UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   CYTR   OTC Market

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] 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:

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [  ] (Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes [  ] No [X]

 

Number of shares of CytRx Corporation common stock, $0.001 par value, outstanding as of August 1, 2019: 33,637,501 shares.

 

 

 

 
 

 

CYTRX CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

   Page
PART I. — FINANCIAL INFORMATION 3
Item 1. Consolidated Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
   
PART II. — OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 6. Exhibits 20
   
SIGNATURES 21
   
INDEX TO EXHIBITS 22

 

2
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. — Condensed Financial Statements

 

CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30, 2019     December 31, 2018  
    (Unaudited)        
ASSETS            
Current assets:                
Cash and cash equivalents   $ 19,377,824     $ 21,373,273  
Receivables     9,383       148,527  
Prepaid expenses and other current assets     465,019       913,162  
Current assets held for sale     49,436       81,182  
Total current assets     19,901,662       22,516,144  
Equipment and furnishings, net     28,067       44,326  
Other assets     12,649       40,642  
Non-current assets held for sale           324,853  
Total assets   $ 19,942,378     $ 22,925,965  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
Current liabilities:                
Accounts payable   $ 895,735     $ 1,234,762  
Accrued expenses and other current liabilities     937,740       726,191  
Current liabilities of discontinued operations     21,879       602,713  
Total liabilities     1,855,354       2,563,666  
                 
Commitments and contingencies                
                 
Stockholders’ equity:                
Preferred Stock, $0.01 par value, 833,334 shares authorized, including 4,167 shares of Series A Junior Participating Preferred Stock; no shares issued and outstanding            
Preferred Stock, $1,000 stated value, 650 shares authorized, no shares issued and outstanding            
Common stock, $0.001 par value, 41,666,667 shares authorized; 33,637,501 shares issued and outstanding at June 30, 2019 and December 31, 2018     33,637       33,637  
Additional paid-in capital     477,617,955       477,192,747  
Accumulated deficit     (459,564,568 )     (456,864,085 )
Total stockholders’ equity     18,087,024       20,362,299  
Total liabilities and stockholders’ equity   $ 19,942,378     $ 22,925,965  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

 

CYTRX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2019     2018     2019     2018  
Revenue:                                
Licensing revenue   $     $     $     $  
                                 
Expenses:                                
Research and development     580       (41,989 )     1,056       614,277  
General and administrative     1,531,073       1,689,553       3,268,223       4,153,112  
      1,531,653       1,647,564       3,269,279       4,767,389  
                                 
Loss before other income (expense)     (1,531,653 )     (1,647,564 )     (3,269,279 )     (4,767,389 )
                                 
Other income (loss):                                
Interest income     104,095       92,975       192,405       175,909  
Interest expense           (659,860 )           (1,352,647 )
Other income (loss), net     14,968       521       (2,321 )     1,083  
Gain on warrant derivative liabilities           73,613             527,025  
                                 
Net loss from continuing operations   (1,412,590 )   (2,140,315 )   (3,079,195 )   (5,416,019 )
                                 
Gain (loss) from discontinued operations     138,095       (869,273 )     378,712       (1,669,143 )
                                 
Net loss   $ (1,274,495 )   $ (3,009,588 )   $ (2,700,483 )   $ (7,085,162 )
                                 
Basic and diluted loss per share                                
Continuing operations   $ (0.04 )   $ (0.07 )   $ (0.09 )   $ (0.19 )
Discontinued operations   $     $ (0.03 )   $ 0.01     $ (0.06 )
Total basic and diluted loss per share   $ (0.04 )   $ (0.10 )   $ (0.08 )   $ (0.25 )
                                 
Basic and diluted weighted-average shares outstanding     33,249,904       30,283,814       33,249,904       28,845,650  

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4
 

 

CYTRX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Six Months Ended June 30,  
    2019     2018  
Cash flows from operating activities:                
Net loss from continuing operations   $ (3,079,195 )   $ (5,416,021 )
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:                
Depreciation and amortization     10,828       15,783  
Loss on retirement of fixed assets     5,432        
Fair value adjustment on warrant liabilities           (527,025 )
Amortization of loan cost and discount           883,153  
Stock-based compensation expense     427,880       934,510  
Changes in assets and liabilities:                
Receivables     139,144       1,359,740  
Prepaid expenses and other current assets     448,143       1,698,378  
Other assets     27,993        
Accounts payable     (339,027 )     (2,536,462 )
Accrued expenses and other current liabilities     211,549       (578,272 )
Net cash used in operating activities from continuing operations     (2,147,253 )     (4,166,216 )
Net cash used in operating activities from discontinued operations     (348,338 )     (1,306,534 )
Net cash used in operating activities     (2,495,591 )     (5,472,750 )
                 
Cash flows from investing activities:                
(Purchase) Sale of fixed assets held for sale     500,142       (9,194 )
Net cash provided by (used in) investing activities from discontinued operations     500,142       (9,194 )
                 
Cash flows from financing activities:                
Proceeds from public offering           6,512,151  
Term loan principal repayment           (2,102,341 )
Net cash provided by financing activities           4,409,810  
                 
Net decrease in cash and cash equivalents     (1,995,449 )     (1,072,134 )
Cash and cash equivalents at beginning of period     21,373,273       37,497,691  
Cash and cash equivalents at end of period   $ 19,377,824     $ 36,425,557  
                 
Supplemental disclosure of Cash Flow Information:                
Cash paid during the period for interest   $     $ 487,328  
                 
Cash paid for income taxes   $ 800     $ 800  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

CYTRX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Unaudited)

 

    Series B Preferred Shares Issued     Common Shares Issued     Preferred Stock Amount     Common Stock Amount    

