. In our most recent Annual Report on Form 10-K,
we also identified material weaknesses in the effectiveness of our internal controls over financial
reporting related to the application of generally accepted accounting principles arising from our
accounting for historical warrant anti-dilution adjustments as deemed dividends and in the
effectiveness of our internal controls over quarterly and annual financial statement reporting
arising from our accounting for research and development expenses related to our laboratory
facility in Worcester, Massachusetts. These matters are described in more detail under the heading
Controls and Procedures in this Quarterly Report and in our prior reports referred to above.
Despite our efforts to ensure the integrity of our financial reporting process, we cannot
guarantee that we will not identify other material weaknesses in the future. Any material
weaknesses in our internal control over financial reporting could result in errors in our financial
statements, which could erode market confidence in our company, adversely affect the market price
of our common stock and, in egregious circumstances, result in possible claims based upon such
financial information.
We Are Subject to Intense Competition, and There is No Assurance That We Can Compete
Successfully
We and our strategic partners or licensees may be unable to compete successfully against our
current or future competitors. The pharmaceutical, biopharmaceutical and biotechnology industry is
characterized by intense competition and rapid and significant technological advancements. Many
companies, research institutions and universities are working in a number of areas similar to our
primary fields of interest to develop new products. There also is intense competition among
companies seeking to acquire products that already are being marketed. Many of the companies with
which we compete have or are likely to have substantially greater research and product development
capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other
resources than at least some of our present or future strategic partners or licensees.
As a result, these competitors may:
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Succeed in developing competitive products sooner than us or our strategic partners
or licensees. |
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Obtain FDA or foreign governmental approvals for their products before we can obtain
approval of any of our products. |
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Obtain patents that block or otherwise inhibit the development and commercialization
of our product candidates. |
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Develop products that are safer or more effective than our products. |
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Devote greater resources than us to marketing or selling products. |
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Introduce or adapt more quickly than us to new technologies and other scientific
advances. |
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Introduce products that render our products obsolete. |
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Withstand price competition more successfully than us or our strategic partners or
licensees. |
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Negotiate third-party strategic alliances or licensing arrangements more effectively
than us. |
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Take better advantage than us of other opportunities. |
We are aware of only one drug, Rilutek, which was developed by Aventis Pharma AG, that has
been approved by the FDA for the treatment of ALS. Many companies are working to develop
pharmaceuticals to treat ALS, including Aeolus Pharmaceuticals, Celgene Corporation, Mitsubishi
Pharma Corporation, Ono Pharmaceuticals, Trophos SA, Faust Pharmaceuticals SA, Oxford BioMedica
plc, Phytopharm plc and Teva Pharmaceutical Industries Ltd., as well as RXi. ALS belongs to a
family of diseases called neurodegenerative diseases, including Alzheimers, Parkinsons and
Huntingtons disease. Due to similarities between these diseases,
26
a new treatment for one such disease potentially could be useful for treating others. There
are many companies producing and developing drugs used to treat neurodegenerative diseases other
than ALS, including Amgen, Inc., Biogen Idec, Bohringer Ingelhaim, Cephalon, Inc., Ceregene, Inc.,
Elan Pharmaceuticals, plc, Forest Laboratories, Inc., H. Lundbeck A/S, Phytopharm plc, UCB Group
and Wyeth.
A number of companies are working to develop proprietary pharmaceuticals and cell-based
therapies to treat diabetic wound healing, including Agennix, Inc., BioSyntech, Inc.,
CardioVascular BioTherapeutics, Inc., Cardium Therapeutics, Inc., Genentech Inc., KeraCure, Inc.,
King Pharmaceuticals, Inc. MacroChem Corporation, Oculus Innovative Sciences, Inc., Rovi
Pharmaceutical Laboratories, SanuWave, Inc. and Wyeth.
Companies developing HIV vaccines that could compete with our HIV vaccine technology include
Merck, GlaxoSmithKline, Sanofi Pasteur, VaxGen, Inc., AlphaVax, Inc. and Immunitor Corporation.
Most of our competitors have substantially greater research and product development capabilities
and financial, technical, scientific, manufacturing, marketing, distribution and other resources
than us.
