UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:53) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-15327
CytRx Corporation
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11726 San Vicente Blvd, Suite 650,
Los Angeles, California
(Address of principal executive offices)
58-1642740
(I.R.S. Employer
Identification No.)
90049
(Zip Code)
Registrant’s telephone number, including area code:
(310) 826-5648
________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
Indicate by check mark with the Registrant is a well-known seasoned issuer (as defined in Securities Act Rule 405). Yes (cid:133) No (cid:53)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934. Yes (cid:133) No (cid:53)
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 and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:53) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K (cid:53)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:53)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 2b-2 of the Act). Yes (cid:133) No (cid:53)
The aggregate market value of the Registrant’s common stock held by non-affiliates on June 30, 2005 was approximately $49,272,313. On
March 23, 2006, there were 70,457,988 shares of the Registrant’s common stock outstanding, exclusive of treasury shares.
CYTRX CORPORATION
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1.
Item 1A.
Item 2.
Item 3.
Item 5.
Item 6.
Item 7.
Item 7
Item 8.
Item 9
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Business
Risk Factors
Properties
Legal Proceedings
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Controls and Procedures
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
PART III
Exhibits and Financial Statement Schedules
Signatures
PART IV
Exhibit Index located on page 50 of this report.
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“SAFE HARBOR” STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical
facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission, or SEC, in its
rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation
Reform Act of 1995 for forward-looking statements made from time to time, including, but not limited to, the forward-looking
statements made in this Annual Report on Form 10-K, as well as those made in other filings with the SEC.
All statements in this Annual Report, including in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” other than statements of historical fact are forward-looking statements for purposes of these provisions, including any
projections of financial items, any statements of the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. 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
and in documents incorporated by this Annual Report 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.
Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks
and uncertainties, including but not limited to the risk factors set forth under the heading “Risk Factors” in this Annual Report, and
including risks or uncertainties regarding the scope of the clinical testing that may be required by regulatory authorities for our
molecular chaperone co-induction drug candidates, including with respect to arimoclomol for the treatment of amyotrophic lateral
sclerosis (ALS or Lou Gehrig’s disease), our HIV vaccine candidate and our other product candidates, and the outcomes of those tests;
uncertainties related to the early stage of our diabetes, obesity, cytomegalovirus, or CMV, and ALS research; the need for future
clinical testing of any small molecules and products based on ribonucleic acid interference, or RNAi, that may be developed by us; the
significant time and expense that will be incurred in developing any of the potential commercial applications for our small molecules
or RNAi technology; risks or uncertainties related to our ability to obtain capital to fund our ongoing working capital needs, including
capital required to fund the RNAi development activities to be conducted by our planned new subsidiary; and risks relating to the
enforceability of any patents covering our products and to the possible infringement of third party patents by those products. All
forward-looking statements and reasons why results may differ included in this Annual Report are made as of the date hereof, and we
assume no obligation to update any such forward-looking statement or reason why actual results might differ.
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Item 1. Business
PART I
As used in this report, the terms “we,” “our,” “ours” and “us” refer to CytRx Corporation, a Delaware corporation, unless the
context suggests otherwise.
General
We are a biopharmaceutical research and development company, based in Los Angeles, California, with an obesity and type 2
diabetes research laboratory in Worcester, Massachusetts. We are in the process of developing products, primarily in the areas of small
molecule therapeutics and ribonucleic acid interference, or RNAi, for the human health care market. Our small molecule therapeutics
efforts include our clinical development of three oral drug candidates that we acquired in October 2004, including a Phase II trial
initiated in September 2005, as well as our drug discovery operations conducted at our laboratory in Worcester, Massachusetts.
Development work on RNAi, a relatively recent technology for silencing genes in living cells and organisms, is still at an early stage,
and we are aware of only four clinical tests of therapeutic applications using RNAi that have yet been initiated by any party. In
addition to our work in RNAi and small molecule therapeutics, we recently announced that a novel HIV DNA + protein vaccine
exclusively licensed to us and developed by researchers at the University of Massachusetts Medical School, or UMMS, and Advanced
BioScience Laboratories, and funded by the National Institutes of Health, demonstrated promising interim Phase I clinical trial results
that indicate its potential to produce potent antibody responses with neutralizing activity against multiple HIV viral strains. We have
also entered into strategic alliances with respect to the development of several other products using our other technologies.
On October 4, 2004, we acquired all of the clinical and pharmaceutical and related intellectual property assets of Biorex Research
& Development, RT, or Biorex, a Hungary-based company focused on the development of novel small molecules based on molecular
“chaperone” co-induction technology, with broad therapeutic applications in neurology, type 2 diabetes, cardiology and diabetic
complications. The acquired assets include three oral, clinical stage drug candidates and a library of 500 small molecule drug
candidates. We recently entered the clinical stage of drug development with the initiation of a Phase II clinical program with our lead
small molecule product candidate arimoclomol for the treatment of amyotrophic lateral sclerosis (ALS or Lou Gehrig’s disease).
Arimoclomol has received Orphan Drug and Fast Track designation from the U.S. Food and Drug Administration.
The initial Phase II clinical trial that we have initiated for arimoclomol for ALS (which we refer to as the Phase IIa trial) is a
multicenter, double-blind, placebo-controlled study of approximately 80 ALS patients enrolled at ten clinical centers across the U.S.
Patients enrolled in Phase IIa trial will receive either placebo (a capsule without drug), or one of three dose levels of arimoclomol
capsules three times daily, for a period of 12 weeks. This treatment phase will be immediately followed by a one-month period
without drug. The primary endpoints of this Phase IIa trial are safety and tolerability. Secondary endpoints include a preliminary
evaluation of efficacy using two widely accepted surrogate markers, the revised ALS Functional Rating Scale (ALSFRS-R), which is
used to determine patients’ capacity and independence in 13 functional activities, and Vital Capacity (VC), an assessment of lung
capacity. The trial is powered to monitor only extreme responses in these two categories. We recently announced initiation of an
“open-label” (i.e. the medication is no longer blinded to the patients or their doctor) extension of this clinical trial. Patients who
complete the Phase IIa study and who still meet the eligibility criteria may have the opportunity to take arimoclomol, at the highest
investigative dose, for as long as an additional 6 months.
Depending upon the results of the Phase IIa trial, we plan to initiate a subsequent Phase II trial (which we refer to as the Phase IIb
trial) that will be powered to detect more subtle efficacy responses. Although this second trial is still in the planning stages and will be
subject to FDA approval, it is expected to include approximately 300 ALS patients recruited from 25 clinical sites and will take
approximately 18 months after initiation to complete.
The acquisition of the molecular “chaperone” co-induction technology from Biorex represented a continuation of our business
strategy, adopted subsequent to our merger with Global Genomics, in July 2002, to conduct further research and development efforts
for our pre-merger adjuvant and co-polymer technologies, including Flocor and TranzFect, through strategic relationships with other
pharmaceutical companies, and to focus our efforts on acquiring and developing new technologies and products to serve as the
foundation for the future of the company.
In April 2003, we acquired our first new technologies by entering into exclusive license agreements with UMMS covering
potential applications for its proprietary RNAi technology in the treatment of specified diseases and in the identification and screening
of novel protein targets. In May 2003, we broadened our strategic alliance with UMMS by acquiring an exclusive license from it
covering a proprietary DNA-based HIV vaccine technology. In July 2004, we further expanded our strategic alliance with UMMS by
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entering into a collaboration and invention disclosure agreement with UMMS under which UMMS will disclose to us certain new
technologies developed at UMMS over a three-year period pertaining to RNAi, diabetes, obesity, neurodegenerative diseases
(including ALS) and CMV, and will give us an option, upon making a specified payment, to negotiate an exclusive worldwide license
to the disclosed technologies on commercially reasonable terms. Approximately one year remains on the technology disclosure option.
As part of our strategic alliance with UMMS, we agreed to fund certain discovery and pre-clinical research at UMMS relating to the
use of our technologies, licensed from UMMS, for the development of therapeutic products within certain fields.
In conjunction with some of our work with UMMS, we operate a research and development laboratory in Worcester,
Massachusetts whose goal is to develop small molecule and RNAi-based therapeutics for the prevention, treatment and cure of obesity
and type 2 diabetes. This laboratory is focusing on using our proprietary RNAi gene silencing technology, combined with genomic
and proteomic based drug discovery technologies, to accelerate the process of screening and identifying potential proprietary drug
targets and pathways for these diseases. Through this laboratory, we are seeking to develop orally active drugs against promising
targets and pathways relevant to obesity and type 2 diabetes.
Although we intend to internally fund the early stage development work for certain product applications (including obesity, type 2
diabetes and ALS) and may seek to fund the completion of the development of certain of these product applications (such as
arimoclomol for ALS), we may also seek to secure strategic alliances or license agreements with larger pharmaceutical or
biotechnology companies to fund the early stage development work for other gene silencing product applications and for subsequent
development of those potential products where we fund the early stage development work.
Prior to 2003, our primary technologies consisted of Flocor, an intravenous agent for treatment of sickle cell disease and other
acute vaso-occlusive disorders, and TranzFect, a delivery technology for DNA and conventional-based vaccines. In October 2003, we
entered into a strategic relationship with another entity to complete the development of Flocor. Our TranzFect technology has been
licensed to two companies. We have granted a third party an option to license our TranzFect technology for development as a potential
DNA-based prostate cancer adjuvant and may also seek to license this technology as a potential conventional adjuvant for hepatitis C,
human pappiloma virus, herpes simplex virus and other viral diseases. Adjuvants are agents added to a vaccine to increase its
effectiveness. In addition, we may seek to license TranzFect for use as a non-clinical research reagent to increase transfection in vitro
or in laboratory animals. Flocor and TranzFect are further described under “Pre-Global Genomics Merger Technologies.”
In addition, through our merger with Global Genomics, we acquired minority interests in two development-stage genomics
companies, Blizzard and Psynomics. In 2003, we recorded a write-off of our investments in those companies. Our decision to record
the write-off was based upon several factors. Those investments, and the write-off of those investments, are further described under
“Genomics Investments.”
Molecular Chaperone Co-Induction Platform
The synthesis of proteins is a normal part of every cell’s activity that is essential for life. Proteins are linear chains of building
blocks known as amino acids. In order to function normally in a cell, proteins must fold into particular three dimensional shapes.
During stressful conditions (e.g. during certain disease states), proteins can fold into inappropriate shapes that result in aggregation of
proteins, which can be toxic to the cell. As an example, it is believed that mis-folding and aggregation of certain mutated forms of the
superoxide dismutase 1 (SOD1) protein leads to the death of motor neurons that causes ALS.
In nature, the cell has developed molecular “chaperone” proteins to deal with these potentially toxic mis-folded proteins.
Molecular chaperones are a key component of a universal cellular protection, maintenance and repair mechanism that helps ensure
that newly synthesized proteins are complete, taken to the correct position within the cell’s structure, and correctly folded. Molecular
chaperones detect proteins that are mis-folded, and have the ability to refold those proteins into the appropriate, non-toxic shape.
However, if the protein is so badly mis-folded that it cannot be repaired, the molecular chaperones also have the ability to “tag” the
toxic protein for destruction by the cell. This tag, called ubiquitin, directs the mis-folded protein to a cellular apparatus called the
proteasome, whose function is to degrade the protein into its constituent amino acids for recycling.
A core element of the cell’s stress-management techniques is known as the heat shock response. Although this response was so-
named because it was initially discovered by subjecting cells to heat stress, it is now known that the heat shock response is generally
induced by a variety of physical and chemical stresses. As a cell comes under stress, proteins begin to mis-fold into toxic shapes. The
heat shock response (also referred to as the stress response) increases the synthesis of molecular chaperones that then repair or degrade
the mis-folded proteins.
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The stress response can be an important mechanism for cellular survival during certain acute physical stresses. For instance, prior
induction of the stress response can protect tissue culture cells from heat-induced cell death. However, it appears that the constant
stress that occurs as a result of chronic disease dulls the stress response and erodes the effectiveness of the mechanism. For instance,
although the stress response is slightly induced in the motor neurons of mice in an ALS model, the level of expression is apparently
insufficient to repair the damage and the mice still die from the disease.
We believe that by boosting the stress response to higher levels, the progression of chronic diseases like ALS can be slowed,
halted or reversed. In test tube experiments, mammalian cells engineered to have increased amounts of molecular chaperones are
protected against a variety of otherwise lethal stresses. In animal studies, mice that have been genetically engineered to have increased
amounts of a molecular chaperone had improved heart function after an experimental heart attack. Increased molecular chaperone
amounts also significantly increased the lifespan of mice with a disease similar to ALS, called spinal and bulbar muscular atrophy. We
believe that these studies give scientifically accepted support for new drugs like arimoclomol that are capable of boosting the stress
response.
Among the assets acquired from Biorex were several drug candidates whose mechanism of action is believed to be the “co-
induction” of the stress response, meaning that they do not seem to activate the stress response by themselves, but instead they amplify
the production of molecular chaperone proteins that are already activated by disease-induced cellular stress. These drug candidates
thus may selectively amplify molecular chaperone proteins specifically in diseased tissue, which would minimize potential drug side-
effects. The amplification of this fundamental protective mechanism may have powerful therapeutic and prophylactic potential, with
the potential for an extremely broad field of medical therapeutic utility.
We believe that our molecular chaperone co-induction drug candidates can potentially improve the cell’s natural capability to
resist the toxic effects of protein mis-folding, caused by both acute and chronic diseases. Thus, these orally available small molecule
drug candidates may accomplish some of the same goals as RNAi, as described below, but accomplish them by repairing or degrading
the offending proteins, instead of degrading their corresponding mRNAs. Since the specificity for the recognition of mis-folded
proteins is an intrinsic feature of the amplified molecular chaperones, it is not necessary to identify the actual molecular target of the
stress-induced damage. As a result, these drug candidates may allow broader therapeutic utility for the removal of damaged proteins
compared to that of RNAi.
We are not aware of other pharmaceutical companies developing small molecule co-inducers of molecular chaperones. At present,
a few potential drug candidates have been reported in scientific papers to activate molecular chaperone expression, but these do not
require pre-activation of the stress response, and therefore these drug candidates may simply represent a “stress” to the cell.
RNAi Platform Technology
RNAi technology is a recently-discovered technology that uses short double-stranded RNA, or dsRNA, molecules to silence
targeted genes and, as a result, is commonly referred to as “gene silencing.” RNAi has been shown to effectively silence targeted
genes within living cells with great specificity and potency. As a result, RNAi technology is able to effectively silence targeted genes
without impacting other, non-targeted, genes.
RNA is a polymeric constituent of all living cells and many viruses, consisting of a long, usually single-stranded chain of
alternating phosphate and ribose units with the bases adenine, guanine, cytosine, and uracil bonded to the ribose. The structure and
base sequence of RNA are determinants of protein synthesis and the transmission of genetic information. RNAi is a technique of using
short pieces of double-stranded RNA to precisely target the messenger RNA, or mRNA, of a specific gene. The end result is the
destruction of the specific mRNA, thus silencing that gene.
RNAi is regarded as a significant advancement in gene silencing and was featured in Science magazine as the “Breakthrough of
the Year” in 2002. Delivery of RNAi can be useful in laboratory cell culture experiments and in animals (including humans) to target
specific mRNAs, thus reducing the levels of the corresponding specific protein product that is coded for by that RNA in the targeted
cells. This allows the use of RNAi either as an effective drug discovery tool or potentially as a therapeutic product itself. We intend to
develop RNAi technology as both a discovery tool to help identify classical, orally-available small molecule drugs and, potentially
through the creation of a new subsidiary, for direct therapeutic applications when technically feasible. As a drug discovery tool, we
use RNAi to identify and validate novel protein targets, which could then be used to discover small molecule therapeutics for the
treatment and prevention of diseases such as obesity and type 2 diabetes. As a therapeutic, we are conducting pre-clinical RNAi
efficacy studies to determine whether to proceed with human clinical trials using RNAi to silence specific genes that cause certain
forms of ALS, CMV retinitis, and type 2 diabetes. In January 2004, Tariq Rana, a scientific authority in delivery and stability of
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RNAi, and in March 2004, Dr. Craig Mello, the co-discoverer of RNAi, each joined our Scientific Advisory Board and they act in an
advisory capacity to help us develop RNAi therapeutics for specific diseases. We are currently pursuing a plan, subject to obtaining
necessary funding, to transfer all of our RNAi therapeutics assets into a newly-formed subsidiary to accelerate the development and
commercialization of drugs based on RNAi technology. In such event, the Company would continue to use its RNAi gene silencing
technology as a drug discovery tool to facilitate its small molecule drug discovery program.
In mammals and human cells, gene silencing can be triggered by dsRNA molecules present in the cell’s cytoplasm (the region
inside the cell membrane but outside the cell nucleus). Specific enzymes (proteins) in the cell called dicer enzymes cut the dsRNA to
form small interfering RNA, or siRNA. These siRNA are approximately 21 to 25 nucleotide long pieces of RNA. The siRNA then
interact with other cellular proteins to form the RNA-induced silencing complex, or RISC, which causes the unwinding of the bound
siRNA. This unwound strand of the siRNA can then act as a template to seek out and bind with the complementary target mRNA,
which carries the coding, or instructions, from the cell nucleus DNA. These instructions determine which proteins the cell will
produce. When the siRNA-loaded RISC binds with the corresponding mRNA, that “message” is degraded and the cell does not
produce the specific protein that it encodes. Since the siRNA can be designed to specifically interact with a single gene through its
mRNA, it can prevent the creation of a specific protein without affecting other genes.
One reason for the potential of RNAi to be effective, where previous nucleic acid-based technologies have, to date, been
unsuccessful, is that the cell already has in place all of the enzymes and proteins to effectively silence genes once the dsRNA is
introduced into the cell. This is in direct contrast to the older technology of antisense, where there were no known proteins present in
the cells to facilitate the recognition and binding of the antisense molecule to its corresponding mRNA.
Another reason for the interest in RNAi is its potential to completely suppress or eliminate the viral replicon. A replicon is a DNA
or RNA element that can act as a template to replicate itself. Once a virus is established in a cell, there are very few drugs that are
effective in eliminating the virus. The RNAi process, however, has the potential of eliminating viral nucleic acids and, therefore, to
cure certain viral diseases. Development work on RNAi is still at an early stage, and we are aware of only four clinical trials using
RNAi, namely trials for age-related macular degeneration by Acuity Pharmaceuticals and Sirna Therapeutics, for respiratory syncytial
virus by Alnylam Pharmaceuticals and for diabetic macular edema by Acuity Pharmaceuticals.
Product Development
ALS
The development of therapeutics for the treatment of various forms of ALS is an area of significant interest for us. ALS is a
debilitating disease. According to the ALS Survival Guide, 50% of ALS patients die within 18 months of diagnosis and 80% of ALS
patients die within five years of diagnosis. According to the ALS Association, in the United States, alone, approximately 30,000
people are living with ALS and nearly 6,000 new cases are diagnosed each year.
We recently entered the clinical stage of drug development in ALS with the initiation of a Phase II clinical program with our lead
small molecule product candidate arimoclomol for the treatment of ALS. Arimoclomol has received Orphan Drug and Fast Track
designation from the U.S. Food and Drug Administration. The initial portion of the Phase II clinical program was initiated in
September 2005. We expect enrollment in this Phase IIa trial to be complete shortly, and expect to announce results in the third
quarter of 2006.
