NOTES
TO CONDENSED FINANCIAL STATEMENTS
March
31, 2019
(Unaudited)
|
1.
|
Description of Company and Basis of Presentation
|
CytRx
Corporation (“CytRx”) is a biopharmaceutical research and development company specializing in oncology. 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 our 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
postulated mechanism of action for the albumin-binding drug conjugates is as follows:
after
administration, the linker portion of the drug conjugate forms a rapid and specific covalent bond to the cysteine-34 position
of circulating albumin;
circulating
albumin preferentially accumulates at the tumors, bypassing concentration in other non-tumor sites, including the heart, liver
and gastrointestinal tract due to a mechanism called “Enhanced Permeability and Retention”;
once
localized at the tumor, the acid-sensitive linker is cleaved due to the specific conditions within the tumor and in the tumor
microenvironment; and
free
active drug is then released.
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. They have concluded all research and development on LADR and its companion diagnostic and are
now focused solely on identifying partnership opportunities.
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 in February 2019 announced they will initiate filing preparations and seek to meet with the
U.S. Food and Drug Administration (FDA) and European Medicines Agency (EMA) mid-2019 to discuss the path to approval. They communicated
they plan to submit the regulatory filing to the FDA and EMA during the first half of 2020, with potential approval expected during
the second 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
Currently,
the Company is working on identifying partnership opportunities for LADR™ ultra-high potency drug conjugates and their albumin
companion diagnostic. We have concluded all research and development on LADR and its companion diagnostic and are now focused
solely on identifying these partnership opportunities In addition, 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 March 31, 2019 and for the three-month periods ended March 31, 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.
|
2.
|
Foreign
Currency Remeasurement
|
The
U.S. dollar has been determined to be the functional currency for the net assets of our German laboratory facility. 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). We recognized a loss of approximately
($2,142) and ($330) respectively, for the three-month periods ended March 31, 2019 and 2018.
|
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 March 31, 2019, the total lease liabilities were $245,000 and
the ROU assets were $229,000.
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 March 31, 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 March 31, 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.
In
February 2018, the FASB issued a new standard that would permit entities to make a one time reclassification from accumulated
other comprehensive income (AOCI) to retained earnings for the stranded tax effects resulting from the newly enacted corporate
tax rates under the Tax Cuts and Jobs Act (the “Act”), effective for the year ended December 31, 2017. The amount
of the reclassification is calculated on the basis of the difference between the historical tax rate and newly enacted tax rate.
The standard is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The
adoption of this guidance did not have a material impact on our financial statements.
|
4
.
|
Short-term
Investments
|
The
Company held short-term investments $11.0 million at March 31, 2019, as compared to none at December 31, 2018. The investment
is federally insured certifiate of deposit maturing in 6 months.
|
5.
|
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 accordingly has classified these assets as current assets held for sale and has written 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.
The net book value of the assets held for sale is $0.4 million at March 31, 2019 and $0.4 million at December 31, 2018. The value
of the assets sold in April 2019 are greater than their net book value and so no write-down has been recorded in the period. The
results of these discontinued operations are presented separately on the Company’s Consolidated Statement of Operations.
|
|
|
Period
Ended
|
|
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Current
assets held for sale
|
|
$
|
402,045
|
|
|
$
|
81,182
|
|
|
Equipment
and furnishings, net
|
|
$
|
—
|
|
|
$
|
313,425
|
|
|
Deposit
|
|
|
—
|
|
|
|
11,401
|
|
|
Non-current
assets held for sale
|
|
$
|
—
|
|
|
$
|
324,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,813
|
|
|
$
|
323,736
|
|
|
Accrued
expenses and other current liabilities
|
|
|
101,325
|
|
|
|
278,977
|
|
|
Current
liabilities for sale
|
|
$
|
109,138
|
|
|
$
|
602,713
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
(171,127
|
)
|
|
$
|
2,869,037
|
|
|
Loss
on impairment of equipment and furnishings
|
|
|
7,100
|
|
|
|
207,662
|
|
|
Employee
stock option expense
|
|
|
(2,672
|
)
|
|
|
95,485
|
|
|
Other
income
|
|
|
(73,845
|
)
|
|
|
2,519
|
|
|
Depreciation
expense
|
|
|
—
|
|
|
|
459,506
|
|
|
Loss
(gain) from discontinued operations
|
|
$
|
(240,544
|
)
|
|
$
|
3,634,209
|
|
|
6.
