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CYTR > SEC Filings for CYTR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for CYTRX CORP


9-Nov-2012

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

From time to time, we make oral and written statements that may constitute "forward-looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We desire to take advantage of the "safe harbor" provisions in the Private Securities Litigation Reform Act of 1995 for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Quarterly Report, as well as those made in our other filings with the SEC.

All statements in this Quarterly Report, including statements in this section, other than statements of historical fact are forward-looking statements for purposes of these provisions, including statements of our current views with respect to the recent developments regarding our business strategy, business plan and research and development activities, our future financial results, and other future events. These statements include forward-looking statements both with respect to us, specifically, and the biotechnology industry, in general. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential" or "could" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements.

All forward-looking statements involve inherent risks and uncertainties, and there are or will be important factors that could cause actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those factors discussed in this section and under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, 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, specializing in oncology. Our oncology pipeline currently consists of two programs in clinical development for cancer indications: aldoxorubicin (formerly known as INNO-206) and tamibarotene. With our tumor-targeted doxorubicin conjugate aldoxorubicin, we have initiated an international Phase 2b clinical trial as a treatment for soft tissue sarcomas, have completed our Phase 1b/2 clinical trial primarily in the same indication, and recently initiated a Phase 1b pharmacokinetics clinical trial in patients with metastatic solid tumors, a Phase 2 trial for patients with advanced pancreatic ductal adenocarcinomas and a Phase 1b study of aldoxorubicin in combination with doxorubicin in patients with advanced solid tumors. We held a positive meeting with the Food and Drug Administration ("FDA") to discuss a potential Phase 3 pivotal trial as a therapy for patients with soft tissue sarcomas whose tumors have progressed following treatment with chemotherapy, and are planning to submit a special protocol assessment in the fourth quarter of 2012 with respect to that potential trial. Tamibarotene is being testing in a double-blind, placebo-controlled, international Phase 2b clinical trial in patients with non-small-cell lung cancer, and is in a Phase 2 clinical trial as a treatment for acute promyelocytic leukemia (APL). We also have completed our evaluation of a third drug candidate, bafetinib, in the ENABLE Phase 2 clinical trial in high-risk B-cell chronic lymphocytic leukemia (B-CLL), and plan to seek a partner for further development of bafetinib.


Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, 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 for the year ended December 31, 2011. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our 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 Financial Accounting Standards Board ("FASB") Accounting Codification Standards ("ASC") ASC 605-25, Revenue Recognition - Multiple-Element Arrangements ("ASC 605-25"). 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.

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 7 of the Notes to Condensed Financial Statements included in this Quarterly Report. We have adopted the provisions of ASC 718, Compensation-Stock Compensation ("ASC 718"), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees.

For stock options and stock warrants paid in consideration of services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50, Equity-Based Payments to Non-Employees ("ASC 505-50").

Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these options, as calculated using the Black-Scholes option-pricing model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options or warrants are fully vested.

The fair value of each 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 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.

Net Income (Loss) per Share

Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding. Diluted net income (loss) per common share computed using the weighted-average number of common share and common share equivalents outstanding. Potentially dilutive stock options and warrants to purchase 9.1 million shares and 9.6 million shares, respectively, for the three-month and nine-month periods ended September 30, 2012, and 9.1 million shares and 2.7 million shares, respectively, for the three-month and nine-month periods ended September 30, 2011, respectively, were excluded from the computation of diluted net income (loss) per share, because the effect would be anti-dilutive.

Warrant Liabilities

Liabilities measured at market value on a recurring basis include warrant liabilities resulting from our July 2009 and August 2011 equity financings. In accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock ("ASC 815-40"), the warrant liabilities are being marked to market each quarter-end until they are completely settled. The warrants are valued using the Black-Scholes method, using assumptions consistent with our application of ASC 505-50. The gain or loss resulting from the marked to market calculation is shown on the statements of operations as a gain or loss on warrant derivative liability.

