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 March 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission file number 0-15327
CytRx Corporation
(Exact name of Registrant as specified in its charter)
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Delaware
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58-1642740 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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11726 San Vicente Blvd., Suite 650
Los Angeles, CA
(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,
a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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, $.001 par value, issued and outstanding as of
May 16, 2008: 90,770,453, exclusive of treasury shares.
CYTRX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
43,538,946 |
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$ |
50,498,261 |
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Short-term investments, at amortized cost |
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9,951,548 |
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Accounts receivable |
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101,217 |
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Prepaid expense and other current assets |
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1,101,651 |
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930,596 |
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Total current assets |
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44,640,597 |
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61,481,622 |
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Equipment and furnishings, net |
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1,349,548 |
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1,573,290 |
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Molecular library, net |
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182,017 |
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193,946 |
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Investment in unconsolidated subsidiary |
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3,536,614 |
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Goodwill |
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183,780 |
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183,780 |
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Other assets |
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647,055 |
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713,398 |
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Total assets |
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$ |
50,539,611 |
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$ |
64,146,036 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
721,093 |
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$ |
1,946,215 |
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Accrued expenses and other current liabilities |
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2,699,777 |
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3,700,866 |
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Income taxes payable |
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342,000 |
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Deferred revenue, current portion |
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8,207,492 |
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8,399,167 |
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Total current liabilities |
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11,970,362 |
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14,046,248 |
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Deferred revenue, non-current portion |
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5,177,967 |
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7,167,381 |
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Total liabilities |
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17,148,329 |
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21,213,629 |
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Minority interest |
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2,708,368 |
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Commitments and Contingencies |
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Stockholders equity: |
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Preferred Stock, $.01 par value, 5,000,000
shares authorized, including 15,000 shares of
Series A Junior Participating Preferred
Stock; no shares issued and outstanding |
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Common stock, $.001 par value, 150,000,000
shares authorized; 91,374,269 and 90,397,867
shares issued at March 31, 2008 and December
31, 2007, respectively |
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91,374 |
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90,398 |
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Additional paid-in capital |
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206,089,009 |
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203,905,691 |
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Treasury stock, at cost (633,816 shares held
at March 31, 2008 and December 31, 2007,
respectively) |
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(2,279,238 |
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(2,279,238 |
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Accumulated deficit |
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(170,509,863 |
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(161,492,812 |
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Total stockholders equity |
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33,391,282 |
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40,224,039 |
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Total liabilities and stockholders equity |
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$ |
50,539,611 |
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$ |
64,146,036 |
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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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March 31, |
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2008 |
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2007 |
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Revenue: |
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Service revenue |
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$ |
2,181,088 |
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$ |
1,446,993 |
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Grant revenue |
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116,070 |
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2,181,088 |
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1,563,063 |
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Expenses: |
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Research and development |
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3,191,713 |
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4,008,374 |
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General and administrative |
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4,473,149 |
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2,485,085 |
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7,664,862 |
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6,493,459 |
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Loss before other income |
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(5,483,774 |
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(4,930,396 |
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Other income: |
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Interest income |
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524,271 |
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382,614 |
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Other income, net |
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218,229 |
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Equity in loss of unconsolidated subsidiary |
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(378,898 |
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Minority interest in losses of subsidiary |
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88,374 |
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2,000 |
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Net loss before income taxes |
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(5,031,798 |
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(4,545,782 |
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Provision for income taxes |
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(342,000 |
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Net loss |
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(5,373,798 |
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(4,545,782 |
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Deemed dividend for anti-dilution adjustment made to stock warrants |
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(756,954 |
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Net loss applicable to common stockholders |
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$ |
(6,130,752 |
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$ |
(4,545,782 |
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Basic and diluted loss per share |
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$ |
(0.07 |
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$ |
(0.06 |
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Weighted average shares outstanding |
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90,280,449 |
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73,273,746 |
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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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Three Months Ended March 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,373,798 |
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$ |
(4,545,782 |
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Adjustments to reconcile net loss to net used in operating activities: |
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Depreciation and amortization |
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133,052 |
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71,353 |
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Equity in loss of unconsolidated subsidiary |
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378,898 |
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Minority interest in losses of subsidiary |
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(88,374 |
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(2,000 |
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RXi common stock transferred for services |
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244,860 |
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Non-cash earned on short-term investments |
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(48,452 |
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Non-cash gain on transfer of RXi common stock |
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(226,579 |
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Common stock, stock options and warrants issued for services |
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975,545 |
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Expense related to employee stock options |
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555,093 |
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148,812 |
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Net change in operating assets and liabilities |
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(2,898,342 |
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(1,741,723 |
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Total adjustments |
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(1,949,844 |
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(548,013 |
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Net cash used in operating activities |
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(7,323,642 |
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(5,093,795 |
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Cash flows from investing activities: |
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Purchases of equipment and furnishings |
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(223,203 |
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(2,501 |
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Deconsolidation of subsidiary, RXi Pharmaceutical Corporation |
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(10,359,278 |
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Proceeds from sale of short-term investments |
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10,000,000 |
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Net cash used in investing activities |
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(582,481 |
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(2,501 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options and warrants |
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946,808 |
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11,064,892 |
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Net proceeds from issuances of common stock in subsidiary |
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2,000 |
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Net cash provided by financing activities |
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946,808 |
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11,066,892 |
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Net increase (decrease) in cash and cash equivalents |
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(6,959,315 |
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5,970,596 |
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Cash and cash equivalents at beginning of period |
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50,498,261 |
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30,381,393 |
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Cash and cash equivalents at end of period |
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$ |
43,538,946 |
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$ |
36,351,989 |
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Supplemental disclosure of cash flow information: |
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Cash received during the period as interest income |
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$ |
524,271 |
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$ |
382,614 |
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Supplemental schedule of non-cash investing and financing activities:
As the result of the stock dividend on March 6, 2008, the Company deconsolidated its
previously majority-owned subsidiary. As part of the transaction, the Company deconsolidated $3.7
million of total assets and $4.6 million of total liabilities.
In connection with the Companys adjustment to the terms of certain outstanding warrants on
March 6, 2008, the Company recorded a deemed dividend of approximately $757,000 in the three months
ended March 31, 2008. The deemed dividend was recorded as a charge to accumulated deficit and a
corresponding credit to additional paid-in capital.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CYTRX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
1. Description of Company and Basis of Presentation
CytRx Corporation (CytRx, the Company, we, us or our) is a clinical-stage
biopharmaceutical company engaged in developing human therapeutic products based primarily upon its
small-molecule molecular chaperone amplification technology. Molecular chaperone proteins occur
normally in human cells and are key components of the bodys defenses against potentially toxic
mis-folded cellular proteins. Since these toxic proteins called aggregates are thought to play a
role in many diseases, the Company believes that amplification of molecular chaperone proteins
could have therapeutic efficacy for a broad range of indications. Currently, the Company is using
its chaperone amplification technology to discover and develop potential treatments for a number of
indications, including neurodegenerative disorders and diabetic complications.