In October 2003, we entered into sponsored research agreements with UMMS and Massachusetts General Hospital, pursuant to
which we sponsored certain ALS research at those institutions utilizing our proprietary RNAi gene silencing technology targeted at the
mutant SOD1 gene, which is the subject of the ALS technology we have licensed from UMMS. The mutant SOD1 gene is responsible
for causing ALS in a subset of the 10% of all ALS patients who suffer from the familial, or genetic, form of the disease.
Dr. Zuoshang Xu, an Associate Professor of Biochemistry and Molecular Pharmacology at UMMS, is the principal investigator
under our sponsored research agreement with UMMS, through which we have agreed to fund approximately $870,000 of research
related to the development of an RNAi therapeutic targeting the mutant form of SOD1 that causes certain forms of ALS, of which
$654,000 had been paid as of December 31, 2005. We anticipate that the development of this program will be continued by our
planned RNAi subsidiary.
Dr. Robert B. Brown, Jr., a Professor of Neurology at Harvard Medical School, Founder and Director of the Cecil B. Day
Laboratory for Neuromuscular Research and a co-discoverer of the mutant SOD1 gene as a cause for certain ALS cases, is the
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principal investigator under our sponsored research agreement with Massachusetts General Hospital. Under the agreement, we have
funded approximately $556,000 of sponsored research at Massachusetts General Hospital to increase our basic understanding of
certain aspects of the ALS disease process. In March 2004, Dr. Brown joined our Scientific Advisory Board and entered into a
consulting agreement with us.
University of Massachusetts Medical School
Through our strategic alliance with UMMS, we have acquired the rights to a portfolio of technologies, including the rights to use
UMMS’s proprietary RNAi technology in the identification and screening of novel protein targets and as a potential therapeutic in
certain defined areas that include obesity, type 2 diabetes, ALS and CMV, as well as a DNA-based HIV vaccine technology. In
addition, we have entered into a collaboration and invention disclosure agreement with the UMMS under which UMMS will disclose
to us certain new technologies developed at UMMS over a three-year period pertaining to RNAi, diabetes, obesity, neurodegenerative
diseases (including ALS) and CMV and will give us an option, upon making a specified payment, to negotiate an exclusive worldwide
license to the disclosed technologies on commercially reasonable terms. Approximately one year remains on the technology disclosure
option.
The HIV subunit vaccine technology that we have licensed from UMMS is based upon a unique mixture of pieces of human HIV-
1 primary isolates from several genetic subtypes of HIV. These pieces, called HIV envelope proteins, are not sufficient for viral
replication and therefore cannot lead to accidental infection by HIV. This polyvalent naked DNA (isolated, purified DNA) vaccine
approach has the potential advantages of maintaining efficacy despite the high mutation rate of HIV, a broader immune response
against divergent HIV-1 glycoproteins and the possible ability to neutralize a wide spectrum of HIV-1 viruses. UMMS has conducted
animal studies of this vaccine, and UMMS and Advanced BioScience Laboratories, or ABL, which provides an adjuvant for use with
the vaccine, received a $16 million grant from the NIH. This grant funded a Phase I clinical trial of a vaccine candidate using our
licensed technology. We have previously announced that the vaccine candidate demonstrated very promising interim Phase I clinical
trial results that indicate its ability to produce potent antibody responses with neutralizing activity against multiple HIV viral strains,
and we expect to announce final results from the Phase I clinical trial in mid-2006. We have a commercial relationship with ABL
which gives us the ownership of, and responsibility for, the further development of the vaccine and subsequent FDA registration
following the completion of the Phase I trial. We do not have a commercial relationship with a company that is providing an adjuvant
for the HIV vaccine candidate in the current Phase I clinical trial. In any future clinical development of the vaccine candidate, we may
be required either to license that adjuvant, or use a different adjuvant in conjunction with our HIV vaccine technology, in which case
we may not be able to utilize some or all of the results of the currently planned trial as part of our clinical data for obtaining FDA
approval of a vaccine.
Our agreements with UMMS may require us to make significant expenditures to fund research at the institution relating to
developing therapeutic products based on UMMS’s proprietary technologies that have been licensed to us. We estimate that the
aggregate amount of these sponsored research expenditures under our current commitments will be approximately $842,000 for 2006,
although a significant portion of those commitments may be assumed by our planned RNAi subsidiary. Our license agreements with
UMMS require us to make payments of an aggregate of up to $94,000 per year to maintain all of our licenses, with such aggregate
annual payments increasing to as much as $154,000 if we are not then conducting certain sponsored research at the institution. Our
UMMS license agreements also provide, in certain cases, for milestone payments, from us to UMMS, based on the progress we make
in the clinical development and marketing of products utilizing the technologies licensed from UMMS. In addition, our license
agreements with UMMS require us to reimburse UMMS for legal expenses that they incur in prosecuting and maintaining of the
related licenses patents. We estimate these legal expenses to be approximately $250,000 during 2006 and 2007. In the event that we
were to successfully develop a product in each of the categories of obesity/type 2 diabetes, ALS, CMV and an HIV vaccine, under our
licenses, those milestone payments could aggregate up to $16.1 million. Those milestone payments, however, could vary significantly
based upon the milestones we achieve and the number of products we ultimately undertake to develop. In addition, our collaboration
and invention disclosure agreement with UMMS requires us to make payments totaling up to $375,000 in 2006 in consideration for
the option, upon making a specified payment, to negotiate an exclusive worldwide license to certain disclosed technologies.
Obesity and Type 2 Diabetes
Obesity and type 2 diabetes are significant health problems. The World Health Organization estimates that, on a worldwide basis,
there are more than 300 million cases of obesity and 159 million cases of type 2 diabetes. According to the American Obesity
Association, there are currently more than 60 million cases of obesity in the United States, and the American Diabetes Association
reports that there are more than 16 million cases of type 2 diabetes in the United States. Scientists in our Worcester laboratory and
scientists at UMMS, as part of our strategic alliance, are focused on using cultured adipocytes (fat cells) as a model system for
8
studying the regulation of gene expression involved in adipocyte differentiation and function. This research may lead to the
identification of specific drug targets which regulate insulin signaling as well as other metabolic pathways regulating glucose and fatty
acids. With this understanding, the program will focus on drug discovery of small molecule therapeutics and, potentially through a
newly-created subsidiary, RNAi-based therapeutics for type 2 diabetes (e.g., drugs that act as insulin sensitizers and compounds that
alleviate obesity). We believe that RNAi could potentially be a reliable method to selectively inhibit certain genes and their
corresponding protein expression in adipocytes.
In May 2004, we licensed from the technology transfer company of the Imperial College of Science, Technology & Medicine, the
exclusive rights to intellectual property covering a drug screening method using RIP 140, which is a nuclear hormone co-repressor that
is believed to regulate fat accumulation. This proprietary technology is covered by a pending patent application. We paid the licensor a
license fee in the form of cash and shares of our common stock, and we will be required to make defined milestone and royalty
payments based on sales of products developed using this technology. We believe this license provides us with an important potential
drug target in the area of obesity and type 2 diabetes in conjunction with our RNAi gene silencing technology.
In addition, one of the drug candidates acquired from Biorex, iroxanadine, was shown to be well tolerated in two Phase I and one
Phase II clinical trials and demonstrated significant improvement of vascular function in the brachial artery of hypertensive patients.
We plan to evaluate the preclinical efficacy of this drug for two diabetic complications that involve vascular dysfunction, retinopathy
and wound healing. If the drug proves to be efficacious in preclinical work and the FDA agrees that it is appropriate to proceed with a
Phase II clinical trial, we believe that a Phase II clinical trial for either of these indications could begin in 2007.
Although we initially intend to develop arimoclomol for the treatment of ALS, the drug also showed efficacy in preclinical animal
models of diabetes. If efficacy is observed in additional preclinical models, we would also consider beginning a Phase II clinical trial
for diabetes in 2007, as arimoclomol has already been tested in two Phase I clinical trials.
Research and Development Laboratory
In addition to the obesity and diabetes work being done under our sponsored research agreement with UMMS, our research and
development laboratory located in Worcester, Massachusetts is working to develop orally-active small-molecule and RNAi-based
drugs for the prevention and treatment of obesity and type 2 diabetes. Our business strategy is to use our portfolio of state of the art
drug discovery technologies and our relationships with leading diabetes and obesity researchers to discover and develop first in class
medicines to prevent and treat obesity and type 2 diabetes. Utilizing the RNAi target validation technology that we have licensed from
UMMS, in combination with state of the art target identification methods, our research and development laboratory is focused on
using a structure-based drug discovery approach to accelerate the process of screening and identifying potential proprietary drug
targets and pathways for these diseases. Through our laboratory, we are seeking to develop orally-administered drugs that are based on
promising targets and pathways that we may be able to identify.
Through our license and sponsored research agreement with UMMS, we have secured rights to novel drug targets believed to be
involved in obesity and type 2 diabetes. We will seek to validate these targets using the proprietary high throughput RNAi screening
technology that we have licensed from UMMS and will apply state-of-the-art structure-based medicinal chemistry to develop small
molecules and RNAi-based therapeutic products.
Cardiovascular Disease
Preclinical results by third parties with our drug candidate, iroxanadine, indicate that it has therapeutic potential for the treatment
of cardiovascular atherosclerosis. If iroxanadine proves to be effective in additional preclinical work, we plan to seek a strategic
alliance with a larger company to support the subsequent clinical development for this indication.
Pre-Global Genomics Merger Technologies
The following discussion describes our primary scientific programs prior to our merger with Global Genomics on July 19, 2002,
and the status of those programs today.
Therapeutic Copolymer Program
Before the Global Genomics merger, our primary focus was on CRL-5861 (purified poloxamer 188), which we also call Flocor.
Flocor is an intravenous agent for the treatment of sickle cell disease and other acute vaso-occlusive disorders. Sickle cell disease is an
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inherited disease caused by a genetic mutation of hemoglobin in the blood, and acute vaso-occlusive disorders are a blockage of blood
flow caused by deformed, or “sickled,” red blood cells which can cause intense pain in sickle cell disease patients. In June 2004, we
licensed our copolymer technologies, including Flocor, on an exclusive basis, to SynthRx, Inc., a Houston, Texas-based
biopharmaceutical company. As a result of the SynthRx license, we received a 19.9% ownership interest in SynthRx and a cash
payment from SynthRx of approximately $228,000, in return for our rights to the licensed technologies. In addition, upon
commercialization of any products developed under our alliance with SynthRx, we may also receive significant milestone payments
and royalties. Prior to the change in our business strategy that led us to seek licensees for our Flocor technology, we had internally
developed Flocor. In December 1999, we reported results from a Phase III clinical study of Flocor for treatment of acute sickle cell
crisis. Although the study did not demonstrate statistical significance in the primary endpoint, or objective, of the study, statistically
significant and clinically important benefits associated with Flocor were observed in certain subgroups. All amounts paid to us by
SynthRx are non-refundable upon termination of the agreement and require no additional effort on our part.
Vaccine Enhancement and Gene Therapy
Gene therapy and gene-based vaccines are mediated through the delivery of DNA containing selected genes into cells by a process
known as transfection. We refer to our gene delivery technology as TranzFect. A large majority of the revenues we have generated
over the past three years has been due to license fees paid to us with respect to our TranzFect technology, representing 54%, 93% and
81% of our total revenues for 2005, 2004 and 2003, respectively.
Merck License
In November 2000, we entered into an exclusive, worldwide license agreement with Merck & Co., Inc. whereby we granted Merck
the right to use our TranzFect technology in DNA-based vaccines for HIV and three other targets. To date, Merck has focused its
efforts on the HIV application, which is still at an early stage of clinical development, and, in July 2003, Merck notified us that it was
returning to us the rights to the three other targets covered by its license, which we are now able to license to other third parties. In
November 2000, Merck paid us a signature payment of $2 million. In February 2002, we received an additional $1 million milestone
fee related to the commencement of Merck’s first FDA Phase I study for a product incorporating TranzFect designed for the
prevention and treatment of HIV. Merck completed a multi-center, blinded, placebo controlled Phase I trial of an HIV vaccine
utilizing TranzFect as a component. Although the formulation of this tested vaccine was generally safe, well-tolerated and generated
an immune response, the addition of TranzFect to the vaccine did not increase this immune response. Moreover, the DNA single-
modality vaccine regimen with TranzFect, when tested in humans, yielded immune responses that were inferior to those obtained with
the DNA vaccines in macaque monkeys. All amounts paid to us by Merck are non-refundable upon termination of the agreement and
require no additional effort on our part.
Vical License
In December 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) the four targets previously licensed by us to
Merck, (2) DNA vaccines or therapeutics based on prostate-specific membrane antigen, or PSMA, and (3) sale of a non-regulated
product for use as a non-clinical research reagent to increase transfection in vitro or in laboratory animals. 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 (short segments of DNA or RNA). Under the Vical license, we received a non-refundable up-
front payment of $3,750,000, and, in addition to annual maintenance payments, we have the potential to receive milestone and royalty
payments in the future based on criteria described in the agreement. In each of April 2004 and January 2005, we received additional
$100,000 milestone fees related to the commencement of Vical’s first FDA Phase I clinical trial for a product incorporating our
TranzFect technology. All amounts paid to us by Vical are non-refundable upon termination of the agreement and require no
additional effort on our part.
Genomics Investments
In connection with our merger with Global Genomics in July 2002, we acquired indirectly equity interests in two development-
stage genomics companies, a 40% equity interest in Blizzard and a 5% equity interest in Psynomics. In the fourth quarter of 2003, we
decided that we would cease funding our investments in those genomics companies to focus on our core strategy of developing human
therapeutics for large market indications. In May 2004, we determined that a write-off of those investments in the third quarter of
2003 should have been made. Our decision to record the write-off was based upon several factors, including Blizzard’s lack of success
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in raising a significant amount of the financing necessary for it to pursue the commercialization strategy for its products, current
financial projections prepared by Blizzard, application of a discounted cash flow valuation model of Blizzard’s projected cash flows
and the consideration of other qualitative factors. Based upon the quantitative and qualitative factors described above, in addition to
others, we determined that the investment in Blizzard had no remaining value as of September 30, 2003 and that a write-off of this
investment should have been made in the third quarter of 2003. It is our understanding that, by the end of 2003, Blizzard had ceased
operations and, in 2004, returned its licensed intellectual property to the Minnesota Research Fund.
Research and Development Expenditures
Expenditures for research and development activities were $9.1 million, $9.0 million and $4.4 million during the years ended
December 31, 2005, 2004 and 2003, respectively. Included in research and development expenses for 2004 was $3.0 million of in-
process research and development that was written off in conjunction with our acquisition of assets from Biorex.
Manufacturing
We do not have the facilities or expertise to manufacture any of the clinical or commercial supplies of any of our products,
including our supply of arimoclomol used for our clinical program. To be successful, our products and the products of our partners
must be manufactured in commercial quantities in compliance with regulatory requirements and at an acceptable cost. To date, we
have not commercialized any products, nor have we demonstrated that we can manufacture commercial quantities of our product
candidates in accordance with regulatory requirements. If we cannot manufacture products in suitable quantities and in accordance
with regulatory standards, either on our own or through contracts with third parties, it may delay clinical trials, regulatory approvals
and marketing efforts for such products. Such delays could adversely affect our competitive position and our chances of achieving
profitability. We cannot be sure that we can manufacture, either on our own or through contracts with third parties, such products at a
cost or in quantities, which are commercially viable. We currently rely and intend to continue to rely on third-party contract
manufacturers to produce materials needed for research, clinical trials and, ultimately, for product commercialization.
Patents and Proprietary Technology
We actively seek patent protection for our technologies, processes, uses, and ongoing improvements and consider our patents and
other intellectual property to be critical to our business. We have filed applications for a number of patents and have been granted
patents related to technologies, primarily TranzFect and Flocor, we were developing prior to our 2002 merger with Global Genomics.
Subsequent to the merger, we acquired patents in connection with our acquisition of intellectual property rights of Biorex and we have
licensed additional technologies covered by patents or patent applications, most of which are in the RNAi field.
As part of our development process, we evaluate the patentability of new inventions and improvements developed by us or our
collaborators. Whenever appropriate, we will endeavor to file United States and international patent applications to protect these new
inventions and improvements. However, we cannot be certain that any of the current pending patent applications we have filed or
licensed, or any new patent applications we may file or license, will ever be issued in the United States or any other country. Even if
issued, there can be no assurance that those patents will be sufficiently broad to prevent others from using our products or processes.
Furthermore, our patents, as well as those we have licensed or may license in the future, may be held invalid or unenforceable by a
court, or third parties could obtain patents that we would need to either license or to design around, which we may be unable to do.
Current and future competitors may have licensed or filed patent applications or received patents, and may acquire additional patents
and proprietary rights relating to molecular chaperone co-induction and other small molecule technology, RNAi technology, DNA-
based vaccines or other compounds, products or processes competitive with ours.
In addition to patent protection, we also attempt to protect our proprietary products, processes and other information by relying on
trade secrets and non-disclosure agreements with our employees, consultants and certain other persons who have access to such
products, processes and information. Under the agreements, all inventions conceived by employees are our exclusive property.
Nevertheless, there can be no assurance that these agreements will afford significant protection against misappropriation or
unauthorized disclosure of our trade secrets and confidential information.
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Competition
Currently, Rilutek(R), which was developed by Aventis Pharma AG, is the only drug of which we are aware that has been
approved by the FDA for the treatment of ALS. Other companies are working to develop pharmaceuticals to treat ALS, including
Aeolus Pharmaceuticals, Ono Pharmaceuticals, Trophos SA, FaustPharmaceuticals SA and Oxford BioMedica plc. In addition, ALS
belongs to a family of diseases called neurodegenerative diseases, which includes Alzheimer’s, Parkinson’s and Huntington’s disease.
Due to similarities between these diseases, a new treatment for one ailment potentially could be useful for treating others. There are
many companies that are producing and developing drugs used to treat neurodegenerative diseases other than ALS, including Amgen,
Inc., Cephalon, Inc., Ceregene, Inc., Elan Pharmaceuticals, plc, H. Lundbeck A/S, Phytopharm plc, and Schwarz Pharma AG.
The RNAi field, though at an early stage of development, is already a competitive one and the competition is expected to increase.
We face competition on many fronts — ranging from large and small pharmaceutical, chemical and biotechnology companies to
universities, government agencies and other public and private research organizations. Examples of companies that are focusing their
commercial efforts in the RNAi field are Sirna Therapeutics, Alnylam Pharmaceuticals, Acuity Pharmaceuticals, Nastech
Pharmaceutical Company Inc., Nucleonics, Inc. and Benitec Ltd. A number of the multinational pharmaceutical companies also either
have their own gene silencing product development programs or are working with smaller biopharmaceutical companies in this area.
In addition to our RNAi competitors, companies in other fields may be using other technologies to target the same diseases that we are
targeting. The competition from other firms and institutions will manifest itself not only in our potential product markets but also, and
importantly at this stage in development of RNAi technology, in recruiting and retaining key scientific and management personnel.
Companies developing HIV vaccines that could compete with our HIV vaccine technology include Merck, VaxGen, Inc.,
AlphaVax, Inc. and Immunitor Corporation, and ABL may also seek to develop competing HIV vaccines that could utilize a portion
of the technology that we have licensed from UMMS and ABL.