We Will Rely Upon Third Parties for the Manufacture of Our Clinical Product Supplies
We do not have the facilities or expertise to manufacture supplies of any of our product
candidates, including the clinical supply of arimoclomol used in our Phase II clinical trials.
Accordingly, we are dependent upon contract manufacturers or our strategic alliance partners to
manufacture these supplies. We have a manufacturing supply arrangement in place with respect to
the clinical supplies for the Phase II clinical program for arimoclomol for ALS. We have no
manufacturing supply arrangements for any of our other product candidates, and there can be no
assurance that we will be able to secure needed manufacturing supply arrangements on attractive
terms, or at all. Our failure to secure these arrangements as needed could have a materially
adverse effect on our ability to complete the development of our products or to commercialize them.
We May Be Unable to Protect Our Intellectual Property Rights, Which Could Adversely Affect the
Value of Our Assets
We believe that obtaining and maintaining patent and other intellectual property rights for
our technologies and potential products is critical to establishing and maintaining the value of
our assets and our business. Although we have patents and patent applications directed to our
molecular chaperone co-induction technologies, there can be no assurance that these patents and
applications will prevent third parties from developing or commercializing similar or identical
technologies, that the validity of our patents will be upheld if challenged by third parties or
that our technologies will not be deemed to infringe the intellectual property rights of third
parties. In particular, although we conducted certain due diligence regarding the patents and
patent applications related to our molecular chaperone co-induction drug candidates, and received
certain representations and warranties from the seller in connection with the acquisition, the
patents and patent applications related to our molecular chaperone co-induction drug candidates
were issued or filed, as applicable, prior to our acquisition and thus there can be no assurance
that the validity, enforceability and ownership of those patents and patent applications will be
upheld if challenged by third parties.
Any litigation brought by us to protect our intellectual property rights or by third parties
asserting intellectual property rights against us, or challenging our patents, could be costly and
have a material adverse effect on our operating results or financial condition, make it more
difficult for us to enter into strategic alliances with third parties to develop our products, or
discourage our existing licensees from continuing their development work on our potential products.
If our patent coverage is insufficient to prevent third parties from developing or commercializing
similar or identical technologies, the value of our assets is likely to be materially and adversely
affected.
We Are Subject to Potential Liabilities From Clinical Testing and Future Product Liability Claims
If any of our products are alleged to be defective, they may expose us to claims for personal
injury by patients in clinical trials of our products or by patients using our commercially
marketed products. Even if the commercialization of one or more of our products is approved by the
FDA, users may claim that such products caused unintended adverse effects. We currently do not
carry product liability insurance covering the commercial marketing of these products. We obtained
clinical trial insurance for our Phase IIa clinical trial of arimoclomol for the treatment of ALS,
and will seek to obtain similar insurance for the planned Phase IIb clinical trial of arimoclomol
and any other clinical trials that we conduct, as well as liability insurance for any products that
we market. There can be no assurance that we will be able to obtain additional insurance in the
amounts we seek, or at all. We anticipate that our licensees who
27
are developing our products will carry liability insurance covering the clinical testing and
marketing of those products. There is no assurance, however, that any insurance maintained by us
or our licensees will prove adequate in the event of a claim against us. Even if claims asserted
against us are unsuccessful, they may divert managements attention from our operations and we may
have to incur substantial costs to defend such claims.
We May Be Unable to Acquire Products Approved For Marketing
In the future, we may seek to acquire products from third parties that already are being
marketed or have been approved for marketing. We have not identified any of these products, and we
do not have any prior experience in acquiring or marketing products and may need to find third
parties to market any products that we might acquire. We may also seek to acquire products through
a merger with one or more companies that own such products. In any such merger, the owners of our
merger partner could be issued or hold a substantial, or even controlling, amount of stock in our
company or, in the event that the other company is the surviving company, in that other company.
