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, 2006
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
(State or other jurisdiction
of incorporation or organization)
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58-1642740
(I.R.S. Employer Identification No.) |
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11726 San Vicente Blvd.
Suite 650
Los Angeles, CA
(Address of principal executive offices)
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90049
(Zip Code) |
(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 o Non-accelerated filer þ
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, $.001 par value, issued and outstanding as of
November 13, 2006: 70,618,586, exclusive of treasury shares.
CYTRX CORPORATION
Form 10-Q
Table of Contents
2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
33,709,677 |
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$ |
8,299,390 |
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Accounts receivable |
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172,860 |
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Prepaid compensation, current portion |
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27,813 |
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Prepaid and other current assets |
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357,449 |
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287,793 |
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Total current assets |
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34,067,126 |
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8,787,856 |
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Equipment and furnishings, net |
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309,914 |
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352,641 |
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Molecular library, net |
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305,838 |
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372,973 |
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Prepaid insurance and other assets |
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395,994 |
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425,440 |
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Total assets |
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$ |
35,078,872 |
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$ |
9,938,910 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
762,287 |
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$ |
815,626 |
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Accrued expenses and other current liabilities |
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1,833,298 |
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1,639,922 |
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Total current liabilities |
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2,595,585 |
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2,455,548 |
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Deferred revenue |
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23,831,408 |
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275,000 |
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Total liabilities |
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26,426,993 |
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2,730,548 |
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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, $.001 par value, 125,000,000
shares authorized; 70,618,000 and 59,284,000
shares issued at September 30, 2006 and
December 31, 2005, respectively |
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70,618 |
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59,284 |
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Additional paid-in capital |
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146,315,401 |
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131,790,932 |
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Treasury stock, at cost (633,816 shares held
at September 30, 2006 and December 31, 2005,
respectively) |
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(2,279,238 |
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(2,279,238 |
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Accumulated deficit |
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(135,454,902 |
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(122,362,616 |
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Total stockholders equity |
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8,651,879 |
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7,208,362 |
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Total liabilities and stockholders equity |
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$ |
35,078,872 |
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$ |
9,938,910 |
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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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2006 |
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2005 |
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2006 |
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2005 |
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Revenue: |
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Service revenue |
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$ |
775,000 |
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$ |
10,000 |
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$ |
835,831 |
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$ |
10,000 |
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License fees |
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1,000 |
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1,000 |
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1,500 |
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776,000 |
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10,000 |
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836,831 |
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11,500 |
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Expenses: |
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Research and development (includes
$92,000 and $197,000 of non-cash
stock-based compensation given to
consultants for the three and
nine-month periods ended September 30,
2006 and $32,000 and $122,000 of
non-cash stock-based compensation given
to consultants for the three and
nine-month periods ended September 30,
2005, respectively) |
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1,129,527 |
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1,990,963 |
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5,517,345 |
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6,820,952 |
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Depreciation and amortization |
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53,243 |
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58,074 |
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192,184 |
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158,486 |
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General and
administrative (includes $0 and $32,000 of non-cash stock-based
compensation given to consultants for
the three and nine-month periods ended
September 30, 2006 and $26,000 and
$342,000 of non-cash stock-based
compensation given to consultants for
the three and nine-month periods ended
September 30, 2005 |
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2,342,426 |
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1,493,853 |
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7,096,254 |
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4,765,759 |
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Expense related to employee stock options |
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379,011 |
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1,075,389 |
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3,904,207 |
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3,542,890 |
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13,881,172 |
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11,745,197 |
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Loss before other income |
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(3,128,207 |
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(3,532,890 |
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(13,044,341 |
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(11,733,697 |
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Other income: |
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Interest and dividend income |
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296,086 |
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40,420 |
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580,483 |
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124,150 |
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Minority interest in losses of subsidiary |
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81,452 |
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Net loss
before income taxes |
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(2,832,121 |
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(3,532,890 |
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(12,463,858 |
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(11,733,697 |
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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 |
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$ |
(2,972,121 |
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$ |
(3,492,470 |
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$ |
(12,603,858 |
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$ |
(11,528,095 |
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Basic and diluted: |
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Loss per common share |
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$ |
(0.04 |
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$ |
(0.06 |
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$ |
(0.19 |
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$ |
(0.20 |
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Weighted average shares outstanding |
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67,421,958 |
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58,190,792 |
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67,463,477 |
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56,367,717 |
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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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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(12,603,858 |
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$ |
(11,528,095 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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192,184 |
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158,486 |
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Minority interest in losses of subsidiary |
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(81,452 |
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Gain on Atlanta lease termination |
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(163,000 |
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Common stock, stock options and warrants issued for services |
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228,432 |
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485,230 |
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Expense related to employee stock options |
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1,075,389 |
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Net change in operating assets and liabilities |
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23,856,908 |
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(461,594 |
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Total adjustments |
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25,352,913 |
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(62,330 |
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Net cash provided/(used) in operating activities |
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12,749,055 |
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(11,590,425 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(82,322 |
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(38,740 |
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Net cash used in investing activities |
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(82,322 |
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(38,740 |
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Cash flows from financing activities: |
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Net proceeds from exercise of stock options and warrants |
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339,194 |
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251,619 |
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Net proceeds from issuances of common stock |
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12,404,360 |
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19,590,446 |
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Net cash provided by financing activities |
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12,743,554 |
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19,842,065 |
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Net increase in cash and cash equivalents |
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25,410,287 |
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8,212,900 |
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Cash and cash equivalents at beginning of period |
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8,299,390 |
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2,999,409 |
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Cash and cash equivalents at end of period |
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$ |
33,709,677 |
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$ |
11,212,309 |
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Non-Cash Financing Activities:
In connection with the Companys adjustment to the terms of certain outstanding warrants on
January 20, 2005 and March 2, 2006, the Company recorded deemed dividends of $1,075,568 and
$488,428, respectively, which were recorded as charges to retained earnings with 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, 2006
(Unaudited)
1. Description of Company and Basis of Presentation
CytRx Corporation (CytRx or the Company) is a biopharmaceutical research and development
company, based in Los Angeles, California, with an obesity and type 2 diabetes research laboratory
in Worcester, Massachusetts (see Note 11 to our financial statements for the year ended December
31, 2005). On September 30, 2005, the Company completed the merger of CytRx Laboratories, Inc.,
previously a wholly owned subsidiary of the Company and the owner of its Massachusetts laboratory
(the Subsidiary), with and into the Company. The Companys small molecule therapeutics efforts
include the clinical development of three, oral drug candidates that it acquired in October 2004,
as well as a drug discovery operation conducted by its laboratory in Worcester, Massachusetts. The
Company owns the rights to a portfolio of technologies, including ribonueleic acid interference
(RNAi or gene silencing) technology in the treatment of specified diseases, including those within
the areas of amyotrophic lateral sclerosis (ALS or Lou Gehrigs disease), obesity and type 2
diabetes and human cytomegalovirus (CMV). In addition, the Company announced that a novel HIV DNA +
protein boost vaccine exclusively licensed to the Company and developed by researchers at
University of Massachusetts Medical School (UMMS) and Advanced BioScience Laboratories (ABL), and
funded by the National Institutes of Health, demonstrated promising interim Phase I clinical trial
results that indicate its potential to produce potent antibody responses with neutralizing activity
against multiple HIV viral strains. The Company has entered into strategic alliances with third
parties to develop several of the Companys other products.
In 2004, the Company began a development program based on molecular chaperone co-induction
technology through the acquisition of novel small molecules with broad therapeutic applications in
neurology, type 2 diabetes, cardiology and diabetic complications. The acquired assets included
three oral, clinical stage drug candidates and a library of 500 small molecule drug candidates. In
September 2006, the Company announced results of its Phase IIa clinical testing of its lead small
molecule product candidate arimoclomol for the treatment of ALS, reporting that arimoclomol had met
the trials primary endpoints of safety and tolerability at all three doses tested, and that the
trial results indicated a non-statistically-significant trend of improvement in functional capacity
as measured by the Revised ALS Functional Ration Scale in the arimoclomol high dose group as
compared with untreated patients. Arimoclomol has received Orphan Drug and Fast Track designation
from the U.S. Food and Drug Administration.
To date, the Company has relied primarily upon selling equity securities and a sale of a
royalty interest in arimoclomol and, to a much lesser extent, upon payments from its strategic
partners and licensees and upon proceeds received upon the exercise of options and warrants to
generate the funds needed to finance its operations. Management believes the Companys cash and
cash equivalents balances are sufficient to meet projected cash requirements through the fourth
quarter of 2008. The Company will be required to obtain significant 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 significant 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.
In August 2006, the Company received approximately $24.5 million in marketable securities
(which were sold by the Company for approximately $24.3 million in cash) from the privately-funded
ALS Charitable Remainder Trust (ALSCT) 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 analyzed the transaction and 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 as a percentage of actual research and development expense. As of September 30, 2006,
the Company recognized approximately $775,000 of service revenue related to this transaction.
The accompanying condensed consolidated financial statements at September 30, 2006 and for the
three and nine-month periods ended September 30, 2006 and 2005 are unaudited, but include all
adjustments, consisting of normal recurring entries, which the Companys 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, 2005 have been
derived from our audited financial statements as of that date.
The financial statements included herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to
such rules and regulations. The financial statements should be read in conjunction with the
Companys audited financial statements in its Form 10-K for the year ended December 31, 2005. 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.