With respect to both our RNAi and non-RNAi products, many companies, including large pharmaceutical and biotechnology firms
with financial resources, research and development staffs, and facilities that may, in certain cases, be substantially greater than those
of ours or our strategic partners or licensees, are engaged in the research and development of pharmaceutical products that could
compete with our potential products. To the extent that we seek to acquire, through license or otherwise, existing or potential new
products, we will be competing with numerous other companies, many of which will have substantially greater financial resources,
large acquisition and research and development staffs that may give those companies a competitive advantage over us in identifying
and evaluating these drug acquisition opportunities. Any products that we acquire will be competing with products marketed by
companies that in many cases will have substantially greater marketing resources than we have. The industry is characterized by rapid
technological advances and competitors may develop their products more rapidly and such products may be more effective than those
currently under development or that may be developed in the future by our strategic partners or licensees. Competitive products for a
number of the disease indications that we have targeted are currently being marketed by other parties, and additional competitive
products are under development and may also include products currently under development that we are not aware of or products that
may be developed in the future.
Government Regulation
The marketing of pharmaceutical products requires the approval of the FDA and comparable regulatory authorities in foreign
countries. The FDA has established guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing,
manufacture and marketing of pharmaceutical products. The process of obtaining FDA approval for a new drug product generally
takes a number of years and involves the expenditure of substantial resources. The steps required before such a product can be
produced and marketed for human use in the United States include preclinical studies in animal models, the filing of an Investigational
New Drug (IND) application, human clinical trials and the submission and approval of a New Drug Application (NDA) or a Biologics
License Application (BLA). The NDA or BLA involves considerable data collection, verification and analysis, as well as the
preparation of summaries of the manufacturing and testing processes, preclinical studies, and clinical trials. The FDA must approve
the NDA or BLA before the drug may be marketed. There can be no assurance that we or our strategic alliance partners or licensees
will be able to obtain the required FDA approvals for any of our products.
The manufacturing facilities and processes for our products, which we anticipate will be manufactured by our strategic partners or
licensees or other third parties, will be subject to rigorous regulation, including the need to comply with Federal Good Manufacturing
Practice regulations. Our manufacturers also will be subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act and the Resource
Conservation and Recovery Act.
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Employees
As of December 31, 2005, we had 28 employees, 18 of whom were engaged in research and development activities and 10 of
whom were involved in management and administrative operations. All of the full-time employees engaged in research and
development activities hold Ph.D. degrees.
Item 1A. Risk Factors
If any of the following risks actually occur, our business or prospects could be materially adversely affected. You should also refer
to the other information in this Annual Report, including our financial statements and the related notes.
We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable Future
We have incurred significant losses over the past five years, including net losses of $15.1 million, $16.4 million and $17.8 million
for the years ended December 31, 2005, 2004 and 2003, respectively, and we had an accumulated deficit of approximately $121.3
million as of December 31, 2005. Our operating losses have been due primarily to our expenditures for research and development on
our products and for general and administrative expenses and our lack of significant revenues. We are likely to continue to incur
operating losses until such time, if ever, that we generate significant recurring revenues. We anticipate it will take a minimum of three
years (and possibly longer) for us to generate recurring revenues, since we expect that it will take at least that long before the
development of any of our licensed or other current potential products is completed, marketing approvals are obtained from the FDA
and commercial sales of any of these products can begin.
We Have No Source of Significant Recurring Revenues, Which Makes Us Dependent on Financing to Sustain Our Operations
Our revenues were $184,000, $428,000, and $94,000 during the years ended December 31, 2005, 2004 and 2003, respectively. We
will not have significant recurring operating revenues until at least one of the following occurs:
• We are able to complete the development of and commercialize one or more of the products that we are currently developing,
which may require us to first enter into license or other arrangements with third parties.
• One or more of our currently licensed products is commercialized by our licensees, thereby generating royalty income for us.
• We are able to acquire products from third parties that are already being marketed or are approved for marketing.
We expect to incur losses from operations until such time, if ever, as we can generate significant recurring revenues. On March 7,
2006, we completed a private placement financing and received net proceeds of approximately $12.4 million. Although we believe
that we have adequate financial resources to support our currently planned level of operations into the third quarter of 2007, we will be
dependent on obtaining financing from third parties in order to maintain our operations, including our Phase II clinical program with
arimoclomol for ALS, our planned levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi subsidiary
and our ongoing research and development efforts related to our other small molecule drug candidates, and in order to continue to
meet our obligations to UMMS.
We have no commitments from third parties to provide us with any additional debt or equity financing, and may not be able to
obtain future financing on favorable terms, or at all. A lack of needed financing would force us to reduce the scope of, or terminate,
our operations, or to seek to merge with or to be acquired by another company. There can be no assurance that we would be able to
identify an appropriate company to merge with or be acquired by or that we could consummate such a transaction on terms that would
be attractive to our stockholders or at all.
Most of Our Revenues Have Been Generated by License Fees for TranzFect, Which May Not be a Recurring Source of
Revenue for Us
License fees paid to us with respect to our TranzFect technology have represented 54%, 93% and 81% of our total revenues for the
years ended December 31, 2005, 2004 and 2003, respectively. We have already licensed most of the potential applications for this
technology, and there can be no assurance that we will be able to generate additional license fee revenues from any new licensees for
this technology. Our current licensees for TranzFect, Merck, and Vical, may be required to make further milestone payments to us
under their licenses based on their future development of products using TranzFect. Since TranzFect is to be used as a component in
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vaccines, we do not need to seek FDA approval, but any vaccine manufacturer will need to seek FDA approval for the final vaccine
formulation containing TranzFect. Merck has completed a multi-center, blinded, placebo controlled Phase I trial of an HIV vaccine
utilizing TranzFect as a component. In the Merck trials, although the formulation of the tested vaccine using TranzFect was generally
safe, well-tolerated and generated an immune response, the addition of TranzFect to the vaccine did not increase this immune
response. Moreover, the DNA single-modality vaccine regimen with TranzFect, when tested in humans, yielded immune responses
that were inferior to those obtained with the DNA vaccines in macaque monkeys. Accordingly, there is likely to be a substantial
period of time, if ever, before we receive any further significant payments from Merck or Vical under their TranzFect licenses.
We Have Changed Our Business Strategy, Which Will Require Us, in Certain Cases, to Find and Rely Upon Third Parties for
the Development of Our Products and to Provide Us With Products
Following our merger with Global Genomics, we modified our business strategy of internally developing Flocor and the other,
then-current, potential products that we had not yet licensed to third parties. Instead, we began to seek to enter into strategic alliances,
license agreements or other collaborative arrangements with other pharmaceutical companies that would provide for those companies
to be responsible for the development and marketing of those products. In June 2004, we licensed Flocor, the primary potential
product that we held prior to the Global Genomics merger and which we had not already licensed to a third party, to SynthRx, Inc., a
recently formed Houston, Texas-based biopharmaceutical company, under a strategic alliance that we entered into with that company
in October 2003. Although we intend to internally fund or carry out a significant portion of the research and development related to at
least one of our small molecule drug candidates, and the early stage development work for certain product applications based on the
RNAi and other technologies that we licensed from UMMS, and we may seek to fund all of the later stage development work for our
potential ALS products, the completion of the development, manufacture and marketing of these products is likely to require, in many
cases, that we enter into strategic alliances, license agreements or other collaborative arrangements with larger pharmaceutical or
biotechnology companies for this purpose.
There can be no assurance that any of our products will have sufficient potential commercial value to enable us to secure strategic
alliances, license agreements or other collaborative arrangements with suitable companies on attractive terms or at all. If we are unable
to enter into collaborative agreements, we may not have the financial or other resources to continue development of a particular
product or the development of any of our products. In connection with the recently-completed Phase I clinical trial conducted by
UMMS and Advanced BioScience Laboratories on an HIV vaccine candidate that utilizes a technology that we licensed from UMMS,
we do not have a commercial relationship with the company that provided an adjuvant for the vaccine for the trial. If we are not able
to enter into an agreement with this company on terms favorable to us or at all, we may be unable to use some or all of the results of
the clinical trial as part of our clinical data for obtaining FDA approval of this vaccine, which will delay the development of the
vaccine.
If we enter into these collaborative arrangements, we will be dependent upon the timeliness and effectiveness of the development
and marketing efforts of our contractual partners. If these companies do not allocate sufficient personnel and resources to these efforts
or encounter difficulties in complying with applicable regulatory (including FDA) requirements, the timing of receipt or amount of
revenues from these arrangements may be materially and adversely affected. By entering into these arrangements rather than
completing the development and then marketing these products on our own, we may suffer a reduction in the ultimate overall
profitability for us of these products. In addition, if we are unable to enter into these arrangements for a particular product, we may be
required to either sell our rights in the product to a third party or abandon it unless we are able to raise sufficient capital to fund the
substantial expenditures necessary for development and marketing of the product.
We may also seek to acquire products from third parties that already are being marketed or have previously been marketed. We
have not yet identified any of these products. Even if we do identify such products, it may be difficult for us to acquire them with our
limited financial resources and, if we acquire products using our securities as currency, we may incur substantial shareholder dilution.
We do not have any prior experience in acquiring or marketing products and may need to find third parties to market these products
for us. We may also seek to acquire products through a merger with one or more companies that own such products. In any such
merger, the owners of our merger partner could be issued or hold a substantial, or even controlling, amount of stock in our company
or, in the event that the other company is the surviving company, in that other company.
Our Current Financial Resources May Limit Our Ability to Execute Certain Strategic Initiatives
In June 2004, we licensed Flocor to SynthRx, which will be responsible for developing potential product applications for Flocor.
Although we are not doing any further development work on TranzFect or Flocor, should our three principal licensees for those
technologies successfully meet the defined milestones, we could receive future milestone payments and, should any of the licensees
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commercialize products based upon our technology, future royalty payments. However, there can be no assurance that our licensees
will continue to develop or ever commercialize any products that are based on our Flocor or our TranzFect technology.
Our strategic alliance with UMMS will require us to make significant expenditures to fund research at UMMS relating to the
development of therapeutic products based on UMMS’s technologies that we have licensed and pursuant to our collaboration and
invention disclosure agreement with UMMS. We estimate that the aggregate amount of these expenditures under our current
commitments will be approximately $1,186,000 million for 2006 and approximately $450,000 for 2007. Our license agreements with
UMMS also provide, in certain cases, for milestone payments based on the progress we make in the clinical development and
marketing of products utilizing the licensed technologies. In the event that we were to successfully develop a product in each of the
categories of obesity/type 2 diabetes, ALS, CMV and an HIV vaccine, under our licenses, those milestone payments could aggregate
up to $16.1 million.
We estimate that the Phase II clinical program with arimoclomol for ALS, including the recently-initiated Phase IIa trial and the
Phase IIb trial that we expect to initiate soon after completion of the present Phase IIa trial subject to FDA approval, will require us to
expend approximately $17.8 million over a period of 24 to 30 months. In addition, the agreement pursuant to which we acquired the
clinical and pharmaceutical assets of Biorex provides for milestone payments based on the occurrence of certain regulatory filings and
approvals related to the acquired products. In the event that we successfully develop any of the products acquired from Biorex, the
milestone payments could aggregate up to $4.2 million. Each of the foregoing milestone payments, however, could vary significantly
based upon the milestones we achieve and the number of products we ultimately undertake to develop.
Under our license for our HIV vaccine candidate, following the completion of the current Phase I trial, we will be responsible for
all of the costs for subsequent clinical trials for this vaccine. The costs of subsequent trials for the HIV vaccine will be very
substantial. Although we are seeking NIH or other governmental funding for these future trials, we do not have, and there can be no
assurance that we will be able to secure, such funding for any of these trials.
The expenditures potentially required under our agreements with UMMS and ABL, together with the operating capital
requirements of our obesity and type 2 diabetes laboratory, our planned sponsored research funding for Massachusetts General
Hospital, our Phase II clinical program with arimoclomol for ALS and our development of our small molecule drug candidates,
substantially exceed our current financial resources. Although we raised approximately $12.4 million in March 2006, net of
transaction expenses, those required expenditures will nonetheless require us to raise additional capital or to secure a licensee or
strategic partner in order to maintain our operations, including our Phase II clinical program with arimoclomol for ALS, our planned
levels of operations for our obesity and type 2 diabetes laboratory, our planned RNAi subsidiary and our ongoing research and
development efforts related to our other small molecule drug candidates, and in order to continue to meet our obligations to UMMS. If
we are unable to meet our various financial obligations under license agreements with UMMS, we could lose all of our rights under
those agreements. If we were to have inadequate financial resources at that time, we also could be forced to reduce the level of, or
discontinue, operations at our laboratory.
If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to Reduce or Terminate Our
Operations
All of our products are at various stages of development and must be approved by the FDA or similar foreign governmental
agencies before they can be marketed. The process for obtaining FDA approval is both time-consuming and costly, with no certainty
of a successful outcome. This process typically includes the conduct of extensive pre-clinical and clinical testing, which may take
longer or cost more than we or our licensees anticipate, and may prove unsuccessful due to numerous factors. Product candidates that
may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results
of preclinical and initial clinical testing of these products may not necessarily indicate the results that will be obtained from later or
more extensive testing. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials.
Numerous factors could affect the timing, cost or outcome of our drug development efforts, including the following:
• Difficulty in securing centers to conduct trials.
• Difficulty in enrolling patients in conformity with required protocols or projected timelines.
• Unexpected adverse reactions by patients in trials.
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• Difficulty in obtaining clinical supplies of the product.
• Changes in the FDA’s requirements for our testing during the course of that testing.
•
Inability to generate statistically significant data confirming the efficacy of the product being tested.
• Modification of the drug during testing.
• Reallocation of our limited financial and other resources to other clinical programs.
It is possible that none of the products we develop will obtain the appropriate regulatory approvals necessary for us to begin selling
them. The time required to obtain FDA and other approvals is unpredictable but often can take years following the commencement of
clinical trials, depending upon the complexity of the drug candidate. Any analysis we perform of data from clinical activities is subject
to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. Any delay or
failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular drug
candidate and we may not have the financial resources to continue to develop our products and may have to terminate our operations.
The Approach We Are Taking to Discover and Develop Novel Therapeutics Using RNAi is Unproven and May Never Lead to
Marketable Products
The RNAi technologies that we have acquired from UMMS have not yet been clinically tested by us, nor are we aware of any
clinical trials having been completed by third parties involving similar technologies. Neither we nor any other company has received
regulatory approval to market therapeutics utilizing RNAi. The scientific discoveries that form the basis for our efforts to discover and
develop new drugs are relatively new. The scientific evidence to support the feasibility of developing drugs based on these discoveries
is both preliminary and limited. Successful development of RNAi-based products will require solving a number of issues, including
providing suitable methods of stabilizing the RNAi drug material and delivering it into target cells in the human body. We may spend
large amounts of money trying to solve these issues, and never succeed in doing so. In addition, any compounds that we develop may
not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact
with human biological systems in unforeseen, ineffective or harmful ways.
Our Planned RNAi Subsidiary May Not Be Able to Obtain Sufficient Funding, and We May Not Control a Majority of the
Planned Subsidiary if We Obtain Financing
We are currently pursuing a plan to transfer all of our RNAi therapeutics assets into a newly-formed subsidiary to accelerate the
development and commercialization of drugs based on RNAi technology. Although we believe that this structure may facilitate our
obtaining additional financing to pursue our RNAi development efforts, we have no commitments or arrangements for any financing,
and there is no assurance that we will be able to obtain financing for this purpose. Our planned RNAi subsidiary will be only partially
owned by us. Depending upon the amount and terms of its future financing activities, we may not control the subsidiary, or may share
control with other shareholders whose interests may not be directly aligned with ours. It also is possible that any products developed
by the RNAi subsidiary could eventually compete with our products for some disease indications, such as ALS, type 2 diabetes and
obesity.
The Drug Candidates Acquired from Biorex May Not Obtain Regulatory Marketing Approvals
On October 4, 2004, we acquired all of the clinical and pharmaceutical assets and related intellectual property of Biorex, including
three drug candidates (arimoclomol, iroxanadine and bimoclomol), and a library of small molecule drug candidates. Although each of
arimoclomol, iroxanadine and bimoclomol has undergone clinical testing, significant and costly additional testing will be required in
order to bring any product to market. We may be unable to confirm in our pre-clinical or clinical trials with arimoclomol, iroxanadine
or bimoclomol the favorable pre-clinical or clinical data previously generated by European investigators for these drug candidates,
which could require us to have to modify our development plans for these compounds.
In September 2005, we initiated Phase II clinical testing for arimoclomol for ALS. There are no assurances that the clinical testing
will be successful, or that the FDA will permit us to commence our planned Phase IIb clinical trial upon the completion of our
ongoing Phase IIa clinical trial. Any additional requirements imposed by the FDA in connection with the ongoing Phase IIa trial, or in
connection with our planned Phase IIb trial, could add further time and expense for us to carry out this trial.
16
We believe that the FDA may accept the completion of a successful Phase II clinical program as sufficient to enable us to submit a
New Drug Application, or NDA; however there are no assurances that the FDA will accept our Phase II program in lieu of a Phase III
clinical trial. If the FDA requires us to complete a Phase III clinical trial, the cost of development of arimoclomol will increase
significantly beyond our estimated costs, and the time to completion of clinical testing would be delayed. In addition, the FDA
ultimately could require us to achieve an efficacy end point in the clinical trials for arimoclomol that could be more difficult,
expensive and time-consuming than our planned end point. Although we anticipate developing arimoclomol for the treatment of ALS,
arimoclomol has also shown therapeutic efficacy in a preclinical animal model of diabetes and we may pursue development of
arimoclomol for diabetic indications. However, such development would require significant and costly additional testing. There is no
guarantee that arimoclomol would show any efficacy for any other indications.
Iroxanadine has been tested in two Phase I clinical trials and one Phase II clinical trial which showed improvement in the function
of endothelial cells in blood vessels of patients at risk of cardiovascular disease. We intend to develop this product to improve
endothelial dysfunction in indications such as diabetic retinopathy and wound healing, which will require significant and costly
additional testing. There is no guarantee that iroxanadine will show any efficacy in the intended uses we are seeking. We may also
attempt to license iroxanadine to larger pharmaceutical or biotechnology companies for cardiovascular indications; however, there is
no guarantee that any such company will be interested in licensing iroxanadine from us or on terms that are favorable to us.
Bimoclomol has been tested in two Phase II clinical trials where it was shown to be safe, but where it did not show efficacy for
diabetic neuropathy, the indication for which it was tested. We intend to develop this compound for other therapeutic indications;
however there can be no guarantee that this compound will be effective in treating any diseases. In addition, the FDA may require us
to perform new safety clinical trials, which would be expensive and time consuming and would delay development of bimoclomol.
There is no guarantee that any additional clinical trials will be successful or that the FDA will approve any of these products and allow
us to begin selling them in the United States.
Our Obesity and Type 2 Diabetes Laboratory May Not Be Able to Develop Products
In order to develop new obesity and type 2 diabetes products, we will first need to identify appropriate drug targets and pathways.
We are using novel RNAi-based techniques to accelerate this process, but there is no assurance that these techniques will accelerate
our work or that we will be able to identify highly promising targets or pathways using these techniques or otherwise. Even if we are
successful in identifying these targets or pathways, we will need to then develop proprietary molecules that are safe and effective
against these targets. The development process and the clinical testing of our potential products will take a lengthy period of time and
involve expenditures substantially in excess of our current financial resources that are available for this purpose. We are currently
seeking a strategic alliance with a major pharmaceutical or biotechnology company to complete the development, clinical testing and
manufacturing and marketing of our potential obesity and type 2 diabetes products, which are at an early stage of development, but we
may not be able to secure such a strategic partner on attractive terms or at all. We do not have prior experience in operating a genomic
and proteomic-based drug discovery company. Accordingly, we will be heavily dependent on the prior experience and current efforts
of Dr. Michael P. Czech, the Chairman of our Scientific Advisory Board, Dr. Jack Barber, our Senior Vice President — Drug
Development, and Dr. Mark A. Tepper, our Senior Vice President — Drug Discovery, in establishing our scientific goals and
strategies.