Through February 2008, the Company owned a majority of the outstanding shares of common stock
of RXi Pharmaceuticals Corporation, or RXi, which was founded in April 2006 by the Company and four
researchers in the field of RNAi, including Dr. Craig Mello, recipient of the 2006 Nobel Prize for
Medicine for his co-discovery of RNAi. RNAi is a naturally occurring mechanism for the regulation
of gene expression that has the potential to selectively inhibit the activity of any human gene.
RXi is focused solely on developing and commercializing therapeutic products based upon RNAi
technologies for the treatment of human diseases, including neurodegenerative diseases, cancer,
type 2 diabetes and obesity. While RXi was majority-owned, the Companys consolidated financial
statements reflected 100% of the assets and liabilities and results of operations of RXi, with the
interests of the minority shareholders of RXi recorded as minority interests. In March 2008, the
Company distributed to its stockholders approximately 36% of RXis outstanding shares, which
reduced CytRxs ownership to less than 50% of RXi. As a result of the reduced ownership, CytRx
began to account for its investment in RXi using the equity method, under which CytRx records only
its pro-rata share of the financial results of RXi against its historical basis investment in RXi.
The investment in RXi is shown as investment in unconsolidated subsidiary on the consolidated
balance sheet and the related earnings are shown as equity in loss of unconsolidated subsidiary
on the consolidated statements of operations. Because only a portion of RXis financial results
for March 2008 were recorded by CytRx under the equity method, the Companys results of operations
for the first quarter of 2008 are not directly comparable to results of operations for the same
period in 2007. The future results of operations of the Company also will not be directly
comparable to corresponding periods in prior years during which our financial statements reflected
the consolidation of RXi.
To date, the Company has relied primarily upon sales of its equity securities and upon
proceeds received upon the exercise of options and warrants and, to a much lesser extent, upon
payments from its strategic partners and licensees, to generate funds needed to finance its
business and operations. See Note 6 Liquidity and Capital Resources.
In August 2006, the Company received approximately $24.3 million in proceeds from the
privately-funded ALS Charitable Remainder Trust (ALSCRT) in exchange for the commitment to
continue research and development of arimoclomol and other potential treatments for ALS and a one
percent royalty in the worldwide sales of arimoclomol. Under the arrangement, the Company retains
the rights to any developments funded by the arrangement and the proceeds of the transaction are
non-refundable. Further, the ALS Charitable Remainder Trust has no obligation to provide any
further funding to the Company. Management has concluded that due to the research and development
components of the transaction that it is properly accounted for under SFAS No. 68, Research and
Development Arrangements (SFAS No. 68). Accordingly, the Company has recorded the value received
under the arrangement as deferred revenue and will recognize service revenue using the proportional
performance method of revenue recognition, meaning that service revenue is recognized on a
dollar-for-dollar basis for each dollar of expense incurred for the research and development of
arimoclomol and other potential ALS treatments.
The accompanying condensed consolidated financial statements at March 31, 2008 and for the
three-month periods ended March 31, 2008 and 2007 are unaudited, but include all adjustments,
consisting of normal recurring entries, which management believes to be necessary for a fair
presentation of the periods presented. Interim results are not necessarily indicative of results
for a full year. Balance sheet amounts as of December 31, 2007 have been derived from the Companys
audited financial statements as of that date.
The consolidated financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial
6
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations. The
financial statements should be read in conjunction with the Companys audited consolidated
financial statements in its Form 10-K for the year ended December 31, 2007. The Companys operating
results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should
not be relied upon as predictive of the results in future periods.
2. Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 does not expand the use of fair
value in any new circumstances. In February 2008, the FASB issued Staff Position No. FAS 157-1,
which amended SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes of lease classification or
measurement under Statement 13. However, this scope exception does not apply to assets acquired and
liabilities assumed in a business combination. Also in February 2008, the FASB issued Staff
Position No. FAS 157-2, which delayed the effective date of SFAS No. 157 for non-financial assets
and liabilities, except those items recognized at fair value on an annual or more frequently
recurring basis to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The Company adopted SFAS No. 157 with no material impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 with no
material impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to additional paid-in capital.
EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company adopted EITF 06-11 with no material impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3), which requires that nonrefundable advance payments for goods
or services that will be used or rendered for future research and development activities be
deferred and amortized over the period that the goods are delivered or the related services are
performed, subject to an assessment of recoverability. EITF 07-3 will be effective for fiscal years
beginning after December 15, 2007. The Company adopted EITF 07-3 with no material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160) and a revision to SFAS No. 141, Business Combinations (SFAS
No. 141R). SFAS No. 160 modifies the accounting for noncontrolling interest in a subsidiary and
the deconsolidation of a subsidiary. SFAS No. 141R establishes the measurements in a business
combination of the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. Both of these related statements are effective for fiscal years beginning
after December 15, 2008. The Company has not determined the impact that the adoption of these two
statements will have on the consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin 110 (SAB 110), which expresses
the views of the Staff regarding use of a simplified method, as discussed in SAB 107, in
developing an estimate of expected term of plain vanilla share options in accordance with
Statement of Financial Accounting Standards No. 123. SAB 110 will allow, under certain
circumstances, the use of the simplified method beyond December 31, 2007 when a Company is unable
to rely on the historical exercise data. The Company adopted SAB 110 with no material impact on its
financial statements.
7
3. Short-term Investments
RXi had zero coupon U.S Treasury Bills that were purchased at a discount and matured within
twelve months. They were classified as held-to-maturity and under Statement of Financial Accounting
Standards No. 115, Investments in Debt Securities, were measured at amortized cost since RXi had
the intent and ability to hold these securities to maturity. The interest income had been amortized
at the effective interest rate.
4. Basic and Diluted Loss Per Common Share
Basic and diluted loss per common share are computed based on the weighted average number of
common shares outstanding. Common share equivalents (which consist of options and warrants) are
excluded from the computation of diluted loss per share since the effect would be antidilutive.
Common share equivalents which could potentially dilute basic earnings per share in the future, and
which were excluded from the computation of diluted loss per share, totaled approximately 16.2
million and 22.7 million shares at March 31, 2008 and 2007, respectively.
In connection with the Companys adjustment to the exercise terms of certain outstanding
warrants to purchase common stock on March 11, 2008, the Company recorded a deemed dividend of
approximately $757,000. The deemed dividend is reflected as an adjustment to net loss for the first
quarter of 2008, to arrive at net loss applicable to common stockholders on the Condensed
Consolidated Statement of Operations and for purposes of calculating basic and diluted loss per
share.
5. Stock Based Compensation
CytRx Corporation
The Company has a stock option plan, the 2000 Stock Option Incentive Plan, under which, as of
March 31, 2008, an aggregate of 10,000,000 shares of common stock were reserved for issuance,
including approximately 5,889,756 shares subject to outstanding stock options and approximately
2,257,032 million 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 9,167 and 100,041
shares subject to outstanding stock options. As the terms of the 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, 29,517 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 expire, unless previously exercised, not later than ten
years from the grant date.
The Companys stock-based employee compensation plans are described in Note 12 to its
financial statements contained in its Annual Report on Form 10-K filed for the year ended December
31, 2007.