6
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 will adopt FIN No. 48 as of January 1, 2007, as required. While the
Company has not yet completed its analysis, we do not expect that the adoption of FIN No. 48 will
have a significant 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 September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes that registrants
should quantify errors using both the balance sheet and income statement approach when quantifying
a misstatement. SAB 108 is effective for the Companys fiscal year ending December 31, 2006. The
Company is currently evaluating the impact of SAB 108 on the Companys consolidated financial
statements.
3. Loss Per Share
Basic net income per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted net income 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 employee stock options and restricted common
stock. 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 29.5 million and 25.0 million shares at September 30, 2006
and 2005, respectively.
Statement of Financial Accounting Standards No. 128, Earnings per Share, requires that
employee equity share options, nonvested shares and similar equity instruments granted by the
Company be treated as potential common shares outstanding in computing diluted earnings per share.
As the Company recorded losses for the three and nine-month periods
ended September 30, 2006 and 2005, all
employee equity share options, non-vested shares and similar equity instruments would be
anti-dilutive. In the event the Company becomes profitable, diluted shares outstanding will include
the dilutive effect of in-the-money options which are calculated based on the average share price
for each fiscal period using the treasury stock method. Under the treasury stock method, the amount
the employee must pay for exercising stock options, the amount of compensation cost for future
service that the Company has not yet recognized, and the amount of benefits that would be recorded
in additional paid-in capital when the award becomes deductible are assumed to be used to
repurchase shares.
4. Stock Based Compensation
As of September 30, 2006, an aggregate of 10,000,000 shares of common stock were reserved for
issuance under the Companys 2000 Stock Option Incentive Plan, including 6,831,000 shares subject
to outstanding stock options and 2,806,000 shares available for future grant. Additionally, the
Company has two other plans, the 1994 Stock Option Plan and the 1998 Long Term Incentive Plan,
which include 31,000 and 100,000 shares subject to outstanding stock options. As the terms of our
plans provide that no options may be issued after 10 years, no options are available under the 1994
Plan. Under the 1998 Long Term Incentive Plan, 40,000 shares are 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 will expire, unless
previously exercised, not later than ten years from the grant date.
7
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Accounting Standard (SFAS) No. 123(R), Share-Based Payment, an amendment of FASB Statements Nos.
123 and 95 (SFAS 123(R)), that addresses the accounting for, among other things, transactions in
which a company receives employee services in exchange for equity instruments of the company. The
statement precludes accounting for employee share-based compensation transactions using the
intrinsic method, and requires that such transactions be accounted for using a fair-value-based
method and that the fair value of the transaction be recognized as expense on a straight-line basis
over the vesting period. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107
(SAB 107) regarding the Staffs interpretation of SFAS 123(R). This interpretation provides the
Staffs views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public companies.
Effective January 1, 2006, the Company adopted the fair value recognition provision of SFAS
123(R) using the modified- prospective method. Under this method, compensation for all share based
payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123(R), Accounting for
Stock-based Compensation (123(R)), and compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R), is recognized as an expense in the first nine-months of 2006. Such
amounts have been reduced by the Companys estimate of forfeitures of all unvested awards. Results
for prior periods have not been restated to retrospectively apply SFAS No. 123(R).
Prior to January 1, 2006, the Company accounted for its stock based compensation plans under
the recognition and measurement provisions of Accounting Principles Board No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations for all awards granted to
employees. Under APB 25, when the exercise price of options granted to employees under these plans
equals the market price of the common stock on the date of grant, no compensation expense is
recorded. When the exercise price of options granted to employees under these plans is less than
the market price of the common stock on the date of grant, compensation expense is recognized over
the vesting period.
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) and EITF
96-18, as amended, and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Under SFAS No. 123(R), the compensation associated with stock options paid to
non-employees is generally recognized in the period during which services are rendered by such
non-employees. Since our adoption of SFAS 123(R), there been no change to our equity plans or
modifications of our outstanding stock-based awards.
Deferred compensation for non-employee option grants that do not vest immediately upon grant
are recorded as an expense over the vesting period of the underlying stock options, using the
method prescribed by FASB Interpretation 28. At the end of each financial reporting period prior to
vesting, the value of these options, as calculated using the Black Sholes option pricing model,
will be re-measured using the fair value of the Companys common stock and deferred compensation
and the non-cash compensation 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 stock options are
fully vested. The Company recognized $26,000 and $228,000 of stock based compensation expense
related to non-employee stock options for the three and nine-month periods ended September 30,
2006, respectively.
The following table illustrates the pro forma effect on net loss and net loss per share
assuming the Company had applied the fair value recognition provisions of SFAS 123(R) to options
granted under the Companys stock option plans for the three and nine-month periods ended September
30, 2005. For purposes of this presentation, the value of the options is estimated using a Black
Sholes option-pricing model and recognized as an expense on a straight-line basis over the options
vesting periods.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine-Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
|
Net loss, as reported |
|
$ |
(3,492 |
) |
|
$ |
(11,528 |
) |
Add: Stock-based employee compensation expense
included in reported net loss |
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under
fair-value based method for all awards |
|
|
(369 |
) |
|
|
(1,027 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,861 |
) |
|
$ |
(12,555 |
) |
|
|
|
|
|
|
|
Loss per share, as reported (basic and diluted) |
|
$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
Loss per share, pro forma (basic and diluted) |
|
$ |
(0.07 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
8
The fair value of stock options at the date of grant was estimated using the Black-Sholes
option-pricing model, based on the following assumptions: The Companys expected stock price
volatility assumption is based upon the historical daily volatility of our publicly traded stock.
For option grants issued during the nine-month period ended September 30, 2006 the Company used a
calculated volatility for each grant. The expected life assumptions is based upon the simplified
method provided for under 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, the Company has estimated an annualized
forfeiture rate of 10% for options granted to its employees and directors and 3% for its senior
management stock options. 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. Under provisions of SFAS 123(R), the Company recorded $379,000 and
$1,075,000 of stock-based compensation for the three and nine-month periods ended September 30,
2006, respectively. No amounts relating to employee stock-based compensation have been capitalized.
|
|
|
|
|
|
|
|
|
|
|
Nine-Months Ended |
|
|
September 30, 2006 |
|
September 30, 2005 |
Risk-free interest rate |
|
|
4.27% - 5.23 |
% |
|
|
3.63% - 4.33 |
% |
Expected volatility |
|
|
111.1 |
% |
|
|
131.0 |
% |
Expected lives (years) |
|
|
6 |
|
|
|
6 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
At September 30, 2006, there remained approximately $3.5 million of unrecognized compensation
expense related to unvested employee stock options to be recognized as expense over a
weighted-average period of 8.64 years. Presented below is the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
Nine-Months Ended |
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number |
|
|
Exercise Price |
|
|
|
of Shares |
|
|
per Share |
|
Outstanding at beginning of year |
|
|
6,205,542 |
|
|
$ |
1.71 |
|
Granted |
|
|
971,500 |
|
|
$ |
1.27 |
|
Exercised |
|
|
(62,500 |
) |
|
$ |
0.96 |
|
Forfeited |
|
|
(152,500 |
) |
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
6,962,042 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
Shares exercisable at end of period |
|
|
4,465,683 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
A summary of the activity for nonvested stock options as of September 30, 2006 and changes
during the nine-month period is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number |
|
|
Grant Date Fair |
|
|
|
of Shares |
|
|
Value per Share |
|
Nonvested at January 1, 2006 |
|
|
2,767,385 |
|
|
$ |
1.47 |
|
Granted |
|
|
971,500 |
|
|
$ |
1.25 |
|
Vested |
|
|
(1,242,526 |
) |
|
$ |
1.45 |
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
2,496,359 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
The following table summarizes significant ranges of outstanding stock options under the three
plans at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,236,043 |
|
|
|
7.67 |
|
|
$ |
0.82 |
|
|
|
622,898 |
|
|
|
7.03 |
|
|
$ |
0.82 |
|
$1.01 1.50
|
|
|
1,825,500 |
|
|
|
8.96 |
|
|
|
1.25 |
|
|
|
844,115 |
|
|
|
6.40 |
|
|
|
1.24 |
|
$1.51 2.00
|
|
|
2,237,500 |
|
|
|
7.32 |
|
|
|
1.86 |
|
|
|
1,495,837 |
|
|
|
6.69 |
|
|
|
1.86 |
|
$2.01 3.00
|
|
|
1,662,999 |
|
|
|
6.86 |
|
|
|
2.43 |
|
|
|
1,502,834 |
|
|
|
6.76 |
|
|
|
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,962,042 |
|
|
|
7.70 |
|
|
$ |
1.65 |
|
|
|
4,465,683 |
|
|
|
6.71 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The aggregate intrinsic value of outstanding options as of September 30, 2006, was $674,000 of
which $325,000 is 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, 2006 ($1.27) and the exercise price of the underlying options. The intrinsic
value of options exercised was $0 and $55,550 for the three and nine-month periods ended September
30, 2006 and the intrinsic value of options vested was $78,000 and $158,000 during these same
periods.
5. Liquidity and Capital Resources
Based on the Companys currently planned level of expenditures, it believes that it will have
adequate working capital to allow it to operate at its currently planned levels through the fourth
quarter of 2008.