We Will Be Reliant Upon SynthRx to Develop and Commercialize Flocor
In June 2004, we licensed Flocor and our other co-polymer technologies to SynthRx and acquired a 19.9% equity interest in that
newly formed biopharmaceutical company. SynthRx has only limited financial resources and will have to either raise significant
additional capital or secure a licensee or strategic partner to complete the development and commercialization of Flocor and these
other technologies. We are not aware that SynthRx has any commitments from third parties to provide the capital that it will require,
and there can be no assurance that it will be able to obtain this capital or a licensee or strategic partner on satisfactory terms or at all.
Our prior Phase III clinical trial of Flocor for the treatment of sickle cell disease patients experiencing an acute vaso-occlusive
crisis did not achieve its primary objective. However, in this study, for patients 15 years of age or younger, the number of patients
achieving a resolution of crisis was higher for Flocor-treated patients at all time periods than for placebo-treated patients, which may
indicate that future clinical trials should focus on juvenile patients. Generating sufficient data to seek FDA approval for Flocor will
require additional clinical studies which have not yet been funded or commenced by SynthRx, and those studies will entail substantial
time and expense for SynthRx.
17
The manufacture of Flocor involves obtaining new raw drug substance and a supply of the purified drug from the raw drug
substance, which requires specialized equipment. Should SynthRx encounter difficulty in obtaining the purified drug substance in
sufficient amounts and at acceptable prices, SynthRx may be unable to complete the development or commercialization of Flocor on a
timely basis or at all.
We Are Subject to Intense Competition That Could Materially Impact Our Operating Results
We and our strategic partners or licensees may be unable to compete successfully against our current or future competitors. The
pharmaceutical, biopharmaceutical and biotechnology industry is characterized by intense competition and rapid and significant
technological advancements. Many companies, research institutions and universities are working in a number of areas similar to our
primary fields of interest to develop new products. There also is intense competition among companies seeking to acquire products
that already are being marketed. Many of the companies with which we compete have or are likely to have substantially greater
research and product development capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other
resources than at least some of our present or future strategic partners or licensees.
As a result, these competitors may:
• Succeed in developing competitive products sooner than us or our strategic partners or licensees.
• Obtain FDA and other regulatory approvals for their products before approval of any of our products.
• Obtain patents that block or otherwise inhibit the development and commercialization of our product candidates.
• Develop products that are safer or more effective than our products.
• Devote greater resources to marketing or selling their products.
•
•
Introduce or adapt more quickly to new technologies or scientific advances.
Introduce products that render our products obsolete.
• Withstand price competition more successfully than us or our strategic partners or licensees.
• Negotiate third-party strategic alliances or licensing arrangements more effectively.
• Take advantage of other opportunities more readily.
A number of medical institutions and pharmaceutical companies are seeking to develop products based on gene silencing
technologies. Companies working in this area include Sirna Therapeutics, Alnylam Pharmaceuticals, Acuity Pharmaceuticals, Nastech
Pharmaceutical Company Inc., Nucleonics, Inc., Benitec Ltd. and a number of the multinational pharmaceutical companies. A number
of products currently are being marketed by a variety of the multinational or other pharmaceutical companies for treating type II
diabetes, including among others the diabetes drugs Avandia(R) by Glaxo SmithKline PLC, Actos(R) by Eli Lilly & Co.,
Glucophage(R) by Bristol-Myers Squibb Co., Symlin(R) by Amylin Pharmaceuticals, Inc. and Starlix(R) by Novartis and the obesity
drugs Acomplia(R) by Sanofi-Aventis SA, Xenical(R) by F. Hoffman-La Roche Ltd. and Meridia(R) by Abbott Laboratories. Many
major pharmaceutical companies are also seeking to develop new therapies for these disease indications. Companies developing HIV
vaccines that could compete with our HIV vaccine technology include Merck, VaxGen, Inc., AlphaVax, Inc. and Immunitor
Corporation.
Currently, Rilutek(R), which was developed by Aventis Pharma AG, is the only drug of which we are aware that has been
approved by the FDA for the treatment of ALS. Other companies are working to develop pharmaceuticals to treat ALS, including
Aeolus Pharmaceuticals, Ono Pharmaceuticals, Trophos SA, FaustPharmaceuticals SA and Oxford BioMedica plc. In addition, ALS
belongs to a family of diseases called neurodegenerative diseases, which includes Alzheimer’s, Parkinson’s and Huntington’s disease.
Due to similarities between these diseases, a new treatment for one ailment potentially could be useful for treating others. There are
many companies that are producing and developing drugs used to treat neurodegenerative diseases other than ALS, including Amgen,
Inc., Cephalon, Inc., Ceregene, Inc., Elan Pharmaceuticals, plc, H. Lundbeck A/S, Phytopharm plc, and Schwarz Pharma AG.
18
Although we do not expect Flocor to have direct competition from other products currently available or that we are aware of that
are being developed related to Flocor’s ability to reduce blood viscosity in the cardiovascular area, there are a number of anticoagulant
products that Flocor would have to compete against, such as tissue plasminogen activator, or t-PA, and streptokinase (blood clot
dissolving enzymes) as well as blood thinners such as heparin and coumatin, even though Flocor acts by a different mechanism to
prevent damage due to blood coagulation. In the sickle cell disease area, Flocor would compete against companies that are developing
or marketing other products to treat sickle cell disease, such as Droxia(R) (hydroxyurea) marketed by Bristol-Myers Squibb Co. and
Dacogen(TM), which is being developed by SuperGen, Inc. Our TranzFect technology will compete against a number of companies
that have developed adjuvant products, such as the adjuvant QS-21(TM) marketed by Antigenics, Inc. and adjuvants marketed by
Corixa Corp.
We Do Not Have the Ability to Manufacture Any of Our Products and Will Need to Rely upon Third Parties for the
Manufacture of Our Clinical and Commercial Product Supplies
We do not currently have the facilities or expertise to manufacture any of the clinical or commercial supplies of any of our
products, including the supply of arimoclomol used in our Phase II clinical trials. Accordingly, we are and will be dependent upon
contract manufacturers or our strategic alliance partners to manufacture these supplies, or we will need to acquire the ability to
manufacture these supplies ourselves, which could be very difficult, time-consuming and costly. We have a manufacturing supply
arrangement in place with respect to the clinical supplies for both the Phase IIa and Phase IIb trials for arimoclomol for ALS. We do
not otherwise have manufacturing supply arrangements for our other product candidates, including any of the licensed RNAi
technology, the other drug candidates acquired from Biorex or, with the exception of the clinical supplies for the current Phase I trial,
the HIV vaccine product that utilizes the HIV vaccine technology that we have licensed from UMMS. There can be no assurance that
we will be able to secure needed manufacturing supply arrangements, or acquire the ability to manufacture the products ourselves, on
attractive terms or at all. Delays in, or a failure to, secure these arrangements or abilities could have a materially adverse effect on our
ability to complete the development of our products or to commercialize them.
We May Be Unable to Protect Our Intellectual Property Rights, Which Could Adversely Affect the Value of Our Assets
We believe that obtaining and maintaining patent and other intellectual property rights for our technologies and potential products
is critical to establishing and maintaining the value of our assets and our business. Although we believe that we have significant patent
coverage for the technologies that we acquired from Biorex and for our TranzFect technologies, there can be no assurance that this
coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies, that the
validity of our patents will be upheld if challenged by third parties or that our technologies will not be deemed to infringe the
intellectual property rights of third parties. In particular, although we conducted certain due diligence regarding the patents and patent
applications acquired from Biorex and received certain representations and warranties from Biorex in connection with the acquisition,
the patents and patent applications acquired from Biorex were issued or filed, as applicable, prior to our acquisition and thus there can
be no assurance that the validity, enforceability and ownership of those patents and patent applications will be upheld if challenged by
third parties. We have a nonexclusive license to a patent owned by UMMS and the Carnegie Institution of Washington that claims
various aspects of gene silencing, or genetic inhibition by double-stranded RNA, but there can be no assurance that this patent will
withstand possible third-party challenges or otherwise protect our technologies from competition. The medical applications of the
gene silencing technology and the other technologies that we have licensed from the UMMS also are claimed in a number of pending
patent applications, but there can be no assurance that these applications will result in any issued patents or that those patents will
withstand third-party challenges or protect our technologies from competition. Moreover, we are aware of at least one other issued
United States patent claiming broad applications for RNAi, and many patent applications covering different methods and
compositions in the field of RNAi therapeutics have been and are expected to be filed, and certain organizations or researchers may
hold or seek to obtain patents that could make it more difficult or impossible for us to develop products based on the gene silencing
technology that we have licensed. We are aware that at least one of our competitors is seeking patent coverage in the RNAi field that
could restrict our ability to develop certain RNAi-based therapeutics.
Any litigation brought by us to protect our intellectual property rights or by third parties asserting intellectual property rights
against us, or challenging our patents, could be costly and have a material adverse effect on our operating results or financial
condition, make it more difficult for us to enter into strategic alliances with third parties to develop our products, or discourage our
existing licensees from continuing their development work on our potential products. If our patent coverage is insufficient to prevent
third parties from developing or commercializing similar or identical technologies, the value of our assets is likely to be materially and
adversely affected.
19
We are sponsoring research at UMMS and Massachusetts General Hospital under agreements that give us certain rights to acquire
licenses to inventions, if any, that arise from that research, and we may enter into additional research agreements with those
institutions, or others, in the future. We also have a collaboration and invention disclosure agreement with UMMS under which
UMMS has agreed to disclose to us certain inventions it makes and to give us an option to negotiate licenses to the disclosed
technologies. There can be no assurance, however, that any such inventions will arise, that we will be able to acquire licenses to any
inventions under satisfactory terms or at all, or that any licenses will be useful to us commercially.
We May Incur Substantial Costs from Future Clinical Testing or Product Liability Claims
If any of our products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of
our products or by patients using our commercially marketed products. Even if the commercialization of one or more of our products
is approved by the FDA, users may claim that such products caused unintended adverse effects. We currently do not carry product
liability insurance covering the commercial marketing of these products. We have obtained clinical trial insurance for our recently-
initiated Phase IIa clinical trial with arimoclomol for the treatment of ALS and will seek to obtain such insurance for any other clinical
trials that we conduct, including the planned Phase IIb clinical trial for arimoclomol, as well as liability insurance for any products that
we market, although there can be no assurance that we will be able to obtain additional insurance in the amounts we seek or at all. We
anticipate that our licensees who are developing our products will carry liability insurance covering the clinical testing and marketing
of those products. However, if someone asserts a claim against us and our insurance or the insurance coverage of our licensees or if
their other financial resources are inadequate to cover a successful claim, such successful claim could have a material adverse effect
on our financial condition or cause us to discontinue operations. Even if claims asserted against us are unsuccessful, they may divert
management’s attention from our operations and we may have to incur substantial costs to defend such claims.
Compliance with Requirements of Section 404 of the Sarbanes-Oxley Act of 2002 Will Increase Our Costs and Require
Additional Management Resources, and We May Not Successfully Comply
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a
report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-K. In addition,
the independent registered public accounting firm auditing the company’s financial statements must attest to and report on
management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Although the SEC has
postponed the effectiveness of this requirement several times, if the SEC does not postpone or otherwise alter the requirement again,
then we expect that it will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2006. If we are
required to comply, we will incur significant legal, accounting, and other expenses and compliance will occupy a substantial amount
of time of our board of directors and management. Uncertainty exists regarding our ability to comply with these requirements by the
SEC’s current deadlines. If we are unable to complete the required assessment as to the adequacy of our internal control reporting or if
we conclude that our internal controls over financial reporting are not effective or if our independent registered public accounting firm
is unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of
December 31, 2006 and future year ends, investors could lose confidence in the reliability of our financial reporting. In addition, while
we plan to expand our staff to assist in complying with the additional requirements when and if they become applicable, we may
encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced
financial professionals.
Our Anti-Takeover Provisions May Make It More Difficult to Change Our Management or May Discourage Others From
Acquiring Us and Thereby Adversely Affect Stockholder Value
We have a stockholder rights plan and provisions in our bylaws that may discourage or prevent a person or group from acquiring
us without the approval of our board of directors. The intent of the stockholder rights plan and our bylaw provisions is to protect our
stockholders’ interests by encouraging anyone seeking control of our company to negotiate with our board of directors.
We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to
effect a change in the majority control of our board of directors. This provision applies to every election of directors, not just an
election occurring after a change in control. The classification of our board increases the amount of time it takes to change majority
control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of
whether our purchase would be beneficial to us or our stockholders. The additional time and cost to change a majority of the members
of our board of directors makes it more difficult and may discourage our existing stockholders from seeking to change our existing
management in order to change the strategic direction or operational performance of our company.
20
Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of our capital stock then entitled to vote at an election of directors. This provision prevents stockholders from
removing any incumbent director without cause. Our bylaws also provide that a stockholder must give us at least 120 days notice of a
proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders.
Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having
advance notice of that proposal or director nomination. This could make a change in control more difficult by providing our directors
with more time to prepare an opposition to a proposed change in control. By making it more difficult to remove or install new
directors, the foregoing bylaw provisions may also make our existing management less responsive to the views of our stockholders
with respect to our operations and other issues such as management selection and management compensation.
Our Outstanding Options and Warrants and the Registrations of Our Shares Issued in the Global Genomics Merger and Our
Recent Private Financings May Adversely Affect the Trading Price of Our Common Stock
As of December 31, 2005, there were outstanding stock options and warrants to purchase approximately 24.7 million shares of our
common stock at exercise prices ranging from $0.20 to $2.73 per share. Our outstanding options and warrants could adversely affect
our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of options and warrants can
be expected to exercise them at a time when we may be able to obtain additional capital through a new offering of securities on terms
more favorable to us than the terms of outstanding options and warrants. For the life of the options and warrants, the holders have the
opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. To the extent the
trading price of our common stock at the time of exercise of any such options or warrants exceeds the exercise price, such exercise
will also have a dilutive effect on our stockholders. In addition, warrants issued in connection with our financings in 2003 contain
anti-dilution provisions that are triggered upon certain events, including any issuance of securities by us below the market price. In the
event that those anti-dilution provisions are triggered by us in the future, we would be required to reduce the exercise price, and
increase the number of shares underlying, those warrants, which would have a dilutive effect on our stockholders.
In August 2003, we registered with the SEC for resale by the holders a total of 14,408,252 shares of our outstanding common
stock and an additional 3,848,870 shares of our common stock issuable upon exercise of outstanding options and warrants, which
shares and options and warrants were issued primarily in connection with our merger with Global Genomics and the $5.4 million
private equity financing that we completed in May 2003. In December 2003, we registered a total of 6,113,448 shares of our common
stock, consisting of the 5,175,611 shares issued, or that are issuable upon exercise of the warrants issued, in connection with the $8.7
million private equity financing that we completed in September 2003, and an additional 937,837 shares of our common stock that we
issued, or that are issuable upon the exercise of warrants that we issued, to certain other third parties. In November 2004, we registered
4,000,000 shares of our common stock and an additional 3,080,000 shares of our common stock issuable upon the exercise of warrants
in connection with the $4,000,000 private equity financing that we completed in October 2004, and an additional 1,550,000 shares of
our common stock issued or issuable upon exercise of warrants to other third parties. In February 2005, we registered 17,334,494
shares of our common stock and an additional 9,909,117 shares of our common stock issuable upon the exercise of warrants in
connection with the $21.3 million private equity financing that we completed in January 2005. In April 2006, we expect to file a
registration statement to register 10,650,794 shares of our common stock and an additional 5,325,397 shares of our common stock
issuable upon the exercise of warrants in connection with the $13.4 million private equity financing that we completed in March 2006.
Both the availability for public resale of these various shares and the actual resale of these shares could adversely affect the trading
price of our common stock.
We May Issue Preferred Stock in the Future, and the Terms of the Preferred Stock May Reduce the Value of Our Common
Stock
We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors may determine
the terms of future preferred stock offerings without further action by our stockholders. If we issue preferred stock, it could affect your
rights or reduce the value of our outstanding common stock. In particular, specific rights granted to future holders of preferred stock
may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and
restrictions on our ability to merge with or sell our assets to a third party.
Changes in Stock Option Accounting Rules May Adversely Impact Our Reported Operating Results, Our Stock Price and Our
Competitiveness in the Employee Marketplace
In December 2004, the Financial Accounting Standards Board published new rules that will require companies in 2005 to record
all stock-based employee compensation as an expense. The new rules apply to stock options grants, as well as a range of other stock-
based compensation arrangements, including restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. We will have to apply the new financial accounting rules beginning in the first quarter of 2006. We
21
have depended in the past upon compensating our officers, directors, employees and consultants with such stock-based compensation
awards in order to limit our cash expenditures and to attract and retain officers, directors, employees and consultants. Accordingly, if
we continue to grant stock options or other stock-based compensation awards to our officers, directors, employees, and consultants
after the new rules apply to us, our future earnings, if any, will be reduced (or our future losses will be increased) by the expenses
recorded for those grants. The expenses we may have to record as a result of future options grants may be significant and may
materially negatively affect our reported financial results. The adverse effects that the new accounting rules may have on our future
financial statements should we continue to rely heavily on stock-based compensation may reduce our stock price and make it more
difficult for us to attract new investors. In addition, reducing our use of stock plans to reward and incentivize our officers, directors
and employees could result in a competitive disadvantage to us in the employee marketplace.
We May Experience Volatility in Our Stock Price, Which May Adversely Affect the Trading Price of Our Common Stock
The market price of our common stock has experienced significant volatility in the past and may continue to experience significant
volatility from time to time. Our stock price has ranged from $0.21 to $3.74 per share over the past three years. Factors such as the
following may affect such volatility:
• Our quarterly operating results.
• Announcements of regulatory developments or technological innovations by us or our competitors.
• Government regulation of drug pricing.
• Developments in patent or other technology ownership rights.
• Public concern regarding the safety of our products.
Other factors which may affect our stock price are general changes in the economy, financial markets or the pharmaceutical or
biotechnology industries.
Item 2. Properties
Our operations are based in Los Angeles, California, and Worcester, Massachusetts. The lease for our headquarters facility in Los
Angeles covers approximately 4,700 square feet of office space and expires in June 2008. The lease for our laboratory in Worcester
covers approximately 6,900 square feet of office and laboratory space and expires in December 2007. Our facilities are suitable and
adequate for our current operations.
Item 3. Legal Proceedings
We are occasionally involved in claims arising out of our operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse effect on us.
22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is currently traded on the Nasdaq Capital Market under the symbol “CYTR.” The following table sets forth the
high and low sale prices for our common stock for the periods indicated as reported by the Nasdaq Capital Market.
PART II
Fiscal Year 2006:
January 1 to March 28
Fiscal Year 2005:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year 2004:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$ 1.87 $ 1.01
$ 1.13 $ 0.85
$ 1.22 $ 0.76
$ 1.44 $ 0.75
$ 2.07 $ 1.14
$ 1.75 $ 1.10
$ 1.80 $ 0.94
$ 2.10 $ 1.06
$ 2.43 $ 1.43
On March 15, 2006, there were approximately 10,900 holders of record of our common stock. The number of record holders does
not reflect the number of beneficial owners of our common stock for whom shares are held by brokerage firms and other institutions.