Risks Associated With Our Ownership of RXi
RXi is Subject to Risks of a New Business
RXi is a development-stage company with limited operating history. RXi began operating on a
stand-alone basis in February 2007, and is focused initially on developing and commercializing
therapeutic products based upon its RNAi technologies. There is no assurance that RXi will be able
to successfully implement its business plan. While RXis management collectively possesses
substantial business experience, there is no assurance that they will be able to manage RXis
business effectively, or that they will be able to identify, hire and retain any needed additional
management or scientific personnel, to develop and implement RXis product development plans,
obtain third-party contracts or any needed financing, or achieve the other components of RXis
business plan.
The Approach RXi is Taking to Discover and Develop Novel Therapeutics Using RNAi is Unproven and
May Never Lead to Marketable Products
The scientific discoveries that form the basis for RXis efforts to discover and develop new
drugs are relatively new. The RNAi technologies that RXi has licensed from UMMS have not yet been
clinically tested by RXi, nor are we aware of any clinical trials having been completed by third
parties involving similar technologies. The scientific evidence to support the feasibility of
developing drugs based on these discoveries is both preliminary and limited, and no company has
received regulatory approval to market therapeutics utilizing RNAi. Successful development of
RNAi-based products by RXi will require solving a number of issues, including providing suitable
methods of stabilizing the RNAi drug material and delivering it into target cells in the human
body. RXi may expend large amounts of money trying to solve these issues, and never succeed in
doing so. In addition, any compounds that RXi develops may not demonstrate in patients the
chemical and pharmacological properties ascribed to them in laboratory studies, and they may
interact with human biological systems in unforeseen, ineffective or even harmful ways.
The Distribution of RXi Common Stock to Our Stockholders May be Taxable to CytRx
On October 29, 2007, RXi filed a registration statement with the SEC to register the shares of
RXi common stock that will be distributed to CytRx stockholders. The registration statement filed
by RXi also covers shares of RXi common stock that will be awarded by us to some of our directors,
officers and other employees. Following the distribution and award transactions, we will own
6,212,861 shares of RXi common stock, or approximately 49% of the outstanding RXi
shares, all of which have been registered for resale by us pursuant to the registration statement
filed by RXi. We will recognize gain on the distribution of shares of RXi common stock in an
amount equal to the excess of the fair market value of the stock distributed over our basis. This
gain will be included in determining whether we have current year earnings and profits.
The FDA Approval Process May be Delayed for Any Drugs RXi Develops That Require the Use of
Specialized Drug Delivery Devices or Vehicles
Some drug candidates that RXi may develop may need to be administered using specialized
vehicles that deliver RNAi therapeutics to diseased parts of the body. While RXi expects to rely on
drug delivery vehicles that have been approved by the FDA or other regulatory agencies, RXi may
need to modify the design or labeling of these delivery vehicles for products that it may develop.
28
In such event, the FDA may regulate the product as a combination product of a drug and a
device, or require additional approvals or clearances for the modified delivery. To the extent any
specialized delivery vehicle is owned by another, RXi would need that companys cooperation to
implement the necessary changes to the vehicle, or its labeling, and to obtain any additional
approvals or clearances. Any delays in finding suitable drug delivery vehicles to administer RNAi
therapeutics directly to diseased parts of the body could negatively affect RXis ability to
successfully commercialize its RNAi therapeutics.
RXi May Be Unable to Protect Its Intellectual Property Rights Licensed From UMMS or May Need to
License Additional Intellectual Property from Others.
The assets we contributed to RXi include a non-exclusive license to the fundamental Fire &
Mello foundational patent owned by UMMS and the Carnegie Institution of Washington, which claims
various aspects of RNAi (sometimes referred to as gene silencing), or genetic inhibition by
double-stranded RNA. The license continues to be available to third parties and, as such, it does
not provide RXi with the ability to exclude others from its use or protect RXi from competition.
Therapeutic applications of gene silencing technology and other technologies that RXi licenses from
UMMS are also claimed in a number of UMMS pending patent applications, but there is no assurance
that these applications will result in any issued patents or that any such issued patents would
withstand possible legal challenges or effectively insulate RXis technologies from competition.
We are aware of a number of third party-issued patents directed to various forms and compositions
of RNAi-mediating molecules, or therapeutic methods using them, that RXi does not currently expect
to use. Third parties may, however, hold or seek to obtain additional patents that could make it
more difficult or impossible for RXi to develop products based on the gene silencing technology
that RXi has licensed.
