form10-q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the quarterly period ended September 30, 2008
OR
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the transition
period from ___________________ to
___________________
Commission
file number 0-15327
CytRx
Corporation
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
58-1642740
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
11726
San Vicente Blvd., Suite 650
Los
Angeles, CA
|
90049
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(310)
826-5648
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12(b)-2 of the Exchange Act). Yes £ No
R
Number of
shares of CytRx Corporation common stock, $.001 par value, issued and
outstanding as of November 6, 2008: 93,344,632, exclusive of treasury
shares.
CYTRX
CORPORATION
FORM
10-Q
TABLE
OF CONTENTS
|
|
Page
|
|
PART
I. — FINANCIAL INFORMATION
|
|
|
|
3
|
|
|
15
|
|
|
22
|
|
|
22
|
|
|
|
|
PART
II. — OTHER INFORMATION
|
|
|
|
22
|
|
|
25
|
|
|
|
|
|
26
|
|
|
|
|
|
27
|
Item
1. — Financial Statements
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
September
30,
2008
|
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
30,913,687 |
|
|
$ |
50,498,261 |
|
|
Short-term
investments, at amortized cost
|
|
|
— |
|
|
|
9,951,548 |
|
|
Accounts
receivable
|
|
|
1,629,023 |
|
|
|
101,217 |
|
|
Prepaid
expense and other current assets
|
|
|
708,922 |
|
|
|
930,596 |
|
|
Total
current assets
|
|
|
33,251,632 |
|
|
|
61,481,622 |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and furnishings, net
|
|
|
1,823,906 |
|
|
|
1,573,290 |
|
|
Molecular
library, net
|
|
|
126,261 |
|
|
|
193,946 |
|
|
Investment
in affiliate – RXi Pharmaceuticals (see Note 9)
|
|
|
— |
|
|
|
— |
|
|
Goodwill
|
|
|
183,780 |
|
|
|
183,780 |
|
|
Other
assets
|
|
|
357,008 |
|
|
|
713,398 |
|
|
Total
assets
|
|
$ |
35,742,587 |
|
|
$ |
64,146,036 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
3,239,271 |
|
|
$ |
1,946,215 |
|
|
Accrued
expenses and other current liabilities
|
|
|
2,470,860 |
|
|
|
3,700,866 |
|
|
Income
taxes payable
|
|
|
632,000 |
|
|
|
— |
|
|
Deferred
revenue, current portion
|
|
|
3,131,679 |
|
|
|
8,399,167 |
|
|
Total
current liabilities
|
|
|
9,473,810 |
|
|
|
14,046,248 |
|
|
Deferred
revenue, non-current portion
|
|
|
7,595,945 |
|
|
|
7,167,381 |
|
|
Total
liabilities
|
|
|
17,069,755 |
|
|
|
21,213,629 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest (see Note 1)
|
|
|
— |
|
|
|
2,708,368 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 5,000,000 shares authorized, including 15,000
shares of Series A Junior Participating Preferred Stock; no shares issued
and outstanding
|
|
|
— |
|
|
|
— |
|
|
Common
stock, $.001 par value, 175,000,000 shares authorized; 93,978,448 and
90,397,867 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
|
|
|
93,978 |
|
|
|
90,398 |
|
|
Additional
paid-in capital
|
|
|
209,509,492 |
|
|
|
203,905,691 |
|
|
Treasury
stock, at cost (633,816 shares held at September 30, 2008 and December 31,
2007)
|
|
|
(2,279,238 |
) |
|
|
(2,279,238 |
) |
|
Accumulated
deficit
|
|
|
(188,651,400 |
) |
|
|
(161,492,812 |
) |
|
Total
stockholders’ equity
|
|
|
18,672,832 |
|
|
|
40,224,039 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
35,742,587 |
|
|
$ |
64,146,036 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended,
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$ |
917,473 |
|
|
$ |
2,046,470 |
|
|
$ |
4,838,923 |
|
|
$ |
5,862,976 |
|
|
Grant
revenue
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116,070 |
|
|
Licensing
revenue
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
|
|
917,473 |
|
|
|
2,046,470 |
|
|
|
4,838,923 |
|
|
|
5,980,046 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,005,813 |
|
|
|
3,907,514 |
|
|
|
7,723,184 |
|
|
|
14,800,183 |
|
|
General
and administrative
|
|
|
1,600,986 |
|
|
|
3,669,361 |
|
|
|
9,266,218 |
|
|
|
10,261,042 |
|
|
In-process
research and development (See Note 11)
|
|
|
8,012,154 |
|
|
|
— |
|
|
|
8,012,154 |
|
|
|
— |
|
|
|
|
|
11,618,953 |
|
|
|
7,576,875 |
|
|
|
25,001,556 |
|
|
|
25,061,225 |
|
|
Loss
before other income
|
|
|
(10,701,480 |
) |
|
|
(5,530,405 |
) |
|
|
(20,162,633 |
) |
|
|
(19,081,179 |
) |
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
215,345 |
|
|
|
857,273 |
|
|
|
1,023,921 |
|
|
|
1,896,950 |
|
|
Other
income, net
|
|
|
— |
|
|
|
(1,250 |
) |
|
|
219,229 |
|
|
|
1,498,750 |
|
|
Equity
in loss of affiliate – RXi Pharmaceuticals (see Note 9)
|
|
|
(1,344,372 |
) |
|
|
— |
|
|
|
(3,857,227 |
) |
|
|
— |
|
|
Minority
interest in loss of subsidiary
|
|
|
— |
|
|
|
77,092 |
|
|
|
88,374 |
|
|
|
255,228 |
|
|
Net
loss before income taxes
|
|
|
(11,830,507 |
) |
|
|
(4,597,290 |
) |
|
|
(22,688,336 |
) |
|
|
(15,430,251 |
) |
|
Provision
for income taxes
|
|
|
(485,000 |
) |
|
|
— |
|
|
|
(827,000 |
) |
|
|
— |
|
|
Net
loss
|
|
|
(12,315,507 |
) |
|
|
(4,597,290 |
) |
|
|
(23,515,336 |
) |
|
|
(15,430,251 |
) |
|
Deemed
dividend for anti-dilution adjustment made to stock
warrants
|
|
|
— |
|
|
|
— |
|
|
|
(756,954 |
) |
|
|
— |
|
|
Net
loss applicable to common stockholders
|
|
$ |
(12,315,507 |
) |
|
$ |
(4,597,290 |
) |
|
$ |
(24,272,290 |
) |
|
$ |
(15,430,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.14 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
91,106,215 |
|
|
|
88,122,908 |
|
|
|
90,719,685 |
|
|
|
82,235,069 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CYTRX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(23,515,336 |
) |
|
$ |
(15,430,251 |
) |
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
442,282 |
|
|
|
175,531 |
|
|
Equity
in loss of unconsolidated subsidiary
|
|
|
3,857,227 |
|
|
|
— |
|
|
Minority
interest in loss of subsidiary
|
|
|
(88,374 |
) |
|
|
(255,228 |
) |
|
RXi
common stock transferred for services
|
|
|
244,860 |
|
|
|
— |
|
|
Non-cash
earned on short-term investments
|
|
|
(48,452 |
) |
|
|
(69,145 |
) |
|
Non-cash
gain on transfer of RXi common stock
|
|
|
(226,579 |
) |
|
|
— |
|
|
Non-cash
expense for in-process research and development acquired
|
|
|
8,012,154 |
|
|
|
— |
|
|
Common
stock issued for services
|
|
|
— |
|
|
|
3,813,482 |
|
|
Expense
related to employee and non-employee stock options
|
|
|
1,605,776 |
|
|
|
1,664,876 |
|
|
Net
change in operating assets and liabilities
|
|
|
(5,831,894 |
) |
|
|
(4,734,702 |
) |
|
Total
adjustments
|
|
|
7,967,000 |
|
|
|
594,814 |
|
|
Net
cash used in operating activities
|
|
|
(15,548,336 |
) |
|
|
(14,835,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment and furnishings
|
|
|
(963,999 |
) |
|
|
(218,455 |
) |
|
Cash
paid related to acquisition of Innovive
|
|
|
(3,689,769 |
) |
|
|
— |
|
|
Deconsolidation
of subsidiary
|
|
|
(10,359,278 |
) |
|
|
— |
|
|
Proceeds
(purchase) from sale of short-term investments
|
|
|
10,000,000 |
|
|
|
(11,757,140 |
) |
|
Net
cash used in investing activities
|
|
|
(5,013,046 |
) |
|
|
(11,975,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
976,808 |
|
|
|
16,401,312 |
|
|
Net
proceeds from issuances of common stock
|
|
|
— |
|
|
|
34,250,905 |
|
|
Net
proceeds from issuances of common stock in subsidiary
|
|
|
— |
|
|
|
152,000 |
|
|
Net
cash provided by financing activities
|
|
|
976,808 |
|
|
|
50,804,217 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(19,584,574 |
) |
|
|
23,993,185 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
50,498,261 |
|
|
|
30,381,393 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
30,913,687 |
|
|
$ |
54,374,578 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
received during the period as interest income
|
|
$ |
1,023,921 |
|
|
$ |
1,829,646 |
|
|
Cash
paid during the period for income taxes
|
|
$ |
195,000 |
|
|
$ |
— |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements. See supplemental information on the following
page.