We have not paid any dividends since our inception and do not contemplate paying dividends in the foreseeable future.
Item 6. Selected Financial Data
The following selected financial data are derived from our audited financial statements. Our financial statements for 2005, 2004
and 2003 have been audited by BDO Seidman, LLP, our independent registered public accounting firm. These historical results do not
necessarily indicate future results. When you read this data, it is important that you also read our financial statements and related
notes, as well as the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk
Factors.” Financial information provided below has been rounded to the nearest thousand.
2005
2004
2003
2002
2001
Statement of Operations Data:
Revenues
Recruiting revenues
License fees
Grant income
Service revenues
Total revenues
Net loss
Basic and diluted loss per common share:
Net loss
Balance Sheet Data:
Total assets
Total stockholders’ equity
$
—
101,000
$
83,000
184,000
$
—
428,000
—
—
428,000
—
94,000
—
—
94,000
$
23,000 $
1,051,000
46,000
—
101,000
3,751,000
157,000
—
$ 1,120,000 $ 4,009,000
(931,000)
$
$
$ (15,093,000) $ (16,392,000) $ (17,845,000) $ (6,176,000) $
$
$
$
$
(0.27) $
(0.48) $
(0.65) $
(0.39) $
(0.09)
9,939,000
7,208,000
$
$
5,049,000
1,595,000
$ 12,324,000
$ 10,193,000
$ 9,284,000 $ 7,611,000
$ 7,959,000 $ 6,583,000
In March 2006, we completed a $13.4 million private equity financing in which we issued 10,650,794 shares of our common stock
and warrants to purchase an additional 5,325,397 shares of our common stock at an exercise price of $1.54 per share. Net of
investment banking commissions, legal, accounting and other fees related to the transaction, we received proceeds of approximately
$12.4 million.
23
Factors Affecting Comparability
In January 2005, we completed a $21.3 million private equity financing in which we issued 17,334,494 shares of our common
stock and warrants to purchase an additional 8,667,247 shares of our common stock at an exercise price of $2.00 per share. Net of
investment banking commissions, legal, accounting and other fees related to the transaction, we received proceeds of approximately
$19.4 million.
In the fourth quarter of 2004, we completed our acquisition of all of the clinical, pharmaceutical and related intellectual property
assets of Biorex, a Hungary-based company focused on the development of novel small molecules with broad therapeutic applications
in neurology, diabetes and cardiology. We paid Biorex $3.0 million in cash for the assets at the closing, and incurred approximately
$500,000 in expenses related to the transaction.
The assets acquired from Biorex include three drug candidates that had completed the equivalent of a Phase I clinical trial. We
intend to perform additional testing on those drug candidates, and initiated a Phase II clinical trial for one of the drug candidates,
arimoclomol, for ALS in September 2005. In addition, we acquired a 500-compound molecular library, which we plan to use in high
throughput screening at our obesity and diabetes laboratory. With the assistance of an outside appraiser, we evaluated the technology
assets acquired from Biorex, including their current state of development, the severability of the assets, and alternative uses of the
compounds. Based in part on that appraisal, we concluded that the $3.0 million value allocated to the three drug candidates should be
written off at the time of acquisition as in-process research and development, and that the $500,000 value attributable to the 500-
compound molecular library should be included in our fixed assets at December 31, 2004.
In the third quarter of 2003, we recorded an impairment charge of $5.9 million related to our investments in Blizzard’s acquired
developed technology and in Psynomics, based upon our analysis of the recoverability of the carrying amount of these assets in
accordance with the Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock. This impairment charge represented the total net book value of these assets at the time of the write-off. See Note 12 to our
audited financial statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the
discussion under “Selected Financial Data” and our consolidated financial statements included in this Annual Report. This discussion
contains forward-looking statements, based on current expectations and related to future events and our future financial performance,
that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of many important factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report.
Overview
We are in the process of developing products, primarily in the areas of small molecule therapeutics and ribonucleic acid
interference, or RNAi, for the human health care market. Our small molecule therapeutics efforts include our clinical development of
three oral drug candidates that we acquired in October 2004, including a Phase II trial initiated in September 2005, as well as our drug
discovery operations conducted at our laboratory in Worcester, Massachusetts. Development work on RNAi, a relatively recent
technology for silencing genes in living cells and organisms, is still at an early stage, and we are aware of only four clinical tests of
therapeutic applications using RNAi that have yet been initiated by any party. In addition to our work in RNAi and small molecule
therapeutics, we recently announced that a novel HIV DNA + protein vaccine exclusively licensed to us and developed by researchers
at the University of Massachusetts Medical School, or UMMS, and Advanced BioScience Laboratories, and funded by the National
Institutes of Health, demonstrated promising interim Phase I clinical trial results that indicate its potential to produce potent antibody
responses with neutralizing activity against multiple HIV viral strains. We have also entered into strategic alliances with respect to the
development of several other products using our other technologies.
On October 4, 2004, we acquired all of the clinical and pharmaceutical and related intellectual property assets of Biorex Research
& Development, RT, or Biorex, a Hungary-based company focused on the development of novel small molecules based on molecular
“chaperone” co-induction technology, with broad therapeutic applications in neurology, type 2 diabetes, cardiology and diabetic
complications. The acquired assets include three oral, clinical stage drug candidates and a library of 500 small molecule drug
candidates. We recently entered the clinical stage of drug development with the initiation of a Phase II clinical program with our lead
small molecule product candidate arimoclomol for the treatment of ALS. Arimoclomol has received Orphan Drug and Fast Track
designation from the U.S. Food and Drug Administration.
24
The initial Phase II clinical trial that we have initiated for arimoclomol for ALS (which we refer to as the Phase IIa trial) is a
multicenter, double-blind, placebo-controlled study of approximately 80 ALS patients enrolled at ten clinical centers across the U.S.
Patients will receive either placebo (a capsule without drug), or one of three dose levels of arimoclomol capsules three times daily, for
a period of 12 weeks. This treatment phase will be immediately followed by a one-month period without drug. The primary endpoints
of this Phase IIa trial are safety and tolerability. Secondary endpoints include a preliminary evaluation of efficacy using two widely
accepted surrogate markers, the revised ALS Functional Rating Scale (ALSFRS-R), which is used to determine patients’ capacity and
independence in 13 functional activities, and Vital Capacity (VC), an assessment of lung capacity. The trial is powered to monitor
only extreme responses in these two categories. We recently announced initiation of an “open-label” (i.e. the medication is no longer
blinded to the patients or their doctor) extension of this clinical trial. Patients who complete the Phase IIa study and who still meet the
eligibility criteria may have the opportunity to take arimoclomol, at the highest investigative dose, for as long as an additional 6
months.
Depending upon the results of the Phase IIa trial, we plan to initiate a subsequent Phase II trial (which we refer to as the Phase IIb
trial) that will be powered to detect more subtle efficacy responses. Although this second trial is still in the planning stages and will be
subject to FDA approval, it is expected to include approximately 300 ALS patients recruited from 25 clinical sites and will take
approximately 18 months after initiation to complete.
The acquisition of the molecular “chaperone” co-induction technology from Biorex represented a continuation of our business
strategy, adopted subsequent to our merger with Global Genomics, in July 2002, to conduct further research and development efforts
for our pre-merger adjuvant and co-polymer technologies, including Flocor and Tranzfect, through strategic relationships with other
pharmaceutical companies, and to focus our efforts on acquiring and developing new technologies and products to serve as the
foundation for the future of the company.
In April 2003, we acquired our first new technologies by entering into exclusive license agreements with UMMS covering
potential applications for its proprietary RNAi technology in the treatment of specified diseases. In May 2003, we broadened our
strategic alliance with UMMS by acquiring an exclusive license from it covering a proprietary DNA-based HIV vaccine technology.
In July 2004, we further expanded our strategic alliance with UMMS by entering into a collaboration and invention disclosure
agreement with UMMS under which UMMS will disclose to us certain new technologies developed at UMMS over a three-year
period pertaining to RNAi, diabetes, obesity, neurodegenerative diseases (including ALS) and CMV, and will give us an option, upon
making a specified payment, to negotiate an exclusive worldwide license to the disclosed technologies on commercially reasonable
terms. Approximately one year remains on the technology disclosure option. As part of our strategic alliance with UMMS, we agreed
to fund certain discovery and pre-clinical research at UMMS relating to the use of our technologies, licensed from UMMS, for the
development of therapeutic products within certain fields.
We have no significant revenues and we expect not to have significant revenues and to continue to incur significant losses over the
next several years. Our net losses may increase from current levels primarily due to activities related to our collaborations, technology
acquisitions, ongoing and planned clinical trials, research and development programs and other general corporate activities. We
anticipate that our operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be
relied upon as predictive of the results in future periods.
To date, we have relied primarily upon sales of equity securities and, to a much lesser extent, upon payments from our strategic
partners and licensees and upon proceeds received upon the exercise of options and warrants, to generate the funds needed to finance
our business plans and operations. We will be required to obtain significant additional funding in order to execute our long-term
business plans. Our sources of potential funding for the next several years are expected to consist primarily of proceeds from sales of
equity, but could also include license and other fees, funded research and development payments, gifts and grants, and milestone
payments under existing and future collaborative arrangements. However, we have no commitment or arrangements for such
additional funding.
Research and Development
Following our 2003 acquisition of rights to new technologies from UMMS and our 2004 acquisition of the clinical assets of
Biorex, we initiated research and development programs for products based upon those technologies. Expenditures for research and
development activities related to continuing operations were $9.1 million, $9.0 million and $4.4 million for the years ended December
31, 2005, 2004 and 2003, respectively, with research and development expenses representing approximately 58%, 53% and 39% of
our total expenses for the years ended December 31, 2005, 2004 and 2003, respectively. Included in research and development
25
expenses for 2004 was $3.0 million of in-process research and development that was written off in conjunction with our acquisition of
assets from Biorex. Research and development expenses are further discussed below under “Critical Accounting Policies and
Estimates” and “Results of Operations.”
There is a risk that any drug discovery and development program may not produce revenue because of the risks inherent in drug
discovery and development. Moreover, there are uncertainties specific to any new field of drug discovery, including molecular
chaperone co-induction technology or RNAi. The successful development of any product candidate we develop is highly uncertain.
We cannot reasonably estimate or know the nature, timing and costs of the efforts necessary to complete the development of, or the
period in which material net cash inflows are expected to commence from any product candidate, due to the numerous risks and
uncertainties associated with developing drugs, including the uncertainty of:
• Our ability to advance product candidates into pre-clinical and clinical trials.
• The scope, rate and progress of our pre-clinical trials and other research and development activities.
• The scope, rate of progress and cost of any clinical trials we commence.
• The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
• Future clinical trial results.
• The terms and timing of any collaborative, licensing and other arrangements that we may establish.
• The cost and timing of regulatory approvals.
• The cost and timing of establishing sales, marketing and distribution capabilities.
• The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop.
• The effect of competing technological and market developments.
Any failure to complete any stage of the development of our products in a timely manner could have a material adverse effect on
our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with completing our projects on
schedule, or at all, and the potential consequences of failing to do so, are set forth in the “Risk Factors” section of this Annual Report.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition, bad debts, impairment of long-lived assets, including finite
lived intangible assets, accrued liabilities and certain expenses. 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 audited financial statements. We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial
statements:
Revenue Recognition
Nonrefundable license fee revenue is recognized when collectibility is reasonably assured, which is generally upon receipt, when
no continuing involvement on our part is required and payment of the license fee represents the culmination of the earnings process.
Nonrefundable license fees received subject to future performance by us, or that are credited against future payments due to us are
26
deferred and recognized as services are performed and collectibility is reasonably assured, which is generally upon receipt, or upon
termination of the agreement and all related obligations thereunder, whichever is earlier. Our revenue recognition policy may require
us in the future to defer significant amounts of revenue.
Research and Development Expenses
Research and development expenses consist of costs incurred for direct and overhead-related research expenses and are expensed
as incurred. Costs to acquire technologies which are utilized in research and development and which have no alternative future use are
expensed when incurred. Technology developed for use in our products is expensed as incurred, until technological feasibility has
been established. Expenditures, to date, have been classified as research and development expense in the consolidated statements of
operations and we expect to continue to expense research and development for the foreseeable future.
Clinical Trial Expenses
Clinical trial expenses, which are included in research and development expenses, include obligations resulting from our contracts
with various clinical research organizations in connection with conducting clinical trials for our product candidates. We recognize
expenses for these activities based on a variety of factors, including actual and estimated labor hours, clinical site initiation activities,
patient enrollment rates, estimates of external costs and other activity-based factors. We believe that this method best approximates the
efforts expended on a clinical trial with the expenses we record. We adjust our rate of clinical expense recognition if actual results
differ from our estimates.
Stock-based Compensation
We apply Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related
interpretations in accounting for our stock-based employee compensation plans, rather than the alternative fair value accounting
method provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS
123”). In the Notes to Consolidated Financial Statements, we provide pro forma disclosures in accordance with SFAS 123 and related
pronouncements. Under APB 25, compensation expense is recorded on the date of grant of an option to an employee or member of the
Board only if the fair market value of the underlying stock at the date of grant exceeds the exercise price. In addition, we have granted
options to certain outside consultants, which are required to be measured at fair value and recognized as compensation expense in our
financial statements. We apply the Black-Scholes option-pricing model for estimating the fair value of options, which involves a
number of judgments and variables, including estimates of the life of the options and expected volatility which are subject to
significant change. A change in the fair value estimate could have a significant effect on the amount of pro forma compensation
expense calculated.
In December 2004, the FASB released its revised standard, SFAS No. 123(R) (SFAS 123(R)”), “Share-Based Payment.” SFAS
123(R) requires that a public entity measure the cost of equity-based service awards based on the fair value of the award on the date of
grant. That cost will be recognized over either the vesting period or the period during which an employee is required to provide
service in exchange for the award. We are required to adopt the provisions of SFAS 123(R) for periods after January 2006, and we
will adopt the new requirements using the modified prospective transition method. The adoption of SFAS 123(R) requires us to value
stock options granted prior to adoption of SFAS 123(R) under the fair value method and expense these amounts in the income
statement over the stock option’s remaining vesting period. The adoption of SFAS 123(R) will result in recognition of additional non-
cash stock-based compensation expense and, accordingly, will increase net losses in amounts which likely will be considered material,
although it will not impact our cash position.
We account for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues
Task Force Issue (“EITF”) No. 96-18, Accounting for Equity Instruments that Are Issued to other than Employees for Acquiring, or in
conjunction with Selling Goods, or Services (“ EITF 96-18”) which require that such equity instruments are recorded at their fair value
on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity
instruments vest. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis.
Impairment of Long-Lived Assets
We review long-lived assets, including finite lived intangible assets, for impairment on an annual basis, as of December 31, or on
an interim basis if an event occurs that might reduce the fair value of such assets below their carrying values. An impairment loss
would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be
determined based on either discounted future cash flows or other appropriate fair value methods.
27
In accordance with the provisions of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock (APB 18), we reviewed the net values on our balance sheet, as of September 30, 2003, assigned to
Investment in Minority — Owned Entity — Acquired Developed Technology resulting from our acquisition of Blizzard Research and
Development Company, or Blizzard. Blizzard was recorded as an acquired development-stage company and there was an external
valuation used for substantiation of the value of the technology and the investment, which was prepared as of the date of the
announcement of the transaction February 11, 2002. For our annual audit of fiscal 2002, potential impairment was addressed and the
valuation was updated internally using similar methods used for the original investment. Based upon our analysis there was no
impairment. Our auditors for that fiscal year concurred. We continued to measure impairment through these methods on a quarterly
basis and through the second quarter of 2003, we continued to believe that Blizzard’s proprietary technology was commercially viable,
subject to its ability to obtain significant financing. At that time we believed there was no impairment. APB 18 requires that a loss in
value of an investment, which is other than a temporary decline, should be recognized as an impairment loss. Through the third quarter
of 2003, Blizzard had been unsuccessful in its attempts to raise a significant amount of financing necessary for it to pursue its
commercialization strategy for its products and we subsequently decided not to further invest in this entity. We believe that Blizzard
was unable to obtain substantial third-party financing primarily because (1) the genomics market, which the Blizzard technology was
targeting, had begun to decline in 2003, (2) Blizzard had not completed a production unit of its principal product for testing by
potential investors, and (3) certain investors were unwilling to invest without a simultaneous infusion of additional capital from us as
Blizzard’s 40% shareholder, and we were unable to reach satisfactory terms for such financing. Our analysis consisted of a review of
the financial projections prepared by Blizzard, application of a discounted cash flow valuation model of Blizzard’s projected cash
flows, and consideration of other qualitative factors such as Blizzard’s termination of its employees, its office lease and its
engagement of its investment banker. Based upon the quantitative and qualitative factors described above, in addition to others, our
management determined that the estimated fair value of our investment in Blizzard was $0 and that an impairment charge of $5.9
million was necessary. In considering the timing of the write-off, we looked to Blizzard’s termination of its employees, lease and
investment banker in October 2003 as affirmation of conditions that existed at September 2003, and therefore recorded the write-off in
the third quarter of 2003. The write-off had no impact upon our cash or working capital position. It is our understanding that, by the
end of 2003, Blizzard had ceased operations and, in 2004, returned its licensed intellectual property to the Minnesota Research Fund.
Estimated Facility Abandonment Accrual
Subsequent to our merger with Global Genomics in 2002, we recorded a loss of $563,000 associated with the closure of our
Atlanta headquarters and our relocation to Los Angeles. This loss represented the total remaining lease obligations and estimated
operating costs through the remainder of the lease term, less estimated sublease rental income and deferred rent at the time. In August
2005, we entered into a lease termination agreement pursuant to which we were released from all future obligations on the lease in
exchange for a one-time $110,000 payment and the forfeiture of a $49,000 security deposit. As a result of this agreement, we realized
a $164,000 offset against third quarter general and administrative expenses.
Quarterly Financial Data
The following table sets forth unaudited statement of operations data for our most recent two completed fiscal years. This quarterly
information has been derived from our unaudited financial statements and, in the opinion of management, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods covered. The
quarterly financial data should be read in conjunction with our financial statements and related notes. The operating results for any
quarter are not necessarily indicative of the operating results for any future period.
2005
Total revenues
Net loss
Basic and diluted loss per common share:
Net loss
2004
Total revenues
Net loss
Basic and diluted loss per common share:
Net loss
March 31
June 30
September 30
December 31
(In thousands, except per share data)
Quarter Ended
$
1 $ —
$
(3,527)
(4,509)
10
(3,492)
$
173
(3,565)
$
(0.07) $
(0.08) $
(0.06)
$
(0.06)
$
100 $
(3,774)
228
(4,061)
$ —
(2,796)
$
100
(5,761)
$
(0.11) $
(0.12) $
(0.08)
$
(0.15)
28
Quarterly and year to date loss per share amounts are computed independently of each other. Therefore, the sum of the per share
amounts for the quarters may not agree to the per share amounts for the year.
Liquidity and Capital Resources
At December 31, 2005, we had cash, cash equivalents and short-term investments of $8.3 million and total assets of $9.9 million
compared to $3.0 million and $5.0 million, respectively, at December 31, 2004. Working capital totaled $6.3 million at December 31,
2005, compared to $1.2 million at December 31, 2004.