Additional

Paid-in

Capital

    Accumulated Deficit     Total  
Balance at January 1, 2018      —       28,037,501             $ 28,037     $ 468,969,445     $ (450,852,427 )   $ 18,145,055  
Cumulative affect of adopting ASC 606 Adoption                                   6,701,950       6,701,950  
Issuance of stock options/restricted stock and warrants for compensation and services                                     481,311               481,311  
Net loss                                             (4,075,574 )     (4,075,574 )
Balance at March 31, 2018             28,037,501               28,037       469,450,756       (448,226,051 )     21,252,742  
Stock issued in connection with a public offering             5,600,000               5,600       6,506,551               6,512,151  
Issuance of stock options/restricted stock and warrants for compensation and services                             453,199             453,199  
Net loss                                             (3,009,588 )     (3,009,588 )
                                                         
Balance at June 30, 2018           33,637,501             $ 33,637     $ 476,410,506     $ (451,235,639 )   $ 25,208,504  
                                                         
Balance at January 1, 2019           33,637,501             $ 33,637     $ 477,192,747     $ (456,864,085 )   $ 20,362,299  
Issuance of stock options/warrants for compensation and services                             210,502             210,502  
Net loss                                             (1,425,495 )     (1,425,495 )
Balance at March 31, 2019           33,637,501             $ 33,637     $ 477,403,249     $ (458,290,073 )   $ 19,146,813  
Issuance of stock options/restricted stock for compensation and services                                     214,706               214,706  
Net loss                                             (1,274,495 )     (1,274,905 )
Balance at June 30, 2019             33,637,501             $ 33,637     $ 477,617,955     $ (459,564,568 )   $ 18,087,024  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6
 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2019
(Unaudited)

 

1. Description of Company and Basis of Presentation

 

CytRx Corporation (“CytRx”) is a biopharmaceutical research and development company specializing in oncology and rare diseases. The Company’s focus has been on the discovery, research and clinical development of novel anti-cancer drug candidates that employ novel linker technologies to enhance the accumulation and release of cytotoxic anti-cancer agents at the tumor. During 2017, CytRx’s discovery laboratory, located in Freiburg, Germany, synthesized and tested over 75 rationally designed drug conjugates with highly potent payloads, culminating in the creation of two distinct classes of compounds. Four lead candidates (LADR-7 through LADR-10) were selected based on in vitro and animal preclinical studies, stability, and manufacturing feasibility. In 2018, additional animal efficacy and toxicology testing of these lead candidates was conducted. In addition, a novel albumin companion diagnostic, ACDx™, was developed to identify patients with cancer who are most likely to benefit from treatment with these drug candidates.

 

On June 1, 2018, CytRx launched Centurion BioPharma Corporation (“Centurion”), a private wholly owned subsidiary, and transferred all of its assets, liabilities and personnel associated with the laboratory operations in Freiburg, Germany. In connection with said transfer, the Company and Centurion entered into a Management Services Agreement whereby the Company agreed to render advisory, consulting, financial and administrative services to Centurion, for which Centurion shall reimburse the Company for the cost of such services plus a 5% service charge. The Management Services Agreement may be terminated by either party at any time. Centurion is focused on the development of personalized medicine for solid tumor treatment. On December 21, 2018, CytRx announced that Centurion had concluded the pre-clinical phase of development for its four LADR drug candidates, and for its albumin companion diagnostic (ACDx™). As a result of completing this work, operations taking place at the pre-clinical laboratory in Freiburg, Germany would no longer be needed and, accordingly, the lab was closed at the end of January 2019.

 

LADR Drug Discovery Platform and Centurion

 

Centurion’s LADR™ (Linker Activated Drug Release) technology platform is a discovery engine combining expertise in linker chemistry and albumin biology to create a pipeline of anti-cancer molecules that will avoid unacceptable systemic toxicity while delivering highly potent agents directly to the tumor. Centurion has created a “toolbox” of linker technologies that are designed to significantly increase the therapeutic index of ultra-high potency drugs (10-1,000 times more potent than traditional chemotherapies) by controlling the release of the drug payloads and improving drug-like properties.

 

Centurion’s efforts were focused on two classes of ultra-high potency albumin-binding drug conjugates. These drug conjugates combine the proprietary LADR™ linkers with novel derivatives of the auristatin and maytansinoid drug classes. These payloads historically have required a targeting antibody for successful administration to humans. These drug conjugates eliminate the need for a targeting antibody and provide a small molecule therapeutic option with potential broader applicability.

 

Centurion’s novel companion diagnostic, ACDx™ (albumin companion diagnostic), was developed to identify patients with cancer who are most likely to benefit from treatment with the four LADR lead assets.

 

7
 

 

CytRx and Centurion have been working on identifying partnership opportunities for LADR™ ultra-high potency drug conjugates and its albumin companion diagnostic. However, no partnerships or any source of financing has become available after eighteen months of effort.

 

Aldoxorubicin

 

Until July 2017, the Company was focused on the research and clinical development of aldoxorubicin, their modified version of the widely-used chemotherapeutic agent, doxorubicin. Aldoxorubicin combines the chemotherapeutic agent doxorubicin with a novel linker-molecule that binds specifically to albumin in the blood to allow for delivery of higher amounts of doxorubicin (3½ to 4 times) without several of the major dose-limiting toxicities seen with administration of doxorubicin alone.

 

On July 27, 2017, the Company entered into an exclusive worldwide license with NantCell, Inc. (“NantCell”), granting to NantCell the exclusive rights to develop, manufacture and commercialize aldoxorubicin in all indications, and our company is no longer directly working on development of aldoxorubicin. As part of the license, NantCell made a strategic investment of $13 million in CytRx common stock at $6.60 per share (adjusted to reflect our 2017 reverse stock split), a premium of 92% to the market price on that date. The Company also issued NantCell a warrant to purchase up to 500,000 shares of common stock at $6.60, which expired on January 26, 2019. The Company is entitled to receive up to an aggregate of $343 million in potential milestone payments, contingent upon achievement of certain regulatory approvals and commercial milestones. The Company is also entitled to receive ascending double-digit royalties for net sales for soft tissue sarcomas and mid to high single digit royalties for other indications.