In August 2006, the Company received approximately $24.5 million in marketable securities
(which were sold by the Company for approximately $24.3 million in cash) from the privately-funded
ALS Charitable Remainder Trust in exchange for a one percent royalty in the worldwide sales of
arimoclomol. The Company retains the right to market arimoclomol for indications other than ALS
without paying a royalty. The royalty agreement provides that the proceeds of the transaction are
non-refundable and will be used by the Company to continue development of arimoclomol and other
potential treatments for ALS, and that the ALS Charitable Remainder Trust has no obligation to
provide any further funding to the Company. Management has recorded this as service revenue
consistent with the contractual services tenants of SFAS No. 68, Research and Development
Arrangements, using the proportional performance method of revenue recognition, meaning that
service revenue is incurred as a percentage of actual expense. As of September 30, 2006, the
Company recognized approximately $775,000 of service revenue related to this transaction.
We
believe that the
$24.5 million received from the ALS Charitable Remainder Trust
in August 2006 together with the $12.4 million equity financing (net of expenses)
that we completed in March 2006, that we have adequate working capital to support our
currently planned level of operations through the fourth quarter of 2008, including our current and
planned clinical trials for arimoclomol and drug discovery efforts related to additional product
candidates. Included in our planned expenses are approximately $0.7 million for our Phase II
clinical program with arimoclomol for ALS during the remainder of 2006, and an additional $4.9
million in 2007 and $18.8 million in 2008 and beyond. The cost of our clinical program for ALS,
which we estimate will total approximately $30.6 million from inception to completion, could vary
significantly from our current projections due to any additional requirements imposed by the FDA in
connection with our clinical program, or if actual costs are higher than current management
estimates for other reasons. 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.
The Company will be required to obtain significant additional funding in order to execute its
long-term business plans. The Company plans to evaluate several potential sources of capital,
including potential strategic alliances, although it does not currently have commitments from any
third parties to provide it with capital.
6. Equity Transactions
On March 2, 2006, the Company completed a $13.4 million private equity financing in which it
issued 10,650,794 shares of its common stock and warrants to purchase an additional 5,325,397
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 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 antidilution
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 antidilution 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 March equity financing, the Company entered into a registration rights
agreement with the purchasers of its stock and warrants, which provides, among other things, for
cash penalties in the event that the Company were unable to initially register, or maintain the
effective registration of, the securities. The Company evaluated the penalty provisions in light of
EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In
a Companys Own Stock, and determined that the maximum penalty does not exceed the difference
between the fair value of a registered share of CytRx common stock and unregistered share of Cytrx
common stock on the date of the transaction. Further, the Companys management evaluated the other
terms of the March 2006 financing with the provisions of EITF 00-19 and related accounting
literature. Management concluded based upon its analysis of EITF 00-19 and related accounting
literature, the common stock and related warrants sold in the March 2006 financing should be
recorded as permanent equity in its financial statements.
During the nine-month period ended September 30, 2006, the Company issued 683,903 shares of
its common stock and received $339,193 upon the exercise of stock options and warrants. The Company
did not issue any shares of its common stock and did not receive any proceeds upon the exercise of
stock options or warrants in the three-month period ended September 30, 2006. In addition to the
warrants issued in the March 2006 financing described above, the Company issued 418,000 and 971,500
options in the three and nine-month periods ended September 30, 2006.
10
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 Securities and Exchange Commission, or 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 on Form 10-K, as well as those made in other filings with the SEC.
All statements in this Quarterly Report, including in Managements Discussion and Analysis of
Financial Condition and Results of Operations, other than statements of historical fact are
forward-looking statements for purposes of these provisions, including any projections of financial
items, any statements of the plans and objectives of management for future operations, any
statements concerning proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of the foregoing. 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 and in documents incorporated by this Quarterly Report
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.
Our future financial condition and results of operations, as well as any forward-looking
statements, are subject to inherent risks and uncertainties, including but not limited to the risk
factors set forth under the heading Risk Factors in this Quarterly Report. These risks and
uncertainties include: the risk that the results and achievements described herein related to our
clinical testing of our drug candidate arimoclomol for the treatment of amyotrophic lateral
sclerosis (ALS or Lou Gehrigs disease) may not be supported by further analysis of the Phase IIa
trial data or by the results of any subsequent clinical trials; uncertainties related to the scope
of the clinical testing that may be required by regulatory authorities for our molecular chaperone
co-induction drug candidates, including arimoclomol, our HIV vaccine candidate and our other
product candidates, and the outcomes of those tests; uncertainties related to the early stage of
our diabetes, obesity, cytomegalovirus, or CMV, and ALS research; the need for future clinical
testing of any small molecules and products based on ribonucleic acid interference, or RNAi, that
may be developed by us; the significant time and expense that will be incurred in developing any of
the potential commercial applications for our small molecules or RNAi technology; risks or
uncertainties related to the sufficiency of our existing cash and cash equivalents to meet our
projected cash requirements and our ability to obtain capital to fund our ongoing working capital
needs, including capital required to fund RNAi development activities that we plan to conduct
through the creation of a new subsidiary; and risks relating to the enforceability of any patents
covering our products and to the possible infringement of third party patents by those products.
All forward-looking statements and reasons why results may differ included in this Quarterly
Report are made as of the date hereof, and we assume no obligation to update any such
forward-looking statement or reason why actual results might differ.
Overview
We are a biopharmaceutical research and development company, based in Los Angeles, California,
with an obesity and type 2 diabetes research laboratory in Worcester, Massachusetts. We are in the
process of developing products, primarily in the areas of small molecule therapeutics and
ribonucleic acid interference, or RNAi, for the human health care market. Our small molecule
therapeutics efforts include clinical development of three oral drug candidates that we acquired in
October 2004, including a Phase II clinical program initiated in September 2005, as well as drug
discovery operations conducted at our laboratory in Worcester, Massachusetts. RNAi is a relatively
recent technology for silencing genes in living cells and organisms, and we are aware of only four
clinical tests of therapeutic applications using RNAi that have been initiated by any party. In
addition to our work in RNAi and small molecule therapeutics, we recently announced that a novel
HIV DNA + protein vaccine exclusively licensed to us and developed by researchers at the University
of Massachusetts Medical School, or UMMS, and Advanced BioScience Laboratories, and funded by the
National Institutes of Health, demonstrated promising interim Phase I clinical trial results that
indicate its potential to produce potent antibody responses with neutralizing activity against
multiple HIV viral strains. We have also entered into strategic alliances with respect to the
development of several other products using our other technologies.
11
In 2004, we began a development program based on molecular chaperone co-induction technology
through the acquisition of novel small molecules with broad therapeutic applications in neurology,
type 2 diabetes, cardiology and diabetic complications. The acquired assets included three oral,
clinical stage drug candidates and a library of 500 small molecule drug candidates. In September
2005, we entered the clinical stage of drug development with the initiation of a Phase II clinical
program with our lead small molecule product candidate arimoclomol for the treatment of amyotrophic
lateral sclerosis (ALS or Lou Gehrigs disease). Arimoclomol has received Orphan Drug and Fast
Track designation from the U.S. Food and Drug Administration, or FDA.
The initial Phase II clinical trial that we recently completed for arimoclomol for ALS (which
we refer to as the Phase IIa trial) was a multicenter, double-blind, placebo-controlled study of
approximately 80 ALS patients enrolled at ten clinical centers across the U.S. Patients received
either placebo (a capsule without drug), or one of three dose levels of arimoclomol capsules three
times daily, for a period of 12 weeks. This treatment phase was followed by a one-month period
without drug. The primary endpoints of this Phase IIa trial were safety and tolerability. Secondary
endpoints included a preliminary evaluation of efficacy using two widely accepted surrogate
markers, the revised ALS Functional Rating Scale (ALSFRS-R), which were used to determine patients
capacity and independence in 13 functional activities, and Vital Capacity (VC), an assessment of
lung capacity. The trial was powered to monitor only extreme responses in these two categories.
In September 2006, we announced results of the Phase IIa trial for arimoclomol for ALS,
reporting that arimoclomol had met the trials primary endpoints of safety and tolerability at all
three doses tested, and that the trial results indicated a non-statistically-significant trend of
improvement in functional capacity as measured by the Revised ALS Functional Ration Scale in the
arimoclomol high dose group as compared with untreated patients.
We have also announced initiation of an open-label (i.e., the medication is no longer
blinded to the patients or their doctor) extension of this clinical trial. Patients who completed
the Phase IIa study and who still met the eligibility criteria were given the opportunity to take
arimoclomol, at the highest investigative dose, for as long as an additional 6 months. We
anticipate completing the open label extension of the trial in the first quarter of 2007.
We plan to initiate a subsequent Phase II trial (which we refer to as the Phase IIb trial)
that will be powered to detect more subtle efficacy responses in the third quarter of 2007.
Although this second trial is still in the planning stages and will be subject to FDA approval, it
is expected to include approximately 400 ALS patients recruited from approximately 30 clinical
sites, and will take approximately 18 months after initiation to complete.
Our molecular chaperone co-induction technology represents a continuation of our business
strategy, adopted subsequent to our merger with Global Genomics, in July 2002, to conduct further
research and development efforts for our pre-merger adjuvant and co-polymer technologies, including
Flocor and Tranzfect, through strategic relationships with other pharmaceutical companies, and to
focus our efforts on acquiring and developing new technologies and products to serve as the
foundation for the future of the company.