Supplemental
schedule of non-cash investing and financing activities:
CytRx
purchased all of the common stock of Innovive Pharmaceuticals in a transaction
that for accounting purposes is considered an asset acquisition. See
Note 11 below. The fair value of Innovive’s assets and liabilities at
September 19, 2008, in millions of dollars, are presented below:
|
In-process
research and development
|
|
$ |
8.0 |
|
|
Leasehold
interests
|
|
|
.1 |
|
|
Prepaid
expenses
|
|
|
.3 |
|
|
Accounts
payable
|
|
|
(6.1 |
) |
|
Net
assets acquired through issuance of common stock
|
|
$ |
2.3 |
|
As a
result of the March 6, 2008 distribution by CytRx Corporation (the “Company”) to
its stockholders of approximately 36% of the outstanding shares of RXi
Pharmaceuticals Corporation, the Company deconsolidated that previously
majority-owned subsidiary. As part of the transaction, the Company
deconsolidated $3.7 million of total assets and $4.6 million of total
liabilities.
In
connection with applicable antidilution adjustments to the price of certain
outstanding warrants in March 2008, the Company recorded a deemed dividend of
approximately $757,000 in the nine months ended September 30, 2008. The deemed
dividend was recorded as a charge to accumulated deficit and a corresponding
credit to additional paid-in capital.
CYTRX
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
1. Description
of Company and Basis of Presentation
CytRx
Corporation (“CytRx,” the “Company,” “we,” “us” or “our”) is a biopharmaceutical
research and development company engaged in the development of high-value human
therapeutics. The CytRx drug development pipeline includes six programs in
clinical development, including registration studies of tamibarotene for the
treatment of acute promyelocytic leukemia, or APL. In addition to a portfolio of
oncology programs, CytRx is developing human therapeutic products based upon its
small-molecule molecular chaperone amplification technology. CytRx is using its
chaperone amplification technology to develop treatments for neurodegenerative
disorders and diabetic complications. In addition, CytRx has been applying
molecular chaperone technology to the identification of drug candidates for
oncology by adapting its proprietary chaperone screening assay to identify
inhibitors (rather than amplifiers) of chaperone activity. The Company owns and
operates a research and development facility in San Diego.
On
September 19, 2008, the Company completed its acquisition of Innovive
Pharmaceuticals, Inc., or Innovive. The Company acquired Innovive, and its four
clinical-stage oncology drug candidates, by means of the merger of Innovive with
CytRx Merger Subsidiary, Inc., the Company’s wholly owned subsidiary, with
Innovive continuing as the surviving corporation. As a result, Innovive became a
wholly owned subsidiary of CytRx and changed its name to CytRx Oncology
Corporation, which better reflects the nature of the Innovive product candidates
acquired in the transaction. For a more detailed description of the
merger, see Note 11 below.
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 Company’s consolidated financial statements
reflected 100% of the assets and liabilities and results of operations of RXi,
with the interests of the minority shareholders of RXi recorded as “minority
interests.” In March 2008, the Company distributed to its stockholders
approximately 36% of RXi’s outstanding shares, which reduced CytRx’s 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 as “equity in
loss of unconsolidated subsidiary” on the consolidated statements of operations
(see Note 9 below). Because only a portion of RXi’s financial results for 2008
were recorded by CytRx under the equity method, the Company’s results of
operations for the first nine months 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 Notes 6 and 7
below.
In August
2006, the Company received approximately $24.3 million in proceeds from the
privately-funded ALS Charitable Remainder Trust (“ALSCRT”) in exchange for the
commitment to continue research and development of arimoclomol and other
potential treatments for ALS and a one percent royalty in the worldwide sales of
arimoclomol. Under the arrangement, the Company retains the rights to any
developments funded by the arrangement and the proceeds of the transaction are
non-refundable. The ALSCRT has no obligation to provide any further funding to
the Company. Management has concluded that due to the research and development
components of the transaction that it is properly accounted for under SFAS No.
68, Research and Development Arrangements
(“SFAS No. 68”). Accordingly, the Company has recorded the value received
under the arrangement as deferred revenue and will recognize service revenue
using the proportional performance method of revenue recognition, meaning that
service revenue is recognized on a dollar-for-dollar basis for each dollar of
expense incurred for the research and development of arimoclomol and other
potential ALS treatments.
The
accompanying condensed consolidated financial statements at September 30, 2008
and for the three-month and nine-month periods ended September 30, 2008 and 2007
are unaudited, but include all adjustments, consisting of normal recurring
entries, that management believes to be necessary for a fair presentation of the
periods presented. Prior period figures have been reclassified, wherever
necessary, to conform to current presentation. Interim results are not
necessarily indicative of results for a full year. Balance sheet amounts as of
December 31, 2007 have been derived from the Company’s audited financial
statements as of that date.
The
consolidated financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements in its Annual Report on Form 10-K for the year ended
December 31, 2007. The Company’s operating results will fluctuate for the
foreseeable future. Therefore, period-to-period comparisons should not be relied
upon as predictive of the results in future periods.
2. Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 does not expand the use of fair value in any new
circumstances. In February 2008, the FASB issued Staff Position No. FAS 157-1,
which amended SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and
other accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under Statement 13. However,
this scope exception does not apply to assets acquired and liabilities assumed
in a business combination. Also in February 2008, the FASB issued Staff Position
No. FAS 157-2, which delayed the effective date of SFAS No. 157 for
non-financial assets and liabilities, except those items recognized at fair
value on an annual or more frequently recurring basis to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. In
October 2008, the FASB issued Staff Position No. 157-3, to clarify the
application of SFAS No. 157 when the market for a financial asset is inactive.
The Company adopted SFAS No. 157 with no material impact on the Company’s
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 Company’s 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 Company’s
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 is
effective for fiscal years beginning after December 15, 2007. The Company
adopted EITF 07-3 with no material impact on the Company’s 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 will adopt SFAS No. 160 and SFAS No. 141R with no expected
material impact on its 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 an issuer is unable to rely
on the historical exercise data. The Company adopted SAB 110 with no material
impact on its financial statements.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS No. 161”). The new
standard amends Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), and seeks to enhance
disclosure about how and why a company uses derivatives; how derivative
instruments are accounted for under SFAS 133 (and the interpretations of that
standard); and how derivatives affect a company’s financial position, financial
performance and cash flows. SFAS 161 will be effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application of the standard is encouraged, as well as
comparative disclosures for earlier periods at initial adoption. The
Company does not believe adoption of this standard will have a material effect
on its financial statements.
In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible
Assets.” The Position will be effective for fiscal years
beginning after December 15, 2008 and will only apply prospectively to
intangible assets acquired after the effective date. Early adoption
is not permitted. The Company does not believe adoption of this standard will
have a material effect on its financial statements.
In May
2008, the FASB issued Staff Position No. Accounting Principles Board 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP No. APB 14-1”). FSP No. APB 14-1 requires
that the liability and equity components of convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an issuer’s nonconvertible
debt borrowing rate. FSP No. APB 14-1 will be effective for us as of
January 1, 2009. The Company does not believe adoption of this
principle will have a material effect on its financial statements.
3. Short-term
Investments
RXi owned
zero coupon U.S Treasury Bills that were purchased at a discount and matured
within twelve months. They were classified as
held-to-maturity and under Statement of Financial Accounting Standards No. 115,
Investments in Debt
Securities, were valued
at amortized cost. The interest income was amortized at the effective interest
rate.
4. Basic
and Diluted Loss Per Common Share
Basic and
diluted loss per common share are computed based on the weighted-average number
of common shares outstanding. Common share equivalents (which consist of options
and warrants) are excluded from the computation of diluted loss per share where
the effect would be antidilutive. Common share equivalents which could
potentially dilute basic earnings per share in the future, and that were
excluded from the computation of diluted loss per share, totaled approximately
15.4 million and 27.3 million shares at September 30, 2008 and 2007,
respectively.
In
connection with applicable antidilution adjustments to the terms of certain
outstanding warrants to purchase common stock in March 2008, the Company
recorded a deemed dividend of approximately $757,000. The deemed dividend is
reflected as an adjustment to net loss for the first quarter of 2008 to arrive
at net loss applicable to common stockholders on the consolidated statements of
operations and for purposes of calculating basic and diluted loss per
share.
5. Stock-Based
Compensation
CytRx
Corporation
The
Company has a 2000 Long-Term Incentive Plan under which an aggregate of
10,000,000 shares of common stock were originally reserved for
issuance. As of September 30, 2008, there were approximately
6,849,756 shares subject to outstanding stock options and approximately
1,267,033 shares available for future grant under the plan. The Company also has
a 1994 Stock Option Plan and a 1998 Long Term Incentive Plan under which 9,167
shares and 100,041 shares, respectively, were subject to outstanding stock
options at September 30, 2008. No options are available for future grant
under either of these plans.
