-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ElbvEZjJGwxiSJ87gVnPcM8eVOhOcjw5kO4LQZSuj8jK9dCZX27y2baCr6fye7C0 UoYELdlKOoS3c9joKM8rbQ== 0000931763-02-001591.txt : 20020508 0000931763-02-001591.hdr.sgml : 20020508 ACCESSION NUMBER: 0000931763-02-001591 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYTRX CORP CENTRAL INDEX KEY: 0000799698 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 581642750 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15327 FILM NUMBER: 02637812 BUSINESS ADDRESS: STREET 1: 154 TECHNOLOGY PKWY STREET 2: TECHNOLOGY PARK/ATLANTA CITY: NORCROSS STATE: GA ZIP: 30092 BUSINESS PHONE: 4043689500 MAIL ADDRESS: STREET 1: 154 TECHNOLOGY PARKWAY CITY: NORCROSS STATE: GA ZIP: 30092 10-Q 1 d10q.htm FORM 10-Q Prepared by R.R. Donnelley Financial -- Form 10-Q
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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 March 31, 2002
 
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.)
     
154 Technology Parkway
    
Suite 200
    
Norcross, Georgia
  
30092
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code:    (770) 368-9500
 
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 ¨    
 
Number of shares of CytRx Corporation Common Stock, $.001 par value, issued and outstanding as of May 8, 2002: 11,614,779.
 

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CYTRX CORPORATION
Form 10-Q
 
 

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Part I—FINANCIAL INFORMATION
 
Item 1.—Financial Statements
 
CYTRX CORPORATION
CONDENSED BALANCE SHEETS
 
    
 
March 31, 2002
 
   
 
 
December 31,
2001
 
 
    
(Unaudited)
         
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
4,988,697
 
   
$
5,272,914
 
Accounts receivable, net
   
 
18,610
 
   
 
28,000
 
Current portion of note receivable
   
 
125,555
 
   
 
122,467
 
Other current assets
   
 
128,914
 
   
 
23,238
 
    
  
Total current assets
   
 
5,261,776
 
   
 
5,446,619
 
Property and equipment, net
   
 
1,599,508
 
   
 
1,745,728
 
Other assets:
                  
Note receivable
   
 
332,678
 
   
 
365,249
 
Deferred transaction costs
   
 
357,466
 
   
 
—  
 
Other assets
   
 
53,000
 
   
 
53,000
 
    
  
Total other assets
   
 
743,144
 
   
 
418,249
 
    
  
Total assets
   
$
7,604,428
 
   
$
7,610,596
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
29,142
 
   
$
178,777
 
Accrued liabilities
   
 
717,658
 
   
 
849,068
 
    
  
Total current liabilities
   
 
746,800
 
   
 
1,027,845
 
Commitments
                  
Stockholders’ equity:
                  
Preferred Stock, $.01 par value, 1,000 shares authorized, including 1,000 shares of Series A Junior Participating Preferred Stock; no shares issued and outstanding
   
 
—  
 
   
 
—  
 
Common stock, $.001 par value, 50,000,000 shares authorized; 12,198,595 and 11,459,012 shares issued at March 31, 2002 and December 31, 2001, respectively
   
 
12,199
 
   
 
11,459
 
Additional paid-in capital
   
 
75,085,674
 
   
 
74,632,292
 
Treasury stock, at cost (633,816 shares held at March 31, 2002 and December 31, 2001)
   
 
(2,279,238
)
   
 
(2,279,238
)
Accumulated deficit
   
 
(65,961,007
)
   
 
(65,781,762
)
    
  
Total stockholders’ equity
   
 
6,857,628
 
   
 
6,582,751
 
    
  
Total liabilities and stockholders’ equity
   
$
7,604,428
 
   
$
7,610,596
 
    
  
 
See accompanying notes.