Investment in Adventrx Pharmaceuticals

On April 8, 2011, ADVENTRX Pharmaceuticals completed its acquisition of SynthRx, Inc., in which we held a 19.1% interest. In the transaction, we received approximately 126,000 shares of common stock of ADVENTRX, which we sold on October 11, 2011 for approximately $112,200. In April 2012, we received an additional 37,000 shares of common stock of ADVENTRX that had been held in an escrow established in connection with the acquisition, which shares were substantially sold for approximately $18,000. If all of the development milestones under the acquisition agreement were to be achieved, we also would be entitled to receive up to 2.9 million additional ADVENTRX shares.


Liquidity and Capital Resources

We have relied primarily upon proceeds from sales of our equity securities and the exercise of options and warrants, and to a much lesser extent upon payments from our strategic partners and licensees, to generate funds needed to finance our business and operations.

At September 30, 2012, we had cash and cash equivalents of approximately $12.5 million and short term investments of approximately $10.0 million. Management believes that our current cash on hand, together with our short-term investments, and approximately $21.4 million of net proceeds received from our underwritten public offering on October 23, 2012, for a total of approximately $43.9 million, will be sufficient to fund our operations for the foreseeable future. The estimate is based, in part, upon our currently projected expenditures for the remainder of 2012 and the first nine months of 2013 of approximately $20.0 million, which includes approximately $7.8 million for our clinical programs for aldoxorubicin, approximately $3.0 million for our clinical program for tamibarotene, approximately $0.2 million for our clinical programs for bafetinib, approximately $2.1 million for general operation of our clinical programs, and approximately $6.9 million for other general and administrative expenses. The projected expenditures are also based upon numerous other assumptions and subject to many uncertainties, and actual expenditures may be significantly different from these projections.

If we obtain marketing approval and successfully commercialize one or more of our product candidates, we anticipate it will take several years and possibly longer, for us to generate significant recurring revenue. We will be dependent on future financing and possible strategic partnerships or asset sales until such time, if ever, as we can generate significant recurring revenue. We have no commitments from third parties to provide us with any additional financing, and we may not be able to obtain future financing on favorable terms, or at all. If we fail to obtain sufficient funding when needed, we may be forced to delay, scale back or eliminate all or a portion of our development programs or clinical trials, seek to license to other companies our product candidates or technologies that we would prefer to develop and commercialize ourselves, or seek to sell some or all of our assets or merge with or be acquired by another company.

We recorded a net income in the quarter ended September 30, 2012 of $1.6 million as compared to a net loss of $0.6 million in the quarter ended September 30, 2011, or an increase of $2.2 million, due principally to a $6.4 million gain on warrant derivative liability attributable primarily to the warrants issued in connection with the August 2011 equity financing, as compared to a $4.3 million gain on warrant derivative liability in the comparative period ended September 30, 2011. There were no appreciable changes in our research and development or our general and administrative expenditures in the current quarter as compared to the quarter ended September 30, 2011.

In the nine-month period ended September 30, 2012, we received $7.9 million of cash from investing activities, as compared to $16.4 million of cash from investing activities in the comparable 2011 period. In the nine-month period ended September 30, 2011, we received $6.9 million from the sale of shares of RXi Pharmaceuticals Corporation (now known at Galena Biopharma, Inc.). There were no such sales in the comparative 2012 period. We received net proceeds from the sale of marketable securities of $8.1 million in the nine-month period ended September 30, 2012; in the comparable 2011 period, net proceeds from the sale of marketable securities were $9.5 million. We utilized approximately $0.1 million for capital expenditures in the nine-month period ended September 30, 2012 as compared to approximately $51,000 in the comparable 2011 period. We do not expect any significant capital spending during the next 12 months.

We received $7,200 from the exercise of stock options in the nine-month period ended September 30, 2012; in the nine-month period ended September 30, 2011, we realized net proceeds of approximately $18.9 million from an underwritten public offering. We continue to evaluate potential future sources of capital, as we do not currently have commitments from any third parties to provide us with additional capital. The results of our technology licensing efforts and the actual proceeds of any fund-raising activities will determine our ongoing ability to operate as a going concern. Our ability to obtain future financings through joint ventures, product licensing arrangements, royalty sales, equity financings, 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 financial information may not necessarily be indicative of our future operating results or future financial condition.

As a development company that is primarily engaged in research and development activities, we expect to incur significant losses and negative cash flow from operating activities for the foreseeable future. There can be no assurance that we will be able to generate revenues from our product candidates and become profitable. Even if we become profitable, we may not be able to sustain that profitability.