The Company adopted the provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)),
which requires the measurement and recognition of compensation expense for all stock-based awards
made to employees and non-employee directors.
For stock options paid in consideration of services rendered by non-employees, the Company
recognizes compensation expense in accordance with the requirements of SFAS No. 123(R), Emerging
Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF
00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, as amended.
Non-employee option grants that do not vest immediately upon grant are recorded as an expense
over the performance period. At the end of each financial reporting period prior to performance,
the value of these options, as calculated using the Black-Scholes option pricing model, will be
determined, and compensation expense recognized or recovered during the period will be adjusted
accordingly. Since the fair market value of options granted to non-employees is subject to change
in the future, the amount of the future compensation expense is subject to adjustment until the
common stock options are fully vested.
8
The following table sets forth the total stock-based compensation expense (recovery) resulting
from stock options included in the Companys unaudited interim consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Research and development employee |
|
$ |
171,000 |
|
|
$ |
37,000 |
|
General and administrative employee |
|
|
291,000 |
|
|
|
112,000 |
|
|
|
|
|
|
|
|
Total employee stock-based compensation |
|
$ |
462,000 |
|
|
$ |
149,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development non-employee |
|
$ |
(422,000 |
) |
|
$ |
695,000 |
|
General and administrative non-employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-employee stock-based compensation |
|
$ |
(422,000 |
) |
|
$ |
695,000 |
|
|
|
|
|
|
|
|
During the first three months of 2008, the Company issued stock options to purchase 86,000
shares of its common stock. The fair value of the stock options granted in the three-month period
listed in the table below was estimated using the Black-Scholes option-pricing model, based on the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
2.84 |
% |
|
|
4.41%-4.89 |
% |
Expected volatility |
|
|
93.8%-96.2 |
% |
|
|
116.8 |
% |
Expected lives (years) |
|
|
6 |
|
|
|
6 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Companys computation of expected volatility is based on the historical daily volatility
of its publicly traded stock. For option grants issued during the three-month periods ended March
31, 2008 and 2007, the Company used a calculated volatility for each grant. The Companys
computation of expected life were estimated using the simplified method provided for under Staff
Accounting Bulletin 107, Share-Based Payment (SAB 107), which averages the contractual term of
the Companys options of ten years with the average vesting term of three years for an average of
six years. The dividend yield assumption of zero is based upon the fact the Company has never paid
cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate
used for each grant is equal to the U.S. Treasury rates in effect at the time of the grant for
instruments with a similar expected life. Based on historical experience, for the three-month
periods ended March 31, 2008 and 2007, the Company has estimated an annualized forfeiture rate of
10% and 5%, respectively, for options granted to its employees and 1% for each period for options
granted to senior management and directors. Compensation costs will be adjusted for future changes
in estimated forfeitures. The Company will record additional expense if the actual forfeitures are
lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are
higher than estimated. No amounts relating to employee stock-based compensation have been
capitalized.
At March 31, 2008, there remained approximately $3.6 million of unrecognized compensation
expense related to unvested stock options granted to employees, directors, scientific advisory
board members and consultants, to be recognized as expense over a weighted-average period of 1.55
years. Presented below is the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
Number of Options |
|
Number of Options |
|
Total Number |
|
Weighted Average |
|
|
(Employees) |
|
(Non-Employees) |
|
of Options |
|
Exercise Price |
Outstanding at January 1, 2008 |
|
|
4,594,000 |
|
|
|
1,397,000 |
|
|
|
5,991,000 |
|
|
$ |
2.29 |
|
Granted |
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
|
$ |
1.93 |
|
Exercised |
|
|
(25,000 |
) |
|
|
|
|
|
|
(25,000 |
) |
|
$ |
0.83 |
|
Forfeited |
|
|
(162,000 |
) |
|
|
|
|
|
|
(162,000 |
) |
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
4,493,000 |
|
|
|
1,397,000 |
|
|
|
5,890,000 |
|
|
$ |
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2008 |
|
|
2,944,000 |
|
|
|
1,147,000 |
|
|
|
4,091,000 |
|
|
$ |
1.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
A summary of the activity for non-vested stock options as of March 31, 2008 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Options |
|
Number of Options |
|
Total Number of |
|
Grant Date Fair |
|
|
(Employees) |
|
(Non-Employees) |
|
Options |
|
Value per Share |
Non-vested at January 1, 2008
|
|
|
1,734,000 |
|
|
|
250,000 |
|
|
|
1,984,000 |
|
|
$ |
2.91 |
|
Granted
|
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
|
$ |
1.50 |
|
Forfeited
|
|
|
(162,000 |
) |
|
|
|
|
|
|
(162,000 |
) |
|
$ |
2.46 |
|
Vested
|
|
|
(84,000 |
) |
|
|
|
|
|
|
(84,000 |
) |
|
$ |
2.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2008
|
|
|
1,574,000 |
|
|
|
250,000 |
|
|
|
1,824,000 |
|
|
$ |
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes significant ranges of outstanding stock options under the
Companys plans at March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Number of |
|
|
|
|
Range of |
|
Number of |
|
Contractual Life |
|
Weighted Average |
|
Options |
|
Weighted Average |
|
Weighted Average |
Exercise Prices |
|
Options |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Contractual Life |
|
Exercise Price |
$0.71 1.00
|
|
|
790,000 |
|
|
|
6.49 |
|
|
$ |
0.81 |
|
|
|
730,000 |
|
|
|
6.49 |
|
|
$ |
0.81 |
|
$1.01 2.00
|
|
|
2,362,000 |
|
|
|
6.97 |
|
|
$ |
1.48 |
|
|
|
1,863,000 |
|
|
|
6.97 |
|
|
$ |
1.52 |
|
$2.01 3.00
|
|
|
1,130,000 |
|
|
|
5.32 |
|
|
$ |
2.46 |
|
|
|
1,112,000 |
|
|
|
5.32 |
|
|
$ |
2.46 |
|
$3.01 4.00
|
|
|
623,000 |
|
|
|
9.47 |
|
|
$ |
3.42 |
|
|
|
150,000 |
|
|
|
9.47 |
|
|
$ |
3.34 |
|
$4.01 4.65
|
|
|
985,000 |
|
|
|
9.10 |
|
|
$ |
4.42 |
|
|
|
236,000 |
|
|
|
9.10 |
|
|
$ |
4.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,890,000 |
|
|
|
7.21 |
|
|
$ |
2.27 |
|
|
|
4,091,000 |
|
|
|
7.19 |
|
|
$ |
1.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding options as of March 31, 2008 was approximately
$300,000, of which approximately $270,000 was related to exercisable options. The aggregate
intrinsic value was calculated based on the positive difference between the closing fair market
value of the Companys common stock on March 31, 2008 ($1.15) and the exercise price of the
underlying options. The intrinsic value of options exercised was $8,000 for the three-month period
ended March 31, 2008, and the intrinsic value of options that vested was approximately $11,000 for
the same period.