 

Molecular Chaperone Assets

 

In 2011, CytRx sold the rights to arimoclomol and iroxanadine, based on molecular chaperone regulation technology, to Orphazyme A/S (formerly Orphazyme ApS) in exchange for a one-time, upfront payment and the right to receive up to a total of $120 million (USD) in milestone payments upon the achievement of certain pre-specified regulatory and business milestones, as well as royalty payments based on a specified percentage of any net sales of products derived from arimoclomol. Orphazyme is testing arimoclomol in three additional indications beyond ALS, including Niemann-Pick disease Type C (NPC), Gaucher disease and sporadic Inclusion Body Myositis (sIBM). CytRx received a milestone payment of $250,000 in September 2018. Orphazyme has highlighted positive Phase2/3 clinical trial data in patients with NPC and has announced they will file with the U.S. Food and Drug Administration (FDA) and European Medicines Agency (EMA) in the first half of 2020. In such event, CytRx will be entitled to a milestone payment of $4 million upon EMA approval and $6 million upon FDA approval, along with royalties and potential additional milestones.

 

Current Business Strategy

 

The Company is investigating new opportunities and lines of business. For this reason and others, including the closure of the lab, its operating expenses are expected to be significantly lower in the near future. Therefore, period to period comparisons should not be relied upon as predictive of the results in future periods.

 

The accompanying condensed consolidated financial statements at June 30, 2019 and for the three-month and six-month periods ended June 30, 2019 and 2018, respectively, 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. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2018 have been derived from our audited financial statements as of that date.

 

The consolidated financial statements included herein have been prepared by us 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 consolidated financial statements should be read in conjunction with our audited financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2018. The Company’s operating results will fluctuate for the foreseeable future. Therefore, prior period results should not be relied upon as predictive of the results in future periods.

 

8
 

 

2. Foreign Currency Remeasurement

 

The U.S. dollar has been determined to be the functional currency for the net assets of our German laboratory facilty. The transactions are recorded in the local currencies and are remeasured at each reporting date using the historical rates for nonmonetary assets and liabilities and current exchange rates for monetary assets and liabilities at the balance sheet date. Exchange gains and losses from the remeasurement of monetary assets and liabilities are recognized in other income (loss). The Company recognized a gain of approximately $8,200 and $6,500, respectively, for the three-month and six-month periods ended June 30, 2019 and a loss of approximately $8,700 and $8,400, respectively, for the three and six-month periods ended June 30, 2018, respectively. The Company does not engage in currency hedging transactions.

 

3. Recently Adopted Accounting Pronouncement

 

On January 1, 2019, CytRx adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use (“ROU”) assets and lease liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount , timing, and uncertainty of cash flows arising from leases. We elected the available practical expedients on adoption. Adoption of the new standard resulted in total lease liabilities of $310,000 and ROU assets of $290,000 as of January 1, 2019. At June 30, 2019, the total lease liabilities were $209,000 and the ROU assets were $196,000.

 

On January 1, 2018 CytRx adopted ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The cumulative effect of initially applying ASC 606 was an adjustment to decrease the opening balance of Accumulated Deficit by $6.7 million as of January 1, 2018.

 

The guidance provides for a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

 

Under the new standard the NantCell Licensing Agreement, which was determined to be a functional license agreement, as the underlying intellectual property had standalone functionality, was recognizable in 2017 when NantCell obtained the right to use the intellectual property. The subsequent Reimbursement Agreement was determined to be a contract modification that introduced variable contra revenue for the Company’s reimbursement obligations. In accordance with ASC 606, management estimated its obligations under the Reimbursement Agreement to be $3.2 million which is recognized as a contract liability at the time of revenue recognition. These costs were previously recognized as research and development expense in 2017 in accordance with prior accounting standards.This contract liability was reduced to $50,000 and $9,000, respectively, as of December 31, 2018 and June 30, 2019, as a result of costs incurred under the Reimbursement Agreement and is included within accrued expenses and other current liabilities on the condensed balance sheet as of June 30, 2019. Under prior revenue recognition standards, no revenue was recognized in 2017 under the NantCell Licensing Agreement as a result of revenue recognition criteria not being met, resulting in a deferred revenue balance of $6.9 million as of December 31, 2017.

 

9
 

 

4. Discontinued Operations

 

On December 21, 2018, the Company announced that its pre-clinical lab operations had successfully completed its objectives – namely, it has developed four lead compounds, LADR 7, LADR-8, LADR-9 and LADR 10 along with a companion diagnostic (ACDx). Accordingly, the Company terminated the contracts of all its employees at this location.

 

The Company terminated its lease in Freiburg Germany on April 30, 2019 with no penalty. The Company sold its analytical equipment in March 2019 and wrote down these assets by $7,000. On April 30, 2019 the Company also sold its German office furniture and German leasehold improvements for $0.3 million, realizing a gain on sale of $0.2 million. The net book value of the assets held for sale is $0 at June 30, 2019 and $0.4 million at December 31, 2018. The results of these discontinued operations are presented separately on the Company’s Consolidated Statement of Operations.