In addition, others may challenge the patent owned by UMMS and the Carnegie Institution of
Washington or other patents that RXi currently licenses or may license in the future. As a result,
these patents could be narrowed, invalidated or rendered unenforceable, which would negatively
affect RXis ability to exclude others from use of RNAi technologies described in these patents.
RXi has entered into an invention disclosure agreement with UMMS under which UMMS has agreed
to disclose to RXi certain inventions it makes and to give RXi the exclusive right to negotiate
licenses to the disclosed inventions. There can be no assurance, however, that any such inventions
will arise, that RXi will be able to negotiate licenses to any inventions on satisfactory terms, or
at all, or that any negotiated licenses will prove commercially successful.
RXi may need to license additional intellectual property rights from third parties in order to
be able to complete the development or enhance the efficacy of its product candidates or avoid
possible infringement of the rights of others. There is no assurance that RXi will be able to
acquire any additional intellectual property rights on satisfactory terms, or at all.
RXi May Not Be Able to Obtain Sufficient Financing, and Our Ownership Interest in RXi May be
Diluted by Additional Funding
On April 30, 2007, we provided to RXi $15.0 million, net of approximately $3.0 million of
expenses reimbursed to us by RXi, to satisfy the initial funding requirements under its agreements
with UMMS. Management of RXi believes this initial funding will be sufficient to fund RXis
planned business and operations into the first quarter of 2009. It is possible, however, that RXi
may need to incur debt or issue equity in order to fund these requirements or to make acquisitions
and other investments. We anticipate that RXi will need to raise substantial amounts of money to
fund a variety of future activities integral to the development of its business, including, but not
limited to, conducting research and development of its RNAi technologies and obtaining regulatory
approval for its products.
We contributed to RXi all of our RNAi-related technologies to RXi in order to accelerate the
development and commercialization of drugs based upon these and RXis other RNAi technologies.
Although we believe that this will facilitate obtaining additional financing to pursue RXis RNAi
development efforts, RXi has no commitments or arrangements for any financing, and there is no
assurance that it will be able to obtain any future financing.
Under our agreement with RXi and its other current stockholders, with some exceptions, CytRx
will have preemptive rights to acquire a portion of any new securities sold or issued by RXi so as
to maintain our percentage ownership of RXi. Depending upon the terms and provisions of any
proposed sale of new securities by RXi, we may be unable or unwilling to exercise our preemptive
rights, in which event our percentage ownership interest in RXi would be diluted.
29
We May Be Required To Dispose of Some of Our RXi Shares, and May Not Be Able To Do So On
Attractive Terms
If the value of RXi shares owned by us from time to time were to exceed 40% of the value of
our total assets, we may be deemed an investment company within the meaning of the Investment
Company Act of 1940 and become subject to the stringent regulations applicable to investment
companies. In this event, we would likely seek to sell or otherwise dispose of shares of our
common stock in order to avoid becoming an inadvertent investment company. There is no assurance
that we would be able to sell or divest of RXi shares at attractive prices, and any such sales or
other disposition by us, or the possibility of such sales or disposition, could adversely affect
the market price of our RXi shares.
RXi Retains Discretion Over Its Use of Any Funds That We Provide To It
We do not and will not control the day-to-day operations of RXi. Accordingly, all funds
provided by us to RXi may be used by RXi in any manner its management deems appropriate, for its
own purposes, including the payment of salaries and expenses of its officers and other employees,
amounts called for under the UMMS licenses and invention disclosure agreement, and for other costs
and expenses of its RNAi research and development activities.
We Will Not Control RXi, And the Officers, Directors and Other RXi Stockholders May Have
Interests That Are Different From Ours
We have entered into a letter agreements with UMMS and RXi and its other current stockholders
under which we agree to vote our shares of RXi common stock for the election of directors of RXi
and to take other actions to ensure that a majority of the RXi board of directors are independent
of us. The other stockholders of RXi may have interests that are different from ours.
Accordingly, RXi may engage in actions or develop its business and operations in a manner that we
believe is not in our best interests.