RXi Pharmaceuticals
RXi has its own stock option plan named the RXi Pharmaceuticals Corporation 2007 Incentive
Plan. They account for stock option expense in the same manner as CytRx, which is described above.
The following table sets forth the total stock-based compensation expense for January and
February 2008, resulting from stock options, that is included in the Companys unaudited condensed
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Research and development employee |
|
$ |
28,000 |
|
|
$ |
|
|
General and administrative employee |
|
|
369,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation |
|
$ |
397,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development non-employee |
|
$ |
121,000 |
|
|
$ |
|
|
General and administrative non-employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-employee stock-based compensation |
|
$ |
121,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
6. Liquidity and Capital Resources
At March 31, 2008, the Company had cash and cash equivalents of $43.5 million. Management
believes that the Company has adequate financial resources to support its currently planned level
of operations into the second half of 2009, based, in part, upon projected expenditures for the
remainder of 2008 and the first three months of 2009 of $31.0 million, including $6.2 million for
the Companys planned clinical program for arimoclomol for ALS and related studies, $6.3 million
for its other ongoing and planned clinical programs, including a planned Phase II clinical trial of
arimoclomol in stroke patients and a planned Phase II clinical trial of iroxanadine for diabetic
ulcers, $9.9 million for the operations of the Companys research laboratory in San Diego and $8.6
million for other general and administrative expenses. Managements projected expenditures assume
the prompt resumption of the Companys Phase II clinical program for arimoclomol for ALS, which has
been placed on clinical hold by the U.S. Food and Drug Administration, or FDA. If the Company is
required to conduct additional toxicology or human studies prior to or in parallel with the
10
resumption of that clinical trial, alter the design of that trial, including by potentially
reducing the dosage of arimoclomol, or is prohibited by the FDA from resuming the current planned
clinical trial or initiating any other clinical trial of arimoclomol for the treatment of ALS or
stroke recovery at the desired dose, or at all, due to safety concerns, then the Companys actual
expenditures will vary, perhaps significantly from managements current projections. The Company
will be required to obtain additional funding in order to execute its long-term business plans,
although it does not currently have commitments from any third parties to provide it with capital.
The Company cannot assure that additional funding will be available on favorable terms, or at all.
If the Company fails to obtain additional funding when needed, it may not be able to execute its
business plans and its business may suffer, which would have a material adverse effect on its
financial position, results of operations and cash flows.
7. Equity Transactions
On March 11, 2008, the Company paid a dividend to its stockholders of approximately 36% of the
outstanding shares of RXi common stock. In connection with that distribution, the Company adjusted
the price of warrants to purchase approximately 10.6 million shares that had been issued in prior
equity financings in October 2004, January 2005 and March 2006. The adjustment was made as a result
of anti-dilution provisions in those warrants that were triggered by the Companys distribution of
a portion of its assets to its stockholders. The Company accounted for the anti-dilution
adjustments as deemed dividends analogous with the guidance in Emerging Issues Task Force Issue
(EITF) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of 98-5 to Certain
Convertible Instruments, and recorded an approximate $757,000 charge to accumulated deficit and a
corresponding credit to additional paid-in capital.
On April 19, 2007, the Company completed a $37.0 million private equity financing in which it
issued approximately 8.6 million shares of its common stock at a price of $4.30 per share. Net of
investment banking commissions, legal, accounting and other expenses related to the transaction,
the Company received proceeds of approximately $34.2 million. On April 30, 2007, the Company
contributed $15.0 million, net of reimbursed expenses estimated at $2.0 million paid by RXi to the
Company, in exchange for equity in RXi, to satisfy the initial funding requirements under its
agreements with the University of Massachusetts Medical School (UMMS). In September 2007, the
actual reimbursed expenses paid by RXi to the Company were finally determined to be approximately
$3.0 million, and on September 25, 2007, RXi issued to CytRx additional equity as reimbursement of
the excess expenses. Following those transactions, CytRx owned approximately 85% of the outstanding
capital stock of RXi, of which approximately 36% was paid as a dividend to CytRx stockholders on
March 11, 2008.
In connection with the April 2007 private equity financing, the Company adjusted the price and
number of underlying shares of warrants to purchase approximately 1.4 million shares that had been
issued in prior equity financings in May and September 2003. The adjustment was made as a result of
anti-dilution provisions in those warrants that were triggered by the Companys issuance of common
stock in the April 2007 financing at a price below the closing market price on the date of the
transaction. For the reasons described above, the Company accounted for the anti-dilution
adjustments as deemed dividends. Because the fair value of the outstanding warrants decreased as a
result of the anti-dilution adjustment, no deemed dividend was recorded, and thus the Company did
not record a charge to retained earnings or a corresponding credit to additional paid-in capital.
In connection with the April 2007 private equity financing, the Company entered into a
registration rights agreement with the purchasers of its common stock and warrants. That agreement
provides, among other things, for cash penalties, up to a maximum of 16% (approximately $5.9
million) of the purchase price paid for the securities in the event that the Company failed to
initially register or maintain the effective registration of the securities until the sooner of two
years or the date on which the securities could be sold pursuant to Rule 144 of the Securities Act
of 1933, as amended. The Company has evaluated the penalty provisions of the April 2007
registration rights agreement in light of FASB Staff Position No. EITF 00-19-2, Accounting for
Registration Payment Arrangements, which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies, pursuant to which a contingent obligation must be accrued only if it is reasonably
estimable and probable. In managements estimation, the contingent payments related to the
registration payment arrangement are not probable to occur, and thus no amount need be accrued.
During the three-month period ended March 31, 2008, the Company issued 1.0 million shares of
its common stock, and received $0.9 million, upon the exercise of stock options and warrants.
During the three-month period ended March 31, 2007, the Company issued 6.9 million shares of its
common stock, and received $11.1 million, upon the exercise of stock options and warrants.
11
8. Minority Interest
Through February 2008, the Company owned approximately 85% of the outstanding shares of common
stock of RXi. While RXi was majority-owned, the Companys consolidated financial statements
reflected 100% of the assets and liabilities and results of operations of RXi, with the interests
of the minority shareholders of RXi recorded as minority interests. In March 2008, the Company
distributed to its stockholders approximately 36% of RXis outstanding shares, which reduced
CytRxs ownership to less than 50% of RXi. As a result, CytRx began to account for its investment
in RXi using the equity method, under which CytRx records only its pro-rata share of the financial
results of RXi against its historical basis investment in RXi. Because only a portion of RXis
financial results for March 2008 were recorded by CytRx under the equity method, the Companys
results of operations for the first quarter of 2008 are not directly comparable to results of
operations for the same period in 2007. The future results of operations of the Company also will
not be directly comparable to corresponding periods in prior years during which our financial
statements reflected the consolidation of RXi.
The Company offset $88,000 of minority interest in losses of RXi against its net loss for the
months of January and February 2008, and $2,000 of minority interest in losses of RXi against its
net loss for the three-month period ended March 31, 2007.