 

    As of  
    June 30, 2019     December 31, 2018  
Current assets held for sale   $ 49,436     $ 81,182  
Equipment and furnishings, net   $     $ 313,425  
Deposit           11,401  
Non-current assets held for sale   $     $ 324,853  
                 
Accounts payable   $ 2,000     $ 323,736  
Accrued expenses and other current liabilities     19,879       278,977  
Current liabilities of discontinued operations   $ 21,879     $ 602,713  

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2019     2018     2019     2018  
Research and development   $ (1,940 )   $ 702,713     $ (172,272 )   $ 1,344,634  
Loss on impairment of equipment and furnishings                 7,100        
Employee stock option expense           29,451       (2,672 )     60,423  
Gain on sale of assets held for sale     (138,976 )             (193,791 )      
Other (income) loss     2,821       8,655       (17,077 )     8,375  
Depreciation expense           128,454             255,711  
Loss (gain) from discontinued operations   $ (138,095 )   $ 869,273     $ (378,712 )   $ 1,669,143  

 

5. Basic and Diluted Net Loss Per Common Share

 

Basic and diluted net loss per common share is 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 net loss per common share where the effect would be anti-dilutive. Common share equivalents that could potentially dilute net loss per share in the future, and which were excluded from the computation of diluted loss per share, totaled 2.6 million shares for each of the three-month and six-month periods ended June 30, 2019, and 6.4 million shares for each of the three-month and six-month periods ended June 30, 2018.

 

6. Warrant Liabilities

 

Liabilities measured at fair value on a recurring basis include warrant liabilities resulting from our equity financings. In accordance with ASC 815-40 , Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”), the warrant liabilities are recorded at fair value until they are completely settled. The warrants are valued using the Black-Scholes method, using assumptions consistent with the Company’s application of ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). The gain or loss resulting from the change in fair value is shown on the Condensed Statements of Operations as gain (loss) on warrant derivative liability. On July 20, 2018, 2,834,246 warrants classified as liabilities expired and consequently, no gain or loss was recorded in the current period ended June 30, 2019. We recognized a gain of $0.1 million and $0.5 million for the three-month and six-months periods ended June 30, 2018, respectively. The following reflects the weighted-average assumptions for each of the six-month periods indicated:

 

10
 

 

    Six Months Ended June 30,  
    2019     2018  
             
Risk-free interest rate           1.77 %
Expected dividend yield           0 %
Expected lives           0.05  
Expected volatility           50.2 %
Warrants classified as liabilities (in shares)           2,834,246  

 

Our computation of expected volatility is based on the historical daily volatility of our publicly traded stock. The dividend yield assumption of zero is based upon the fact that we have never paid cash dividends and presently have no intention to do so. The risk-free interest rate used for each warrant classified as a derivative is equal to the U.S. Treasury rates in effect at June 30 of each year presented. The expected lives are based on the remaining contractual lives of the related warrants at the valuation date.

 

7. Leases

 

The Company determines whether an arrangement is, or contains, a lease at inception. Prior to 2019, the company generally accounted for operating lease payments by charging them to expense as incurred. Beginning in 2019, operating leases that have commenced are included in other assets, other accrued expenses and other long-term liabilities in the consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the company’s obligations.

 

Because most of the company’s leases do not provide an implicit rate, the company estimates incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. The company uses the implicit rate when readily determinable. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the company will exercise that option.

 

We lease office space related primarily to the administrative activities and at June 30, 2019, the remaining term of these leases are less than 12 months. See Note 3.

 

Leases with lease terms of twelve-months or less are expensed on a straight-line basis over the lease term and are not recorded in the Condensed Consolidated Balance Sheet.

 

In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. In our application of hindsight, we evaluated the Freiburg lease and determined the term would be less than 12 months.

 

As of June 30, 2019, balance of the right-of-use assets was approximately $196,000, and balance of the total lease liabilities was approximately $209,000. The remaining term of the leases were less than 12 months and as such, balances of the right-of-use assets and lease liabilities were included in prepaid expenses and other current assets, and accrued expenses and other current liabilities, respectively, on the accompanying condensed consolidated balance sheet.

 

The components of rent expense and supplemental cash flow information related to leases for the period are as follows:

 

   

Six Months Ended

June 30, 2019

 
Lease Cost      
Operating lease cost (included in General and Administrative expenses in the Company’s unaudited condensed consolidated statements of operations)   $ 138,760  
Other information        
Cash paid for amounts included in the measurement of lease liabilities for six months ended June 30, 2019   $ 140,106  
Weighted average remaining lease term – operating leases (in years)     0.98  
Average discount rate     5.5 %

 

8 . Stock Based Compensation

 

We have a 2000 Long-Term Incentive Plan, which expired on August 6, 2010. As of June 30, 2019, there were 14,020 shares subject to outstanding stock options under this plan. No further shares are available for future grant under this plan.

 

We also have a 2008 Stock Incentive Plan under which 5 million shares of common stock are reserved for issuance. As of June 30, 2019, there were approximately 2.4 million shares subject to outstanding stock options and approximately 0.8 million shares outstanding related to restricted stock grants issued from the 2008 Plan. This plan expired on November 20, 2018 and thus no further shares are available for future grant under this plan.

 

We follow ASC 718, Compensation-Stock Compensation, 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.

 

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, 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. As a result, the amount of the future compensation expense is subject to adjustment until the common stock options are fully vested.