The
Company’s stock-based employee compensation plans are described in Note 12 to
its financial statements contained in its Annual Report on Form 10-K filed for
the year ended December 31, 2007.
The
Company has adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and non-employees.
For stock
options paid in consideration of services rendered by non-employees, the Company
recognizes compensation expense in accordance with the requirements of SFAS No.
123(R), Emerging Issues Task Force Issue No. 96-18 (“EITF 96-18”), Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees, as amended.
Non-employee
option grants that do not vest immediately upon grant are recorded as an expense
over the vesting period. At the end of each financial reporting period prior to
performance, the value of these options, as calculated using the Black-Scholes
option-pricing model, is determined, and compensation expense recognized or
recovered during the period is adjusted accordingly. Since the fair market value
of options granted to non-employees is subject to change in the future, the
amount of the future compensation expense is subject to adjustment until the
common stock options are fully vested.
The
following table sets forth the total stock-based compensation expense (recovery)
resulting from stock options included in the Company’s unaudited interim
consolidated statements of operations:
|
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Research
and development — employee
|
|
$ |
187,000 |
|
|
$ |
138,000 |
|
|
$ |
540,000 |
|
|
$ |
332,000 |
|
|
General
and administrative — employee
|
|
|
365,000 |
|
|
|
231,000 |
|
|
|
972,000 |
|
|
|
598,000 |
|
|
Total
employee stock-based compensation
|
|
$ |
552,000 |
|
|
$ |
369,000 |
|
|
$ |
1,512,000 |
|
|
$ |
930,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee (recovery)
|
|
$ |
— |
|
|
$ |
80,000 |
|
|
$ |
(422,000 |
) |
|
$ |
383,000 |
|
|
General
and administrative — non-employee
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
non-employee stock-based compensation
|
|
$ |
— |
|
|
$ |
80,000 |
|
|
$ |
(422,000 |
) |
|
$ |
383,000 |
|
During
the first nine months of 2008, the Company issued stock options to purchase
1,003,000 shares of its common stock. The fair value of the stock options
granted in the nine-month period listed in the table below was estimated using
the Black-Scholes option-pricing model, based on the following
assumptions:
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free
interest rate
|
|
|
2.72% – 3.84 |
% |
|
|
4.07%
– 4.84 |
% |
|
Expected
volatility
|
|
|
93.8% – 96.8 |
% |
|
|
108.7 |
% |
|
Expected
lives (years)
|
|
|
6 |
|
|
|
6 |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
The
Company’s computation of expected volatility is based on the historical daily
volatility of its publicly traded stock. For option grants issued during the
nine-month periods ended September 30, 2008 and 2007, the Company used a
calculated volatility for each grant. The Company’s computation of expected
lives 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 Company’s options of ten years
with the average vesting term of three years for an average of six years. The
dividend yield assumption of zero is based upon the fact the Company has never
paid cash dividends and presently has no intention of paying cash dividends. The
risk-free interest rate used for each grant is equal to the U.S. Treasury rates
in effect at the time of the grant for instruments with a similar expected life.
Based on historical experience, for the nine-month periods ended September 30,
2008 and 2007, the Company has estimated an annualized forfeiture rate of 10%
and 5%, respectively, for options granted to its employees, 1% for each period
for options granted to senior management and 0% for each period for options
granted to directors. Compensation costs will be adjusted for future changes in
estimated forfeitures. The Company will record additional expense if the actual
forfeitures are lower than estimated and will record a recovery of prior expense
if the actual forfeiture rates are higher than estimated. No amounts relating to
employee stock-based compensation have been capitalized.
At
September 30, 2008, there remained approximately $3.1 million of unrecognized
compensation expense related to unvested stock options granted to current and
former employees, directors and consultants, to be recognized as expense over a
weighted-average period of 1.30 years. Presented below is the Company’s stock
option activity:
|
|
|
Nine Months Ended September 30,
2008
|
|
|
|
|
Number
of Options
(Employees)
|
|
|
Number
of Options
(Non-Employees)
|
|
|
Total
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding
at January 1, 2008
|
|
|
4,594,000 |
|
|
|
1,397,000 |
|
|
|
5,991,000 |
|
|
$ |
2.29 |
|
|
Granted
|
|
|
1,089,000 |
|
|
|
— |
|
|
|
1,089,000 |
|
|
$ |
1.14 |
|
|
Exercised
|
|
|
(55,000 |
) |
|
|
— |
|
|
|
(55,000 |
) |
|
$ |
0.92 |
|
|
Forfeited
|
|
|
(175,000 |
) |
|
|
— |
|
|
|
(175,000 |
) |
|
$ |
2.83 |
|
|
Outstanding
at September 30, 2008
|
|
|
5,453,000 |
|
|
|
1,397,000 |
|
|
|
6,850,000 |
|
|
$ |
2.10 |
|
|
Options
exercisable at September 30, 2008
|
|
|
3,518,000 |
|
|
|
1,147,000 |
|
|
|
4,665,000 |
|
|
$ |
1.93 |
|
A summary
of the activity for non-vested stock options as of September 30, 2008 is
presented below:
|
|
|
Number
of Options
(Employees)
|
|
|
Number
of Options
(Non-Employees)
|
|
|
Total Number
of Options
|
|
|
Weighted
Average
Grant
Date Fair
Value per Share
|
|
|
Non-vested
at January 1, 2008
|
|
|
1,734,000 |
|
|
|
250,000 |
|
|
|
1,984,000 |
|
|
$ |
2.91 |
|
|
Granted
|
|
|
1,089,000 |
|
|
|
— |
|
|
|
1,089,000 |
|
|
$ |
0.90 |
|
|
Forfeited
|
|
|
(175,000 |
) |
|
|
— |
|
|
|
(175,000 |
) |
|
$ |
2.38 |
|
|
Vested
|
|
|
(713,000 |
) |
|
|
— |
|
|
|
(713,000 |
) |
|
$ |
1.89 |
|
|
Non-vested
at September 30, 2008
|
|
|
1,935,000 |
|
|
|
250,000 |
|
|
|
2,185,000 |
|
|
$ |
2.28 |
|
The
following table summarizes significant ranges of outstanding stock options under
the Company’s plans at September 30, 2008:
|
Range
of
Exercise Prices
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of
Options
Exercisable
|
|
|
Weighted
Average
Contractual Life
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
0.46
- 1.00 |
|
|
|
980,000 |
|
|
|
7.03 |
|
|
$ |
0.76 |
|
|
|
885,000 |
|
|
|
7.03 |
|
|
$ |
0.77 |
|
| $ |
1.01
- 2.00 |
|
|
|
3,137,000 |
|
|
|
7.22 |
|
|
$ |
1.41 |
|
|
|
2,044,000 |
|
|
|
7.22 |
|
|
$ |
1.50 |
|
| $ |
2.01
- 3.00 |
|
|
|
1,130,000 |
|
|
|
4.82 |
|
|
$ |
2.46 |
|
|
|
1,112,000 |
|
|
|
4.82 |
|
|
$ |
2.46 |
|
| $ |
3.01
- 4.00 |
|
|
|
618,000 |
|
|
|
8.96 |
|
|
$ |
3.43 |
|
|
|
221,000 |
|
|
|
8.96 |
|
|
$ |
3.35 |
|
| $ |
4.01
- 4.65 |
|
|
|
985,000 |
|
|
|
8.60 |
|
|
$ |
4.42 |
|
|
|
403,000 |
|
|
|
8.60 |
|
|
$ |
4.42 |
|
| |
|
|
|
|
6,850,000 |
|
|
|
7.15 |
|
|
$ |
2.10 |
|
|
|
4,665,000 |
|
|
|
7.15 |
|
|
$ |
1.93 |
|
The
aggregate intrinsic value of outstanding options as of September 30, 2008 was
approximately $0. The aggregate intrinsic value was calculated based on the
positive difference between the closing fair market value of the Company’s
common stock on September 30, 2008 of $0.51 per share and the exercise price of
the underlying options. The intrinsic value of options exercised was $28,000 for
the nine-month period ended September 30, 2008, and the intrinsic value of
options that vested was approximately $0 for the same period.
RXi
Pharmaceuticals
RXi has
its own stock option plan, the RXi Pharmaceuticals Corporation 2007 Incentive
Plan. RXi accounted for stock option expense in the same manner as CytRx as
described above.