9. Equity Investment in RXi
In the first quarter of 2008, the Company distributed approximately 4.5 million shares of RXi
common stock to its stockholders representing approximately 36% of RXis outstanding shares, which
reduced CytRxs ownership to approximately 49% of RXi. Management determined that the distribution
of the RXi common stock to stockholders of CytRx represented a partial spin-off of RXi and
accounted for the distribution of the RXi common shares at cost. As a result of its reduced
ownership in RXi, CytRx began to account for its investment in RXi using the equity method, under
which CytRx records only its pro-rata share of the financial results of RXi against its historical
basis investment in RXi. The following table presents summarized financial information for RXi for
the three months ended March 31, 2008:
|
|
|
|
|
|
|
Three Month |
|
|
Period Ended |
Income Statement Data (in thousands) |
|
March 31, 2008 |
Sales |
|
$ |
|
|
Gross profit |
|
|
|
|
Loss from continuing operations |
|
|
(2,713 |
) |
Loss |
|
|
(2,646 |
) |
|
|
|
|
|
Balance Sheet Data (in thousands) |
|
March 31, 2008 |
Current assets |
|
$ |
10,179 |
|
Noncurrent assets |
|
|
401 |
|
Current liabilities |
|
|
1,774 |
|
Stockholders equity |
|
|
8,806 |
|
At March 31, 2008, the fair value of CytRxs ownership of 6,268,881 shares of RXis common stock
was $59,554,000 based on the closing price of RXis common stock on that date.
10. Income Taxes
On March 11, 2008, the Company distributed to our stockholders approximately 4.5 million
shares of RXi common stock. We will recognize approximately a $32.9 million gain for income tax
purposes on the distribution of shares of RXi common stock, which is the amount equal to the excess
of the fair market value of the stock distributed over our basis. The gain will be included in
determining whether we have current year earnings and profits subject to taxation. Based upon our
anticipated loss from operations for 2008 and currently available loss carryforwards, we expect to
pay no regular income taxes in connection with the distribution, however, we have recorded a tax
provision of $342,000 related to the estimated Alternative Minimum Tax resulting from this gain.
12
Item 2. Managements Discussion and Analysis of Financial Condition And Results of Operations
Forward Looking Statements
From time to time, we make oral and written statements that may constitute forward-looking
statements (rather than historical facts) as defined in the Private Securities Litigation Reform
Act of 1995 or by the SEC in its rules, regulations and releases, including Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. We desire to take advantage of the safe harbor provisions in the Private Securities
Litigation Reform Act of 1995 for forward-looking statements made from time to time, including, but
not limited to, the forward-looking statements made in this Quarterly Report, as well as those made
in our other filings with the SEC.
All statements in this Quarterly Report, including statements in this section, other than
statements of historical fact are forward-looking statements for purposes of these provisions,
including statements of our current views with respect to the recent developments regarding our
majority-owned subsidiary, RXi Pharmaceuticals Corporation, our business strategy, business plan
and research and development activities, our future financial results, and other future events.
These statements include forward-looking statements both with respect to us, specifically, and the
biotechnology industry, in general. In some cases, forward-looking statements can be identified by
the use of terminology such as may, will, expects, plans, anticipates, estimates,
potential or could or the negative thereof or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking statements contained herein are reasonable,
there can be no assurance that such expectations or any of the forward-looking statements will
prove to be correct, and actual results could differ materially from those projected or assumed in
the forward-looking statements.
All forward-looking statements involve inherent risks and uncertainties, and there are or will
be important factors that could cause actual results to differ materially from those indicated in
these statements. We believe that these factors include, but are not limited to, those factors set
forth in this Quarterly Report under the captions Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations, all of which you should review
carefully. If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially from what we
anticipate. Please consider our forward-looking statements in light of those risks as you read this
Quarterly Report. We undertake no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future developments or otherwise.
Overview
CytRx Corporation (CytRx, the Company, we, us or our) is a clinical-stage
biopharmaceutical company engaged in developing human therapeutic products based primarily upon its
small-molecule molecular chaperone amplification technology. Molecular chaperone proteins occur
normally in human cells and are key components of the bodys defenses against potentially toxic
mis-folded cellular proteins. Since these toxic proteins, called aggregates, are thought to play a
role in many diseases, the Company believes that amplification of molecular chaperone proteins
could have therapeutic efficacy for a broad range of indications. Currently, the Company is using
its chaperone amplification technology to discover and develop potential treatments for a number of
indications, including neurodegenerative disorders and diabetic complications.
Through February 2008, we owned a majority of the outstanding shares of common stock of RXi
Pharmaceuticals Corporation, or RXi, which was founded in April 2006 by the Company and four
researchers in the field of RNAi, including Dr. Craig Mello, recipient of the 2006 Nobel Prize for
Medicine for his co-discovery of RNAi. RNAi is a naturally occurring mechanism for the regulation
of gene expression that has the potential to selectively inhibit the activity of any human gene.
RXi is focused solely on developing and commercializing therapeutic products based upon RNAi
technologies for the treatment of human diseases, including neurodegenerative diseases, cancer,
type 2 diabetes and obesity. While RXi was majority-owned, the Companys consolidated financial
statements reflected 100% of the assets and liabilities and results of operations of RXi, with the
interests of the minority shareholders of RXi being recorded as minority interests. In March
2008, we distributed to our stockholders approximately 36% of RXis outstanding shares, which
reduced our ownership to less than 50% of RXi. As a result of the reduced ownership, CytRx began
to account for its investment in RXi using the equity method, under which CytRx records only its
pro-rata share of the financial results of RXi against its historical basis investment in RXi. The
investment in RXi is shown as investment in unconsolidated subsidiary on the consolidated balance
sheet and the related earnings are shown as equity in loss of unconsolidated subsidiary on the
consolidated statements of operations. Because only a portion of RXis financial results for March
2008 were recorded by CytRx under the equity method, the Companys results of operations for the
first quarter of 2008 are not directly comparable to results of operations for the same period in
2007. The future results of operations of the Company also will not be directly comparable to
corresponding periods in prior years during which our financial statements reflected the
consolidation of RXi.
In January 2008, the FDA placed a clinical hold on our Phase IIb clinical efficacy trial of
arimoclomol for the treatment of ALS due to concerns relating to previous toxicology studies of
arimoclomol in rats. Although we have submitted additional information to
13
the FDA regarding these concerns, we cannot predict how long it may take to resolve them.
Depending on the outcome of the FDAs review, we may be:
|
|
|
required to conduct additional toxicology or human studies prior to or in parallel with
the resumption of our clinical trial, which would result in substantial additional expenses
and possible significant delays in completing the clinical trial; |
|
|
|
|
required to alter the design including reducing the dosage of arimoclomol, of the
clinical trial, which could significantly delay the completion of the trial, increase the
cost of the trial, adversely affect our ability to demonstrate the efficacy of arimoclomol
in the trial or cause us to cancel the trial altogether due to one or more of these
consideration; or |
|
|
|
|
prohibited by the FDA from resuming our current planned clinical trial or initiating
any other clinical trial of arimoclomol for the treatment of ALS or any other indication
due to safety concerns. |
We also planned to commence a Phase II clinical trial for arimoclomol for stroke recovery in the
second half of 2008. In light of the FDAs concerns regarding toxicity of arimoclomol, our planned
trial is subject to similar risks.