To date, we have relied primarily upon sales of equity securities and, to a much lesser extent, payments from our strategic partners
and licensees and upon proceeds received upon the exercise of options and warrants, to generate funds needed to finance our business
and operations. As a result of the $12.4 million equity financing, net of expenses, that we completed in March 2006, we believe that
we have adequate working capital to support our currently planned level of operations into the third quarter of 2007, including our
current and planned clinical trials for arimoclomol, drug discovery efforts related to additional product candidates, working capital and
general corporate purposes. Included in our planned expenses are approximately $3.2 million for our Phase II clinical program with
arimoclomol for ALS during 2006, and an additional $4.5 million in 2007 and $6.3 million in 2008. The cost of our clinical program
for ALS could vary significantly from our current projections due to any additional requirements imposed by the FDA in connection
with the ongoing Phase IIa trial, or in connection with our planned Phase IIb trial, or if actual costs are higher than current
management estimates for other reasons. In the event that actual costs of our clinical program for ALS, or any of our other ongoing
research activities, are significantly higher than our current estimates, we may be required to significantly modify our planned level of
operations. In the future, we will be dependent on obtaining financing from third parties in order to maintain our operations, including
our Phase II clinical program with arimoclomol for ALS, our planned levels of operations for our obesity and type 2 diabetes research
laboratory and our ongoing research and development efforts related to our other small molecule drug candidates, and in order to
continue to meet our obligations to UMMS. We currently have no commitments from any third parties to provide us with capital. We
cannot assure that additional funding will be available to us on favorable terms, or at all. If we fail to obtain additional funding when
needed, we would be forced to scale back, or terminate, our operations, or to seek to merge with or to be acquired by another
company.
For the year ended December 31, 2005, net cash provided by investing activities consisted of $964,000, of which $1.0 million was
from the redemption of short-term securities, which was partially offset by the acquisition of $48,000 of property and equipment. We
expect capital spending to increase during 2006 over our 2005 levels to support our increasing research and development efforts and
the implementation of Sarbanes-Oxley. In the year ended December 31, 2004, net cash used in investing activities consisted of
$962,000 for the purchase of securities to be held to maturity and $772,000 for property and equipment, which includes $447,000
related to assets acquired in connection with the molecular library assets of Biorex. Net cash provided by investing activities for the
year ended December 31, 2003 was $1.2 million which was primarily due to the maturity of held-to-maturity investments acquired in
2002.
Cash provided by financing activities for the year-ended December 31, 2005 was $19.8 million. The cash provided includes
$256,000 received upon the exercise of stock options and warrants. Additionally, we raised $19.6 million through the sale of equity, of
which $19.4 million was raised in connection with a private equity financing, net of expenses, that closed in January 2005. Net cash
provided by financing activities in the year ended December 31, 2004 was $4.4 million. The cash provided was the result of $526,000
received upon the exercise of stock options and warrants and the $4.0 million private equity financing completed in October 2004. Net
cash provided by financing activities for the year ended December 31, 2003 was $14.4 million. In May and September 2003, we
completed private equity financings raising net proceeds of $4.9 million and $7.7 million, respectively. For the year ended December
31, 2003, we also received proceeds from the exercise of stock options and warrants totaling $1.9 million.
Our net loss for the year-ended December 31, 2005 was $15.1 million, which resulted in net cash used in operating activities of
$14.5 million. Adjustments to reconcile net loss to net cash used in operating activities for the year-ended December 31, 2005 include
$586,000 of common stock, options and warrants issued in lieu of cash for research and development and general and administrative
services, as well as a net change in assets and liabilities of $210,000 offset by the recording of $217,000 in depreciation and
amortization. Our net loss for the year ended December 31, 2004 was $16.4 million, which includes the write-off of $3.0 million of in-
process research and development related to the acquisition of assets from Biorex. The $16.4 million loss resulted in net cash used in
operating activities of $12.4 million. Adjustments to reconcile net loss to net cash used in operating activities for the year ended
December 31, 2004 were primarily $873,000 of common stock, options and warrants issued in lieu of cash for general and
administrative services. Additionally, we issued $388,000 of common stock, options and warrants in lieu of cash in connection with
certain license fees and $1.0 million in connection with research and development activities. Our net loss for the year-ended December
29
31, 2003 was $17.8 million, which resulted in net cash used in operating activities of $4.3 million. Adjustments to reconcile net loss to
net cash used in operating activities for the year ended December 31, 2003 were primarily $6.7 million of losses from a minority-
owned entity, $1.5 million of common stock, options and warrants issued in lieu of cash for general and administrative services, $1.8
million of common stock issued in connection with certain license agreements and $1.1 million of common stock issued in connection
with research and development activities.
We believe that we have adequate working capital to allow us to operate at our currently planned levels into the third quarter of
2007. Our strategic alliance with UMMS may require us to make significant expenditures to fund research at UMMS relating to
developing therapeutic products based on UMMS’s proprietary gene silencing technology that has been licensed to us. The aggregate
amount of these expenditures was approximately $2.5 million during 2005, and if we retain our current license portfolio, we expect
expenditures to be approximately $1.2 million during 2006.
We will require significant additional capital in order to fund the completion of our Phase II clinical program with our lead small
molecule product candidate arimoclomol for the treatment of ALS, which commenced in September 2005, and the other ongoing
research and development related to the drug candidates acquired from Biorex in October 2004. We spent $3.8 million on the
arimoclomol clinical program in 2005, and we estimate that the overall program, including the ongoing Phase IIa trial and the planned
Phase IIb trial that we expect to initiate soon after completion of the present Phase IIa trial subject to FDA approval, will require us to
expend approximately $3.2 million in 2006, and an additional $10.8 million over the following 12 to 18 months. However, we may
incur substantial additional expense and the trial may be delayed if the FDA requires us to generate additional pre-clinical or clinical
data in connection with the clinical trial, or the FDA requires us to revise significantly our planned protocol for the Phase IIb.
Any additional capital may be provided by potential milestones payments pursuant to our licenses with Merck and Vical, both of
which relate to Tranzfect, or our license with SynthRx related to Flocor, or by potential payments from future strategic alliance
partners or licensees of our technologies. However, Merck is at an early stage of clinical trials of a product utilizing TransFect and
Vical has only recently commenced a Phase IIa clinical trial of a product using TransFect, so there is likely to be a substantial period
of time, if ever, before we receive any further significant payments from Merck or Vical.
We intend also to pursue other sources of capital, although we do not currently have commitments from any third parties to
provide us with capital. The results of our technology licensing efforts and the actual proceeds of any fund-raising activities will
determine our ongoing ability to operate as a going concern. Our ability to obtain future financings through joint ventures, product
licensing arrangements, equity financings, gifts, and grants or otherwise is subject to market conditions and out ability to identify
parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. Depending upon the outcome of
our fundraising efforts, the accompanying financial information may not necessarily be indicative of future operating results or future
financial condition.
We expect to incur significant losses for the foreseeable future and there can be no assurance that we will become profitable. Even
if we become profitable, we may not be able to sustain that profitability.
Contractual Obligations
We have no current commitments for capital expenditures in 2006; however, we anticipate incurring capital expenditures in
connection with the expansion of our laboratory. As of December 31, 2005, we had no committed lines of credit or other committed
funding or long-term debt. As of December 31, 2005, minimum annual future obligations for operating leases, minimum annual future
obligations under various license agreements and minimum annual future obligations under employment agreements consist of the
following:
Operating
Leases
License
Agreements
Employment
Agreements
Total
2006
2007
2008
2009
2010 and thereafter
Total
$
507
389
108
1
2
$ 1,007
30
$
(In thousands)
971
235
339
339
1070
$ 2,954
$ 1,264
887
590
—
—
$ 2,741
$ 2,742
1,511
1,037
340
1,072
$ 6,702
We have employment agreements with our executive officers, the terms of which expire at various times through July 2008.
Certain agreements provide for minimum salary levels, which are subject to increase annually in the Compensation Committee’s
discretion, as well as for minimum annual bonuses. The reported commitment for employment agreements includes, among other
things, a total of $0.9 million of compensation payable to members of our Scientific Advisory Board through 2008, and a total of $1.6
million of minimum salary and guaranteed bonuses payable to our executives.
License and Collaboration Agreements
In April 2003, we acquired new technologies by entering into exclusive license arrangements with UMMS covering potential
applications of the medical institution’s proprietary RNAi technology in the treatment of specified diseases, including those within the
areas of obesity, type 2 diabetes ALS and CMV. In consideration of the licenses, we made cash payments to UMMS totaling $186,000
and issued it a total of 1,613,258 shares of our common stock which were valued, for financial statement purposes, at $1.5 million. In
May 2003, we broadened our strategic alliance with UMMS by acquiring an exclusive license from that institution covering a
proprietary DNA-based HIV vaccine technology. In consideration of this license, we made cash payments to UMMS totaling $18,000
and issued it 215,101 shares of our common stock which were valued, for financial statement purposes, at $361,000. In July 2004, we
further expanded our strategic alliance with UMMS by entering into a collaboration and invention disclosure agreement with UMMS
under which UMMS will disclose to us certain new technologies developed at UMMS over a three-year period pertaining to RNAi,
diabetes, obesity, neurodegenerative diseases (including ALS) and CMV and will give the Company an option, upon making a
specified payment, to negotiate an exclusive worldwide license to the disclosed technologies on commercially reasonable terms.
Approximately one year remains on the technology disclosure option. As of December 31, 2005, we have made cash payments to
UMMS totaling $1.1 million pursuant to the collaboration agreement with UMMS, but have not yet acquired or made any payments to
acquire any options under that agreement.
In May 2004, we licensed from the technology transfer company of the Imperial College of Science, Technology & Medicine, or
Imperial College, the exclusive rights to intellectual property covering a drug screening method using RIP 140, which is a nuclear
hormone co-repressor that is believed to regulate fat accumulation. In consideration of the license, we made cash payments to Imperial
College totaling $87,000 and issued it a total of 75,000 shares of our common stock which were valued, for financial statement
purposes, at the then-aggregate fair market value of $108,000. As the drug screening technology from Imperial College and the RNAi
technology from UMMS had not achieved technological feasibility at the time of their license by us, had no alternative future uses
and, therefore, no separate economic value, the total value of all cash payments and stock issued for acquisition of the technology was
expensed as research and development in our financial statements.
Net Operating Loss Carryforward
At December 31, 2005, we had consolidated net operating loss carryforwards for income tax purposes of $35.6 million, which will
expire in 2006 through 2025 if not utilized. We also have research and development tax credits and orphan drug tax credits available
to reduce income taxes, if any, of $6.4 million, which will expire in 2006 through 2025 if not utilized. The amount of net operating
loss carryforwards and research tax credits available to reduce income taxes in any particular year may be limited in certain
circumstances. Based on an assessment of all available evidence including, but not limited to, our limited operating history in our core
business and lack of profitability, uncertainties of the commercial viability of our technology, the impact of government regulation and
healthcare reform initiatives, and other risks normally associated with biotechnology companies, we have concluded that it is more
likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred tax
valuation allowance has been recorded against these assets.
Results of Operations
CytRx Corporation recorded net losses of $15.1 million, $16.4 million and $17.8 million during the years ended 2005, 2004 and
2003.
We earned an immaterial amount in licensing fees during the years ended 2005, 2004 and 2003. All future licensing fees under out
current licensing agreements are dependent upon successful development milestones being achieved by the licensor. During fiscal
2006, we are not anticipating receiving any significant licensing fees.
31
Research and Development
Research and development expense
Non-cash research and development expense
Acquired in-process research and development expense
2005
2003
Year Ended December 31,
2004
(In thousands)
$ 8,867 $ 4,626 $ 1,485
2,903
220
1,387
— 3,022
—
$ 9,087 $ 9,035 $ 4,388
Research expenses are expenses incurred by us in the discovery of new information that will assist us in the creation and the
development of new drugs or treatments. Development expenses are expenses incurred by us in our efforts to commercialize the
findings generated through our research efforts. Our research and development expenses were $9.1 million in 2005, $9.0 million in
2004 and $4.4 million in 2003.
Research and development expenses incurred during 2005 relate primarily to (i) the initiation of our Phase II clinical program for
arimoclomol in ALS, (ii) our ongoing research and development related to other drug candidates purchased from Biorex, (iii) our
research and development activities conducted at UMMS related to the technologies covered by the UMMS license agreements, (iv)
our collaboration and invention disclosure agreement pursuant to which UMMS has agreed to disclose certain inventions to us and
provide us with the right to acquire an option to negotiate exclusive licenses for those disclosed technologies, and (v) the on-going
small molecule drug discovery operations at our Massachusetts laboratory. Although our future research and development activities
could vary substantially, our research and development activities will remain substantial in the future as a result of commitments
related to the foregoing activities. Research and development expenses presented in the accompanying consolidated financial
statements during 2004 were primarily the result of efforts to develop RNAi through new and existing licensing agreements,
sponsored research agreements, as well as research and development efforts performed at our Massachusetts laboratory. Research and
development expenses incurred in 2003 were primarily for the acquisition and licensing of intellectual property and the
commencement of operations of our Massachusetts laboratory. All research and development costs related to the activities of our
laboratory are expensed. No in-process research and development costs were eligible for capitalization at the time we purchased the
minority interest in our prior subsidiary, CytRx Laboratories.
In October 2004, we acquired all of the clinical and pharmaceutical and related intellectual property assets of Biorex, a Hungry-
based company focused on the development of novel small molecules with broad therapeutic applications in neurology, diabetes and
cardiology for approximately $3.5 million in cash. Included in the assets acquired from Biorex are a 500-compound molecular library,
as well as the molecules arimoclomol, iroxanadine and bimoclomol, each of which had, at the time of acquisition, successfully
completed the European equivalent of a Phase I clinical trial. After management’s evaluation of the acquired technology,
approximately $3.0 million of the acquisition price was expensed in 2004 as in-process research and development.
As compensation to members of our scientific advisory board and consultants, and in connection with the acquisition of
technology, we issue shares of our common stock, stock options and warrants to purchase shares of our common stock. For financial
statement purposes, we value these shares of common stock, stock options, and warrants at the fair value of the common stock, stock
options or warrants granted, or the services received, whichever is more reliably measurable. We recorded non-cash charges of $0.2
million, $1.4 million, and $2.9 million during 2005, 2004, and 2003, respectively.
In 2006, we expect our research and development expenses to increase primarily as a result of our ongoing Phase II clinical
program with arimoclomol and related studies for the treatment of ALS. We estimate that the Phase II trial and related studies will
cost approximately $17.8 million, of which approximately $3.8 million had been spent as of December 31, 2005, and will last between
24 to 30 months. Additionally, we estimate that our costs related to the activities of our Massachusetts laboratory will be consistent
with expenses incurred in 2005.
General and administrative expense
General and administrative expense
Common stock, stock options and warrants issued for general and administrative expense
32
2005
2003
Year Ended December 31,
2004
(In thousands)
$ 6,057 $ 5,924 $ 3,841
367 1,977 3,148
$ 6,424 $ 7,901 $ 6,989
General and administrative expenses include all administrative salaries and general corporation expenses. Our total general and
administrative expenses, including common stock, stock options and warrants issued, were $6.4 million in 2005, $7.9 million in 2004
and $7.0 million in 2003. Our general and administrative expenses, net of common stock, stock options and warrants issued, were $6.1
million in 2005, $5.9 million in 2004 and $3.8 million in 2003. General and administrative expenses during 2005 as compared to 2004
were relatively constant. During 2005 the Company incurred approximately $0.9 million in higher salary expense than 2004, although
the difference in total general and administrative expense was substantially smaller between 2005 and 2004 due to one-time expenses
associated with our change in auditors in 2004, severance paid to certain members of management in the first half of 2004, and the
settlement of certain legal proceedings, for which there was no comparable expenses in 2005. For the same reasons, general and
administrative expenses during 2004 were higher as compared to 2003. We expect our general and administrative expenses in 2006 to
be slightly higher than those incurred in 2005, as a result of our ongoing Sarbanes-Oxley compliance efforts.
From time to time, we issue shares of our common stock or warrants or options to purchase shares of our common stock to
consultants and other service providers in exchange for services. For financial statement purposes, we value these shares of common
stock, stock options, and warrants at the fair value of the common stock, stock options or warrants granted, or the services received,
whichever is more reliably measurable. We recorded non-cash charges of $0.4 million, $2.0 million, and $3.1 million during 2005,
2004, and 2003, respectively. These charges relate primarily to common stock, stock options and warrants issued in connection with
the engagement and retention of financial, business development and scientific advisors. During 2004, as our business strategy
matured, less use of financial business advisors was required, which resulted in substantially fewer options and common stock being
issued as compared to 2003.
Depreciation and amortization expense
Depreciation and amortization expenses were $217,000, $104,000, and $2,000 in 2005, 2004 and 2003 respectively. Depreciation
and amortization expenses recorded in 2005 reflect the depreciation of fixed assets located at our obesity and diabetes laboratory, as
well as $75,000 of amortization expenses related to the molecular screening library acquired from Biorex in October 2004 and placed
in service in March 2005. Depreciation incurred in 2004 consists almost entirely of depreciation on assets acquired for our obesity and
diabetes laboratory. During the fourth quarter of 2003 and the first two quarters of 2004, we increased our capital spending as part of
our overall strategy to establish our obesity and diabetes laboratory. As our need for additional equipment was nominal during 2005,
our net capital assets declined to $726,000, net of depreciation, from $895,000 at December 31, 2004. During 2004, capital assets
increased by $668,000 to $895,000, net of depreciation. As a result of these additions to assets, depreciation related to capital
equipment increased from $2,000 in 2003 to $104,000 in 2004.
Severance and other contractual payments to officers
In accordance with a Mutual General Release and Severance Agreement in May 2004, we paid our former General Counsel,
approximately $52,000 and 12 months of related benefits, and vested options to purchase 87,500 shares of our common stock that
were granted upon the commencement of his employment. In accordance with a Mutual General Release and Severance Agreement in
May 2004, we paid our former Chief Financial Officer, approximately $150,000 and 18 months of related benefits, and vested options
to purchase 105,000 shares of our common stock that were granted upon the commencement of his employment.
Loss on facility abandonment
Subsequent to our merger with Global Genomics in 2002, we recorded a loss of $478,000 associated with the closure of our
Atlanta headquarters and our relocation to Los Angeles. This loss represented the total remaining lease obligations and estimated
operating costs through the remainder of the lease term, less estimated sublease rental income and deferred rent at the time. In August
2005, we entered into a lease termination agreement pursuant to which we were released from all future obligations on the lease in
exchange for a one-time $110,000 payment and the forfeiture of a $49,000 security deposit. As a result of this agreement, we realized
a $163,000 offset against third quarter general and administrative expenses.
Interest income
Interest income was $206,000 in 2005, as compared to $60,000 in 2004 and $82,000 in 2003. The variances between years are
primarily attributable to the cash available for investment and higher interest yields.
33
Equity Losses from Minority-Owned Entity
Equity losses from minority-owned entity
Asset impairment charge
Amortization of acquired developed technology
2005
Year Ended December 31,
2004
(In thousands)
2003
$ — $ — $
245
5,869
548
$ — $ — $ 6,662
—
—
—
—
Blizzard ceased operations at the end of 2003. Prior to that time, we recorded our portion of the net loss of Blizzard in accordance
with the equity method of accounting. In 2003, we recorded $6.7 million in equity losses, of which $5.9 million was an asset
impairment charge, $245,000 was our 40% share of the net loss in Blizzard and $548,000 was amortization of acquired developed
technology. For the period July 19, 2002 (date of acquisition of Global) to December 31, 2002, we recorded $665,000 in equity losses,
of which $330,000 was our share in the net losses of Blizzard Genomics and $335,000 was amortization of acquired developed
technology.