In April 2003, we acquired our first new technologies by entering into exclusive license
agreements with UMMS covering potential applications for its proprietary RNAi technology in the
treatment of specified diseases and in the identification and screening of novel protein targets.
In May 2003, we broadened our strategic alliance with UMMS by acquiring an exclusive license from
it covering a proprietary DNA-based HIV vaccine technology. In July 2004, we further expanded our
strategic alliance with UMMS by entering into a collaboration and invention disclosure agreement
with UMMS under which UMMS will disclose to us certain new technologies developed at UMMS over a
three-year period pertaining to RNAi, diabetes, obesity, neurodegenerative diseases (including ALS)
and CMV, and will give us an option, upon making a specified payment, to negotiate an exclusive
worldwide license to the disclosed technologies on commercially reasonable terms. Approximately
nine months remain on the technology disclosure option. As part of our strategic alliance with
UMMS, we agreed to fund certain discovery and pre-clinical research at UMMS relating to the use of
our technologies, licensed from UMMS, for the development of therapeutic products within certain
fields.
In conjunction with some of our work with UMMS, we operate a research and development
laboratory in Worcester, Massachusetts whose goal is to develop small molecule and RNAi-based
therapeutics for the prevention, treatment and cure of obesity and type 2 diabetes. This laboratory
is focusing on using our proprietary RNAi gene silencing technology, combined with genomic and
proteomic based drug discovery technologies, to accelerate the process of screening and identifying
potential proprietary drug targets and pathways for these diseases. Through this laboratory, we are
seeking to develop orally active drugs against promising targets and pathways relevant to obesity
and type 2 diabetes. We are currently pursuing a plan, subject to obtaining necessary funding, to
transfer all of our RNAi-related programs into a newly-formed subsidiary to accelerate the
development and commercialization of drugs based on RNAi technology.
12
Although we intend to internally fund the early stage development work for certain product
applications (including obesity, type 2 diabetes and ALS) and may seek to fund the completion of
the development of certain of these product applications (such as arimoclomol for ALS), we may also
seek to secure strategic alliances or license agreements with larger pharmaceutical or
biotechnology companies to fund the early stage development work for other gene silencing product
applications and for subsequent development of those potential products where we fund the early
stage development work.
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 activities related to our collaborations, technology acquisitions, ongoing
and planned clinical trials, research and development programs and other general corporate
activities. We anticipate that our 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.
To date, we have relied primarily upon sales of equity securities and a sale of a royalty
interest in arimoclomol and, to a much lesser extent, upon payments from our strategic partners and
licensees and upon proceeds received upon the exercise of options and warrants, to generate the
funds needed to finance our business plans and operations. We will be required to obtain
significant additional funding in order to execute our long-term business plans. Our sources of
potential funding for the next several years are expected to consist primarily of proceeds from
sales of equity, but could also include license and other fees, funded research and development
payments, gifts and grants, and milestone payments under existing and future collaborative
arrangements. However, we have no commitment or arrangements for such additional funding.
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. The preparation of these 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, bad debts, impairment of long-lived assets, including finite lived intangible
assets, accrued liabilities and certain expenses. 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, 2005. 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
Nonrefundable license fee revenue is recognized when collectibility is reasonably assured,
which is generally upon receipt, and no continuing involvement on our part is required and payment
of the license fee represents the culmination of the earnings process. Nonrefundable license fees
received subject to future performance by us or that are credited against future payments due to us
are deferred and recognized as services are performed and collectibility is reasonably assured,
which is generally upon receipt, or upon termination of the agreement and all related obligations
thereunder, whichever is earlier. Our revenue recognition policy may require us to defer
significant amounts of future revenue.
In August 2006, the Company received approximately $24.5 million in marketable securities
(which were sold by the Company for approximately $24.3 million in cash) from the privately-funded
ALS Charitable Remainder Trust (ALSCT) 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 analyzed the transaction and 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 as a percentage of actual research and development expense. As of September 30, 2006,
the Company recognized approximately $775,000 of service revenue related to this transaction.
Research and Development Expenses
Research and development expenses consist of costs incurred for direct and overhead-related
research expenses and are expensed as incurred. Costs to acquire technologies which are utilized in
research and development and which have no alternative future use are
13
expensed when incurred. Technology developed for use in our products is expensed as incurred,
until technological feasibility has been established. Expenditures, to date, have been classified
as research and development expense in the consolidated statements of operations, and we expect to
continue to expense research and development for the foreseeable future.
Stock-based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS 123(R), Share-Based Payment
(SFAS 123(R)), which revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
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. The pro forma disclosures previously permitted under SFAS 123(R) are no
longer an alternative to financial statement recognition. We are using the modified-prospective
method and the Black-Scholes valuation model for valuing the 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) and
Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
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.
Facility Abandonment
During 2005, we entered into a termination agreement related to the lease for our former
Atlanta headquarters. Pursuant to this agreement, we were released from all future obligations on
the lease in exchange for a one-time $110,000 payment and the forfeiture of a $49,000 security
deposit. As a result of this agreement, we realized a $164,000 offset against our 2005 third
quarter general and administrative expenses.
Liquidity and Capital Resources
At September 30, 2006, we had cash and cash equivalents of $33.7 million and total assets of
$35.1 million, compared to $8.3 million and $9.9 million, respectively, at December 31, 2005.
Working capital totaled $31.5 million at September 30, 2006, compared to $6.3 million at December
31, 2005.
To date, we have relied primarily upon sales of equity securities and a sale of a royalty
interest in arimoclomol and, to a much lesser extent, payments from our strategic partners and
licensees and upon proceeds received upon the exercise of options and warrants, to generate funds
needed to finance our business and operations. As a result of the $12.4 million equity financing
(net of expenses) that we completed in March 2006 and our
execution of the royalty and research and development agreement for $24.5 million of marketable
securities (which were converted into approximately $24.3 million in cash) to the privately-funded
ALS Charitable Remainder Trust of a one percent royalty interest in worldwide sales of arimoclomol
for ALS, we believe that we have adequate working capital to support our currently planned level of
operations through the fourth quarter of 2008, including our current and planned clinical trials
for arimoclomol and drug discovery efforts related to additional product candidates. Included in
our planned expenses are approximately $0.7 million for our Phase II clinical program with
arimoclomol for ALS during the remainder of 2006, and an additional $4.9 million in 2007 and $18.8
million in 2008 and beyond. The cost of our clinical program for ALS, which we estimate will total
approximately $30.6 million from inception to completion, could vary significantly from our current
projections due to any additional requirements imposed by the FDA in connection with our clinical
program, or if actual costs are higher than current management estimates for other reasons. 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, our planned levels of operations for our obesity and
type 2 diabetes research laboratory and our ongoing research and development efforts related to our
other small molecule drug candidates, and in order to continue to meet our obligations to UMMS.
Additionally, we expect to spend approximately an additional $150,000 related to our efforts to
comply with the requirements of Section 404 of the Sarbanes Oxley Act of 2002 during the fourth
quarter of 2006.
14
We currently have no commitments from any third parties to provide us with capital. 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.
In the nine-month periods ended September 30, 2006 and 2005, net cash used in investing
activities consisted of approximately $82,000 and $39,000, respectively, for the purchase of
equipment. We expect capital spending during the fourth quarter to be comparable to the first three
quarters of 2006.
Cash
provided by operating activities included $24.5 million in
marketable securities (which were sold by the Company for
approximately $24.3 million in cash) received upon the execution
of the royalty and research and development agreement with the
privately-funded ALS Charitable Remainder Trust of a one percent royalty in the worldwide sales of
arimoclomol less the royalty revenue recognized during the third quarter of $775,000. The royalty
agreement provides that the proceeds of the transaction will be used by the Company to continue
development of arimoclomol and other potential treatments for ALS.
Cash provided by financing activities in the nine-month period ended September 30, 2006 was
$12.7 million. The cash provided includes approximately $339,000 received from the exercise of
stock options and warrants. Additionally, we received approximately $12.4 million, net of expenses,
through a private equity financing that closed in March 2006. Cash provided by financing activities
in the nine-month period ended September 30, 2005 was $19.8 million. During that period, we raised
$19.6 million, net of expenses,- from the issuance of common stock in a private equity financing in
January 2005, and we received proceeds from the exercise of stock options and warrants totaling
$252,000.
Our net loss for the nine-month period ended September 30, 2006 was $12.6 million, which
resulted in net cash provided from operating activities of $12.7 million. Adjustments to reconcile
net loss to net cash provided from operating activities for the nine-month period ended September 30,
2006 were primarily $1.1 million from the employee stock option expense incurred related to our
implementation of
SFAS 123(R); $228,000 of common stock, options and warrants expense
issued in lieu of cash for general and administrative services and research and development
services, respectively, and $192,000 of depreciation and amortization expense, which was off-set by
a $23.8 million change in operating assets and liabilities (including the $24.3 million of deferred
revenue received upon the sale of a royalty interest to the ALS Charitable Remainder Trust less the
royalty revenue recognized of $775,000). Our net loss for the nine-month period ended September 30,
2005 was $11.5 million, which resulted in net cash used in operating activities of $11.6 million.