We have relied primarily upon proceeds from sales of our equity securities and the exercise of
options and warrants, and to a much lesser extent upon payments from our strategic partners and
licensees, to generate funds needed to finance our business and operations. At March 31, 2008, we
had cash and cash equivalents of $43.5 million. We believe that we have adequate financial
resources to support our currently planned level of operations into the second half of 2009, based,
in part, upon projected expenditures for the remainder of 2008 and the first three months of 2009
of $31.0 million, including $6.2 million for our planned clinical program for arimoclomol for ALS
and related studies, $6.3 million for our other ongoing and planned clinical programs, including a
planned Phase II clinical trial of arimoclomol in stroke patients and a planned Phase II clinical
trial of iroxanadine for diabetic ulcers, $9.9 million for the operations of our research
laboratory in San Diego and $8.6 million for other general and administrative expenses. Our
projected expenditures assume the prompt resumption of our Phase II clinical program for
arimoclomol for ALS that currently is on clinical hold by the FDA. If we are required to conduct
additional toxicology or human studies prior to or in parallel with the resumption of that clinical
trial, alter the design of that trial, including by potentially reducing the dosage of arimoclomol,
or are prohibited by the FDA from resuming the current planned clinical trial or initiating any
other clinical trial of arimoclomol for the treatment of ALS or stroke recovery at the desired
dose, or at all, due to safety concerns, then our actual expenditures will vary, perhaps
significantly, from our current projections.
We will be required to obtain additional funding in order to execute our long-term business
plans. We do not have commitments from any third parties to provide us with capital and we cannot
assure that additional funding will be available on favorable terms, or at all. If we fail to
obtain additional funding when needed, we may not be able to execute our business plans and our
business may suffer, which would have a material adverse effect on our financial position, results
of operations and cash flows.
Critical Accounting Policies and Estimates
Managements discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, impairment of long-lived assets, including finite
lived intangible assets, research and development expenses and clinical trial expenses and
stock-based compensation expense.
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, 2007. We believe
the following critical accounting policies affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements:
14
Revenue Recognition
Biopharmaceutical revenues consist of license fees from strategic alliances with
pharmaceutical companies as well as service and grant revenues. Service revenues consist of
contract research and laboratory consulting. Grant revenues consist of government and private
grants.
Monies received for license fees are deferred and recognized ratably over the performance
period in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Milestone
payments will be recognized upon achievement of the milestone as long as the milestone is deemed
substantive and we have no other performance obligations related to the milestone and
collectability is reasonably assured, which is generally upon receipt, or recognized upon
termination of the agreement and all related obligations. Deferred revenue represents amounts
received prior to revenue recognition.
Revenues from contract research, government grants, and consulting fees are recognized over
the respective contract periods as the services are performed, provided there is persuasive
evidence or an arrangement, the fee is fixed or determinable and collection of the related
receivable is reasonably assured. Once all conditions of the grant are met and no contingencies
remain outstanding, the revenue is recognized as grant fee revenue and an earned but unbilled
revenue receivable is recorded.
In August 2006, we received approximately $24.3 million in proceeds from the privately-funded
ALS Charitable Remainder Trust (ALSCRT) in exchange for the commitment to continue research and
development of arimoclomol and other potential treatments for ALS and a one percent royalty in the
worldwide sales of arimoclomol. Under the arrangement, we retain the rights to any products or
intellectual property funded by the arrangement and the proceeds of the transaction are
non-refundable. Further, the ALSCRT has no obligation to provide any further funding to us. We have
concluded that due to the research and development components of the transaction that it is
properly accounted for under Statement of Financial Accounting Standards No. 68, Research and
Development Arrangements. Accordingly, we have recorded the value received under the arrangement as
deferred service revenue and will recognize service revenue using the proportional performance
method of revenue recognition, meaning that service revenue is recognized on a dollar-for-dollar
basis for each dollar of expense incurred for the research and development of arimoclomol and other
potential ALS treatments. We believe that this method best approximates the efforts expended
related to the services provided. We adjust our estimates of expense incurred for this research and
development on a quarterly basis. For the three-month periods ended March 31, 2008 and 2007, we
recognized approximately $2.2 million and $1.4 million, respectively, of service revenue related to
this transaction. Any significant change in ALS related research and development expense in any
particular quarterly or annual period will result in a change in the recognition of revenue for
that period and consequently affect the comparability or revenue from period to period.
The amount of deferred revenue, current portion is the amount of deferred revenue that is
expected to be recognized in the next twelve months and is subject to fluctuation based upon
managements estimates. Managements estimates include an evaluation of what pre-clinical and
clinical trials are necessary, the timing of when trials will be performed and the estimated
clinical trial expenses. These estimates are subject to changes and could have a significant effect
on the amount and timing of when the deferred revenues are recognized.
Research and Development Expenses
Research and development expenses consist of costs incurred for direct and overhead-related
research expenses and are expensed as incurred. Costs to acquire technologies, including licenses,
that are utilized in research and development and that have no alternative future use are expensed
when incurred. Technology developed for use in its products is expensed as incurred until
technological feasibility has been established.
Clinical Trial Expenses
Clinical trial expenses, which are included in research and development expenses, include
obligations resulting from our contracts with various clinical research organizations in connection
with conducting clinical trials for our product candidates. We recognize expenses for these
activities based on a variety of factors, including actual and estimated labor hours, clinical site
initiation activities, patient enrollment rates, estimates of external costs and other
activity-based factors. We believe that this method best approximates the efforts expended on a
clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if
actual results differ from our estimates. If our estimates are incorrect, clinical trial expenses
recorded in any particular period could vary.
15
Stock-Based Compensation
Our share-based employee compensation plans are described in Note 5 to our interim financial
statements. SFAS 123(R), Share-Based Payment, requires the recognition of compensation expense
associated with stock option grants and other equity instruments to employees in the financial
statements. We adopted SFAS 123(R) using the modified-prospective method and use the Black-Scholes
valuation model for valuing share-based payments. We account for transactions in which services are
received in exchange for equity instruments based on the fair value of such services received from
non-employees, in accordance with SFAS 123(R), Emerging Issues Task Force Issue No. 96-18 (EITF
96-18), Accounting for Equity Instruments that are Issued to other than Employees for Acquiring,
or in Conjunction with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees, as amended.
Non-employee share-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances, option grants to non-employees are immediately
vested and have no future performance requirements by the non-employee and the total share-based
compensation charge is recorded in the period of the measurement date.
The fair value of each CytRx and RXi common stock option grant is estimated using the
Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest
rates, expected volatility, expected life of the common stock options and future dividends.
Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing
model, based on an expected forfeiture rate that is adjusted for actual experience. If our
Black-Scholes option pricing model assumptions or our actual or estimated forfeiture rate are
different in the future, that could materially affect compensation expense recorded in future
periods.