 

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The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock and warrants included in our Condensed Consolidated Statements of Operations:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2019     2018     2019     2018  
Research and development   $     $ 29,451     $ (2,672 )   $ 60,423  
General and administrative — employee     214,706       404,231       427,880       833,220  
Total employee stock-based compensation   $ 214,706     $ 433,682     $ 425,208     $ 893,643  
                                 
General and administrative — non-employee           19,517             40,867  
Total non-employee stock-based compensation   $     $ 19,517     $     $ 40,867  

 

No options were granted during the current six-month-period ended June 30, 2019 as compared to 1,667 stock options at an exercise price of $1.89 during the comparative June 30, 2018 period. The fair value of the stock options was estimated using the Black-Scholes option-pricing model, based on the following assumptions:

 

    Six Months Ended
June 30, 2019
    Six Months Ended
June 30, 2018
 
Risk-free interest rate           2.42 %
Expected volatility           91.6 %
Expected lives (years)           6  
Expected dividend yield           0.00 %

 

Our computation of expected volatility is based on the historical daily volatility of our publicly traded stock. We use historical information to compute expected lives. In the six-month period ended June 30, 2018, the contractual term of the options granted was ten years. The dividend yield assumption of zero is based upon the fact we have never paid cash dividends and presently have no intention to do so. The risk-free interest rate used for each grant and issuance is equal to the U.S. Treasury rates in effect at the time of the grant and issuance for instruments with a similar expected life. On January 1, 2017, the Company adopted ASU 2016-09 and made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact to the Company’s financial condition or results of operations. No amounts relating to stock-based compensation have been capitalized.

 

The Company recorded stock compensation expense on vested options of $75,410 and $148,146, respectively, for the three and six-month periods ended June 30, 2019, as compared to $294,386 and $616,581, respectively, for the three and six-month periods ended June 30, 2018.

 

As of June 30, 2019, there remained approximately $0.3 million of unrecognized compensation expense related to unvested stock options granted to current and former employees, directors, to be recognized as expense over a weighted-average period of 0.62 years. Presented below is our stock option activity:

 

    Six Months Ended June 30, 2019  
    Number of Options (Employees)     Number of Options (Non-Employees)     Total Number of Options     Weighted-Average Exercise Price  
Outstanding at January 1, 2019     2,190,835       365,000       2,555,835     $ 10.69  
Granted                     $  
Exercised, Forfeited or Expired     (178,258 )           (178,258 )   $ 9.91  
Outstanding at June 30, 2019     2,012,577       365,000       2,377,577     $ 10.74  
Options exercisable at June 30, 2019     1,816,429       365,000       2,181,429     $ 11.53  

 

The following table summarizes significant ranges of outstanding stock options under our plans at June 30, 2019:

 

Range of Exercise Prices   Total Number of Options     Weighted-Average Remaining Contractual Life (years)     Weighted-Average Exercise Price     Total Number of Options Exercisable     Weighted-Average Remaining Contractual Life (years)     Weighted-Average Exercise Price  
$0.77 - $5.00     1,123,458       8.09     $ 2.13       927,310       8.07     $ 2.16  
$5.01 – $11.00     165,834       3.45     $ 10.98       165,834       3.45     $ 10.98  
$11.01 – $15.00     623,193       5.79     $ 13.89       623,193       5.79     $ 13.89  
$15.01 – $48.30     465,092       4.18     $ 27.25       465,092       4.18     $ 27.25  
      2,377,577       6.40     $ 10.74       2,181,429       6.24     $ 11.53  

   

There was no aggregate intrinsic value to the outstanding options and vested options as of June 30, 2019.

 

At June 30, 2019 and December 31, 2018, there were warrants outstanding to purchase 193,196 and 693,196, respectively, at a weighted-average exercise price of $8.60 and $7.16, respectively, in each period.

 

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Restricted Stock

 

No restricted stock was granted in 2019 and 2018. In December 2017, the Company granted to our Chairman and Chief Executive Officer, 387,597 shares of restricted common stock, pursuant to the 2008 Plan. This restricted stock vests in equal annual instalments over three years. The fair value of the restricted stock is based on the market price of the Company’s shares on the grant date less the par value received as consideration. The fair value of the restricted stock on the grant date was $679,000. In December 2016, the Company granted to our Chairman and Chief Executive Officer, 387,597 shares of restricted common stock, pursuant to the 2008 Plan. This restricted stock vests in equal annual instalments over three years. The fair value of the restricted stock is based on the market price of the Company’s shares on the grant date less the par value received as consideration. The fair value of the restricted stock on the grant date was $1,000,000 The Company recorded an employee stock-based compensation expense for restricted stock of $139,296 and $277,062 respectively, for the three and six-month periods ended June 30, 2019 as compared to $139,296 and $277,062 respectively, for the three and six-month periods ended June 30, 2018.

 

9. Fair Value Measurements

 

Assets and liabilities recorded at fair value on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs are as follows:

 

Level 1 – quoted prices in active markets for identical assets or liabilities.

 

Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

 

Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

 

The following table summarizes fair value measurements by level at June 30, 2019 for assets and liabilities measured at fair value on a recurring basis:

 

(In thousands)   Level I     Level II     Level III     Total  
Cash equivalents   $ 7,855     $     $     $ 7,855  

 

The following table summarizes fair value measurements by level at December 31, 2018 for assets and liabilities measured at fair value on a recurring basis:

 

(In thousands)   Level I     Level II     Level III     Total  
Cash equivalents   $ 19,731     $     $     $ 19,731  

 

Liabilities measured at market value on a recurring basis include warrant liabilities resulting from recent debt and equity financings. In accordance with ASC 815-40, the warrant liability are 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.

 

We consider carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments.

 

Our non-financial assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

 

10 . Liquidity and Capital Resources

 

At June 30, 2019, the Company had cash and cash equivalents of approximately $19.4 million. Management believes that our current cash and cash equivalents and short-term investments 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 2019 and the first five months of 2020 of approximately $5.2 million. These projected expenditures are also based upon numerous other assumptions and subject to many uncertainties, and our actual expenditures may be significantly different from these projections.

 

While these projections represent the Company’s current expected expenditures, the Company has the ability to reduce the amounts as needed to manage its liquidity needs while still advancing its corporate objectives. The Company will ultimately be required to obtain additional funding in order to execute its long-term business plans, although it does not currently have commitments from any third parties to provide it with long term debt, capital or non-dilutive up-front payments from a potential strategic partner. The Company cannot assure that additional funding will be available on favorable terms, or at all. If the Company fails to obtain additional funding when needed, it may not be able to execute its business plans and its business may suffer, which would have a material adverse effect on its financial position, results of operations and cash flows.