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CYTRX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
    
Three Month
Period Ended March 31,
  
    
2002
     
2001
  
Revenues:
                  
Service revenues
   
$
22,453
 
   
$
26,014
 
License fees
   
 
1,000,000
 
   
 
—  
 
Interest income
   
 
32,117
 
   
 
60,824
 
Grant income
   
 
31,313
 
   
 
45,752
 
Other
   
 
55,137
 
   
 
50,204
 
    
  
    
 
1,141,020
 
   
 
182,794
 
Expenses:
                  
Cost of service revenues
   
 
11,287
 
   
 
12,608
 
Research and development
   
 
318,801
 
   
 
448,673
 
Selling, general and administrative
   
 
990,177
 
   
 
878,745
 
    
  
    
 
1,320,265
 
   
 
1,340,026
 
    
  
Net loss
   
$
(179,245
)
   
$
(1,157,232
)
    
  
Basic and diluted loss per common share
   
$
(0.02
)
   
$
(0.11
)
    
  
Basic and diluted weighted average shares outstanding
   
 
11,091,535
 
   
 
10,136,446
 
 
See accompanying notes.

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CYTRX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
    
Three Month
Period Ended March 31,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(179,245
)
   
$
(1,157,232
)
Adjustments to reconcile net loss to net cash used by operating activities:
                  
Depreciation and amortization
   
 
146,220
 
   
 
146,562
 
Stock option and warrant expense
   
 
89,000
 
   
 
479,416
 
Net change in assets and liabilities
   
 
(705,314
)
   
 
(433,266
)
    
  
Total adjustments
   
 
(470,094
)
   
 
192,712
 
    
  
Net cash used in operating activities
   
 
(649,339
)
   
 
(964,520
)
                   
Cash flows from financing activities:
                  
Net proceeds from issuance of common stock
   
 
365,122
 
   
 
30,469
 
    
  
Net cash provided by financing activities
   
 
365,122
 
   
 
30,469
 
    
  
Net decrease in cash and cash equivalents
   
 
(284,217
)
   
 
(934,051
)
Cash and cash equivalents at beginning of period
   
 
5,272,914
 
   
 
3,779,376
 
    
  
Cash and cash equivalents at end of period
   
$
4,988,697
 
   
$
2,845,325
 
    
  
 
See accompanying notes.

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CYTRX CORPORATION
 
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
 
1.    Description of Company and Basis of Presentation
 
CytRx Corporation (“CytRx” or “the Company”) is a biopharmaceutical company focused on the development and commercialization of high-value human therapeutics. The Company’s current research and development activities include CRL-5861, an intravenous agent for treatment of sickle cell disease and other acute vaso-occlusive disorders, and TranzFect, a delivery technology for DNA-based vaccines. CytRx has licensed TranzFect to Merck & Co., Inc. for use in Merck’s efforts to develop DNA-based vaccines for HIV and three other infectious diseases. All other uses of TranzFect for enhancement of viral or non-viral delivery of polynucleotides (such as DNA and RNA) were recently licensed to Vical, Incorporated. CytRx also has a research pipeline with opportunities in the areas of muscular dystrophy, cancer, spinal cord injury, vaccine delivery, gene therapy and food animal feed additives.
 
The accompanying condensed financial statements at March 31, 2002 and for the three month periods ended March 31, 2002 and 2001 are unaudited, but include all adjustments, consisting of normal recurring entries, which the Company’s 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. The financial statements should be read in conjunction with the Company’s audited financial statements in its Form 10-K for the year ended December 31, 2001.
 
2.    Pending Merger with Global Genomics Capital, Inc.
 
On February 11, 2002, CytRx entered into an agreement whereby the Company will acquire Global Genomics Capital, Inc. (“GGC”), a privately-held genomics holding company, through a merger of a wholly-owned subsidiary of CytRx into GGC. The terms of the merger provide for CytRx to acquire all outstanding shares, and rights to acquire shares, of GGC in return for the issuance or reservation for issuance of a maximum of approximately 9,963,000 shares of CytRx Common Stock, subject to adjustment. The closing of the transaction is anticipated in the third quarter of 2002, and is contingent upon approval by the shareholders of each company and other customary closing conditions. If the merger with GGC is completed, the Company will become obligated under contracts with its officers to make cash payments of up to $1.1 million in the aggregate upon termination of their employment subsequent to the merger.