Impairment of Long-Lived Assets
We review long-lived assets, including finite lived intangible assets, for impairment on an
annual basis, as of December 31, or on an interim basis if an event occurs that might reduce the
fair value of such assets below their carrying values. An impairment loss would be recognized based
on the difference between the carrying value of the asset and its estimated fair value, which would
be determined based on either discounted future cash flows or other appropriate fair value methods.
If our estimates used in the determination of either discounted future cash flows or other
appropriate fair value methods are not accurate as compared to actual future results we may be
required to record an impairment charge.
Earnings Per Share
Basic and diluted loss per common share are computed based on the weighted-average number of
common shares outstanding. Common share equivalents (which consist of options and warrants) are
excluded from the computation of diluted loss per share since the effect would be anti-dilutive.
Common share equivalents which could potentially dilute basic earnings per share in the future, and
which were excluded from the computation of diluted loss per share, totaled approximately 16.2
million shares and 22.7 million shares at March 31, 2008 and 2007, respectively. In connection with
the dividend of 36% of the outstanding shares of RXi paid to our stockholders on March 11, 2008, we
recorded a deemed dividend of $757,000. The deemed dividend was reflected as an adjustment to net
loss for the first quarter of 2008, to arrive at net loss applicable to common stockholders on the
consolidated statement of operations and for purposes of calculating basic and diluted loss per
shares.
Liquidity and Capital Resources
We have relied primarily upon proceeds from sales of our equity securities and the exercise of
options and warrants, and to a much lesser extent upon payments from our strategic partners and
licensees, to generate funds needed to finance our business and operations. At March 31, 2008, we
had cash, cash equivalents and short-term investments of $43.5 million. We believe that we have
adequate financial resources to support our currently planned level of operations into the second
half of 2009, based, in part, upon projected expenditures for the remainder of 2008 and the first
three months of 2009 of $31.0 million, including $6.2 million for our planned clinical program for
arimoclomol for ALS and related studies, $6.3 million for our other ongoing and planned clinical
programs, including a planned Phase II clinical trial of arimoclomol in stroke patients and a
planned Phase II clinical trial of iroxanadine for diabetic ulcers, $9.9 million for the operations
of our research laboratory in San Diego and $8.6 million for other general and administrative
expenses. Our projected expenditures assume the prompt resumption of our Phase II clinical program
for arimoclomol for ALS that currently is on clinical hold by the FDA. If we are required to
conduct additional toxicology or human studies prior to or in parallel with the resumption of that
clinical trial, alter the design of that trial, including by potentially reducing the dosage of
arimoclomol, or are prohibited by the FDA from resuming the current planned clinical trial or
initiating any other clinical trial of arimoclomol for the treatment of ALS or stroke recovery at
the desired dose, or at all, due to safety concerns, then our actual expenditures will vary,
perhaps significantly from our projections.
16
We have no significant revenue, and we expect to have no significant revenue and to continue
to incur significant losses over the next several years. Our net losses may increase from current
levels primarily due to expenses related to our ongoing and planned clinical trials, research and
development programs, possible technology acquisitions, and other general corporate activities. In
the event that actual costs of our ongoing and planned 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. We cannot assure that additional funding will be available to us on
favorable terms, or at all. If we fail to obtain additional funding when needed in the future, we
would be forced to scale back, or terminate, our operations, or to seek to merge with or to be
acquired by another company.
Our net loss, which includes non-cash charges relating to (1) common stock, stock option and
warrants issued for services and (2) expenses related to employee stock options, increased by
approximately $0.8 million from the quarter ended March 31, 2007 to the quarter ended March 31,
2008. This increase was due to several factors, including an additional $0.9 million of
professional and consulting fees associated with compliance with provisions of the Sarbanes-Oxley
Act, and professional fees and other costs related to RXis registration statement on Form S-1 to
register RXis common stock. Research and development expenses decreased by approximately $0.5
million principally because RXis expenses for the month of March were excluded. The Companys
total expenses were offset in part by an increase of $0.6 million in service revenue.
In the three-month period ended March 31, 2008 there was $0.6 million of cash used in
investing activities, compared to $3,000 used in the respective 2007 period. The 2008 period
included $10.0 million of funds provided by RXi converting short-term investments to cash
equivalents. However, RXis cash of $10.4 million (inclusive of this $10.0 million) is no longer available due to the deconsolidation. The remainder of the investing activity for both the 2008 and 2007 periods primarily
related to cash used for the purchase of equipment. We manage our cash, cash equivalents and
short-term investments interchangeably and at the present time do not anticipate any significant
changes to our current holdings in cash equivalents. We expect capital spending to continue due to
additional laboratory equipment necessary for our new San Diego, California laboratory.
Cash provided by financing activities in the three months ended March 31, 2008 and 2007 was
$0.9 million and $11.1 million, respectively, which consisted almost exclusively of funds received
from the exercise of stock options and warrants.
We are evaluating other potential future sources of capital as we do not currently have
commitments from any third parties to provide us with capital. The results of our technology
licensing efforts and the actual proceeds of any fund-raising activities will determine our ongoing
ability to operate as a going concern. Our ability to obtain future financings through joint
ventures, product licensing arrangements, royalty sales, equity financings, gifts, and grants or
otherwise is subject to market conditions and our ability to identify parties that are willing and
able to enter into such arrangements on terms that are satisfactory to us. Depending upon the
outcome of our fundraising efforts, the accompanying consolidated financial information may not
necessarily be indicative of future operating results or future financial condition.
We expect to incur significant losses for the foreseeable future and there can be no assurance
that we will become profitable. Even if we become profitable, we may not be able to sustain that
profitability.
Results of Operations
We recorded a net loss applicable to common stockholders of approximately $6.1 million for the
three-month period ended March 31, 2008, as compared to $4.5 million for the same period in 2007.
We recognized $2.2 million of revenue for the three-month period ended March 31, 2008, and
$1.6 million for the same period in 2007. We recognized $2.2 million and $1.4 million during those
periods, respectively, from our $24.3 million sale to the ALSCRT of a 1% royalty interest in
worldwide sales of arimoclomol in August 2006. All future licensing fees under our current
licensing agreements are dependent upon successful development milestones being achieved by the
licensor. During 2008, we do not anticipate receiving any significant licensing fees. We will
continue to recognize the balance of the deferred revenue recorded from the royalty transaction
with the ALSCRT over the development period of our arimoclomol research.
17
Research and Development
|
|
|
|
|
|
|
|
|
|
|
Three Month Period |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Research and development expense |
|
$ |
3,125 |
|
|
$ |
3,209 |
|
Non-cash research and development expenses (recovery) |
|
|
(243 |
) |
|
|
695 |
|
Employee stock option expense |
|
|
199 |
|
|
|
37 |
|
Depreciation and amortization |
|
|
111 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
$ |
3,192 |
|
|
$ |
4,008 |
|
|
|
|
|
|
|
|
Research expenses are expenses incurred by us in the discovery of new information that will
assist us in the creation and the development of new drugs or treatments. Development expenses are
expenses incurred by us in our efforts to commercialize the findings generated through our research
efforts.