 

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11. Income Taxes

 

At December 31, 2018, we had federal and state net operating loss carryforwards of $323.4 million and $248.3 million, respectively, available to offset against future taxable income, which expire in 2019 through 2038, of which $248.3 million and $248.3 million, respectively, are not subject to limitation under Section 382 of the Internal Revenue Code.

 

12. Commitments and contingencies

 

Commitments

 

We have an agreement with Vergell Medical (formerly KTB Tumorforschungs GmbH, or KTB) (“Vergell”) for the Company’s exclusive license of patent rights held by Vergell for the worldwide development and commercialization of aldoxorubicin. Under the agreement, we must make payments to Vergell in the aggregate of $7.5 million upon meeting clinical and regulatory milestones up to and including the product’s second final marketing approval. We also have agreed to pay:

 

  commercially reasonable royalties based on a percentage of net sales (as defined in the agreement);
     
  a percentage of non-royalty sub-licensing income (as defined in the agreement); and
     
    milestones of $1 million for each additional final marketing approval that we obtain.

 

In the event that we must pay a third party in order to exercise our right to the intellectual property under the agreement, we will deduct a percentage of those payments from the royalties due Vergell, up to an agreed upon cap.

 

Contingencies

 

We applied the disclosure provisions of ASC 460, Guarantees (“ASC 460”) to our agreements that contain guarantees or indemnities by us. We provide (i) indemnifications of varying scope and size to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims; and (ii) indemnifications of varying scope and size to officers and directors against third party claims arising from the services they provide to us.

 

During 2018, the Company resolved various shareholder derivative actions and a class action lawsuit that were pending against it. The Company has directors’ and officers’ liability insurance, which would be utilized in the defense of any such matters.

 

The Company may from time to time be subject to third-party claims or proceedings, include those claiming that we are infringing the proprietary rights of others or that we owe royalty, milestone or other payments to third parties. The Company evaluates developments in legal proceedings and other matters on a quarterly basis. The Company records accruals for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated.

 

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Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

All statements in this Quarterly Report, including statements in this section, other than statements of historical fact are forward-looking statements, 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, the 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, 2018, 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”) is a biopharmaceutical research and development company specializing in oncology and rare diseases. The Company’s focus has been on the discovery, research and clinical development of novel anti-cancer drug candidates that employ novel linker technologies to enhance the accumulation and release of cytotoxic anti-cancer agents at the tumor. During 2017, CytRx’s discovery laboratory, located in Freiburg, Germany, synthesized and tested over 75 rationally designed drug conjugates with highly potent payloads, culminating in the creation of two distinct classes of compounds. Four lead candidates (LADR-7 through LADR-10) were selected based on in vitro and animal preclinical studies, stability, and manufacturing feasibility. In 2018, additional animal efficacy and toxicology testing of these lead candidates was conducted. In addition, a novel albumin companion diagnostic, ACDx™, was developed to identify patients with cancer who are most likely to benefit from treatment with these drug candidates.

 

On June 1, 2018, CytRx launched Centurion BioPharma Corporation (“Centurion”), a private wholly owned subsidiary, and transferred all of its assets, liabilities and personnel associated with the laboratory operations in Freiburg, Germany. In connection with said transfer, the Company and Centurion entered into a Management Services Agreement whereby the Company agreed to render advisory, consulting, financial and administrative services to Centurion, for which Centurion shall reimburse the Company for the cost of such services plus a 5% service charge. The Management Services Agreement may be terminated by either party at any time. Centurion is focused on the development of personalized medicine for solid tumor treatment. On December 21, 2018, CytRx announced that Centurion had concluded the pre-clinical phase of development for its four LADR drug candidates, and for its albumin companion diagnostic (ACDx™). As a result of completing this work, operations taking place at the pre-clinical laboratory in Freiburg, Germany would no longer be needed and, accordingly, the lab was closed at the end of January 2019.

 

LADR Drug Discovery Platform and Centurion

 

Centurion’s LADR™ (Linker Activated Drug Release) technology platform is a discovery engine combining expertise in linker chemistry and albumin biology to create a pipeline of anti-cancer molecules that will avoid unacceptable systemic toxicity while delivering highly potent agents directly to the tumor. Centurion has created a “toolbox” of linker technologies that are designed to significantly increase the therapeutic index of ultra-high potency drugs (10-1,000 times more potent than traditional chemotherapies) by controlling the release of the drug payloads and improving drug-like properties.

 

Centurion’s efforts were focused on two classes of ultra-high potency albumin-binding drug conjugates. These drug conjugates combine the proprietary LADR™ linkers with novel derivatives of the auristatin and maytansinoid drug classes. These payloads historically have required a targeting antibody for successful administration to humans. These drug conjugates eliminate the need for a targeting antibody and provide a small molecule therapeutic option with potential broader applicability.

 

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Centurion’s novel companion diagnostic, ACDx™ (albumin companion diagnostic), was developed to identify patients with cancer who are most likely to benefit from treatment with the four LADR lead assets.

 

CytRx and Centurion have been working on identifying partnership opportunities for LADR™ ultra-high potency drug conjugates and its albumin companion diagnostic. However, no partnerships or any source of financing has become available after eighteen months of effort.

 

Aldoxorubicin

 

Until July 2017, the Company was focused on the research and clinical development of aldoxorubicin, their modified version of the widely-used chemotherapeutic agent, doxorubicin. Aldoxorubicin combines the chemotherapeutic agent doxorubicin with a novel linker-molecule that binds specifically to albumin in the blood to allow for delivery of higher amounts of doxorubicin (3½ to 4 times) without several of the major dose-limiting toxicities seen with administration of doxorubicin alone.