As
discussed in Note 9, the Company started accounting for its investment in RXi
under the equity method in March 2008, and accordingly, the following table sets
forth the total stock-based compensation expense for January and February 2008
resulting from RXi stock options that is included in the Company’s unaudited
condensed consolidated statements of operations:
|
|
|
Nine Months Ended September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Research
and development — employee
|
|
$ |
28,000 |
|
|
$ |
80,000 |
|
|
General
and administrative — employee
|
|
|
369,000 |
|
|
|
654,000 |
|
|
Total
employee stock-based compensation
|
|
$ |
397,000 |
|
|
$ |
734,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee
|
|
$ |
121,000 |
|
|
$ |
1,043,000 |
|
|
General
and administrative — non-employee
|
|
|
— |
|
|
|
— |
|
|
Total
non-employee stock-based compensation
|
|
$ |
121,000 |
|
|
$ |
1,043,000 |
|
6. Liquidity
and Capital Resources
At
September 30, 2008, the Company had cash and cash equivalents of
approximately $30.9 million and held 6,268,881 shares of restricted common stock
of RXi Pharmaceuticals Corporation with a market value of $51.2 million based
upon the closing price of the RXi common stock on that date. The
Company currently projects expenditures for the remainder of 2008 and the first
nine months of 2009 of approximately $27.0 million, which amount includes the
integration of the former operations of Innovive. These projections
include approximately $7.0 million of direct expenditures for its ongoing
clinical trial for tamibarotene as a third-line treatment for APL, approximately
$3.9 million of direct expenditures for its planned Phase II clinical trial of
iroxanadine for diabetic complications and related studies, approximately $1.1
million of direct expenditures for its ongoing clinical program for INNO-406 for
chronic myeloid leukemia, approximately $0.4 million of direct expenditures for
its ongoing program for INNO-206 for an oncology indication to be determined,
approximately $0.6 million of direct expenditures for its programs for
arimoclomol for ALS and stroke recovery and related studies, approximately $1.6
million for operating our clinical programs, approximately $5.2 million for the
operations of our research laboratory in San Diego, California, and
approximately $7.3 million for other general and administrative expenses. The
Company’s projected expenditures are based on its plan to conduct additional
animal toxicology studies on arimoclomol as part of its efforts to develop, or
seek one or more partnerships related to the development of, that drug candidate
for ALS, stroke recovery or other indications. Those animal toxicology studies
are expected to take approximately one year. These projected expenditures are
based upon numerous other assumptions and subject to many uncertainties,
including the Company’s ability to successfully integrate Innovive’s clinical
development programs, and its actual expenditures may be significantly different
from these projections.
If the
Company obtains marketing approval as currently planned and successfully
commercialize its current product candidates, it anticipates it will take a
minimum of three years, and possibly
longer, for it to generate significant recurring revenue, and the Company will
be dependent on future financing and possible asset sales until such time, if
ever, as it can generate significant recurring revenue. The Company has no
commitments from third parties to provide it with any additional financing, and
we may not be able to obtain future financing on favorable terms, or at all. If
the Company is unable to raise additional funding from outside sources, it may
have to sell some or all of its assets, including its RXi shares. If
the Company fails to obtain sufficient funding when needed, it may be forced to
delay or reduce the scope of or eliminate some portion or all of its development
programs or clinical trials, license to other companies its product candidates
or technologies that it would prefer to develop and commercialize itself, or
seek to merge with or be acquired by another company.
7. Equity
Transactions
On March
11, 2008, the Company paid a dividend to its stockholders of approximately 36%
of the outstanding shares of RXi common stock. In connection with that dividend,
the Company adjusted the price of warrants to purchase approximately 10.6
million shares that had been issued in prior equity financings in October 2004,
January 2005 and March 2006. The adjustments were made as a result of
anti-dilution provisions in those warrants that were triggered by the Company’s
distribution of a portion of its assets to its stockholders. The Company
accounted for the anti-dilution adjustments as deemed dividends analogous with
the guidance in Emerging Issues Task Force Issue (“EITF”) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and EITF 00-27, Application of 98-5 to Certain
Convertible Instruments, and recorded an approximate $757,000 charge to
accumulated deficit and a corresponding credit to additional paid-in
capital.
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, in order 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 adjustments were was made as a result of anti-dilution
provisions in those warrants that were triggered by the Company’s 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 provided, 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 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 management’s
estimation, the contingent payments related to the registration payment
arrangement are not probable to occur, and thus no amount was
accrued.
During
the three-month period ended September 30, 2008, no options or warrants in the
Company’s common stock were exercised. During the three-month period ended
September 30, 2007, the Company issued 0.4 million shares of its common stock
and received $0.5 million upon the exercise of stock options and warrants.
During the nine-month period ended September 30, 2008, the Company issued 1
million shares of its common stock and received $0.9 million upon the exercise
of stock options and warrants. For the comparative 2007 period, the Company
issued 10.0 million shares of its common stock and received $16.4 million upon
the exercise of stock options and warrants.
8. Minority
Interest in RXi
Through
February 2008, the Company owned approximately 85% of the outstanding shares of
common stock of RXi. While RXi was majority-owned, the Company’s consolidated
financial statements reflected 100% of the assets and liabilities and results of
operations of RXi, with the interests of the minority shareholders of RXi
recorded as “minority interests.” The Company offset $88,000 of minority
interest in losses of RXi against its net loss for the months of January and
February 2008, and approximately $77,000 and $255,000 of minority interest in
losses of RXi against its net loss for the three-month and nine-month periods
ended September 30, 2007, respectively.
On March
11, 2008, the Company distributed to its stockholders approximately 4.5 million
shares of RXi common stock, or approximately 36% of RXi’s outstanding shares,
which reduced CytRx’s ownership to less than 50% of RXi. As a result, CytRx
began to account for its investment in RXi using the equity method, under which
CytRx records only its pro-rata share of the financial results of RXi. Because
only a portion of RXi’s financial results for 2008 were recorded by CytRx under
the equity method, the Company’s results of operations for the first nine months
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.
9. Equity
Investment in RXi
Management
determined that the distribution of RXi common stock to stockholders of CytRx in
March 2008 represented a partial spin-off of RXi and accounted for the
distribution of the RXi common shares at cost. As a result of its reduced
ownership in RXi, CytRx began to account for its investment in RXi using the
equity method, under which CytRx records only its pro-rata share of the
financial results of RXi. The following table presents summarized financial
information for RXi for the three-month and nine-month periods ended September
30, 2008:
|
Income
Statement Data (unaudited, in thousands)
|
|
Three-Month
Period
Ended
September 30, 2008
|
|
|
Nine-month
Period
Ended
September 30, 2008
|
|
|
Sales
|
|
$ |
— |
|
|
$ |
— |
|
|
Gross
profit
|
|
|
— |
|
|
|
— |
|
|
Loss
from continuing operations
|
|
|
(3,464 |
) |
|
|
(10,523 |
) |
|
Loss
|
|
|
(3,366 |
) |
|
|
(10,330 |
) |
|
Balance
Sheet Data (unaudited, in thousands)
|
|
September 30, 2008
|
|
|
Current
assets
|
|
$ |
13,047 |
|
|
Noncurrent
assets
|
|
|
374 |
|
|
Current
liabilities
|
|
|
1,180 |
|
|
Stockholders’
equity
|
|
|
12,232 |
|
At
September 30, 2008, the fair value of CytRx’s 6,268,881 shares of RXi common
stock was $51.2 million based on the closing price of RXi common stock (NASDAQ:
“RXII”) on that date. As CytRx accounts for its investment in RXi using the
equity method, this value it not reflected in the “Investment in affiliates –
RXi Pharmaceuticals” on the CytRx balance sheet.
10. Income
Taxes
The
Company will recognize approximately a $32.9 million gain for income tax
purposes on its 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 the
Company’s basis. The gain will be included in determining whether the Company
has current year earnings and profits subject to taxation. Based upon the
Company’s anticipated loss from operations for 2008 and currently available loss
carryforwards, it expects to pay no regular federal income taxes in connection
with the distribution; however, the Company has recorded a tax provision of
$260,000 related to the estimated federal Alternative Minimum Tax resulting from
this gain. The Company expects to pay approximately $569,000 of regular state
income tax because California recently suspended the utilization of tax loss
carryforwards for 2008 and 2009.
11. Acquisition
of Innovive Pharmaceuticals
On
September 19, 2008, the Company completed the merger of Innovive with CytRx
Merger Subsidiary, Inc., the Company’s wholly owned subsidiary, with Innovive
continuing as the surviving corporation. As a result, Innovive became a wholly
owned subsidiary of CytRx and changed its name to CytRx Oncology Corporation,
which better reflects the nature of the Innovive product candidates acquired in
the transaction.
In the
merger, each outstanding share of Innovive common stock (other than shares owned
by Innovive, CytRx and CytRx Merger Subsidiary, Inc.) was cancelled and
converted into the right to receive initial merger consideration of 0.1762 share
of the Company’s common stock (plus cash in lieu of any fractional CytRx share
at a price of $0.94 per share). The Company issued as the initial merger
consideration a total of 2,574,282 CytRx shares to the former Innovive
stockholders. The former Innovive stockholders also will be entitled to receive
up to $1.01 per Innovive share of future earnout merger consideration, subject
to our achievement of specified net sales under the existing Innovive license
agreements. The earnout merger consideration, if any, will be payable in shares
of CytRx common stock, subject to specified conditions, or, at CytRx’s election,
in cash or by a combination of shares of CytRx common stock and cash. CytRx’s
common stock will be valued for purposes of any future earnout merger
consideration based upon the trading price of CytRx common stock at the time the
earnout merger consideration is paid.