|
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, warrants and restricted stock) 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 the three-month
period ended March 31, 2019 as compared to 6.8 million shares for the three-month period ended March 31, 2018.
Liabilities
measured at market value on a recurring basis include warrant liabilities resulting from our past equity financings. In accordance
with ASC 815-40
, Derivatives and Hedging – Contracts in Entity’s Own Equity
(“ASC 815-40”), the
warrant liabilities are being marked to market until they are completely settled. The warrants are valued using the Black-Scholes
method, using assumptions consistent with our application of ASC 505-50,
Equity-Based Payments to Non-Employees
(“ASC
505-50”). The gain or loss resulting from the marked to market calculation is shown on the Condensed Statements of Operations
as gain 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 March 31, 2019. We recognized a gain of $453,000 for the three-month
period ended March 31, 2018. The following reflects the weighted-average assumptions for each of the three-month periods indicated:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
—
|
|
|
|
1.83
|
%
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
0
|
%
|
|
Expected
lives
|
|
|
—
|
|
|
|
0.30
|
|
|
Expected
volatility
|
|
|
—
|
|
|
|
76.7
|
%
|
|
Warrants
classified as liabilities (in shares)
|
|
|
—
|
|
|
|
2,834,246
|
|
|
Gain
on warrant liabilities
|
|
|
—
|
|
|
$
|
453,412
|
|
Our
computation of expected volatility is based on the historical daily volatility of its publicly traded stock. The dividend yield
assumption of zero is based upon the fact that we have never paid cash dividends and presently has 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 March
31 of each year presented. The expected lives are based on the remaining contractual lives of the related warrants at the valuation
date.
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 March 31, 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.
|
9
.
|
Stock
Based Compensation
|
We
have a 2000 Long-Term Incentive Plan, which expired on August 6, 2010. As of March 31, 2019, there were 14,018 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 March 31,
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. Since the fair market value of options granted to non-employees
is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock
options are fully vested.
The
following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock and warrants
included in our unaudited interim statements of operations:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Research
and development — employee
|
|
$
|
—
|
|
|
$
|
—
|
|
|
General
and administrative — employee
|
|
|
213,174
|
|
|
|
428,989
|
|
|
Total
employee stock-based compensation
|
|
$
|
213,174
|
|
|
$
|
428,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development — non-employee
|
|
$
|
—
|
|
|
$
|
—
|
|
|
General
and administrative — non-employee
|
|
|
—
|
|
|
|
21,350
|
|
|
Total
non-employee stock-based compensation
|
|
$
|
|
|
|
$
|
21,350
|
|
No
options were granted during the current three-month-period ended March 31, 2019 as compared to 1,667 stock options at an exercise
price of $1.89 during the comparative March 31, 2018 period. The fair value of the stock options and warrants was estimated using
the Black-Scholes option-pricing model, based on the following assumptions:
|
|
|
Three
Months Ended March 31, 2019
|
|
|
Three
Months Ended March 31, 2018
|
|
|
Risk-free
interest rate
|
|
|
—
|
|
|
|
2.42
|
%
|
|
Expected
volatility
|
|
|
—
|
|
|
|
91.6
|
%
|
|
Expected
lives (years)
|
|
|
—
|
|
|
|
6
|
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
0.0
|
%
|
We
compute expected volatility based on the historical daily volatility of our publicly traded stock. We use historical information
to compute expected lives. In the three-month period ended March 31, 2018, the expected life of the options granted were six years
and the contractual term 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. No amounts relating to stock-based compensation
have been capitalized.