Products Developed by RXi Could Eventually Compete With Our Products For ALS, Type 2 Diabetes and
Obesity and Other Disease Indications
RXi is focusing its initial efforts on developing an RNAi therapeutics for the treatment of a
specific form of ALS caused by a defect in the SOD1 gene. Although we are developing arimoclomol
for treatment for all forms of ALS, it is possible that any products developed by RXi for the
treatment of ALS could compete with any ALS products that we may develop. RXi also plans to pursue
the development of RNAi therapeutics for the treatment of obesity and type 2 diabetes, which could
compete with any products that we may develop for the treatment of these diseases. The potential
commercial success of any products that we may develop for these and other diseases may be
adversely affected by competing products that RXi may develop.
RXi Will Be Subject to Competition, and It May Not Be Able To Compete Successfully
A number of medical institutions and pharmaceutical companies are seeking to develop products
based on gene silencing technologies. Companies working in this area include Alnylam
Pharmaceuticals, Sirna Therapeutics (which was recently acquired by Merck), Acuity Pharmaceuticals,
Nastech Pharmaceutical Company Inc., Cequent Pharmaceuticals, Inc., Nucleonics, Inc., Tacere
Therapeutics Inc., Benitec Ltd., Opko Corp., Silence Therapeutics plc (formerly SR Pharma plc),
Quark Pharmaceuticals, Inc., Rosetta Genomics Ltd., Calanda Pharmaeuticals, Inc. and Isis
Pharmaceuticals, Inc., and a number of multinational pharmaceutical companies. These competitors
have substantially greater research and development capabilities and financial, scientific,
technical, manufacturing, marketing, distribution, and other resources than RXi, and RXi may not be
able to compete successfully. In addition, even if RXi is successful in developing its product
candidates, in order to compete successfully, it may need to be first to market or to demonstrate
that its RNAi-based products are superior to therapies based on different technologies. If RXi is
not first to market or is unable to demonstrate such superiority, its products may be not
successful.
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Risks Associated with Our Common Stock
Our Anti-Takeover Provisions May Make It More Difficult to Change Our Management or May
Discourage Others From Acquiring Us and Thereby Adversely Affect Stockholder Value
We have a stockholder rights plan and provisions in our bylaws that are intended to protect
our stockholders interests by encouraging anyone seeking control of our company to negotiate with
our board of directors, and that may discourage or prevent a person or group from acquiring us
without the approval of our board of directors.
We have a classified board of directors, which means that at least two stockholder meetings,
instead of one, will be required to effect a change in the majority control of our board of
directors. This provision applies to every election of directors, not just an election occurring
after a change in control. The classification of our board increases the amount of time it takes
to change majority control of our board of directors and may cause our potential purchasers to lose
interest in the potential purchase of us, regardless of whether our purchase would be beneficial to
us or our stockholders. The additional time and cost to change a majority of the members of our
board of directors makes it more difficult and may discourage our existing stockholders from
seeking to change our existing management in order to change the strategic direction or operational
performance of our company.
Our bylaws provide that directors may only be removed for cause by the affirmative vote of the
holders of at least a majority of the outstanding shares of our capital stock then entitled to vote
at an election of directors. This provision prevents stockholders from removing any incumbent
director without cause. Our bylaws also provide that a stockholder must give us at least 120 days
notice of a proposal or director nomination that such stockholder desires to present at any annual
meeting or special meeting of stockholders. Such provision prevents a stockholder from making a
proposal or director nomination at a stockholder meeting without us having advance notice of that
proposal or director nomination. This could make a change in control more difficult by providing
our directors with more time to prepare an opposition to a proposed change in control. By making
it more difficult to remove or install new directors, the bylaw provisions may also make our
existing management less responsive to the views of our stockholders with respect to our operations
and other issues such as management selection and management compensation.