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3.    Segment Reporting
 
(in thousands)
   
Product Development
     
Recruiting Services *
   
Total
  
Three Months Ended March 31, 2002
                         
Sales to external customers
   
$
—  
 
   
$
22
   
$
22
 
Intersegment sales
   
 
—  
 
   
 
—  
   
 
—  
 
License fee income
   
 
1,000
 
   
 
—  
   
 
1,000
 
Interest income
   
 
32
 
   
 
—  
   
 
32
 
Grant & other income
   
 
86
 
   
 
—  
   
 
86
 
Interest expense
   
 
—  
 
   
 
—  
   
 
—  
 
Depreciation and amortization
   
 
146
 
   
 
—  
   
 
146
 
Stock option and warrant expense
   
 
89
 
   
 
—  
   
 
89
 
Segment profit (loss)
   
 
(185
)
   
 
5
   
 
(180
)
Total assets
   
 
7,604
 
          
 
7,604
 
Capital expenditures
   
 
—  
 
   
 
—  
   
 
—  
 
Three Months Ended March 31, 2001
                         
Sales to external customers
   
 
—  
 
   
 
26
   
 
26
 
Intersegment sales
   
 
—  
 
   
 
—  
   
 
—  
 
License fee income
   
 
—  
 
   
 
—  
   
 
—  
 
Interest income
   
 
61
 
   
 
—  
   
 
61
 
Grant & other income
   
 
96
 
   
 
—  
   
 
96
 
Interest expense
   
 
—  
 
   
 
—  
   
 
—  
 
Depreciation and amortization
   
 
147
 
   
 
—  
   
 
147
 
Stock option and warrant expense
   
 
479
 
   
 
—  
   
 
479
 
Segment profit (loss)
   
 
(1,164
)
   
 
7
   
 
(1,157
)
Total assets
   
 
5,785
 
   
 
—  
   
 
5,785
 
Capital expenditures
   
 
—  
 
   
 
—  
   
 
—  
 
*
 
The activities of the Spectrum Recruitment Research segment were terminated effective February 1, 2002.

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Item 2.    Management’s Discussion and Analysis of Financial Condition And Results of Operations
 
This discussion includes “forward looking” statements that reflect our current views with respect to future events and financial performance. Investors should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events, particularly those risks identified under “Risk Factors” set forth in our Annual Report on Form 10-K, and should not unduly rely on these forward looking statements. We undertake no duty to update the information in this discussion.
 
Liquidity and Capital Resources
 
At March 31, 2002, we had cash and cash equivalents of $5.0 million and net assets of $6.9 million, compared to $5.3 million and $6.6 million, respectively, at December 31, 2001. Working capital totaled $4.5 million at March 31, 2002, compared to $4.4 million at December 31, 2000.
 
On December 7, 2001, we entered into a license agreement with Vical Incorporated granting Vical exclusive, worldwide rights to use or sublicense our TranzFect poloxamer technology to enhance viral or non-viral delivery of polynucleotides (such as DNA and RNA) in all preventive and therapeutic human and animal health applications, except for (1) four infectious disease vaccine targets previously licensed by CytRx to Merck & Co., Inc., and (2) DNA vaccines or therapeutics based on prostate-specific membrane antigen (PSMA). In addition, the Vical license permits Vical to use TranzFect poloxamer technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. Under the Vical license, we received an up-front payment of $3,750,000 and have the potential to receive milestone and royalty payments in the future based on criteria described in the agreement. Restrictions in the Vical license prevent us from disclosing certain of its terms, including some of the specific terms of the potential milestone and royalty payments. All amounts paid to us are non-refundable upon termination and require no additional effort on our part.
 