Because
Innovive is a development stage company, under accounting principles generally
accepted in the United States and the SEC regulations, it is not considered a
business. Accordingly, CytRx accounted for the merger in accordance
with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, for transactions other than a business
combination. Management of CytRx has further determined it is not
required to include in this Quarterly Report pro forma financial statements
giving effect to the merger.
The
initial merger consideration, together with direct costs incurred to effect the
merger, were allocated to the individual assets acquired, including identifiable
intangible assets and liabilities assumed based on the relative fair
value. No goodwill was recorded. The Company’s
consolidated financial statements will reflect these fair values and will not be
restated retroactively to reflect the historical financial position or results
of operations of Innovive. In connection with the merger, CytRx recorded a
one-time expense for acquired in-process research and development.
Simultaneously
with the signing of the merger agreement in June 2008, CytRx entered into a loan
and security agreement with Innovive pursuant to which the Company agreed to
advance funds to Innovive to be used to pay current accounts payable and accrued
expenses of Innovive until the closing. On the date of the merger, the total
advances to Innovive of approximately $3.5 million were eliminated in the merger
accounting and the related $690,000 reserve for doubtful accounts relating to
the loan in the second quarter of 2008 was reversed.
Forward
Looking Statements
From time
to time, we make oral and written statements that may constitute
“forward-looking statements” (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1995 or by the SEC in its rules,
regulations and releases, including Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
We desire to take advantage of the “safe harbor” provisions in the Private
Securities Litigation Reform Act of 1995 for forward-looking statements made
from time to time, including, but not limited to, the forward-looking statements
made in this Quarterly Report, as well as those made in our other filings with
the SEC.
All
statements in this Quarterly Report, including statements in this section, other
than statements of historical fact are forward-looking statements for purposes
of these provisions, including statements of our current views with respect to
the recent developments regarding our business strategy, business plan and
research and development activities, our future financial results, and other
future events. These statements include forward-looking statements both with
respect to us, specifically, and the biotechnology industry, in general. In some
cases, forward-looking statements can be identified by the use of terminology
such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,”
“potential” or “could” or the negative thereof or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements.
All
forward-looking statements involve inherent risks and uncertainties, and there
are or will be important factors that could cause actual results to differ
materially from those indicated in these statements. We believe that these
factors include, but are not limited to, those factors discussed in this section
and under the caption “Risk Factors,” all of which should be reviewed carefully.
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we anticipate. Please consider our forward-looking statements in light
of those risks as you read this Quarterly Report. We undertake no obligation to
publicly update or review any forward-looking statement, whether as a result of
new information, future developments or otherwise.
Overview
CytRx
Corporation (“CytRx,” the “Company,” “we,” “us” or “our”) is a biopharmaceutical
research and development company engaged in the development of high-value human
therapeutics. Our drug development pipeline includes six programs in clinical
development, including registration studies of tamibarotene for the treatment of
acute promyelocytic leukemia, or APL. In addition to a portfolio of oncology
programs, we are developing human therapeutic products based upon our
small-molecule molecular chaperone amplification technology. We are
using our chaperone amplification technology to develop treatments for
neurodegenerative disorders and diabetic complications. In addition, at our
research and development facility in San Diego, California, we have been
applying molecular chaperone technology to the identification of drug candidates
for oncology by adapting our proprietary chaperone screening assay to identify
inhibitors (rather than amplifiers) of chaperone activity. On
September 19, 2008, we completed our acquisition of Innovive and its four
clinical-stage oncology drug candidates, including tamibarotene.
Through
February 2008, we owned a majority of the outstanding shares of common stock of
RXi Pharmaceuticals Corporation, or RXi, which was founded in April 2006 by the
Company and four researchers in the field of RNAi, including Dr. Craig Mello,
recipient of the 2006 Nobel Prize for Medicine for his co-discovery of RNAi.
RNAi is a naturally occurring mechanism for the regulation of gene expression
that has the potential to selectively inhibit the activity of any human gene.
RXi is focused solely on developing and commercializing therapeutic products
based upon RNAi technologies for the treatment of human diseases, including
neurodegenerative diseases, cancer, type 2 diabetes and obesity. While RXi was
majority-owned, our consolidated financial statements reflected 100% of the
assets and liabilities and results of operations of RXi, with the interests of
the minority shareholders of RXi recorded as “minority interests.” In March
2008, we distributed to our stockholders approximately 36% of RXi’s outstanding
shares, which reduced our ownership to less than 50% of RXi. As a result of the
reduced ownership, we began to account for its investment in RXi using the
equity method, under which we record only our pro-rata share of the financial
results of RXi as “equity in loss of unconsolidated subsidiary” on the
consolidated statements of operations. Because only a portion of RXi’s financial
results for 2008 were recorded by us under the equity method, our results of
operations for the first nine months 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.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, impairment of long-lived assets,
including finite lived intangible assets, research and development expenses and
clinical trial expenses and stock-based compensation expense.
We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or
conditions.
Our
significant accounting policies are summarized in Note 2 to our financial
statements contained in our Annual Report on Form 10-K filed for the year
ended December 31, 2007. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:
Revenue
Recognition
Revenue
consists of license fees from strategic alliances with pharmaceutical companies
as well as service and grant revenues. Service revenue consists of contract
research and laboratory consulting. Grant revenues consist of government
and private grants.
Monies
received for license fees are deferred and recognized ratably over the
performance period in accordance with Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition.
Milestone payments will be recognized upon achievement of the milestone as long
as the milestone is deemed substantive and we have no other performance
obligations related to the milestone and collectability is reasonably assured,
which is generally upon receipt, or recognized upon termination of the agreement
and all related obligations. Deferred revenue represents amounts received prior
to revenue recognition.
Revenues
from contract research, government grants, and consulting fees are recognized
over the respective contract periods as the services are performed, provided
there is persuasive evidence or an arrangement, the fee is fixed or determinable
and collection of the related receivable is reasonably assured. Once all
conditions of the grant are met and no contingencies remain outstanding, the
revenue is recognized as grant fee revenue and an earned but unbilled revenue
receivable is recorded.
In August
2006, we received approximately $24.3 million in proceeds from the
privately-funded ALS Charitable Remainder Trust (“ALSCRT”) in exchange for the
commitment to continue research and development of arimoclomol and other
potential treatments for ALS and a one percent royalty in the worldwide sales of
arimoclomol. Under the arrangement, we retain the rights to any products or
intellectual property funded by the arrangement and the proceeds of the
transaction are non-refundable. The ALSCRT has no obligation to provide any
further funding to us. We have concluded that due to the research and
development components of the transaction that it is properly accounted for
under Statement of Financial Accounting Standards No. 68, Research and Development Arrangements.
Accordingly, we have recorded the value received under the arrangement as
deferred service revenue and will recognize service revenue using the
proportional performance method of revenue recognition, meaning that service
revenue is recognized on a dollar-for-dollar basis for each dollar of expense
incurred for the research and development of arimoclomol and other potential ALS
treatments. We believe that this method best approximates the efforts expended
related to the services provided. We adjust our estimates of expense incurred
for this research and development on a quarterly basis. For the three-month and
nine-month periods ended September 30, 2008 and 2007, we recognized
approximately $0.9 million, $4.8 million, $2.0 million and $5.9 million,
respectively, of service revenue related to this transaction. Any significant
change in ALS related research and development expense in any particular
quarterly or annual period will result in a change in the recognition of revenue
for that period and consequently affect the comparability or revenue from period
to period.
The
amount of “deferred revenue, current portion” is the amount of deferred revenue
that is expected to be recognized in the next twelve months and is subject to
fluctuation based upon management’s estimates. Management’s estimates include an
evaluation of what pre-clinical and clinical trials are necessary, the timing of
when trials will be performed and the estimated clinical trial expenses. These
estimates are subject to changes and could have a significant effect on the
amount and timing of when the deferred revenues are recognized.
Research
and Development Expenses
Research
and development expenses consist of costs incurred for direct and
overhead-related research expenses and are expensed as incurred. Costs to
acquire technologies, including licenses, that are utilized in research and
development and that have no alternative future use are expensed when incurred.
Technology developed for use in its products is expensed as incurred until
technological feasibility has been established.
Clinical
Trial Expenses
Clinical
trial expenses, which are included in research and development expenses, include
obligations resulting from our contracts with various clinical research
organizations in connection with conducting clinical trials for our product
candidates. We recognize expenses for these activities based on a variety of
factors, including actual and estimated labor hours, clinical site initiation
activities, patient enrollment rates, estimates of external costs and other
activity-based factors. We believe that this method best approximates the
efforts expended on a clinical trial with the expenses we record. We adjust our
rate of clinical expense recognition if actual results differ from our
estimates. If our estimates are incorrect, clinical trial expenses recorded in
any particular period could vary.