Adjustments to reconcile net loss to net cash used in operating activities for the nine-month
period ending September 30, 2005 include $485,000 of common stock, options and warrants issued in
lieu of cash for research and development and selling, general and administrative services, as well
as a net change in assets and liabilities of $462,000, the recording of $158,000 depreciation and
amortization expense, $81,000 of minority interest and $163,000 gain on the termination of the
Atlanta lease.
We believe that we have adequate working capital to allow us to operate at our currently
planned levels through the fourth quarter of 2008. Our strategic alliance with UMMS may require us
to make significant expenditures to fund research at UMMS relating to developing therapeutic
products based on UMMSs proprietary gene silencing technology that has been licensed to us. The
aggregate amount of these expenditures during 2006 was approximately $1.0 million; all of which had
been expensed through September 30, 2006. At this time, we have no future commitments to fund
research, however we are in discussions regarding future licensing and commitments.
We will require significant additional capital in order to fund the completion of our clinical
program with our lead small molecule product candidate arimoclomol for the treatment of ALS, which
commenced in September 2005, and the other ongoing research and development related to our other
molecular chaperone co-induction drug candidates. We incurred $3.4 million on the arimoclomol
clinical program in the first nine months of 2006, and we estimate that the overall program,
including the ongoing open label trial and the planned Phase IIb trial that we expect to initiate
in 2007 subject to FDA approval, will require us to expend an additional $0.7 million in the
remainder of 2006, and an additional $23.7 million for 2007 and beyond. However, we may incur
substantial additional expense and the trial may be delayed if the FDA requires us to generate
additional pre-clinical or clinical data in connection with the clinical trial, or the FDA requires
us to revise significantly our planned protocol for the Phase IIb.
Additional capital may be provided by potential milestones payments pursuant to our license
with Vical, which relates to Tranzfect, or our license with SynthRx related to Flocor, or by
potential payments from future strategic alliance partners or licensees of our technologies. As
Vical is currently only in Phase II development of a product using TransFect it is likely to be a
substantial period of time, if ever, before we receive any further significant payments from Vical.
15
We are evaluating other potential future sources of capital, although 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 out ability to identify parties that are willing and
able to enter into such arrangements on terms that are satisfactory to us. Depending upon the
outcome of our fundraising efforts, the accompanying 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 of $3.0 and $12.6 million for the three and nine-month periods ended
September 30, 2006, respectively, as compared to $3.5 million and $11.5 million for the same
periods in 2005.
We
recognized $775,000 of revenue from our $24.5 million sale of
marketable securities (which were sold by the Company for
approximately $24.3 million in cash) to the ALS Charitable Remainder
Trust of a royalty interest in worldwide sales of arimoclomol, and earned an immaterial amount of
service revenue during the three and nine-month periods ended September 30, 2006. We earned an
immaterial amount of licensing fees during the three and nine-month periods ended September 30,
2005. All future licensing fees under our current licensing agreements are dependent upon
successful development milestones being achieved by the licensor. During fiscal 2006, we are not
anticipating receiving any significant licensing fees. We will continue to recognize the balance of
the deferred revenue recorded from the royalty transaction with the ALS Charitable Remainder Trust
over the life of our arimoclomol research (the development period).
In 2006, we expect our research and development expenses to increase primarily as a result of
our ongoing Phase II clinical program with arimoclomol and related studies for the treatment of
ALS. We incurred $3.4 million on the arimoclomol clinical program in the first nine months of 2006,
and we estimate that the overall program, including the ongoing open label trial and the planned
Phase IIb trial that we expect to initiate subject to FDA approval, will require us to expend an
additional $0.7 million in the remainder of 2006, and an additional $23.7 million for 2007 and
beyond. Additionally, we estimate that our costs related to the activities of our Massachusetts
laboratory will remain consistent with 2005 expenditures.
Research and development expenses were $1.1 million and $5.5 million, respectively, during the
three and nine-month periods ended September 30, 2006, as compared to $2.0 million and $6.8 million
for the same periods in 2005. Research and development expenses incurred during the first nine
months of 2006 and 2005 related primarily to (i) the preparation for and initiation of our Phase II
clinical program for arimoclomol in ALS, (ii) our ongoing research and development related to our
other molecular chaperone co-induction drug candidates, (iii) our research and development
activities conducted at UMMS related to the technologies covered by the UMMS license agreements,
(iv) our collaboration and invention disclosure agreement pursuant to which UMMS has 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 on-going small molecule drug
discovery operations at our Massachusetts laboratory. Although our future research and development
activities could vary substantially, our research and development activities will remain
substantial in the future as a result of commitments related to the foregoing activities.
In each of the periods presented in the accompanying condensed consolidated statements of
operations, certain vesting criteria of stock options issued to consultants were achieved,
resulting in aggregate non-cash charges for research and development activities of $92,000 and
$197,000 during the three and nine-month periods ended September 30, 2006 and $32,000 and $122,000
for the same periods ended September 30, 2005.
All research and development costs related to the activities of our laboratory are expensed.
No in-process research and development costs were eligible for capitalization at the time we
purchased the minority interest in our prior subsidiary, CytRx Laboratories.
Depreciation and amortization expense was $53,000 and $192,000 during the three and nine-month
periods ended September 30, 2006, as compared to $58,000 and $158,000 for the same periods in 2005.
The amounts in 2006 and 2005 primarily relate to depreciation of fixed assets located at our
Massachusetts laboratory and the amortization of the molecular screening library acquired in 2004,
which was put into service in March of 2005.
16
From time to time, we issue shares of our common stock or options and warrants to purchase
shares of our common stock to consultants and other service providers in exchange for services. For
financial statement purposes, we value these shares of common stock, stock options, or warrants at
the fair market value of the common stock, stock options or warrants granted, or the services
received, whichever is more reliably measurable, and we recognize the expense in the period in
which a performance commitment exists or the period in which the services are received, whichever
is earlier. During each of the periods presented in the accompanying condensed consolidated
statements of operations, certain vesting criteria of stock options and warrants issued to
consultants were achieved, resulting in aggregate non-cash charges for general and administrative
activities of $(66,000) and $32,000 for the three and nine-month periods ended September 30, 2006,
respectively, and $26,000 and $342,000 for the three and nine-month periods ended September 30,
2005. In addition, for the nine-month period ended September 30, 2006, we recorded $1,075,000 of
employee stock option expense in accordance with SFAS 123(R), for which there was no corresponding
expense recorded in prior periods.
General
and administrative expenses incurred were $2.3 and $7.2 million
for the three and nine-month periods ended September 30, 2006,
as compared to $1.5 and $4.8 million for the same periods in
2005. The expenses incurred during the three and nine-month periods
ended September 30, 2006 were higher in the third quarter due to
increases in salary and benefits of $530,000 and professional fees of
$330,000. We anticipate general and
administrative expenses to increase over the remainder of 2006 as a
result of, among other things, our efforts to comply with the
requirements of Section 404 of the Sarbanes Oxley Act of 2002,
and continuing employee stock option expense as a result of our
implementation of SFAS 123(R).
Interest income was $296,000 and $580,000 for the three and nine-month periods ended September
30, 2006, as compared to $40,000 and $124,000 for the same period in 2005. The increase in interest
income was due to the larger balances maintained and the higher rates on our cash and investments
that were held during 2006 compared to the lower rates in the same period in 2005.
For 2006, we did not record any minority interest share of our losses because, on September
30, 2005, we repurchased the outstanding 5% interest in CytRx Laboratories from Dr. Michael Czech,
and on September 30, 2005, we completed our merger with CytRx Laboratories. For the Nine-Months
ended September 30, 2005, we recorded a $81,000 reduction to our losses as a result of the minority
interest share in the losses of CytRx Laboratories. This amount is reported as a separate line item
in the accompanying condensed consolidated statements of operations.
Related Party Transactions
Dr. Michael Czech, a 5% minority shareholder of CytRx Laboratories until September 30, 2005
and a member of our Scientific Advisory Board, is an employee of UMMS and is the principal
investigator for a sponsored research agreement between CytRx and UMMS. During the nine-month
periods ended September 30, 2006 and 2005, we incurred expenses to UMMS related to Dr. Czechs
sponsored research agreement of $201,000 and $604,000, respectively. Additionally, we paid $60,000
to Dr. Czech for his services on the Scientific Advisory Board for each of these periods.
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 and
nine-month periods ended September 30, 2006, it would not have had a material effect on our results
of operations or cash flows for that period.
Item 4 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 Form 10-Q. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. There were no changes made during our most
recently completed fiscal quarter in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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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 incurred significant losses over the past five years, including net losses of $15.1
million, $16.4 million and $17.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively, and we had an accumulated deficit of approximately $135.5 million as of September 30,
2006. Our operating losses have been due primarily to our expenditures for research and development
on our products and for general and administrative expenses and our lack of significant revenue. We
are likely to continue to incur operating losses until such time, if ever, that we generate
significant recurring revenue.