In November 2000, we entered into an exclusive, worldwide license agreement with Merck whereby we granted to Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. For the license to the TranzFect technology to treat the first disease target, Merck has paid us a signature payment of $2 million. In addition, in February 2002, Merck paid us a $1 million milestone fee related to the commencement by Merck of the first U.S. Food and Drug Administration Phase I Study for the first product incorporating TranzFect designed for the prevention and treatment of HIV. Merck may pay us additional milestone and product approval payments in the future of up to $3 million as they develop the product. Additionally, if certain conditions are met regarding patent protection and Merck’s competitive position, Merck may pay a royalty to us of 1% on net sales of products incorporating TranzFect for the first disease target. If Merck chooses to pursue development of the TranzFect technology to treat the three additional disease targets, Merck will make a series of milestone and product approval payments to us totaling up to $2,850,000 for each target. If and when sales

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of products incorporating TranzFect for the three additional disease targets commence, we will receive royalties of between 2 and 4% of the net sales from such products. Additionally, if certain conditions are met regarding patent protection and Merck’s competitive position, Merck may pay an additional royalty of 1% on net sales of products incorporating TranzFect for these additional disease targets. Merck will also pay an annual fee of between $50,000 and $100,000 until the first product approval for one of the three additional disease targets. Merck may terminate the license at any time upon 90 days written notice. All amounts paid to us are non-refundable upon termination and require no additional effort on our part.
 
In April 2000, we entered into a private equity line of credit agreement whereby we have the right to put shares of our common stock to an investor from time to time to raise up to $5,000,000, subject to the conditions and restrictions included in the agreement. Our ability to raise significant funds through this mechanism is subject to a number of risks and uncertainties, including stock market conditions and our ability to obtain and maintain an effective registration of the related shares with the Securities and Exchange Commission. To date, we have not exercised our right to sell shares under this agreement.
 
We are seeking government support for additional clinical studies of CRL-5861 (FLOCOR) in sickle cell disease. Based on the encouraging results we observed in children in the previous Phase III clinical study of CRL-5861, we have collaborated with a consortium of pediatric hematology centers led by Johns Hopkins University School of Medicine to design a follow-up Phase III trial to further investigate CRL-5861 in children with sickle cell crisis. Johns Hopkins University School of Medicine, in cooperation with the Maryland Medical Research Institute, has submitted grant applications to the National Heart, Lung and Blood Institute of the National Institutes of Health (NHLBI) for financial support of the trial. We expect the NHLBI to make funding decisions with regard to these grant applications during the third quarter of 2002. We also continue to engage in discussions with third parties for the possible license of CRL-5861.
 
On February 11, 2002, we entered into an agreement whereby CytRx will acquire Global Genomics Capital, Inc., a privately held genomics holding company, through a merger of a wholly-owned subsidiary of CytRx into Global Genomics Capital. The closing of the transaction is anticipated in the third quarter of 2002, and is contingent upon approval by the shareholders of each company and other customary closing conditions. If our proposed merger with Global Genomics Capital is completed, we will become obligated under contracts with our Chief Executive Officer and other officers to make cash payments to such officers of up to $1.1 million in the aggregate upon termination of their employment for severance, stay bonuses and other benefits.
 
We believe that we will have adequate working capital to allow us to operate through early 2003, but that additional funds will be needed to significantly advance any of our technologies under development. Some of our additional capital requirements may be provided by the equity line of credit agreement or by potential milestone payments pursuant to the Merck and Vical licenses, but we will also pursue other sources of capital. The results of our technology licensing efforts and/or the actual proceeds of any fund-raising activities will determine our ongoing ability to operate as a going concern with the current portfolio of

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technologies under development. These efforts are subject to market conditions and our ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. There is no assurance that such funding will be available to finance our operations on acceptable terms, if at all. Insufficient funding may require us to delay, reduce or eliminate some or all of our research and development activities, planned clinical trials and administrative programs.
 
The above statements regarding our plans and expectations for future financing are forward-looking statements that are subject to a number of risks and uncertainties. Our ability to obtain future financings through joint ventures, product licensing arrangements, equity financings or otherwise is subject to market conditions and our ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. There can be no assurance that we will be able to obtain future financing from these sources. Additionally, depending upon the outcome of our fund raising efforts, the accompanying financial information may not necessarily be indicative of future operating results or future financial condition.
 