Stock-Based
Compensation
Our
stock-based employee compensation plans are described in Note 5 of the Notes to
Condensed Consolidated Financial Statements included in this Quarterly Report.
SFAS 123(R), Share-Based
Payment, requires the recognition of compensation expense associated with
stock option grants and other equity instruments to employees in the financial
statements. We adopted SFAS 123(R) using the modified-prospective method and use
the Black-Scholes valuation model for valuing share-based payments. We account
for transactions in which services are received in exchange for equity
instruments based on the fair value of such services received from
non-employees, in accordance with SFAS 123(R), Emerging Issues Task Force Issue
No. 96-18 (“EITF 96-18”), Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees, as amended.
Non-employee
stock-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances, option grants to
non-employees are immediately vested and have no future performance requirements
by the non-employee and the total stock-based compensation charge is recorded in
the period of the measurement date.
The fair
value of each CytRx and RXi common stock option grant is estimated using the
Black-Scholes option-pricing model, which uses certain assumptions related to
risk-free interest rates, expected volatility, expected life of the common stock
options and future dividends. Compensation expense is recorded based upon the
value derived from the Black-Scholes option-pricing model, based on an expected
forfeiture rate that is adjusted for actual experience. If our Black-Scholes
option-pricing model assumptions or our actual or estimated forfeiture rate are
different in the future, that could materially affect compensation expense
recorded in future periods.
Impairment
of Long-Lived Assets
We review
long-lived assets, including finite lived intangible assets, for impairment on
an annual basis, as of December 31, or on an interim basis if an event occurs
that might reduce the fair value of such assets below their carrying values. An
impairment loss would be recognized based on the difference between the carrying
value of the asset and its estimated fair value, which would be determined based
on either discounted future cash flows or other appropriate fair value methods.
If our estimates used in the determination of either discounted future cash
flows or other appropriate fair value methods are not accurate as compared to
actual future results we may be required to record an impairment
charge.
Earnings
Per Share
Basic and
diluted loss per common share are computed based on the weighted-average number
of common shares outstanding. Common share equivalents (which consist of options
and warrants) are excluded from the computation of diluted loss per share where
the effect would be anti-dilutive. Common share equivalents that were excluded
from the computation of diluted loss per share totaled approximately 15.4
million shares and 27.3 million shares at September 30, 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 share.
Liquidity
and Capital Resources
We have
relied primarily upon proceeds from sales of our equity securities and the
exercise of options and warrants, and to a much lesser extent upon payments from
our strategic partners and licensees, to generate funds needed to finance our
business and operations. At September 30, 2008, the Company had
cash and cash equivalents of approximately $30.9 million and held 6,268,881
shares of restricted common stock of RXi Pharmaceuticals Corporation with a
market value of $51.2 million based upon the closing price of the RXi common
stock on that date. The Company currently projects expenditures for
the remainder of 2008 and the first nine months of 2009 of approximately $27.0
million, which amount includes the integration of the former operations of
Innovive. These projections include approximately
$7.0 million of direct expenditures for our ongoing clinical trial
for tamibarotene as a third-line treatment for APL, approximately $3.9 million
of direct expenditures for our planned Phase II clinical trial of iroxanadine
for diabetic complications and related studies, approximately $1.1 million of
direct expenditures for our ongoing clinical program for INNO-406 for chronic
myeloid leukemia, approximately $0.4 million of direct expenditures for our
ongoing program for INNO-206 for an oncology indication to be determined,
approximately $0.6 million of direct expenditures for our programs for
arimoclomol for ALS and stroke recovery and related studies, approximately $1.6
million for operating our clinical programs, approximately $5.2 million for the
operations of our research laboratory in San Diego, California, and
approximately $7.3 million for other general and administrative expenses. Our
projected expenditures are based on our plan to conduct additional animal
toxicology studies on arimoclomol as part of our efforts to develop, or seek one
or more partnerships related to the development of, that drug candidate for ALS,
stroke recovery or other indications. Those animal toxicology studies are
expected to take approximately one year. These projected expenditures are based
upon numerous other assumptions and subject to many uncertainties, including our
ability to successfully integrate Innovive’s clinical development programs, and
our actual expenditures may be significantly different from these
projections.
If we
obtain marketing approval as currently planned and successfully commercialize
our current product candidates, we anticipate it will take a minimum of
three years, and
possibly longer, for us to generate significant recurring revenue, and we will
be dependent on future financing and possible asset sales until such time, if
ever, as we can generate significant recurring revenue. We have no commitments
from third parties to provide us with any additional financing, and we may not
be able to obtain future financing on favorable terms, or at all. If we are
unable to raise additional funding from outside sources, we may have to sell
some or all of our assets, including our RXi shares. If we fail to
obtain sufficient funding when needed, we may be forced to delay or reduce the
scope of or eliminate some portion or all of our development programs or
clinical trials, license to other companies our product candidates or
technologies that we would prefer to develop and commercialize ourselves, or
seek to merge with or be acquired by another company.
Our net
loss increased by approximately $7.7 million during the quarter ended September
30, 2008 compared to the quarter ended September 30, 2007. Included in 2008 was
a one-time charge of $8.0 million relating to the acquisition of in-process
research and development from Innovive (see Note 11). Excluding this
one-time charge, our net loss decreased by approximately $0.3 million primarily
as a result of the deconsolidation of RXi in the first quarter, resulting in no
RXi expenses being included in the results for the quarter ended September 30,
2008
In the
nine-month period ended September 30, 2008, we used $5.0 million of cash in
investing activities, compared to $12.0 million used in the comparable 2007
period. The 2008 period included $10.0 million of funds provided by RXi
converting short-term investments to cash equivalents. However, RXi’s 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 do not expect significant capital spending for additional equipment to be
necessary during the next 12 months.
Cash
provided by financing activities in the nine months ended September 30, 2008 and
2007 was $1.0 million and $50.8 million,
respectively. The 2008 period consisted of $1.0 million of funds
received from the exercise of stock options and warrants. In the 2007
period, $16.4 million resulted from the proceeds from the exercise of stock
options and warrants and $34.2 from the net proceeds from the issuance of common
stock.
We are
evaluating other potential future sources of capital, as we do not currently
have commitments from any third parties to provide us with capital. The results
of our technology licensing efforts and the actual proceeds of any fund-raising
activities will determine our ongoing ability to operate as a going concern. Our
ability to obtain future financings through joint ventures, product licensing
arrangements, royalty sales, equity financings, sales of RXi shares, grants or
otherwise is subject to market conditions and our ability to identify parties
that are willing and able to enter into such arrangements on terms that are
satisfactory to us. Depending upon the outcome of our fundraising efforts, the
accompanying consolidated financial information may not necessarily be
indicative of future operating results or future financial
condition.
We expect
to incur significant losses for the foreseeable future, and there can be no
assurance that we will become profitable. Even if we become profitable, we may
not be able to sustain that profitability.
Results
of Operations
We
recorded a net loss applicable to common stockholders of approximately $12.3
million and $24.3 million for the three-month and nine-month periods ended
September 30, 2008, respectively, as compared to $4.6 million and $15.4 million
for the same periods in 2007. The net loss in 2008 includes a one-time charge of
$8.0 million relating to the purchase of in-process research and development in
the Innovive acquisition.
We
recognized $0.9 million and $4.8 million of revenue for the three-month and
nine-month periods ended September 30, 2008, respectively, and $2.0 million and
$6.0 million for the same periods in 2007. These revenues relate to our $24.3
million sale to the ALSCRT of a one percent royalty interest in worldwide sales
of arimoclomol in August 2006. All future licensing fees under our current
licensing agreements are dependent upon successful development milestones being
achieved by the licensor. During 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.
Research
and Development
|
|
|
Three-Month
Period
Ended September 30,
|
|
|
Nine-Month
Period
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
| |
|
|
|
|
|
|
|
Research
and development expenses
|
|
$ |
1,671 |
|
|
$ |
3,566 |
|
|
$ |
7,020 |
|
|
$ |
10,496 |
|
|
Non-cash
research and development expenses (recovery)
|
|
|
— |
|
|
|
111 |
|
|
|
(243 |
) |
|
|
3,736 |
|
|
Employee
stock option expense
|
|
|
187 |
|
|
|
181 |
|
|
|
568 |
|
|
|
413 |
|
|
Depreciation
and amortization
|
|
|
148 |
|
|
|
49 |
|
|
|
378 |
|
|
|
155 |
|
|
|
|
$ |
2,006 |
|
|
$ |
3,907 |
|
|
$ |
7,723 |
|
|
$ |
14,800 |
|
Research
expenses are expenses incurred by us in the discovery of new information that
will assist us in the creation and the development of new drugs or treatments.