We Have No Source of Significant Recurring Revenue, Which Makes Us Dependent on Financing to
Sustain Our Operations
Our revenue was $184,000, $428,000 and $94,000 during the years ended December 31, 2005,
2004 and 2003, respectively. We anticipate it will take a minimum of three years (and possibly
longer) for us to generate recurring revenue. We did not have any other significant revenue in the
first nine months of 2006, however we recognized $775,000 of deferred revenue associated with our
$24.5 million sale to the ALS Charitable Remainder Trust. We will not have significant recurring operating revenue until at least one of the
following occurs:
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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. |
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One or more of our licensed products is commercialized by our licensees, thereby generating royalty revenue for us. |
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We are able to acquire products from third parties that are already being marketed or are approved for marketing. |
We will be dependent on obtaining financing until such time, if ever, as we can generate
significant recurring revenue. On March 7, 2006, we completed a private placement financing and
received net proceeds of approximately $12.4 million. In August 2006, we received approximately
$24.3 million from the privately-funded ALS Charitable Remainder Trust in exchange for a one
percent royalty in the worldwide sales of arimoclomol. Although we believe that we have adequate
financial resources to support our currently planned level of operations through the fourth quarter
of 2008, 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, our planned
levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi subsidiary
and our ongoing research and development efforts related to our other small molecule drug
candidates, and in order to continue to meet our obligations to UMMS.
We have no commitments from third parties to provide us with any additional debt or equity
financing, and may not be able to obtain future financing on favorable terms, or at all. A lack of
needed financing would force us to reduce the scope of, or terminate, our operations, or to seek to
merge with or to be acquired by another company. There can be no assurance that we could complete
such a merger or acquisition on terms that would be attractive to our stockholders, or at all.
Most of Our Revenue Has Been Generated by License Fees for TranzFect, Which May Not be a
Recurring Source of Revenue for Us
Our current licensees for TranzFect, Merck and Vical, may be required to make further
milestone payments to us under their licenses based on their future development of products using
TranzFect. Since TranzFect is to be used as a component in vaccines, we do not need to seek FDA
approval, but any vaccine manufacturer will need to seek FDA approval for the final vaccine
formulation containing TranzFect. Merck has completed a multi-center, blinded, placebo controlled
Phase I trial of an HIV vaccine utilizing TranzFect as a component. In the Merck trials, although
the formulation of the tested vaccine using TranzFect was generally safe, well-tolerated and
generated an immune response, the addition of TranzFect to the vaccine did not increase this immune
response. Moreover, the DNA single-modality vaccine regimen with TranzFect, when tested in humans,
yielded immune responses that were inferior to those obtained with the DNA vaccines in macaque
monkeys. Accordingly, it is likely to be a substantial period of time, if ever, before we receive
any further significant payments from Merck or Vical under their TranzFect licenses.
18
Our Business Strategy Will Require Us to Rely Upon Third Parties for the Development of Our
Products and to Provide Us With Products
Our business strategy is to enter into strategic alliances, license agreements or other
collaborative arrangements with other pharmaceutical companies under which those companies are
responsible for the development and marketing of our products. In June 2004, we licensed Flocor,
the primary potential product that we held prior to our merger with Global Genomics and which we
had not already licensed to a third party, to SynthRx, Inc., a Houston, Texas-based
biopharmaceutical company. The completion of the development of our other products, as well as the
manufacture and marketing of our products, will 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 conducted by UMMS and Advanced BioScience Laboratories on an HIV vaccine candidate that
utilizes a technology that we licensed from UMMS. 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 will delay the development of
the vaccine.
If 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 regulatory (including FDA) 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 may also seek to acquire products from third parties that already are being marketed or
have previously been marketed. We have not yet identified any of these products. Even if we do
identify such products, it may be difficult for us to acquire them with our limited financial
resources and, if we acquire products using our securities as currency, we may incur substantial
shareholder dilution. We do not have any prior experience in acquiring or marketing products and
may need to find third parties to market these products for us. 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.
Our Current Financial Resources May Limit Our Ability to Execute Certain Strategic Initiatives
In June 2004, we licensed Flocor to SynthRx, which will be responsible for developing
potential product applications for Flocor. Although we are not doing any further development work
on TranzFect or Flocor, should our three principal licensees for those technologies successfully
meet the defined milestones, we could receive future milestone payments and, should any of the
licensees commercialize products based upon our technology, future royalty payments. However, there
can be no assurance that our licensees will continue to develop or ever commercialize any products
that are based on our Flocor or our TranzFect technology.
Our strategic alliance with UMMS will require us to make significant expenditures to fund
research at UMMS relating to the development of therapeutic products based on UMMSs technologies
that we have licensed and pursuant to our collaboration and invention disclosure agreement with
UMMS. We estimate that the aggregate amount of these expenditures under our current commitments
will be approximately $1,030,000 million for 2006 (of which $903,000 had been expensed through
September 30, 2006). Our license agreements with UMMS also provide, in certain cases, for milestone
payments based on the progress we make in the clinical development and marketing of products
utilizing the licensed technologies. In the event that we were to successfully develop a product in
each of the categories of obesity/type 2 diabetes, ALS, CMV and an HIV vaccine, under our licenses,
those milestone payments could aggregate up to $16.1 million.
We estimate that the Phase II clinical program with arimoclomol for ALS, including the ongoing
open label extension trial and the Phase IIb trial that we expect to initiate subject to FDA
approval, will require us to incur approximately $24.4 million over the next 30 months. In
addition, the agreement pursuant to which we acquired our molecular chaperone co-induction drug
candidates provides for milestone payments based on the occurrence of certain regulatory filings
and approvals related to the acquired products. In the event
19
that we successfully develop any of those products, the milestone payments could aggregate up
to $4.2 million. Each of the foregoing milestone payments, however, could vary significantly based
upon the milestones we achieve and the number of products we ultimately undertake to develop.
Under our license for our HIV vaccine candidate, following the completion of the current Phase
I trial, we will be responsible for all of the costs for any subsequent clinical trials for this
vaccine. The costs of subsequent trials for the HIV vaccine, if initiated, would be very
substantial. Although we are seeking NIH or other governmental funding for these future trials,
there can be no assurance that we will be able to secure any such funding.
The expenditures potentially required under our agreements with UMMS and ABL, together with
the capital requirements of our obesity and type 2 diabetes laboratory and funding needs of our
other planned research and development activities, substantially exceed our current financial
resources. Although we raised approximately $12.4 million in March 2006, net of transaction
expenses, and received approximately $24.5 million of marketable
securities (which were sold by the Company for approximately
$24.3 million in cash) from the privately-funded ALS Charitable
Remainder Trust in exchange for a one percent royalty in the worldwide sales of arimoclomol in
August 2006, we may require additional capital or to secure a licensee or strategic partner in
order to maintain our operations, including our clinical development of arimoclomol for ALS, our
planned levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi
subsidiary and our ongoing research and development efforts related to our other small molecule
drug candidates, and in order to continue to meet our obligations to UMMS. If we are unable to meet
our financial obligations under our license agreements with UMMS, we could lose all of our rights
under those agreements. If we were to have inadequate financial resources at that time, we also
could be forced to reduce the level of, or discontinue, operations at our laboratory.
If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to
Reduce or Terminate 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 approval 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:
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Difficulty in securing centers to conduct trials. |
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Difficulty in enrolling patients in conformity with required protocols or projected timelines. |
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Unexpected adverse reactions by patients in trials. |
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Difficulty in obtaining clinical supplies of the product. |
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Changes in the FDAs requirements for our testing during the course of that testing. |
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Inability to generate statistically significant data confirming the efficacy of the product being tested. |
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Modification of the drug during testing. |
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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 other
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
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failure in obtaining required approvals could have a material adverse effect on our ability to
generate revenue from the particular drug candidate.
The Approach We Are Taking to Discover and Develop Novel Therapeutics Using RNAi is Unproven and
May Never Lead to Marketable Products
The RNAi technologies that we have acquired from UMMS have not yet been clinically tested by
us, nor are we aware of any clinical trials having been completed by third parties involving
similar technologies. Neither we nor any other company has received regulatory approval to market
therapeutics utilizing RNAi. The scientific discoveries that form the basis for our efforts to
discover and develop new drugs are relatively new. The scientific evidence to support the
feasibility of developing drugs based on these discoveries is both preliminary and limited.
Successful development of RNAi-based products 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. We may spend large amounts of money trying to solve these issues, and
never succeed in doing so. In addition, any compounds that we develop 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.
Our Planned RNAi Subsidiary May Not Be Able to Obtain Sufficient Funding, and We May Not Control
a Majority of the Planned Subsidiary if We Obtain Financing
We are currently pursuing a plan to transfer all of our RNAi-related assets into a
newly-formed subsidiary to accelerate the development and commercialization of drugs based on or
discovered using RNAi technology. Although we believe that this structure may facilitate our
obtaining additional financing to pursue our RNAi development efforts, we have no commitments or
arrangements for any financing, and there is no assurance that we will be able to obtain financing
for this purpose. Our planned RNAi subsidiary will be only partially owned by us. Depending upon
the amount and terms of its future financing activities, we may not control the subsidiary, or may
share control with other shareholders whose interests may not be directly aligned with ours. It
also is possible that any products developed by the RNAi subsidiary could eventually compete with
our products for some disease indications, such as ALS, type 2 diabetes and obesity.
Our Molecular Chaperone Co-Induction Drug Candidates May Not Obtain Regulatory Marketing
Approvals
In 2004, we began a development program based on molecular chaperone co-induction technology
through the acquisition of novel small molecules with broad therapeutic applications in neurology,
type 2 diabetes, cardiology and diabetic complications, including three drug candidates
(arimoclomol, iroxanadine and bimoclomol), and a library of small molecule drug candidates.
Although each of arimoclomol, iroxanadine and bimoclomol has undergone clinical testing,
significant and costly additional testing will be required in order to bring any product to market.