Minority interest in losses of subsidiary
We recorded $81,000 in 2005, $160,000 in 2004 and $20,000 in 2003 related to the 5% minority interest in losses of CytRx
Laboratories, which we acquired in September 2003. On June 30, 2005, we repurchased the outstanding 5% interest in CytRx
Laboratories from Dr. Michael Czech, and on September 30, 2005, we completed the merger of CytRx Laboratories with and into the
Company.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) revised and issued SFAS 123, Share-Based Payment
(SFAS 123(R)). SFAS 123(R) eliminates the alternative of using the APB 25 intrinsic value method of accounting for stock options.
This revised statement will require recognition of the cost of employee services received in exchange for awards of equity instruments
based on the fair value of the award at the grant date. This cost is required to be recognized over the vesting period of the award. The
stock-based compensation table in Note 2 to our audited financial statements illustrates the effect on net income and earnings per share
for 2005, 2004 and 2003 if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
SFAS 123(R) applies to all awards granted, modified, repurchased, or cancelled after June 30, 2005. We will adopt SFAS 123(R)
effective January 1, 2006, using the modified prospective method. As a result of the adoption of this statement, our compensation
expense for share-based payments is expected to be approximately $0.6 million in 2006, but may be significantly greater dependant
upon levels of share-based payments granted in the future, option valuation models utilized and assumptions selected at the time of the
future grants.
In December 2004, the FASB issued SFAS 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No.
29, Accounting for Nonmonetary Transactions.” SFAS 153 requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Adoption of this standard did not have a material effect on our consolidated financial
statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error
Corrections”, (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change
in accounting principle. We are required to adopt SFAS 154 in 2006. Our results of operations and financial condition will only be
impacted by SFAS 154 if we implement changes in accounting principles that are addressed by the standard or correct accounting
errors in future periods.
Related Party Transactions
Dr. Michael Czech, who was until June 30, 2005 a 5% minority shareholder of our prior subsidiary, CytRx Laboratories, and who
is a member of our Scientific Advisory Board, is an employee of UMMS and is the principal investigator for a sponsored research
agreement between CytRx and UMMS. During each of 2005 and 2004, Dr. Czech was paid $80,000 for his Scientific Advisory Board
services. In addition, during 2005 and 2004, we paid UMMS $1,410,000 and $403,000, respectively, under a sponsored research
agreement to fund a portion of Dr. Czech’s research.
34
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet financing arrangements, other than operating leases.
Item 7A. 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
United States interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by the
U.S. government and institutional money market funds. The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income received without significantly increasing risk. Due to the nature of our short-term
investments, we believe that we are not subject to any material market risk exposure. We do not have any derivative financial
instruments or foreign currency instruments. If interest rates had varied by 10% in 2005, it would not have had a material effect on our
statement of operations or cash flows for 2005 based upon our December 31, 2005 balances.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and supplemental schedule and notes thereto as of December 31, 2005 and 2004, and for
each of the three years ended December 31, 2005, 2004 and 2003, together with the independent registered public accounting firms’
reports thereon, are set forth on pages F-1 to F-21 of this Annual Report.
Item 9A. Controls and Procedures
An evaluation was performed by our management team, with the participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005, the end of
the period covered by this Annual Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of December 31, 2005 to provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms.
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2005,
that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
Item 10. Directors and Executive Officers of the Registrant
The following table provides information concerning our directors and executive officers:
PART III
Name
Max Link
Steven A. Kriegsman
Marvin R. Selter
Louis Ignarro, Ph.D.
Joseph Rubinfeld, Ph.D.
Richard L. Wennekamp
Mark A. Tepper, Ph.D.
Matthew Natalizio
Jack R. Barber, Ph.D.
Benjamin S. Levin
Age
65
64
78
64
73
63
48
51
50
30
Class of
Director(1)
III
II
II
I
I
II
—
—
—
—
Position
Director, Chairman of the Board(2)(3)
Director, Chief Executive Officer, President
Director, Vice Chairman of the Board(2)(3)(4)
Director
Director(2)(4)
Director(2)(3)(4)
Senior Vice President; Drug Discovery
Chief Financial Officer, Treasurer
Senior Vice President — Drug Development
General Counsel, Vice President — Legal Affairs and
Corporate Secretary
____________
(1) Our Class I directors serve until the 2007 annual meeting of stockholders, our Class II directors serve until the 2008 annual
meeting of stockholders and our Class III director serves until the 2006 annual meeting of stockholders.
(2) These directors constitute the members of our Audit Committee. Mr. Selter is the Chairman of the Committee.
(3) These directors constitute the members of our Nominating and Corporate Governance Committee. Mr. Wennekamp is Chairman
of the Committee.
(4) These directors constitute the members of our Compensation Committee. Dr. Rubinfeld is Chairman of the committee.
Max Link has been a director since 1996. Dr. Link has been retired from business since 2003. From March 2002 until its
acquisition by Zimmer Holdings, Dr. Link served as Chairman and CEO of Centerpulse, Ltd. From May 1993 to June 1994, Dr. Link
served as the Chief Executive Officer of Corange Ltd. (the holding company for Boehringer Mannheim Therapeutics, Boehringer
Mannheim Diagnostics and DePuy International). From 1992 to 1993, Dr. Link was Chairman of Sandoz Pharma, Ltd. From 1987 to
1992, Dr. Link was the Chief Executive Officer of Sandoz Pharma and a member of the Executive Board of Sandoz, Ltd., Basel. Prior
to 1987, Dr. Link served in various capacities with the United States operations of Sandoz, including President and Chief Executive
Officer. Dr. Link also serves as a director of Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Celsion Corporation,
Discovery Laboratories, Inc., Human Genome Sciences, Inc. and PDL BioPharma, Inc.
Steven A. Kriegsman has been a director and our President and Chief Executive Officer since July 2002. He previously served as a
director and the Chairman of Global Genomics since June 2000. Mr. Kriegsman is Chairman and founder of Kriegsman Capital Group
LLC, a financial advisory firm specializing in the development of alternative sources of equity capital for emerging growth
companies. Mr. Kriegsman has advised such companies as Closure Medical Corporation, Novoste Corporation, Miravant Medical
Technologies, Maxim Pharmaceuticals and Supergen Inc. Mr. Kriegsman has a B.S. degree from New York University in accounting
and completed the Executive Program in Mergers and Acquisitions at New York University, The Management Institute. Mr.
Kriegsman serves as a director of Bradley Pharmaceuticals, Inc.
Marvin R. Selter has been a director since October 2003. He has been President and Chief Executive Officer of CMS, Inc. since he
founded that firm in 1968. CMS, Inc. is a national management consulting firm. In 1972, Mr. Selter originated the concept of
employee leasing. He serves as a member of the Business Tax Advisory Committee—City of Los Angeles, Small Business Board—
State of California and the Small Business Advisory Commission—State of California. Mr. Selter also serves on the Valley Economic
Development Center as past Chairman and Audit Committee Chairman, the Board of Valley Industry and Commerce Association as
past Chairman, the Advisory Board of the San Fernando Economic Alliance and the California State University—Northridge as
Chairman of the Economic Research Center. He has served, and continues to serve, as a member of boards of directors of various
hospitals, universities, private medical companies and other organizations. Mr. Selter attended Rutgers—The State University,
36
majoring in Accounting and Business Administration. He was an LPA having served as Controller, Financial Vice President and
Treasurer at distribution, manufacturing and service firms. He has lectured extensively on finance, corporate structure and budgeting
for the American Management Association and other professional teaching associations.
Louis Ignarro, Ph.D. has been a director since July 2002. He previously served as a director of Global Genomics since November
20, 2000. Dr. Ignarro serves as the Jerome J. Belzer, M.D. Distinguished Professor of Pharmacology in the Department of Molecular
and Medical Pharmacology at the UCLA School of Medicine. Dr. Ignarro has been at the UCLA School of Medicine since 1985 as a
professor, acting chairman and assistant dean. Dr. Ignarro received the Nobel Prize for Medicine in 1998. Dr. Ignarro received a B.S.
in pharmacy from Columbia University and his Ph.D. in Pharmacology from the University of Minnesota.
Joseph Rubinfeld, Ph.D. has been a director since July 2002. He co-founded SuperGen, Inc. in 1991 and has served as its Chief
Executive Officer and President and as a director since its inception until December 31, 2003. He resigned as Chairman Emeritus of
SuperGen, Inc. on Februrary 8, 2005. Dr. Rubinfeld was also Chief Scientific Officer of SuperGen from 1991 until September 1997.
Dr. Rubinfeld is also a founder of, and currently serves as the Chairman and Chief Executive Officer of, JJ Pharma. Dr. Rubinfeld was
one of the four initial founders of Amgen, Inc. in 1980 and served as a Vice President and its Chief of Operations until 1983. From
1987 until 1990, Dr. Rubinfeld was a Senior Director at Cetus Corporation and from 1968 to 1980, Dr. Rubinfeld was employed at
Bristol-Myers Company, International Division in a variety of positions. Dr. Rubinfeld received a B.S. degree in chemistry from
C.C.N.Y. and an M.A. and Ph.D. in chemistry from Columbia University.
Richard L. Wennekamp has been a director since October 2003. He has been the Senior Vice President-Credit Administration of
Community Bank since October 2002. From September 1998 to July 2002, Mr. Wennekamp was an executive officer of Bank of
America Corporation, holding various positions, including Managing Director-Credit Product Executive for the last four years of his
22-year term with the bank. From 1977 through 1980, Mr. Wennekamp was a Special Assistant to former President of the United
States, Gerald R. Ford, and the Executive Director of the Ford Transition Office. Prior thereto, he served as Staff Assistant to the
President of the United States for one year, and as the Special Assistant to the Assistant Secretary of Commerce of the U.S.
Mark A. Tepper, Ph.D. was the President and co-founder of our prior subsidiary CytRx Laboratories (formerly Araios, Inc.) since
September 2004, and is now our Senior Vice President, Drug Discovery. From November 2002 to August 2003, he served as an
independent pharmaceutical consultant. Prior to that, from April 2002 to October 2002, he served as President and CEO of Arradial,
Inc., an Oxford Biosciences Venture-backed company developing a novel microfluidics based drug discovery platform. From April
1995 to March 2002, Dr. Tepper served in a number of senior management roles at Serono, US, including Vice President, Research
and Operations for the US Pharmaceutical Research Institute and Executive Director of Lead Discovery. From 1988 to 1995, Dr.
Tepper was Sr. Research Investigator at the Bristol Myers Squibb Pharmaceutical Research Institute where he worked on the
discovery and development of novel drugs in the area of Oncology and Immunology. Prior to that, Dr. Tepper was a post-doctoral
fellow at the University of Massachusetts Medical School in the laboratory of Dr. Michael Czech. Dr. Tepper received a B.A. in
Chemistry from Clark University with highest honors, and a Ph.D. in Biochemistry and Biophysics from Columbia University.
Matthew Natalizio has been our Chief Financial Officer and Treasurer since July 2004. From November 2002 to December 2003,
he was President and General Manager of a privately held furniture manufacturing company. Prior to that, from January 2000 to
October 2002, he was Chief Financial Officer at Qualstar Corporation, a publicly traded designer and manufacturer of data storage
devices. He was also the Vice President of Operations Support, the Vice President — Finance and Treasurer of Superior National
Insurance Group, a publicly traded workers’ compensation insurance company. Mr. Natalizio is a CPA who worked at Ernst and
Young as an Audit Manager and Computer Audit Executive and was a Senior Manager at KPMG. He earned his Bachelor of Arts
degree in Economics from the University of California, Los Angeles.
Jack Barber, Ph.D. has been our Senior Vice President — Drug Development since July 2004. He previously served as Chief
Technical Officer and Vice President of Research and Development at Immusol, a biopharmaceutical company based in San Diego,
California, since 1994. Prior to that, Dr. Barber spent seven years in various management positions at Viagene, most recently serving
as Associate Director of Oncology. Dr. Barber received both his B.S. and Ph.D. in Biochemistry from the University of California,
Los Angeles. He also carried out his post-doctoral fellowship at the Salk Institute for Biological Studies in La Jolla, California.
Benjamin S. Levin has been our General Counsel, Vice President — Legal Affairs and Corporate Secretary since July 2004. From
November 1999 to June 2004, Mr. Levin was an associate in the transactions department of the Los Angeles office of O’Melveny &
Myers LLP. Mr. Levin received his S.B. in Economics from the Massachusetts Institute of Technology, and a J.D. from Stanford Law
School.
37
Our board of directors has determined that Messrs. Link, Rubinfeld, Selter and Wennekamp are “independent” under the current
independence standards of both the Nasdaq Capital Market and the SEC, and have no material relationships with us (either directly or
as a partner, shareholder or officer of any entity) which could be inconsistent with a finding of their independence as members of our
board of directors or as the members of our Audit Committee. In making these determinations, our board of directors has broadly
considered all relevant facts and circumstances, recognizing that material relationships can include commercial, banking, consulting,
legal, accounting, and familial relationships, among others.
Our board of directors has a standing Audit Committee currently composed of Messrs. Selter, Link, Rubinfeld and Wennekamp.
Our board of directors has determined that Mr. Selter, one of the independent directors serving on our Audit Committee, also is an
audit committee financial expert as defined by the SEC’s rules.
Section 16(a) Beneficial Ownership Reporting Compliance
Our executive officers and directors and any person who owns more than 10% of our outstanding shares of common stock are
required by Section 16(a) of the Securities Exchange Act to file with the SEC initial reports of ownership and reports of changes in
ownership of our common stock and to furnish us with copies of those reports. Based solely on our review of copies of reports we
have received and written representations from certain reporting persons, we believe that all Section 16(a) filing requirements
applicable to our directors and executive officers and greater than 10% shareholders for 2005 were complied with.
Code of Ethics
We have adopted a Code of Ethics applicable to our principal executive officer, principal financial officer, and principal
accounting officer or controller, a copy of which is filed as an exhibit to this Form 10-K.
Item 11. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning all compensation paid or accrued by us for services rendered in all
capacities during the fiscal years ended December 31, 2005, 2004 and 2003 by Steven A. Kriegsman, our President and Chief
Executive Officer, and the four other most highly compensated executive officers:
Name and Principal Position
Steven A. Kriegsman
President and Chief Executive Officer
Jack R. Barber, Ph.D.
Senior Vice President — Drug Development
Mark A. Tepper, Ph.D.
Senior Vice President — Drug Discovery
Matthew Natalizio
Chief Financial Officer and Treasurer
Benjamin S. Levin
General Counsel, Vice President — Legal
Affairs and Corporate Secretary
Year
Salary
Bonus
$ 399,403 $ 250,000
$ 361,173 $ 150,000
$ 313,772 $ 150,000
$ 238,132 $ 50,000
2005
2004
2003
2005
2004 (5) $ 112,910
2005
2004
2003 (7) $ 58,333 $
2005
2004 (8) $ 82,900 $
2005
$ 214,285 $ 50,000
$ 200,699 $ 50,000
—
$ 184,167 $ 50,000
—
$ 184,167 $ 50,000
Long-Term
Compensation
Securities
Underlying
Options (#)
300,000 (1)
—
1,000,000 (4)
150,000 (1)
$ 100,000 (6)
—
—
400,000 (6)
150,000 (1)
100,000 (6)
150,000 (1)
All Other
Compensation
$11,000 (2)
$42,617 (3)
—
—
—
—
—
—
—
—
—
2004 (9) $ 80,881 $
—
160,000 (6)
—
____________
(1) The options shown are subject to vesting in 36 equal monthly installments beginning on May 17, 2005, subject to the option
holder’s remaining in our continuous employ through such dates.
(2) The amount shown includes approximately $5,000 in insurance premiums paid by us with respect to a life insurance policy for Mr.
Kriegsman with a face value of approximately $1.4 million and under which Mr. Kriegsman’s designee is the beneficiary. The
amount shown also includes approximately $6,000 of legal fees and expenses paid or reimbursed by us in accordance with the
terms of Mr. Kriegsman’s employment agreement described below under “Employment Agreement with Steven A. Kriegsman.”
38
(3) The amount shown includes approximately $5,000 in insurance premiums paid by us with respect to the life insurance policy for
Mr. Kriegsman referred to in note (2) above. The amount shown also includes approximately $37,617 of legal fees and expenses
paid or reimbursed by us in accordance with the terms of Mr. Kriegsman’s employment agreement described below under
“Employment Agreement with Steven A. Kriegsman.”
(4) 250,000 of the options shown vested on each of June 20, 2003 and June 20, 2004. The remaining 500,000 of the options shown
vest in twenty-four monthly installments of 1/24th each on the 20th day of each month beginning on June 20, 2004, subject to Mr.
Kriegsman’s remaining in our continuous employ through such dates.
(5) Dr. Barber was hired on July 6, 2004.
(6) The options shown are subject to vesting in three annual installments of 1/3rd each on each of the first three anniversaries of the
named executive officer’s date of hire, subject to his remaining in our continuous employ through such dates.
(7) Dr. Tepper was hired on September 20, 2003.
(8) Mr. Natalizio was hired on July 12, 2004.
(9) Mr. Levin was hired on July 15, 2004.
Option Grants in Last Fiscal Year
The following table contains information concerning grants of stock options during the fiscal year ended December 31, 2005 to the
executive officers named in the Summary Compensation Table:
Option Grants in Twelve Months Ended December 31, 2005
Individual Grants
Number of
Shares
% of Total
Options
Potential Realizeable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Underlying
Name
Steven A. Kriegsman
Jack R. Barber, Ph.D.
Mark A. Tepper, Ph.D.
Matthew Natalizio
Benjamin S. Levin
____________
(1) The potential realizable value shown in this table represents the hypothetical gain that might be realized based on assumed 5% and
10% annual compound rates of stock price appreciation over the full option term. These prescribed rates are not intended to
forecast possible future appreciation of the common stock.
10%
$ 564,500
$ 282,200
$
—
$ 282,200
$ 282,200
Term(1)
5%
$ 266,300
$ 133,200
$
—
$ 133,200
$ 133,200
Options
Granted
300,000
150,000
—
150,000
150,000
Exercise
Price
$ 0.79
$ 0.79
—
$ 0.79
$ 0.79
Granted to
Employees In
Fiscal Year
28.6%
14.3%
—
14.3%
14.3%
Fiscal Year-End Option Values
The following table sets forth the number of options and total value of unexercised in-the-money options and warrants at
December 31, 2005 for the executive officers named in the Summary Compensation Table, using the price per share of our common
stock of $1.03 on December 30, 2005. During 2005, Mr. Kriegsman exercised warrants to purchase 459,352 shares of our common
stock.
Name
Steven A. Kriegsman
Jack R. Barber, Ph.D.
Mark A. Tepper, Ph.D.
Matthew Natalizio
Benjamin S. Levin
Number of Securities
Underlying Unexercised
Options at
December 31, 2005 (#)
Exercisable
850,000
62,500
266,680
62,500
82,495
Unexercisable
450,000
187,500
133,320
187,500
227,505
Value of Unexercised
In-the-Money Options at
December 31, 2005 ($)
Exercisable
$ 14,000
$ 7,000
$
—
$ 7,000
$ 7,000
Unexercisable
$ 58,000
$ 29,000
$
—
$ 29,000
$ 29,000
39
Compensation of Directors
Periodically, our board of directors reviews our director compensation policies and, from time to time, makes changes to such
policies based on various criteria the board deems relevant. During 2005, directors who were employees of our company received no
compensation for their service as directors or as members of board committees.