Results of Operations

We recorded net income of approximately $1.6 million and a net loss of approximately $21.8 million for the three-month and nine-month periods ended September 30, 2012, respectively, as compared to a net loss of approximately $0.6 million and $10.0 million for the three-month and nine-month periods ended September 30, 2011, respectively. The increase in our net income during the current three-month period resulted from a gain on warrant derivative liability of $6.4 million associated with marking to market each quarter-end our warrant derivative liabilities until they are completely settled, as compared to a similar gain of $4.3 million in the comparative 2011 quarter.

We recognized no service revenue for the three-month and nine-month periods ended September 30, 2012, and licensing revenue of $0 and $150,000 for the three-month and nine-month periods ended September 30, 2011, respectively. All future licensing fees under our current licensing agreements are dependent upon successful development milestones being achieved by the licensor. During 2012, we do not anticipate receiving any significant licensing fees.

Research and Development

                                                Three-Month Period Ended            Nine-Month Period Ended
                                                      September 30,                      September 30,
                                                 2012               2011             2012               2011
                                                     (In thousands)                      (In thousands)
Research and development expenses            $      3,052       $      3,126     $       9,937       $    9,616
Non-cash research and development expenses              -                 10                 -               52
Employee stock option expense                          96                 81               289              252
Depreciation and amortization                          10                  3                20                7
                                             $      3,158       $      3,220     $      10,246       $    9,927

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. Our research and development expenses, excluding stock option expense, non-cash expenses, and depreciation expense, were $3.1 million and $9.9 million for the three-month and nine-month periods ended September 30, 2012, respectively, and $3.1 million and $9.6 million, respectively, for the same periods in 2011.

Research and development expenses incurred during the three-month and nine-month periods ended September 30, 2012 relate to our various development programs. In the three-month period ended September 30, 2012, the development expenses of our program for aldoxorubicin were $1.7 million, the expenses of our program for tamibarotene were $0.7 million, and the expenses of our program for bafetinib were $0.03 million. The remainder of our research and development expenses primarily related to research and development support costs.

We sometimes issue equity securities as compensation to our consultants and in connection with the acquisition of technologies. For financial statement purposes, we record these transactions based on the fair value of the securities, or of the services received, whichever can be measured more reliably. The value of non-employee options and warrants 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. We recorded $0.1 million and $0.3 million of employee stock option expense during the three-month and nine-month periods ended September 30, 2012, respectively, and $0.1 million and $0.3 million, respectively, for the same periods in 2011.

General and Administrative Expenses

                                                  Three-Month Period Ended             Nine-Month Period Ended
                                                        September 30,                       September 30,
                                                   2012               2011             2012               2011
                                                       (In thousands)                      (In thousands)
General and administrative expenses            $      1,350       $      1,525     $      4,649       $      5,029
Non-cash general and administrative expenses            178                (11 )            406                 77
Employee stock option expense                           177                203              614                744
Depreciation and amortization                            25                 22               67                 63
                                               $      1,730       $      1,739     $      5,736       $      5,913

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 $1.4 million and $4.6 million for the three-month and nine-month periods ended September 30, 2012, respectively, $1.5 million and $5.0 million, respectively, for the same periods in 2011. The professional fees in the 2011 period were higher due to the costs associated with the underwritten public offering.

Employee stock option expense relates to options granted to recruit and retain directors, officers and other employees. We recorded approximately $0.2 million and $0.6 million of employee stock option expense in the three-month and nine-month periods ended September 30, 2012, respectively, as compared to $0.2 million and $0.7 million, respectively, for the same periods in 2011. We recorded approximately $0.2 million and $0.4 million of non-employee stock option expense in the three-month and nine-month periods ended September 30, 2012, respectively, as compared to $0 and $0.1 million, respectively, for the same periods in 2011.

Depreciation and Amortization

Depreciation expense reflects the depreciation of our equipment and furnishings.


Interest Income

Interest income was $25,000 and $88,000 for the three-month and nine-month periods ended September 30, 2012, respectively, as compared to $56,000 and $0.2 million, respectively, for the same periods in 2011. This was as a result of lower cash balances in the current 2012 periods, as well as a lower rate of return on our cash investments in 2012.

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