Results of Operations
 
We recorded a net loss of $179,000 for the three month period ended March 31, 2002 as compared to $1,157,000 for the same period in 2001.
 
Since 1996 we have marketed the services of a small group of human resource professionals to third parties under the name of Spectrum Recruitment Research (“Spectrum”) as a way of offsetting our cost of maintaining this function. Service revenues related to Spectrum were $22,000 and $26,000 during the three months ended March 31, 2002 and 2001, respectively. Cost of service revenues was $11,000 in 2002 versus $13,000 in 2001. In February 2002 CytRx terminated the operations of Spectrum and transferred the rights to use the Spectrum tradenames to Albert, Isaac & Alexander, Inc., a consulting firm comprised of former CytRx (Spectrum) employees.
 
License fee income was $1,000,000 and $-0- during the three months ended March 31, 2002 and 2001, respectively. License fees for 2002 consist of a milestone fee received from Merck related to the commencement by Merck of a Phase I human clinical trial incorporating our TranzFect technology. Interest income for the first quarter of 2002 was $32,000 versus $61,000 for the same period in 2001. The variance generally corresponds to fluctuating cash and investment balances. Grant income was $31,000 in the first quarter of 2002 versus $46,000 in the first quarter of 2001. Costs related to grant income are included in research and development expense and generally approximate the amount of revenue recognized. Other income was $55,000 in the first quarter of 2002 versus $50,000 for the same period in 2001. Other income primarily consists of subrental fees.
 
Research and development expenses were $319,000 and $449,000 during the three months ended March 31, 2002 and 2001, respectively. Research and development expenditures for both periods primarily relate to our development activities for CRL-5861. During the first quarter of 2002, we conducted limited activities, pending a funding decision from the NHLBI relative to our previous grant application submissions (See “Liquidity and Capital Resources”). Higher

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expenses during the first quarter of 2001 relate to our initiation of preclinical studies of CRL-5861 for the treatment of spinal cord injury and cancer.
 
Selling, general and administrative expenditures were $990,000 and $879,000 during the three months ended March 31, 2002 and 2001, respectively. During the first quarter of 2002 and 2001, we recognized non-cash charges of $89,000 and $479,000, respectively, related to the issuance of stock purchase warrants to certain consultants. Additionally, during the first quarter of 2002, as a result of our agreement to merge with Global Genomics Capital (See “Liquidity and Capital Resources”), we paid Jack Luchese, our President and Chief Executive Officer, a “Success Bonus” of approximately $435,000 pursuant to his employment agreement. In order to conserve the Company’s cash resources, at the Company’s request Mr. Luchese agreed to accept $325,000 of the amount in CytRx stock rather than cash. The number of shares issued to Mr. Luchese were calculated based upon a price per share equal to 85% of the volume-weighted average price per share for the 20 trading days preceding Mr. Luchese’s commitment to accept shares in lieu of cash. The total expense we recorded was approximately $428,000. Excluding these one-time charges, selling, general and administrative expenditures were $473,000 and $400,000 during the three months ended March 31, 2002 and 2001, respectively.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
Our financial instruments that are sensitive to changes in interest rates are our investments. As of March 31, 2002, we hold no investments other than amounts invested in money market accounts. We are not subject to any other material market risks.
 
PART II—OTHER INFORMATION
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a)  Exhibits
 
        None.
 
(b)  Reports on Form 8-K
 
On January 11, 2002, we filed a Current Report on Form 8-K to provide an unaudited Pro Forma Condensed Balance Sheet as of November 30, 2001, in order to demonstrate compliance with the minimum $4,000,000 net tangible asset requirement for continued listing of our Common Stock on The Nasdaq National Market.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CYTRX CORPORATION
(Registrant)
By:
  
/s/    MARK W. REYNOLDS         
   
Mark W. Reynolds
Vice President, Finance
(Chief Accounting Officer
and a duly authorized officer)
Date:    May 8, 2002

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