Development expenses are expenses incurred by us in our efforts to commercialize
the findings generated through our research efforts.
Research
and development expenses incurred during the three-month and nine-month periods
of 2008 relate to our various development programs. The three-month period ended
September 30, 2008 excludes any RXi-related research and development expenses
and in the nine-month period ended September 30, 2008, RXi’s expenses are only
included for the months of January and February 2008, all of which accounts for
the significant decreases in research ands development costs of $1.9 million and
$7.1 million in the respective comparative periods. In the nine-month period
ended September 30, 2008, our development costs associated with our program for
arimoclomol in ALS were $3.0 million, the costs of our program for arimoclomol
in stroke recovery and related studies were $0.7 million, the costs of our
program for iroxanadine for diabetic complications were $1.2 million and the
cost of operations in our research laboratory were $1.7 million. The RXi-related
research and development expenses included for the first two months of 2008 were
approximately $0.6 million.
As
compensation to members of RXi’s scientific advisory board and our consultants,
and in connection with the acquisition of technology, we and RXi sometimes issue
shares of common stock, stock options and warrants to purchase shares of common
stock. For financial statement purposes, we value these shares of common stock,
stock options, and warrants at the fair value of the common stock, stock options
or warrants granted, or the services received, whichever is more reliably
measurable. The value of the non-employee option grants are marked to market
using the Black-Scholes option-pricing model and most of the compensation
expense recognized or recovered during the period is adjusted accordingly. This
resulted in a recovery of expenses in the three-month and nine-month periods
ended September 30, 2008 totaling approximately $0 and $(243,000), respectively,
and an expense of approximately $111,000 and $3,736,000 for the same periods of
2007. The significant decrease in the non-cash research and
development expenses for the comparative nine-month periods relates to the
inclusion of RXi’s expenses in the 2007 period. We recorded $187,000
and $568,000 of employee stock option expense during the three-month and
nine-month periods ended September 30, 2008, as compared with $181,000 and
$413,000 for the same periods in 2007.
Over the
coming twelve months, we expect our research and development expenses to
increase primarily as a result of the acquisition of Innovive, particularly the
tamibarotene program, as well as our ongoing clinical programs for iroxanadine
and arimoclomol and our drug discovery efforts at our San Diego, California,
laboratory.
General
and Administrative Expenses
|
|
|
Three-Month
Period
Ended September 30,
|
|
|
Nine-Month
Period
Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
(In
thousands)
|
|
| |
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$ |
1,904 |
|
|
$ |
3,071 |
|
|
$ |
7,673 |
|
|
$ |
8,989 |
|
|
Non-cash
general and administrative expenses
|
|
|
(690 |
) |
|
|
— |
|
|
|
189 |
|
|
|
— |
|
|
Employee
stock option expense
|
|
|
365 |
|
|
|
593 |
|
|
|
1,340 |
|
|
|
1,252 |
|
|
Depreciation
and amortization
|
|
|
22 |
|
|
|
5 |
|
|
|
64 |
|
|
|
20 |
|
|
|
|
$ |
1,601 |
|
|
$ |
3,669 |
|
|
$ |
9,266 |
|
|
$ |
10,261 |
|
General
and administrative expenses include all administrative salaries and general
corporate expenses, including legal expenses associated with the prosecution of
our intellectual property. Our general and administrative expenses, excluding
stock option expense, non-cash expenses and depreciation expense, were $1.9
million and $7.7 million for the three-month and nine-month periods ended
September 30, 2008, respectively, compared to $3.1 million and $9.0 million for
the same periods in 2007. General and administrative expenses decreased by $1.2
million in the third quarter of 2008 as compared to 2007, primarily due to the
2007 period including approximately $1.0 million of RXi
expenses. Additionally, there was a reduction in professional fees of
approximately $320,000, which largely related to fees incurred in effecting the
partial spinoff of RXi in the first quarter of 2008.
Employee
stock option expense relates to options granted to recruit and retain directors,
officers and other employees. We recorded approximately $0.4 million and $1.3
million, respectively, of employee stock option expense during the three-month
and nine-month periods ended September 30, 2008 as compared to approximately
$0.6 million and $1.3 million during the same periods in 2007. The decreases
relate primarily to the exclusion of RXi’s expenses in the three-months ended
September 30, 2008. In June 2008, we set a reserve of $690,000 against the loan
receivable from Innovive, which was subsequently reversed in the three months
ended September 30, 2008, upon the successful close of the Innovive acquisition.
In March 2008, we awarded RXi common stock to our directors and certain
employees and recorded the $189,000 fair value as non-cash compensation expense
which is the total for the nine-months ended September 30, 2008. There were no
comparable awards in the 2007 period.
In-Process
Research and Development
On
September 19, 2008, the Company completed the acquisition of Innovive. For a
more detailed description of the acquisition, see Note 11 of the Notes to
Condensed Consolidated Financial Statements included in this Quarterly Report.
The initial merger consideration, together with direct costs incurred to effect
the merger, were allocated to the individual assets acquired, including
identifiable intangible assets and liabilities assumed based on the relative
fair value. CytRx recorded a one-time expense of approximately $8.0 million
for acquired in-process research and development. No goodwill was
recorded.
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 $0.2 million and $1.0 million for the three-month and nine-month
periods ended September 30, 2008, respectively, compared to $0.9 million and
$1.9 million for the same periods 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 and for the second and third
quarters of 2008, we did not record a minority interest in the losses of RXi, as
RXi’s 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 $77,000 and $255,000 of minority interest
in losses of RXi against our net loss for the three-month and nine-month periods
ended September 30, 2007, respectively.
Income
Taxes
On March
11, 2008, we 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 federal income taxes in connection with the distribution;
however, we have recorded a tax provision of $260,000 related to the estimated
federal Alternative Minimum Tax resulting from this gain. We expect to pay
approximately $569,000 of regular state income tax because California recently
suspended the utilization of tax loss carryforwards for 2008 and
2009.
Our
exposure to market risk is limited primarily to interest income sensitivity,
which is affected by changes in the general level of United States interest
rates, particularly because a significant portion of our investments are in
short-term debt securities issued by the U.S. government and institutional money
market funds. The primary objective of our investment activities is to preserve
principal. Due to the nature of our short-term investments, we believe that we
are not subject to any material market risk exposure. We do not have any
derivative financial instruments or foreign currency instruments. If interest
rates had varied by 10% in the three-month period ended September 30, 2008, it
would not have had a material effect on our results of operations or cash flows
for that period.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in
Securities Exchange Act Rule 13a-15(e)) as of the end of the quarterly period
covered by this Quarterly Report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
Changes
in Controls over Financial Reporting
During
the quarterly period covered by this Quarterly Report, we continued to make
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 and our Quarterly Report on Form 10-Q for the quarter ended June 30,
2008. 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 continued to enhance
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
continually seek to assure that all of our controls and procedures are adequate
and effective. Any failure to implement and maintain improvements in the
controls over our financial reporting could cause us to fail to meet our
reporting obligations under the SEC’s rules and regulations. Any failure to
improve our internal controls to address the weaknesses we have identified could
also cause investors to lose confidence in our reported financial information,
which could have a negative impact on the trading price of our common
stock.
PART
II — OTHER INFORMATION
We
are subject to a number of risks and uncertainties, including the risks and
uncertainties discussed below, as well as those described in our Annual Report
on Form 10-K for the year ended December 31, 2007 or reflected in any subsequent
filings we make with the SEC. If any of these risks or uncertainties actually
occur, our business, results of operations, financial condition and prospects
could be materially and adversely affected. In that case, the trading price of
our common stock could decline. These risks and uncertainties are not the only
ones facing us. Additional risks and uncertainties not presently known to us, or
that we currently perceive as immaterial, also may adversely affect
us.
Risks
Associated with the Acquisition of Innovive
Our
planned clinical programs for the Innovive product candidates are subject to the
risks inherent in our business.
The
product candidates we acquired as part of the Innovive acquisition, and our
planned clinical programs for these products, are subject to all of the risks
and uncertainties associated with our business, generally, as set forth in our
Annual Report on Form 10-K for the year ended December 31,
2007.
We
incurred significant transaction costs and will incur increased operating
expenses as a result of the acquisition, which will adversely affect our
available cash and could adversely affect our stock price.
We
incurred significant transaction costs in connection with the acquisition of
Innovive, and expect to incur additional operating costs associated with our
conduct of Innovive’s former business and operations. These
additional costs will result in reductions in our cash available to our other
programs and increased losses to us in the immediate future, which could have an
adverse effect on the market price of our common stock.
We
may not achieve the benefits we expect from the acquisition, which may have a
material adverse effect on us.
We
acquired Innovive with the expectation that the acquisition would benefit
us. Among other things, we believe that our ongoing development of
Innovive’s existing product candidates may accelerate the time to market of our
first product candidate. If we are not successful in achieving this
or other expected benefits of the acquisition, our future prospects may be
adversely affected.