 

On July 27, 2017, the Company entered into an exclusive worldwide license with NantCell, Inc. (“NantCell”), granting to NantCell the exclusive rights to develop, manufacture and commercialize aldoxorubicin in all indications, and our company is no longer directly working on development of aldoxorubicin. As part of the license, NantCell made a strategic investment of $13 million in CytRx common stock at $6.60 per share (adjusted to reflect our 2017 reverse stock split), a premium of 92% to the market price on that date. The Company also issued NantCell a warrant to purchase up to 500,000 shares of common stock at $6.60, which expired on January 26, 2019. The Company is entitled to receive up to an aggregate of $343 million in potential milestone payments, contingent upon achievement of certain regulatory approvals and commercial milestones. The Company is also entitled to receive ascending double-digit royalties for net sales for soft tissue sarcomas and mid to high single digit royalties for other indications.

 

Molecular Chaperone Assets

 

In 2011, CytRx sold the rights to arimoclomol and iroxanadine, based on molecular chaperone regulation technology, to Orphazyme A/S (formerly Orphazyme ApS) in exchange for a one-time, upfront payment and the right to receive up to a total of $120 million (USD) in milestone payments upon the achievement of certain pre-specified regulatory and business milestones, as well as royalty payments based on a specified percentage of any net sales of products derived from arimoclomol. Orphazyme is testing arimoclomol in three additional indications beyond ALS, including Niemann-Pick disease Type C (NPC), Gaucher disease and sporadic Inclusion Body Myositis (sIBM). CytRx received a milestone payment of $250,000 in September 2018. Orphazyme has highlighted positive Phase2/3 clinical trial data in patients with NPC and has announced they will file with the U.S. Food and Drug Administration (FDA) and European Medicines Agency (EMA) in the first half of 2020 In such event, CytRx will be entitled to a milestone payment of $4 million upon EMA approval and $6 million upon FDA approval, along with royalties and potential additional milestones.

 

Current Business Strategy

 

The Company is investigating new opportunities and lines of business. For this reason and others, including the closure of the lab, its operating expenses are expected to be significantly lower in the near future. Therefore, period to period comparisons should not be relied upon as predictive of the results in future periods.

 

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.

 

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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, 2018. 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 grant revenues. Grant revenues consist of government and private grants.

 

On January 1, 2018 CytRx adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The cumulative effect of initially applying ASC 606 was an adjustment to decrease the opening balance of Accumulated Deficit by $6.7 million as of January 1, 2018.

 

The guidance provides for a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.

 

Under the new standard the NantCell Licensing Agreement, which was determined to be a functional license agreement, as the underlying intellectual property had standalone functionality, was recognizable in 2017 when NantCell obtained the right to use the intellectual property. The subsequent Reimbursement Agreement was determined to be a contract modification that introduced variable contra revenue for the Company’s reimbursement obligations. In accordance with ASC 606, management estimated its obligations under the Reimbursement Agreement to be $3.2 million which is recognized as a contract liability at the time of revenue recognition. These costs were previously recognized as research and development expense in 2017 in accordance with prior accounting standards. This contract liability was reduced to $0.3 million as of January 1, 2018 as a result of costs incurred under the Reimbursement Agreement. This amount was further reduced to $50,000 as of December 31, 2018 and $9,000 as of June 30, 2019.

 

Additionally, CytRx is eligible to receive tiered high single to low double-digit royalties on product sales. The royalty term is determined on a licensed-product-by-licensed-product and country-by-country basis and begins on the first commercial sale of a licensed product in a country and ends on the expiration of the last to expire of specified patents or regulatory exclusivity covering such licensed product in such country or, with a customary royalty reduction, ten years after the first commercial sale if there is no such exclusivity. These revenues will be recognized when earned.

 

Research and Development Expenses

 

Research and development expenses consist of 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. Costs of technology developed for use in our products are expensed as incurred until technological feasibility has been established.

 

Stock-Based Compensation

 

Our stock-based employee compensation plans are described in Note 9 of the Notes to Condensed Financial Statements included in this Quarterly Report. We follow 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 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”).

 

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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 is determined using the Black-Scholes option-pricing model, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted or issued 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 and warrant 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 our actual experience. If our Black-Scholes option-pricing model assumptions or our actual or estimated forfeiture rate are different in the future, it could materially affect our compensation expense recorded in future periods.

 

Net Income (Loss) per Share

 

Basic and diluted net loss per common share is computed using the weighted-average number of common shares outstanding. Potentially dilutive stock options and warrants to purchase 2.6 million shares for each of the three-month and six-month periods ended June 30, 2019, and 6.4 million shares for each of the three-month and six-month periods ended June 30, 2018, were excluded from the computation of diluted net loss per share, because the effect would be anti-dilutive

 

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 operation.

 

At June 30, 2019, the Company had cash and cash equivalents of approximately $19.4 million. Management believes that our current cash and cash equivalentss 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 2019 and the first five months of 2020 of approximately $5.2 million. These projected expenditures are also based upon numerous other assumptions and subject to many uncertainties, and our actual expenditures may be significantly different from these projections.

 

While these projections represent the Company’s current expected expenditures, the Company has the ability to reduce the amounts as needed to manage its liquidity needs while still advancing its corporate objectives. The Company will ultimately be required to obtain additional funding in order to execute its long-term business plans, although it does not currently have commitments from any third parties to provide it with long term debt, capital or non-dilutive up-front payments from a potential strategic partner. The Company cannot assure that additional funding will be available on favorable terms, or at all. If the Company fails to obtain additional funding when needed, it may not be able to execute its business plans and its business may suffer, which would have a material adverse effect on its financial position, results of operations and cash flows.