Our Outstanding Options and Warrants and the Availability for Resale of Our Shares Issued in Our
Private Financings May Adversely Affect the Trading Price of Our Common Stock
As of September 30, 2007, there were outstanding stock options and warrants to purchase
approximately 26.9 million shares of our common stock at a weighted-average exercise price of $2.68 per share. Our outstanding options and warrants could adversely affect our ability to obtain
future financing or engage in certain mergers or other transactions, since the holders of options
and warrants can be expected to exercise them at a time when we may be able to obtain additional
capital through a new offering of securities on terms more favorable to us than the terms of
outstanding options and warrants. For the life of the options and warrants, the holders have the
opportunity to profit from a rise in the market price of our common stock without assuming the risk
of ownership. To the extent the trading price of our common stock at the time of exercise of any
such options or warrants exceeds the exercise price, such exercise will also have a dilutive effect
on our stockholders. Many of our outstanding warrants contain anti-dilution provisions pertaining
to dividends or distributions with respect to our common stock. Our outstanding warrants to
purchase approximately 1.4 million shares also contain anti-dilution provisions that are triggered
upon any issuance of securities by us below the prevailing market price of our common stock. In
the event that these anti-dilution provisions are triggered by us in the future, we would be
required to reduce the exercise price, and increase the number of shares underlying, those
warrants, which would have a dilutive effect on our stockholders.
As of October 31, 2007, we had registered with the SEC for resale by the holders a total of
approximately 89 million outstanding shares of our common stock and approximately 27.7 million
shares of our common stock issuable upon exercise of outstanding options and warrants. The
availability of these shares for public resale, as well as actual resales of these shares, could
adversely affect the trading price of our common stock.
We May Issue Preferred Stock in the Future, and the Terms of the Preferred Stock May Reduce the
Value of Our Common Stock
We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series.
Our board of directors may determine the terms of future preferred stock offerings without further
action by our stockholders. If we issue preferred stock, it could affect your rights or reduce the
value of our outstanding common stock. In particular, specific rights granted to future holders of
preferred
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stock may include voting rights, preferences as to dividends and liquidation, conversion and
redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell
our assets to a third party.
We May Experience Volatility in Our Stock Price, Which May Adversely Affect the Trading Price of
Our Common Stock
The market price of our common stock has ranged from $1.38 to $5.49 per share during the
52-week period ended October 31, 2007, and may continue to experience significant volatility from
time to time. Factors such as the following may affect such volatility:
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Announcements of regulatory developments or technological innovations by us or our
competitors. |
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Changes in our relationship with our licensors and other strategic partners. |
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Changes in our ownership or other relationships with RXi. |
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Our quarterly operating results. |
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Developments in patent or other technology ownership rights. |
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Public concern regarding the safety of our products. |
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Government regulation of drug pricing. |
Other factors which may affect our stock price are general changes in the economy, the
financial markets or the pharmaceutical or biotechnology industries.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Since our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007, we have issued a
total of 814,910 shares of our common stock in unregistered sales of our equity securities. The
814,910 shares were issued to two warrant holders in connection with the exercise of outstanding
common stock purchase warrants as follows: 175,000 shares were issued on October 26, 2007 upon the
payment of a warrant exercise price of $1.69 per share; 406,504 shares were issued on October 26,
2007 upon the payment of a warrant exercise price of $2.00 per share; and 233,406 shares were
issued on September 12, 2007 pursuant to the cashless exercise provisions of the warrants through
the surrender of the right to purchase 326,000 shares. We received approximately $1.1 million in
the aggregate upon the exercise of the foregoing warrants.
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 on Form 10-Q and incorporated herein by reference.
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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.
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CYTRX CORPORATION
(Registrant)
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Date: November 13, 2007 |
By: |
/s/ MITCHELL K. FOGELMAN
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Mitchell K. Fogelman |
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Chief Financial Officer (Principal Financial Officer) |
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INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
10.1 *
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Employment Agreement dated September 11, 2007, between CytRx Corporation and Mitchell K. Fogelman |
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10.2
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Lease dated September 25, 2007, between RXi Pharmaceuticals Corporation and Newgate Properties, LLC |
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10.3 *
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Employment Letter dated October 26, 2007, between CytRx Corporation and John Y. Caloz |
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31.1
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Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a-14(a) |
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31.2
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Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a-14(a) |
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32.1
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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 |
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32.2
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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 |
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* |
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Indicates a management contract or compensatory plan or arrangement. |
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