We may be unable to confirm in our pre-clinical or clinical trials with arimoclomol, iroxanadine or
bimoclomol the favorable pre-clinical or clinical data previously generated by European
investigators for these drug candidates, which could require us to have to modify our development
plans for these compounds.
In September 2006 we announced results of our Phase II clinical testing for arimoclomol in
ALS, and reported that arimoclomol had met the trials primary endpoints of safety and tolerability
at all three doses tested in the Phase IIa trial, and that the trial results indicated a
non-statistically-significant trend of improvement in functional capacity as measured by the
Revised ALS Functional Ration Scale in the arimoclomol high dose group as compared with untreated
patients. There is no assurance that the results and achievements described will be supported by
further analysis of the Phase IIa trial data or by the results of any subsequent clinical trials,
or that the FDA will permit us to commence our planned Phase IIb clinical trial upon the completion
of our ongoing Phase IIa clinical trial. Any additional requirements imposed by the FDA in
connection with the ongoing Phase IIa trial, or in connection with our planned Phase IIb trial,
could add further time and expense for us to carry out this trial.
We believe that the FDA may accept the completion of a successful Phase II clinical program as
sufficient to enable us to submit a New Drug Application, or NDA; however, there is no assurance
that the FDA will accept our Phase II program in lieu of a Phase III clinical trial. If the FDA
requires us to complete a Phase III clinical trial, the cost of development of arimoclomol will
increase significantly beyond our estimated costs, and the time to completion of clinical testing
will be delayed. In addition, the FDA ultimately could require us to achieve an efficacy end point
in the clinical trials for arimoclomol that could be more difficult, expensive and time-consuming
than our planned end point. Although we anticipate developing arimoclomol for the treatment of ALS,
arimoclomol has also shown therapeutic efficacy in a preclinical animal model of diabetes and we
may pursue development of arimoclomol for diabetic indications. However, such development would
require significant and costly additional testing. There is no guarantee that arimoclomol will show
any efficacy for any indication.
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Iroxanadine has been tested in two Phase I clinical trials and one Phase II clinical trial
which indicated improvement in the function of endothelial cells in blood vessels of patients at
risk of cardiovascular disease. We intend to develop this product to improve endothelial
dysfunction in indications such as diabetic retinopathy and wound healing, which will require
significant and costly additional testing. There is no guarantee that iroxanadine will show any
efficacy in the intended uses we are seeking. We may also attempt to license iroxanadine to larger
pharmaceutical or biotechnology companies for cardiovascular indications; however, there is no
guarantee that any such company will be interested in licensing iroxanadine from us or licensing it
on terms that are attractive to us.
Bimoclomol has been tested in two Phase II clinical trials where it was shown to be safe, but
where it did not show efficacy for diabetic neuropathy, the indication for which it was tested. We
intend to develop this compound for other therapeutic indications; however, there can be no
guarantee that this compound will be effective in treating any diseases. In addition, the FDA may
require us to perform new safety clinical trials, which would be expensive and time consuming and
would delay development of bimoclomol.
There is no guarantee that any additional clinical trials will be successful or that the FDA
will approve any of these products and allow us to begin selling them in the United States.
Our Obesity and Type 2 Diabetes Laboratory May Not Be Able to Develop Products
In order to develop new obesity and type 2 diabetes products, we will first need to identify
appropriate drug targets and pathways. We are using novel RNAi-based techniques to accelerate this
process, but there is no assurance that these techniques will accelerate our work or that we will
be able to identify promising targets or pathways using these techniques or otherwise. Even if we
are successful in identifying these targets or pathways, we will need to then develop proprietary
molecules that are safe and effective against these targets. The development process and the
clinical testing of our potential products will take a lengthy period of time and involve
expenditures substantially in excess of our current financial resources available for this purpose.
We are currently seeking a strategic alliance with a major pharmaceutical or biotechnology company
to complete the development, clinical testing and manufacturing and marketing of our potential
obesity and type 2 diabetes products, which are at an early stage of development, but we may not be
able to secure such a strategic partner on attractive terms, or at all. We do not have prior
experience in operating a genomic and proteomic-based drug discovery company. Accordingly, we will
be heavily dependent on our current scientific management and advisory personnel in establishing
and executing our scientific strategies to reach our goals.
We Will Be Reliant Upon SynthRx to Develop and Commercialize Flocor
In June 2004, we licensed Flocor and our other co-polymer technologies to SynthRx and acquired
a 19.9% equity interest in that newly formed biopharmaceutical company. SynthRx has only limited
financial resources and will have to either raise significant additional capital or secure a
licensee or strategic partner to complete the development and commercialization of Flocor and these
other technologies. We are not aware that SynthRx has any commitments from third parties to provide
the capital that it will require, and there can be no assurance that it will be able to obtain this
capital or a licensee or strategic partner on satisfactory terms, or at all.
Our prior Phase III clinical trial of Flocor for the treatment of sickle cell disease patients
experiencing an acute vaso-occlusive crisis did not achieve its primary objective. However, in this
study, for patients 15 years of age or younger, the number of patients achieving a resolution of
crisis was higher for Flocor-treated patients at all time periods than for placebo-treated
patients, which may indicate that future clinical trials should focus on juvenile patients.
Generating sufficient data to seek FDA approval for Flocor will require additional clinical
studies, which have not yet been funded or commenced by SynthRx, and, if undertaken, those studies
would entail substantial time and expense for SynthRx.
The manufacture of Flocor involves obtaining new raw drug substance and a supply of the
purified drug from the raw drug substance, which requires specialized equipment. Should SynthRx
encounter difficulty in obtaining the purified drug substance in sufficient amounts and at
acceptable prices, SynthRx may be unable to complete the development or commercialization of Flocor
on a timely basis, or at all.
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
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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 and other regulatory 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 to marketing or selling their products. |
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Introduce or adapt more quickly 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. |
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Take advantage of other opportunities more readily. |
A number of medical institutions and pharmaceutical companies are seeking to develop products
based on gene silencing technologies. Companies working in this area include Sirna Therapeutics,
Alnylam Pharmaceuticals, Acuity Pharmaceuticals, Nastech Pharmaceutical Company Inc., Nucleonics,
Inc., Benitec Ltd. and a number of the multinational pharmaceutical companies. A number of products
currently are being marketed by a variety of the multinational or other pharmaceutical companies
for treating type II diabetes, including among others the diabetes drugs Avandia® by
GlaxoSmithKline PLC, Actos® by Eli Lilly & Co., Glucophage® and Junavia® by Bristol-Myers Squibb
Co., Symlin® and Byetta® by Amylin Pharmaceuticals, Inc. and Starlix® by Novartis and the obesity
drugs Acomplia® by Sanofi-Aventis SA, Xenical® by F. Hoffman-La Roche Ltd. and Meridia® by Abbott
Laboratories. Many major pharmaceutical companies are also seeking to develop new therapies for
these disease indications. Companies developing HIV vaccines that could compete with our HIV
vaccine technology include Merck, GlaxoSmithKline, Sanofi Pasteur, VaxGen, Inc., AlphaVax, Inc. and
Immunitor Corporation.
Currently, Rilutek®, which was developed by Aventis Pharma AG, is the only drug of which we
are aware that has been approved by the FDA for the treatment of ALS. Other companies are working
to develop pharmaceuticals to treat ALS, including Aeolus Pharmaceuticals, Celgene Corporation,
Mitsubishi Pharma Corporation, Ono Pharmaceuticals, Trophos SA, FaustPharmaceuticals SA, Oxford
BioMedica plc, and Teva Pharmaceutical Industries Ltd. In addition, ALS belongs to a family of
diseases called neurodegenerative diseases, which includes Alzheimers, Parkinsons and
Huntingtons disease. Due to similarities between these diseases, a new treatment for one ailment
potentially could be useful for treating others. There are many companies that are producing and
developing drugs used to treat neurodegenerative diseases other than ALS, including Amgen, Inc.,
Cephalon, Inc., Ceregene, Inc., Elan Pharmaceuticals, plc, H. Lundbeck A/S, Phytopharm plc, and
Schwarz Pharma AG.
Although we do not expect Flocor to have direct competition from other products currently
available or that we are aware of that are being developed related to Flocors ability to reduce
blood viscosity in the cardiovascular area, there are a number of anticoagulant products that
Flocor would have to compete against, such as tissue plasminogen activator, or t-PA, and
streptokinase (blood clot dissolving enzymes) as well as blood thinners such as heparin and
coumatin. In the sickle cell disease area, Flocor would compete against other products such as
Droxia® (hydroxyurea) marketed by Bristol-Myers Squibb Co., ICA-17043, which is being developed by
Icagen, Inc., and HemoxinTM, which is being developed by Xechem International, Inc. Our TranzFect
technology will compete against a number of companies that have developed adjuvant products, such
as the adjuvant QS-21tm marketed by Antigenics, Inc., adjuvants marketed by Corixa Corp., and
adjuvants under development by Coley Pharmaceutical Group and Vical, Inc.