 

We recorded a net loss in the six-months ended June 30, 2019 of $2.7 million as compared to a net loss in the six-months ended June 30, 2018 of $7.1 million, or a decrease of $4.4 million. CytRx closed its drug development operations in Freiburg Germany in December 2018, resulting in a comparative decrease of approximately $2.0 million in these discontinued operations. There were also reductions in research and development expenditures of $0.6 million, a decrease in general administrative expenses of $0.9 million and a decrease in interest expense of $1.4 million; these decreases were offset by the gain on warrant derivative liabilities of $0.5 million in 2018, versus none in the current 2019 period.

 

We realized $0.5 million from the sale of fixed assets from the discontinued operations in the six-month period ended June 30, 2019 as compared to capital spending of $9,000 in the comparable 2018 period. We do not expect any significant capital spending during the next 12 months.

 

There were no financing transactions in the six-month period ended June 30, 2019. In the comparative 2018 period, we received a net amount of $6.5 million from the proceeds of a public offering in May 2018 offset partially by principal payments on a now expired term loan of $2.1 million.

 

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, the ability of our partner to commercialize aldoxorubicin and our ability to identify parties that are willing and able to enter into such arrangements related to our drug development efforts in our German lab 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 financial condition.

 

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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 a net loss of approximately $1.3 and $2.7 million for the three-month and six-month periods ended June 30, 2019, as compared to a net loss of approximately $3.0 million and $7.1 million for the three-month and six-month periods ended June 30, 2018, respectively. The closure of our drug development operations in Freiburg Germany resulted in a comparative decrease of approximately $0.9 million and $1.7 million in expenditures for these discontinued operations for the three-month and six-month 2019 periods. There were no research and development expenditures in the 2019 periods as compared to $0.6 million for the six-month period ended June 30, 2018, since our aldoxorubicin program had been licensed to NantCell.

 

We recognized no licensing revenue in neither the three and six-month periods ended June 30, 2019 and June 30, 2018. All future licensing fees under our current licensing agreements are dependent upon successful development milestones being achieved by the licensors. During the remainder of 2019, we do not anticipate receiving any significant licensing fees.

 

Research and Development

    Three-Month Period Ended
June 30,
   

Six-Month Period Ended

June 30,

 
    2019     2018     2019     2018  
    (In thousands)     (In thousands)  
Research and development expenses   $ 1     $ (45 )   $ 1     $ 609  
Employee stock option expense                        
Depreciation and amortization           3             5  
    $ 1     $ (42 )   $ 1     $ 614  

 

Research expenses are 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 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 six-month periods ended June 30, 2018 related primarily to our aldoxorubicin program which is licensed to NantCell.

 

General and Administrative Expenses

    Three-Month Period Ended
June 30,
   

Six-Month Period Ended

June 30,

 
    2019     2018     2019     2018  
    (In thousands)     (In thousands)  
General and administrative expenses   $ 1,311     $ 1,261     $ 2,829     $ 3,269  
Non-cash general and administrative expenses           20             41  
Employee stock option expense     215       404       428       833  
Depreciation and amortization     5       5       11       10  
    $ 1,531     $ 1,690     $ 3,268     $ 4,153  

 

General and administrative expenses include all administrative salaries and general corporate expenses, including legal expenses. Our general and administrative expenses, excluding stock option expense, non-cash expenses and depreciation and amortization, were $1.3 million and 2.8 million for the three and six-month periods ended June 30, 2019, respectively, and $1.3 million and $3.3 million, respectively, for the same periods in 2018. Our general and administrative expenses in the comparative six-month periods excluding stock option expense, non-cash expenses and depreciation and amortization, decreased by approximately $0.4 million, primarily due to a decrease in legal fees and a reduction in head count.

 

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Employee stock option expense relates to options granted to retain and compensate directors, officers and other employees. We recorded, in total, approximately $0.2 million and $0.4 million of employee stock option expense in the three-month and six-month periods ended June 30, 2019, respectively, as compared to $0.4 million and $0.8 million, respectively, for the same periods in 2018. We recorded no non-employee stock option expense in the three-month and six-month periods, ended June 30, 2019, respectively, as compared to $20,000 and 41,000 for the comparative 2018 periods.

 

Depreciation and Amortization

 

Depreciation expense reflects the depreciation of our equipment and furnishings.

 

Interest Income and Expense

 

Interest income was approximately $104,000 and $192,000 for the three-month and six-month periods ended June 30, 2019, respectively, as compared to $93,000 and $176,000, respectively, for the same periods in 2018.

 

There was no interest expense in 2019 as compared to $0.7 million and $1.4 million for the comparative 2018 periods.

 

Item 3. — Quantitative and Qualitative Disclosures About Market Risk

 

Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. 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 speculative or hedging derivative financial instruments or foreign currency instruments. If interest rates had varied by 10% in the three-month period ended June 30, 2019, it would not have had a material effect on our results of operations or cash flows for that period.

 

Item 4. — Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our 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 our 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

 

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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 weakness we have identified could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our common stock.

 

PART II — OTHER INFORMATION

 

Item 1. — Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

You should carefully consider and evaluate the information in this Quarterly Report and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Form 10-K”), which was filed with the SEC on March 29, 2019. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

 

Item 6. — Exhibits

 

The exhibits listed in the accompanying Index to Exhibits are filed as part of this Quarterly Report and incorporated herein by reference.

 

20
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CytRx Corporation
     
Date: August 9, 2019 By: /s/ JOHN Y. CALOZ
    John Y. Caloz
    Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit

Number

  Description
31.1   Certification of Chief Executive Officer  Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer  Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Schema Document
     
101.CAL   XBRL Calculation Linkbase Document
     
101.DEF   XBRL Definition Linkbase Document
     
101.LAB   XBRL Label Linkbase Document
     
101.PRE   XBRL Presentation Linkbase Document

 

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