Research and development expenses incurred during the first three months of 2008 and 2007
related primarily to (i) our Phase II clinical program for arimoclomol in ALS, (ii) our ongoing
research and development related to other molecular chaperone amplification drug candidates, (iii)
RXis acquisition of technologies covered by the UMMS license agreements, and (iv) the small
molecule drug discovery and development operations at our former Massachusetts and new California
laboratory. All research and development costs related to the activities of RXi and our former
laboratory were expensed.
As compensation to members of our scientific advisory board and consultants, and in connection
with the acquisition of technology, we and RXi sometimes issue shares of common stock, stock
options and warrants to purchase shares of common stock. For financial statement purposes, we value
these shares of common stock, stock options, and warrants at the fair value of the common stock,
stock options or warrants granted, or the services received, whichever is more reliably measurable.
The value of the non-employee option grants are marked to market using the Black Scholes option
pricing model and most of the compensation expense recognized or recovered during the period is
adjusted accordingly. This resulted in a significant recovery of expenses in this quarter totaling
approximately $243,000 and an expense of approximately $695,000 for the same period of 2007. We
recorded $199,000 of employee stock option expense during the three-month period ended March 31,
2008, as compared with $37,000 for the related period in 2007.
Over the coming twelve months, we expect our research and development expenses to increase
primarily as a result of our ongoing clinical programs for arimoclomol and iroxanadine and our drug
discovery efforts at our San Diego, California laboratory.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Month Period |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
General and administrative expenses |
|
$ |
3,603 |
|
|
$ |
2,369 |
|
Non-cash general and administrative expenses |
|
|
189 |
|
|
|
|
|
Employee stock option expense |
|
|
659 |
|
|
|
112 |
|
Depreciation and amortization |
|
|
22 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
$ |
4,473 |
|
|
$ |
2,485 |
|
|
|
|
|
|
|
|
General and administrative expenses include all administrative salaries and general corporate
expenses, including legal expenses associated with the prosecution of our intellectual property.
Our general and administrative expenses, excluding stock option expense and depreciation expense,
were $3.6 million for the first three months of 2008, compared to $2.4 million for the related
period in 2007. General and administrative expenses increased by $1.9 million in the first quarter
of 2008 as compared to 2007 primarily due to increased audit, legal and consulting fees and higher
employment costs. Audit fees associated with our annual audit, compliance with the internal control
provisions of the Sarbanes-Oxley Act and RXis registration statement relating to our partial
spinoff of RXi increased by approximately $550,000. Legal fees increased by approximately $160,000
primarily related to RXis Registration Statement, increased patent work and other legal matters,
including possible financing transactions. Recruiting and consulting fees increased by
approximately $190,000 related to the recruitment of additional officers, financial and scientific
personnel and the engagement of consultants to assist with the preparation of RXis registration
statement. Employment costs increased by
18
approximately $121,000 related to wages and bonuses for additional personnel for RXi and
annual increases for other employees. Printing costs and other expenses relating to the filing of
RXis registration statement totaled approximately $180,000.
Employee stock option expense relates to options granted to recruit and retain directors,
officers and additional employees. We recorded approximately $659,000 of employee stock option
expense during the three-month period ended March 31, 2008 as compared to approximately $112,000
during the three-month period ended March 31, 2007. Of this increase, approximately $370,000
relates to RXi and $177,000 relates to CytRx. In March 2008 we awarded RXi common stock to
directors and certain employees and recorded the $189,000 fair value as non-cash compensation
expense. There were no comparable awards in the 2007 period.
Depreciation and Amortization
The depreciation expense reflects the depreciation of our equipment and furnishings and the
amortization expenses related to our molecular library, which was placed in service in March 2005.
These expenses are classified as Research and Development or General and Administrative expenses
depending upon the associated business activity.
Interest Income
Interest income was $0.5 million for the three months ended March 31, 2008, compared to $0.4
million for the comparable period in 2007. The difference between periods is attributable primarily
to the cash available for investment each year.
Minority Interest in Losses of Subsidiary
We offset $88,000 of minority interest in losses of RXi against our net loss for the months of
January and February 2008. For March 2008, we did not record a minority interest in the losses of
RXi, as RXis gain and losses were accounted for under the equity method because, following our
March 11, 2008 distribution to our stockholders of RXi shares, we owned less than 50% of RXi. We
offset $2,000 of minority interest in losses of RXi against our net loss for the three-month period
ended March 31, 2007.
Income Taxes
On March 11, 2008, the Company distributed to our stockholders approximately 4.5 million
shares of RXi common stock. We will recognize approximately a $32.9 million gain for income tax
purposes on the distribution of shares of RXi common stock, which is the amount equal to the excess
of the fair market value of the stock distributed over our basis. The gain will be included in
determining whether we have current year earnings and profits subject to taxation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited primarily to interest income sensitivity, which is
affected by changes in the general level of United States interest rates, particularly because a
significant portion of our investments are in short-term debt securities issued by the U.S.
government and institutional money market funds. The primary objective of our investment activities
is to preserve principal. Due to the nature of our short-term investments, we believe that we are
not subject to any material market risk exposure. We do not have any derivative financial
instruments or foreign currency instruments. If interest rates had varied by 10% in the three-month
period ended March 31, 2008, it would not have had a material effect on our results of operations
or cash flows for that period.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the
quarterly period covered by this Quarterly Report and identified continuing deficiencies as
disclosed in the Form 10-K for the period ending December 31, 2007, that it considered to be
material weaknesses in the effectiveness of our internal controls over financial reporting.
Pursuant to standards established by the Public Company Accounting Oversight Board, a
19
Material weakness is a deficiency or combination of deficiencies in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the companys annual or interim financial statements will not be prevented or detected on a timely
basis.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC.
Changes in Controls over Financial Reporting
During the quarterly period covered by this Quarterly Report, we made changes to our internal
controls designed to strengthen our financial reporting and disclosure controls and procedures in
light of material weaknesses in those regards reported in our Annual Report on Form 10-K for the
year ended December 31, 2007. During the quarterly period covered by this Quarterly Report, we
strengthened our managerial controls over our compliance with the established financial closing
policies and procedures. Additionally, we enhanced the communications among our scientific, legal
and accounting departments including the timing of and control over the flow of documents into our
legal database.
We are continuing our efforts in these regards in order to fully remedy previously reported
material weaknesses and to ensure that all of our controls and procedures are adequate and
effective. Any failure to implement and maintain improvements in the controls over our financial
reporting could cause us to fail to meet our reporting obligations under the SECs rules and
regulations. Any failure to improve our internal controls to address the weaknesses we have
identified could also cause investors to lose confidence in our reported financial information,
which could have a negative impact on the trading price of our common stock.
PART II OTHER INFORMATION
Item 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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CYTRX CORPORATION
(Registrant)
|
|
Date: May 19, 2008 |
By: |
/s/ MITCHELL K. FOGELMAN
|
|
|
|
Mitchell K. Fogelman |
|
|
|
Chief Financial Officer (Principal Financial Officer) |
|
21
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1 |
|
Certification of Chief Executive Officer Pursuant to 17 CFR 240.13a-14(a) |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to 17 CFR 240.13a-14(a) |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
22