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We Do Not Have the Ability to Manufacture Any of Our Products and Will Need to Rely upon Third
Parties for the Manufacture of Our Clinical and Commercial Product Supplies
We do not have the facilities or expertise to manufacture any of the clinical or commercial
supplies of any of our products, including the supply of arimoclomol used in our Phase II clinical
trials. Accordingly, we are and will be dependent upon contract manufacturers or our strategic
alliance partners to manufacture these supplies, or we will need to acquire the ability to
manufacture these supplies ourselves, which could be very difficult, time-consuming and costly. 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 do not otherwise have manufacturing supply
arrangements for our other product candidates. There can be no assurance that we will be able to
secure needed manufacturing supply arrangements on attractive terms, or at all. Delays in, or a
failure to, secure these arrangements 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 believe that we have significant patent coverage for our
molecular chaperone co-induction technologies and for our TranzFect technologies, there can be no
assurance that this coverage will be broad enough to 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. We have a
nonexclusive license to a patent owned by UMMS and the Carnegie Institution of Washington that
claims various aspects of gene silencing, or genetic inhibition by double-stranded RNA, but there
can be no assurance that this patent will withstand possible third-party challenges or otherwise
protect our technologies from competition. The medical applications of the gene silencing
technology and the other technologies that we have licensed from UMMS also are claimed in a number
of pending patent applications, but there can be no assurance that these applications will result
in any issued patents or that those patents would withstand challenges or protect our technologies
from competition. Moreover, we are aware of at least one other issued United States patent claiming
broad applications for RNAi, and many patent applications covering different methods and
compositions in the field of RNAi therapeutics have been and are expected to be filed, and certain
organizations or researchers may hold or seek to obtain patents that could make it more difficult
or impossible for us to develop products based on the gene silencing technology that we have
licensed. We are aware that at least one of our competitors is seeking patent coverage in the RNAi
field that could restrict our ability to develop certain RNAi-based therapeutics.
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 have a collaboration and invention disclosure agreement with UMMS under which UMMS has
agreed to disclose to us certain inventions it makes and to give us an option to negotiate licenses
to the disclosed technologies. There can be no assurance, however, that any such inventions will
arise, that we will be able to acquire licenses to any inventions under satisfactory terms or at
all, or that any licenses will be useful to us commercially.
We May Incur Substantial Costs from Future Clinical Testing or 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 recently-completed Phase IIa clinical trial with arimoclomol for
the treatment of ALS and will seek to obtain such insurance for any other clinical trials that we
conduct, including the planned Phase IIb clinical trial for arimoclomol, as well as liability
insurance for any
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products that we market, although 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 are
developing our products will carry liability insurance covering the clinical testing and marketing
of those products. However, there is no assurance, however, that any insurance maintained by us or
our licenses 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.
Compliance with Requirements of Section 404 of the Sarbanes-Oxley Act of 2002 Will Increase Our
Costs and Require Additional Management Resources, and We May Not Successfully Comply
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include a report of management on the companys internal controls over
financial reporting in their annual reports on Form 10-K. In addition, the independent registered
public accounting firm auditing the companys financial statements must attest to and report on
managements assessment of the effectiveness of the companys internal controls over financial
reporting. We expect that this requirement will first apply to our annual report on Form 10-K for
our fiscal year ending December 31, 2006, and that, as a result, we will incur significant legal,
accounting, and other expenses and compliance will occupy a substantial amount of time of our board
of directors and management. Uncertainty exists regarding our ability to comply with these
requirements by the SECs deadlines. If we are unable to complete the required assessment as to the
adequacy of our internal control reporting or if we conclude that our internal controls over
financial reporting are not effective or if our independent registered public accounting firm is
unable to provide us with an unqualified report as to the effectiveness of our internal controls
over financial reporting, investors could lose confidence in the reliability of our financial
reporting. In addition, while we plan to expand our staff to assist in complying with the
additional requirements when and if they become applicable, we may encounter substantial difficulty
attracting qualified staff with requisite experience due to the high level of competition for
experienced financial professionals.
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 may discourage or prevent
a person or group from acquiring us without the approval of our board of directors. The intent of
the stockholder rights plan and our bylaw provisions is to protect our stockholders interests by
encouraging anyone seeking control of our company to negotiate with 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 foregoing 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 Registrations of Our Shares Issued in the Global
Genomics Merger and Our Recent Private Financings May Adversely Affect the Trading Price of Our
Common Stock
As of September 30, 2006, there were outstanding stock options and warrants to purchase
approximately 29 million shares of our common stock at exercise prices ranging from $0.20 to $2.70
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
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will also have a dilutive effect on our stockholders. In addition, warrants issued in
connection with our financings in 2003 contain antidilution provisions that are triggered upon
certain events, including any issuance of securities by us below the prevailing market price of our
common stock. In the event that those antidilution 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.
In August 2003, we registered with the SEC for resale by the holders a total of 14,408,252
shares of our outstanding common stock and an additional 3,848,870 shares of our common stock
issuable upon exercise of outstanding options and warrants, which shares and options and warrants
were issued primarily in connection with our merger with Global Genomics and the $5.4 million
private equity financing that we completed in May 2003. In December 2003, we registered a total of
6,113,448 shares of our common stock, consisting of the 5,175,611 shares issued, or that are
issuable upon exercise of the warrants issued, in connection with the $8.7 million private equity
financing that we completed in September 2003, and an additional 937,837 shares of our common stock
that we issued, or that are issuable upon the exercise of warrants that we issued, to certain other
third parties. In November 2004, we registered 4,000,000 shares of our common stock and an
additional 3,080,000 shares of our common stock issuable upon the exercise of warrants in
connection with the $4,000,000 private equity financing that we completed in October 2004, and an
additional 1,550,000 shares of our common stock issued or issuable upon exercise of warrants to
other third parties. In February 2005, we registered 17,334,494 shares of our common stock and an
additional 9,909,117 shares of our common stock issuable upon the exercise of warrants in
connection with the $21.3 million private equity financing that we completed in January 2005. In
May 2006, we registered 17,121,750 shares of our common stock, including the 15,976,191 shares we
issued or that are issuable upon exercise of the warrants that we issued to the investors in
connection with the $13.4 million private equity financing that we completed in March 2006, and an
additional 745,556 shares of our common stock that are issuable to T.R. Winston & Company, LLC,
upon the exercise of warrants issued in connection with that financing. Both the availability for
public resale of these various shares and the actual resale 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 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.
Recent Changes in Stock Option Accounting Rules May Adversely Impact Our Reported Operating
Results, Our Stock Price and Our Reliance on Stock-Based Compensation
Beginning with the first quarter of this year, we are required to record all stock-based
employee compensation as an expense. These new rules apply to stock options grants, as well as a
range of other stock-based compensation arrangements, including restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. We have
relied in the past upon compensating our officers, directors, employees and consultants with such
stock-based compensation awards in order to limit our cash expenditures and to attract and retain
qualified officers, directors, employees and consultants. If we continue to do so, the expenses we
have to record as a result may be significant and may materially negatively affect our reported
financial results compared to prior years periods and our stock price and make it more difficult
for us to attract new investors. Reducing our use of stock plans to reward and incentivize our
officers, directors and employees, on the other hand, could result in a competitive disadvantage to
us in the employee marketplace.
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 $0.76 to $2.50 per share over the past
three years, and may continue to experience significant volatility from time to time. Factors such
as the following may affect such volatility:
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Our quarterly operating results. |
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Announcements of regulatory developments or technological innovations by us or our competitors. |
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Government regulation of drug pricing. |
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Developments in patent or other technology ownership rights. |
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Public concern regarding the safety of our products. |
Other factors which may affect our stock price are general changes in the economy, the financial
markets or the pharmaceutical or biotechnology industries.
Item 4 Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on July 18, 2006 for the following purposes:
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1. |
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To elect one Class III member of the board of directors to serve until our 2009 annual
meeting of stockholders; and |
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2. |
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To ratify the selection of BDO Seidman, LLP as independent auditors for the fiscal year
ending December 31, 2006. |
The number of outstanding shares of our common stock as of the record date for the annual
meeting was 69,924,277 out of which in excess of 57,284,000 shares were represented at the annual
meeting.
Dr. Max Link was reelected as our Class III director to serve until the 2009 annual meeting of
stockholders. Dr. Louis Ignarro, and Dr. Joseph Rubinfeld, our Class I directors, and Steven A.
Kriegsman, Marvin R. Selter and Richard L. Wennekamp, our Class II directors, continued to serve as
directors after the annual meeting.
With respect to the proposal to reelect Dr. Max Link as our Class III director: (i) 55,333,016
votes were cast for, (ii) 1,950,438 votes were cast against, (iii) no shares abstained and (iv)
there were no broker non-votes.
With respect to the proposal to ratify the selection of BDO Seidman, LLP as independent
auditors for the fiscal year ending December 31, 2006: (i) 56,998,048 votes were cast for, (ii)
231,487 votes were cast against, (iii) 54,481 shares abstained and (iv) there were no broker
non-votes with respect to the proposal. Accordingly, the proposal was approved by our stockholders.
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.
27
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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|
|
|
|
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CYTRX CORPORATION
(Registrant)
|
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Date: November 13, 2006 |
By: |
/s/ MATTHEW NATALIZIO
|
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Matthew Natalizio |
|
|
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Chief Financial Officer (Principal Financial
Officer) |
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28
INDEX TO EXHIBITS
|
|
|
Exhibit Number |
|
Description |
|
|
|
10.1
|
|
Royalty Agreement dated August 28, 2006 between CytRx Corporation and
Kenneth Council, as Trustee of the ALS Charitable Remainder Trust |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes Oxley Act
of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
29