As
of March 31, 2019, there remained approximately $0.3 million of unrecognized compensation expense related to unvested stock options
granted to current employees, which we expect will be recognized over a weighted-average period of 0.73 years. Presented below
is our stock option activity:
|
|
|
Three
Months Ended March 31, 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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
or expired
|
|
|
(146,950
|
)
|
|
|
—
|
|
|
|
(146,950
|
)
|
|
$
|
10.03
|
|
|
Outstanding
at March 31, 2019
|
|
|
2,043,885
|
|
|
|
365,000
|
|
|
|
2,408,885
|
|
|
$
|
10.73
|
|
|
Exercisable
at March 31, 2019
|
|
|
1,803,304
|
|
|
|
365,000
|
|
|
|
2,168,304
|
|
|
$
|
11.69
|
|
The
following table summarizes significant ranges of outstanding stock options under our plans at March 31, 2019:
|
Range
of Exercise Prices
|
|
Number of Options
|
|
|
Weighted-Average
Remaining Contractual Life (years)
|
|
|
Weighted-Average
Exercise Price
|
|
|
Number
of
Options
Exercisable
|
|
|
Weighted-Average
Remaining Contractual Life (years)
|
|
|
Weighted-Average
Exercise Price
|
|
|
$1.75
– $5.00
|
|
|
1,138,099
|
|
|
|
8.34
|
|
|
$
|
2.13
|
|
|
|
897,518
|
|
|
|
8.32
|
|
|
$
|
2.17
|
|
|
$5.01
– $11.00
|
|
|
165,834
|
|
|
|
3.70
|
|
|
$
|
10.98
|
|
|
|
165,834
|
|
|
|
3.70
|
|
|
$
|
10.98
|
|
|
$11.01
– $15.00
|
|
|
634,025
|
|
|
|
6.05
|
|
|
$
|
13.91
|
|
|
|
634,025
|
|
|
|
6.05
|
|
|
$
|
13.91
|
|
|
$15.01
– $98.28
|
|
|
470,927
|
|
|
|
4.44
|
|
|
$
|
27.12
|
|
|
|
470,927
|
|
|
|
4.44
|
|
|
$
|
27.12
|
|
|
|
|
|
2,408,885
|
|
|
|
6.65
|
|
|
$
|
10.73
|
|
|
|
2,168,304
|
|
|
|
6.46
|
|
|
$
|
11.69
|
|
There
was no aggregate intrinsic value to the outstanding options and options vested as of March 31, 2019.
At
March 31, 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.
Restricted
Stock
No
restricted stock was granted in 2018. In December 2017, the Company granted to Steven Kriegsman, 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 Steven Kriegsman, 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 $137,766 and $137,766 respectively, for the quarters ended March 31, 2019 and 2018.
|
10.
|
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 March 31, 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
|
|
|
Short-term
investments
|
|
$
|
11,036
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,036
|
|
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.
|
11.
|
Liquidity
and Capital Resources
|
At
March 31, 2019, we had cash and cash equivalents and short-term investments of approximately $20.1 million. Management believes
that our current cash and cash equivalents and short-term investments will be sufficient to fund its operations for the foreseeable
future. This estimate is based, in part, upon our currently projected expenditures for the remainder of 2019 and the first four
months of 2020 of approximately $5.6 million (unaudited)
,
which includes approximately $0.3 million (unaudited) for payments
related to the Freiburg lab, and approximately $5.3 million (unaudited) for other general and administrative expenses. These projected
expenditures and payments 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.
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.
|
13.
|
Commitments
and Contingencies
|
Commitments
We
have an agreement with Vergell Medical (formerly with KTB) (“Vergell”) for the 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 rights to the intellectual property under the agreement, we
are entitled to deduct a percentage of those payments from the royalties due Vergell, up to an agreed upon cap.
Contingencies
We
apply the disclosure provisions of ASC 460,
Guarantees
(“ASC 460”) to its agreements that contain guarantees
or indemnities by the Company. 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 the Company.
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.