Risks
Associated with Our Common Stock and Business
Our
common stock may be delisted from The Nasdaq Capital Market if the stock price
does not increase.
We
received notice from The Nasdaq Stock Market on May 28, 2008 that we were not in
compliance with the minimum $1.00 closing bid price required by Nasdaq
Marketplace Rule 4310(c)(4) and, in accordance with Marketplace Rule
4310(c)(8)(D), could regain compliance if, by November 24, 2008, our common
stock closes at or above $1.00 for 10 consecutive business days and we otherwise
meet the Nasdaq's continuing listing requirements. On
October 16, 2008, Nasdaq announced that it had suspended until
January 16, 2009 the enforcement of its rules requiring a minimum $1.00
closing bid price. As a result, we will have until March 2, 2009 to
regain compliance with this rule, assuming no further actions by Nasdaq in this
regard. In its original notice to us on May 28, 2008, Nasdaq
also informed us that, if we did not regain compliance by the stated deadline,
we would be granted up to an additional 180 calendar days to regain full
compliance while continuing to trade during such time if we meet the Nasdaq's
initial listing requirements other than the minimum bid price
rule. If we eventually fail to comply with this condition for
continued listing and our common stock is delisted from The Nasdaq Small Capital
Market, there is no assurance that our common stock will be listed for trading
or quoted elsewhere and an active trading market for our common stock may cease
to exist, which would materially and adversely impact the market value of our
common stock.
We
must depend on financing to sustain our operations, because we have no source of
significant recurring revenue.
Developing
products and conducting clinical trials require substantial amounts of capital.
To date, 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. We will need to raise
additional capital to, among other things:
|
·
|
fund
our clinical trials and pursue regulatory approval of our existing product
candidates, including those acquired as part of our recent acquisition of
Innovive, and
possible future product candidates;
|
|
·
|
expand
our research and development
activities;
|
|
·
|
finance
our general and administrative
expenses;
|
|
·
|
acquire
or license other technologies;
|
|
·
|
prepare,
file, prosecute, maintain, enforce and defend our patent and other
proprietary rights; and
|
|
·
|
develop
and implement sales, marketing and distribution capabilities to
commercialize any product for which we obtain marketing approval and which
we choose to market itself.
|
Our
revenues were approximately $7.5 million, $2.1 million and $0.2 million,
respectively, for years ended December 31, 2007, 2006 and 2005, and
approximately $0.9 million and $4.8 million for the three and nine months ended
September 30, 2008, respectively. Our revenues for the years
ended December 31, 2007 and 2006 and the three and nine months ended September
30, 2007 included approximately $7.2 million, $1.9 million, $2.0 million and
$6.0 million, respectively, of deferred revenue recognized from our sale in
August 2006 of a one percent royalty interest in worldwide sales of arimoclomol
for the treatment of ALS. The product candidates we acquired from
Innovive also have generated no revenues to date. We will have no
significant recurring revenue unless we are able to commercialize one or more of
our product candidates in development, which may require us to first enter into
license or other strategic arrangements with third parties.
At
September 30, 2008, the Company had cash and cash equivalents of
approximately $30.9 million and held 6,268,881 shares of restricted common stock
of RXi Pharmaceuticals Corporation with a market value of $51.2 million based
upon the closing price of the RXi common stock on that date. The
Company currently projects expenditures for the remainder of 2008 and the first
nine months of 2009 of approximately $27.0 million, which amount includes the
integration of the former operations of Innovive. These projections
include approximately $7.0 million of direct expenditures for our ongoing
clinical trial for tamibarotene as a third-line treatment for APL, approximately
$3.9 million of direct expenditures for our planned Phase II clinical trial of
iroxanadine for diabetic complications and related studies, approximately $1.1
million of direct expenditures for our ongoing clinical program for INNO-406 for
chronic myeloid leukemia, approximately $0.4 million of direct expenditures for
our ongoing program for INNO-206 for an oncology indication to be determined,
approximately $0.6 million of direct expenditures for our programs for
arimoclomol for ALS and stroke recovery and related studies, approximately $1.6
million for operating our clinical programs, approximately $5.2 million for the
operations of our research laboratory in San Diego, California, and
approximately $7.3 million for other general and administrative expenses. Our
projected expenditures are based on our plan to conduct additional animal
toxicology studies on arimoclomol as part of our efforts to develop, or seek one
or more partnerships related to the development of, that drug candidate for ALS,
stroke recovery or other indications. Those animal toxicology studies are
expected to take approximately one year. These projected expenditures are based
upon numerous other assumptions and subject to many uncertainties, including our
ability to successfully integrate Innovive’s clinical development programs, and
our actual expenditures may be significantly different from these
projections.
If we
obtain marketing approval as currently planned and successfully commercialize
our current product candidates, we anticipate it will take a minimum of
three years, and
possibly longer, for us to generate significant recurring revenue, and we will
be dependent on future financing and possible asset sales until such time, if
ever, as we can generate significant recurring revenue. We have no commitments
from third parties to provide us with any additional financing, and we may not
be able to obtain future financing on favorable terms, or at all. If we are
unable to raise additional funding from outside sources, we may have to sell
some or all of our assets, including our RXi shares. If we fail to
obtain sufficient funding when needed, we may be forced to delay or reduce the
scope of or eliminate some portion or all of our development programs or
clinical trials, license to other companies our product candidates or
technologies that we would prefer to develop and commercialize ourselves, or
seek to merge with or be acquired by another company.
The
FDA has placed a clinical hold on CytRx’s Phase IIb efficacy trial of
arimoclomol, which will delay the trial and could lead to a requirement that
CytRx conduct additional toxicology studies or alter the trial
design.
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. We received a formal
determination letter from the FDA in July 2008. In light of the
ongoing clinical hold, we recently announced plans to conduct additional
preclinical toxicology studies of arimoclomol, which are expected to take up to
one year to complete, before any possible resumption or initiation of clinical
trials of arimoclomol. We cannot predict the outcome of those additional animal
toxicology studies. Depending on the outcome, we may be:
|
·
|
required
to conduct additional toxicology or human studies prior to or in parallel
with the resumption of clinical development of arimoclomol, which would
result in substantial additional expenses and possible significant delays
in completing that development;
|
|
·
|
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 considerations;
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.
|
|
·
|
Our
development of arimoclomol for stroke recovery is subject to similar
risks.
|
Risk
Associated with Our Investment in RXi
Our
ownership interest in RXi may be diluted.
Under our
agreement with RXi and RXi’s other founding stockholders, with some exceptions,
we will have preemptive rights to acquire a portion of any new securities sold
or issued by RXi in the future so as to maintain CytRx’s percentage ownership of
RXi. Depending upon the terms and provisions of any proposed sale of new
securities by RXi, our financial condition and other factors, we may be
unwilling or unable to exercise our preemptive rights. We agreed to
waive our preemptive rights in connection with a private placement financing
with RXi in June of this year, which resulted in a reduction in our percentage
ownership of RXi from approximately 49% to approximately 45%. If RXi raises
funds through further issuances of additional equity securities in which we do
not participate, our percentage ownership interest in RXi may be diluted
further.
We
may elect to sell our RXi shares, and may not be able to do so on attractive
terms.
As of
November 3, 2008, we owned 6,268,881 shares of common stock of RXi, which had a
market value of approximately $57.7 million based upon the market price of RXi
common stock as reported on The Nasdaq Capital Market on that date.
We may
desire to sell our RXi shares in the future in order to raise funds for the
conduct of our business and operations. If it becomes necessary or
advisable for any reason for us to sell our RXi shares, we would have to do so
pursuant to Rule 144 under the Securities Act of 1933, which includes manner of
sale and volume limitations applicable to sales by affiliates such as us, or
negotiate private sales with third parties. We may be unable to sell
or dispose of our RXi shares at attractive prices, if at all. In addition, any
sale or other disposition of RXi shares by us, or the possibility of such sale
or disposition, could adversely affect the market price of our RXi
shares.
The
exhibits listed in the accompanying Index to Exhibits are filed as part of this
Quarterly Report and incorporated herein by reference.
Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
| |
CytRx
Corporation |
|
| |
|
|
|
|
Date:
November 6, 2008
|
By:
|
/s/ MITCHELL
K. FOGELMAN |
|
| |
|
Mitchell
K. Fogelman |
|
| |
|
Chief
Financial Officer |
|
| |
|
|
|
|
Exhibit
Number
|
|
Description
|
|
2.1
|
(a)
|
Agreement
and Plan of Merger, dated as of June 6, 2008, among CytRx
Corporation, CytRx Merger Subsidiary, Inc., Innovive Pharmaceuticals,
Inc., and Steven Kelly
|
|
10.1
|
(a)
|
Loan
and Security Agreement, dated as of June 6, 2008, between CytRx
Corporation and Innovive Pharmaceuticals, Inc.
|
|
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
|
__________________
|
(a)
|
Incorporated
by reference to the CytRx Corporation Current Report on Form 8-K filed on
June 24, 2008.
|