Effective October 1, 2005, our non-employee directors receive a quarterly retainer of $2,000 ($8,000 for the Chairman of the
Board), a fee of $2,000 for each board meeting attended ($750 for meetings attended by teleconference and for board actions taken by
unanimous written consent) and $1,000 for each committee meeting attended. Non-employee directors who serve as the Chairman a
Board committee receive an additional $1,500 for each meeting attended as the Chairman of the Nomination and Governance
Committee or the Compensation Committee and an additional $2,000 for each meeting attended as the Chairman of the Audit
Committee. Prior to October 2005, our non-employee directors received a quarterly retainer of $1,500, a fee of $1,500 for each board
meeting attended ($750 for meetings attended by teleconference and for board actions taken by unanimous written consent) and $750
for each committee meeting attended. Non-employee directors who served as Chairman of a Board committee received an additional
$500 for each meeting attended as the Chairman of the Nomination and Governance Committee or the Compensation Committee and
an additional $1,000 for each meeting attended as the Chairman of the Audit Committee. We grant options to purchase 15,000 shares
of common stock at an exercise price equal to the current market value of our common stock to each non-employee director annually,
usually in the summer of each year. Past option grants were made subject to vesting in annual increments of 1/3rd each, subject to the
director remaining as a director.
Equity Compensation Plans
The following table sets forth certain information as of December 31, 2005 regarding securities authorized for issuance under our
equity compensation plans.
Plan Category
Equity compensation plans approved by our
stockholders:
1994 Stock Option Plan
1995 Stock Option Plan
1998 Long-Term Incentive Plan
2000 Long-Term Incentive Plan
Equity compensation plans not approved by our
stockholders:
(a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available
for Issuance Under Equity
Compensation
Plans (Excluding Securities
Reflected in Column (a))
30,834
—
132,541
6,042,167
$ 1.00
—
1.00
1.71
70,850
22,107
29,517
3,957,833
Outstanding warrants(1)
Total:
____________
(1) Issued as compensation for various services and does not include warrants attached to common stock that were sold in private
5,029,822
11,235,364
—
4,080,307
1.47
$ 1.59
placement transactions.
Perquisites
In general, we afford our directors and executive officers no perquisites apart from the compensation and stock option benefits
described above and any benefits specifically provided for under the terms of any employment agreement as described below. We do,
however, bear the cost of outside counsel employed by us to assist directors and executive officers in preparing reports of changes in
beneficial ownership under Section 16 of the Securities Exchange Act of 1934 and other Section 16 compliance matters. We also
permit Mr. Kriegsman, our President and Chief Executive Officer, and our directors to fly first-class for business travel, which is an
exception to our usual practice for business travel by our officers and employees.
40
Employment Agreements; Change in Control Agreements
Employment Agreement with Steven A. Kriegsman
Mr. Kriegsman is employed as our Chief Executive Officer pursuant to an employment agreement that was amended and restated
as of May 17, 2005 to continue through July 1, 2008. As an incentive to enter the amended and restated employment agreement, Mr.
Kriegsman was granted as of May 17, 2005, a ten-year, nonqualified option under our 2000 Long-Term Incentive Plan to purchase
300,000 shares of our common stock at a price of $0.79 per share. The employment agreement will automatically renew in July 2008
for an additional one-year period, unless either Mr. Kriegsman or we elect not to renew it.
Under his employment agreement, Mr. Kriegsman is entitled to an annual base salary of $400,000. Our board of directors (or its
Compensation Committee) will review the base salary annually and may increase (but not decrease) it in its sole discretion. In addition
to his annual salary, Mr. Kriegsman is eligible to receive an annual bonus as determined by our board of directors (or its
Compensation Committee) in its sole discretion, but not to be less than $150,000. Pursuant to his employment agreement with us, we
have agreed that he shall serve on a full-time basis as our Chief Executive Officer and that he may continue to serve as Chairman of
the Kriegsman Group only so long as necessary to complete certain current assignments.
Mr. Kriegsman is eligible to receive grants of options to purchase shares of our common stock. The number and terms of those
options, including the vesting schedule, will be determined by our board of directors (or its Compensation Committee) in its sole
discretion.
Under Mr. Kriegsman’s employment agreement, we have agreed that, if he is made a party, or threatened to be made a party, to a
suit or proceeding by reason of his service to us, we will indemnify and hold him harmless from all costs and expenses to the fullest
extent permitted or authorized by our certificate of incorporation or bylaws, or any resolution of our board of directors, to the extent
not inconsistent with Delaware law. We also have agreed to advance to Mr. Kriegsman such costs and expenses upon his request if he
undertakes to repay such advances if it ultimately is determined that he is not entitled to indemnification with respect to the same.
These employment agreement provisions are not exclusive of any other rights to indemnification to which Mr. Kriegsman may be
entitled and are in addition to any rights he may have under any policy of insurance maintained by us.
In the event we terminate Mr. Kriegsman’s employment without “cause” (as defined), or if Mr. Kriegsman terminates his
employment with “good reason” (as defined), (i) we have agreed to pay Mr. Kriegsman a lump-sum equal to his salary and prorated
minimum annual bonus through to his date of termination, plus his salary and minimum annual bonus for a period of two years after
his termination date, or until the expiration of the amended and restated employment agreement, whichever is later, (ii) he will be
entitled to immediate vesting of all stock options or other awards based on our equity securities, and (iii) he will also be entitled to
continuation of his life insurance premium payments and continued participation in any of our health plans through to the later of the
expiration of the amended and restated employment agreement or 24 months following his termination date. Mr. Kriegsman will have
no obligation in such events to seek new employment or offset the severance payments to him by the Company by any compensation
received from any subsequent reemployment by another employer.
Under Mr. Kriegsman’s employment agreement, he and his affiliated company, The Kriegsman Group, are to provide us during
the term of his employment with the first opportunity to conduct or take action with respect to any acquisition opportunity or any other
potential transaction identified by them within the biotech, pharmaceutical or health care industries and that is within the scope of the
business plan adopted by our board of directors. Mr. Kriegsman’s employment agreement also contains confidentiality provisions
relating to our trade secrets and any other proprietary or confidential information, which provisions shall remain in effect for five
years after the expiration of the employment agreement with respect to proprietary or confidential information and for so long as our
trade secrets remain trade secrets.
Change in Control Agreement with Steven A. Kriegsman
Mr. Kriegsman’s employment agreement contains no provision for payment to him in the event of a change in control of CytRx. If,
however, a change in control (as defined in our 2000 Long-Term Incentive Plan) occurs during the term of the employment
agreement, and if, during the term and within two years after the date on which the change in control occurs, Mr. Kriegsman’s
employment is terminated by us without cause or by him for good reason (each as defined in his employment agreement), then, to the
extent that any payment or distribution of any type by us to or for the benefit of Mr. Kriegsman resulting from the termination of his
employment is or will be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, we
have agreed to pay Mr. Kriegsman, prior to the time the excise tax is payable with respect to any such payment (through withholding
or otherwise), an additional amount that, after the imposition of all income, employment, excise and other taxes, penalties and interest
thereon, is equal to the sum of (i) the excise tax on such payments plus (ii) any penalty and interest assessments associated with such
excise tax.
41
Employment Agreement with Matthew Natalizio
Matthew Natalizio is employed as our Chief Financial Officer pursuant to an employment agreement that was amended and
restated as of May 17, 2005, to continue through July 1, 2006. Mr. Natalizio is entitled under his amended and restated employment
agreement to an annual base salary of $195,000 and is eligible to receive an annual bonus as determined by our board of directors (or
its Compensation Committee) in its sole discretion. As an incentive to enter the amended and restated employment agreement, Mr.
Natalizio was granted as of May 17, 2005, a ten-year, nonqualified option under our 2000 Long-Term Incentive Plan to purchase
150,000 shares of our common stock at a price of $0.79 per share. This option will vest as to 1/36th of the shares covered thereby each
month after the date of the employment agreement, provided that Mr. Natalizio remains in our continuous employ.
In the event we terminate Mr. Natalizio’s employment without cause (as defined), we have agreed to pay him a lump-sum equal to
his accrued but unpaid salary and vacation, plus an amount equal to three months’ salary under his employment agreement.
Employment Agreement with Jack R. Barber, Ph.D.
Jack R. Barber, Ph.D. is employed as our Senior Vice President — Drug Development pursuant to an employment agreement that
was amended and restated as of May 17, 2005 to continue through July 1, 2006. Dr. Barber is entitled under his amended and restated
employment agreement to an annual base salary of $250,000 and is eligible to receive an annual bonus as determined by our board of
directors (or its Compensation Committee) in its sole discretion. As an incentive to enter the amended and restated employment
agreement, Dr. Barber was granted as of May 17, 2005, a ten-year, nonqualified option under our 2000 Long-Term Incentive Plan to
purchase 150,000 shares of our common stock at a price of $0.79 per share. This option will vest as to 1/36th of the shares covered
thereby each month after the date of the employment agreement, provided that Dr. Barber remains in our continuous employ.
In the event we terminate Dr. Barber’s employment without cause (as defined), we have agreed to pay him a lump-sum equal to his
accrued but unpaid salary and vacation, plus an amount equal to three months’ salary under his employment agreement.
Employment Agreement with Mark A. Tepper, Ph.D.
Mark A. Tepper, Ph.D., is employed as our Senior Vice President — Drug Discovery pursuant to an employment agreement
effective as of September 17, 2005 to continue through September 17, 2006. Under his employment agreement, Dr. Tepper is entitled
to an annual base salary of $250,000 and is eligible to receive an annual bonus as determined by our board of directors (or its
Compensation Committee) in its sole discretion.
In the event Dr. Tepper’s employment is terminated without cause (as defined), we have agreed to continue to pay Dr. Tepper his
salary and other employee benefits for a period of six months following his termination.
Employment Agreement with Benjamin S. Levin
Benjamin S. Levin is employed as our Vice President — Legal Affairs, General Counsel and Secretary pursuant to an employment
agreement that was amended and restated as of May 17, 2005 to continue through July 1, 2006. Mr. Levin is entitled under his
amended and restated employment agreement to an annual base salary of $195,000 and is eligible to receive an annual bonus as
determined by our board of directors (or its Compensation Committee) in its sole discretion. As an incentive to enter the amended and
restated employment agreement, Mr. Levin was granted as of May 17, 2005, a ten-year, nonqualified option under our 2000 Long-
Term Incentive Plan to purchase 150,000 shares of our common stock at a price of $0.79 per share. This option will vest as to 1/36th
of the shares covered thereby each month after the date of the employment agreement, provided that Mr. Levin remains in our
continuous employ.
In the event we terminate Mr. Levin’s employment without cause (as defined), we have agreed to pay him a lump-sum equal to his
accrued but unpaid salary and vacation, plus an amount equal to three months’ salary under his employment agreement.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
There are no “interlocks,” as defined by the SEC, with respect to any member of the compensation committee. Joseph Rubinfeld,
Ph.D., Marvin R. Selter and Richard L. Wennekamp are the current members of the compensation committee.
42
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Based solely upon information made available to us, the following table sets forth information with respect to the beneficial
ownership of our common stock as of March 10, 2006 by (1) each person who is known by us to beneficially own more than five
percent of our common stock; (2) each director; (3) the named executive officers listed in the Summary Compensation Table under
Item 11; and (4) all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the SEC rules. Shares of common stock subject to any warrants or options
that are presently exercisable, or exercisable within 60 days of March 10, 2006 (which are indicated by footnote) are deemed
outstanding for the purpose of computing the percentage ownership of the person holding the warrants or options, but are not treated
as outstanding for the purpose of computing the percentage ownership of any other person. The percentage ownership reflected in the
table is based on 69,515,867 shares of our common stock outstanding as of March 10, 2006. Except as otherwise indicated, the holders
listed below have sole voting and investment power with respect to all shares of common stock shown, subject to applicable
community property laws. An asterisk represents beneficial ownership of less than 1%.
Name of Beneficial Owner
Louis Ignarro, Ph.D.(1)
Steven A. Kriegsman(2)
Max Link(3)
Joseph Rubinfeld(4)
Marvin R. Selter(5)
Richard Wennekamp(6)
Matthew Natalizio(7)
Jack R. Barber(8)
Mark A. Tepper(9)
Benjamin S. Levin(10)
All executive officers and directors as a group (ten persons)(11)
____________
(1) Includes 373,667 shares subject to options or warrants.
Shares of
Common Stock
Number
465,583
5,050,265
60,417
23,667
369,118
16,667
79,168
79,168
266,676
99,168
6,509,897
Percent
*
7.16%
*
*
*
*
*
*
*
*
9.10%
(2) Includes 1,029,165 shares subject to options or warrants. Mr. Kriegsman’s address is c/o CytRx Corporation, 11726 San Vicente
Boulevard, Suite 650, Los Angeles, CA 90049.
(3) Includes 31,210 shares subject to options or warrants.
(4) Includes 23,667 shares subject to options or warrants.
(5) The shares shown are owned, of record, by the Selter Family Trust or Selter IRA Rollover. Includes 11,667 shares subject to
options or warrants owned by Mr. Selter.
(6) Includes 11,667 shares subject to options or warrants.
(7) Includes 79,168 shares subject to options or warrants.
(8) Includes 79,168 shares subject to options or warrants.
(9) Includes 266,676 shares subject to options or warrants.
(10) Includes 99,168 shares subject to options or warrants.
(11) Includes 2,005,223 shares subject to options or warrants.
43
Item 13. Certain Relationships and Related Transactions
We entered into an agreement, dated as of July 17, 2003 (and subsequently amended on October 18, 2003), with Louis Ignarro,
Ph.D., one of our current directors. Pursuant to the agreement, Dr. Ignarro agreed to serve as our Chief Scientific Spokesperson to the
medical and financial communities. As payment for his services, Dr. Ignarro was granted a non-qualified stock option under our 2000
Long-Term Incentive Plan to purchase 350,000 registered shares of our common stock at an exercise price equal to $1.89, the closing
price for our common stock on Nasdaq on the date of grant. The option is now fully vested and has a term of seven years. Either party
may terminate the agreement at any time.
Item 14. Principal Accountant Fees and Services
BDO Seidman, LLP, or BDO, serves as our independent registered public accounting firm and audited our financial statements for
the years ended December 31, 2003, 2004 and 2005.
Audit Fees
The aggregate fees billed for professional services rendered for the audit of our annual financial statements for the fiscal years
ended December 31, 2003 and 2004 and the estimated fees for the audit for the fiscal year ended December 31, 2005 are as follows:
Year:
2005
2004
2003
Audit Related Fees
BDO
$ 170,000
$ 217,000
$ 160,000
For the fiscal year ended December 31, 2003, 2004 and 2005, BDO rendered $45,000, $0 and $14,000 of other audit-related
services, which consisted of certain agreed-upon procedures performed prior to their audit of our financial statements for fiscal 2003
and work performed on the registration statement in 2005.
Tax Fees
The aggregate fees billed by BDO for professional services for tax compliance, tax advice and tax planning for the years ended
December 31, 2003 and 2004 were $25,000 and $20,000, respectively. We did not engage BDO to perform any tax-related services
for the year ended December 31, 2005.
All Other Fees
No other services were rendered by BDO for the years ended December 31, 2003, 2004 or 2005. Our Audit Committee has pre-
approved all services (audit and non-audit) provided or to be provided to us by BDO for the years ended December 31, 2003, 2004
and 2005.
44
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this 10-K:
(1) Financial Statements
Our consolidated financial statements and the related report of the independent registered public accounting firm thereon are set
forth on pages F-1 to F-22 of this Annual Report. These consolidated financial statements are as follows:
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
(2) Financial Statement Schedules
The following financial statement schedule is set forth on page F-22 of this Annual Report.
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003
All other schedules are omitted because they are not required, not applicable, or the information is provided in the financial
statements or notes thereto.
(b) Exhibits
See Exhibit Index on page 50 of this Annual Report, which is incorporated herein by reference.
45
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1
10.2
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
CytRx Corporation
Form 10-K Exhibit Index
Restated Certificate of Incorporation
Restated By-Laws
Certificate Of Amendment To Restated Certificate of Incorporation
Corrected Restated Certificate of Incorporation
Certificate of Amendment to Restated Certificate of Incorporation
Certificate of Amendment to Restated Certificate of Incorporation
Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx Corporation and
American Stock Transfer &Trust Company as Rights Agent
Amendment No. 1 to Shareholder Protection Rights Agreement
Stock Restriction and Registration Rights Agreement
Warrant issued on July 20, 2002 to Corporate Consulting International Group pursuant to Consulting
Engagement Letter dated July 20, 2002
Warrant issued on February 21, 2003 to Corporate Capital Group International Ltd. Inc
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
May 29, 2003 private placement
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
September 16, 2003 private placement
Warrant issued on May 10, 2004 to MBN Consulting, LLC
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
October 4, 2004 private placement
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
January 2005 private placement
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
March 2006 private placement
Agreement with Emory University, as amended
Option Agreement granting PSMA Development Company option to enter into a license agreement with
CytRx Corporation dated December 23, 2002
Amended and Restated Employment Agreement between CytRx Corporation and Jack J. Luchese
Amended and Restated Change of Control Employment Agreement between CytRx Corporation and
Jack J. Luchese
Amendment No. 1 to Employment Agreement with Jack J. Luchese
Amendment No. 1 to Change in Control Employment Agreement with Jack J. Luchese
1986 Stock Option Plan, as amended and restated
1994 Stock Option Plan, as amended and restated
1995 Stock Option Plan
1998 Long-Term Incentive Plan
2000 Long-Term Incentive Plan
Amendment No. 1 to 2000 Long-Term Incentive Plan
Amendment No. 2 to 2000 Long-Term Incentive Plan
46
Footnote
(a)
(b)
(m)
(n)
(n)
(ll)
(c)
(k)
(o)
(p)
(r)
(s)
(v)
(aa)
(dd)
(ee)
(kk)
(d)
(q)
(i)
(i)
(k)
(k)
(f)
(e)
(g)
(h)
(k)
(m)
(m)
10.14*
10.15*
10.16†
10.17
10.18†
10.19*
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28†
10.29†
10.30†
10.31†
10.32†
10.33†
10.34†
10.35
10.36
10.37
10.38
Amendment No. 3 to 2000 Long-Term Incentive Plan
Amendment No. 4 to 2000 Long-Term Incentive Plan
License Agreement dated November 1, 2000 by and between CytRx Corporation and Merck & Co., Inc
License Agreement dated February 16, 2001 by and between CytRx Corporation and Ivy Animal
Health, Inc
License Agreement dated December 7, 2001 by and between CytRx Corporation and Vical
Incorporated
Amended and Restated Employment Agreement dated as of May 2002 between CytRx Corporation and
Steven A. Kriegsman
Extension of financial advisory agreement between CytRx Corporation and Cappello Capital Corp.
dated January 1, 2002 Agreement between Kriegsman Capital Group and CytRx Corporation dated
February 11, 2002 regarding office space rental
Marketing Agreement with Madison & Wall Worldwide, Inc. dated August 14, 2002
Non-exclusive financial advisory agreement between CytRx Corporation and Sands Brothers & Co.
Ltd. dated September 12, 2002
Agreement between Kriegsman Capital Group and CytRx Corporate dated January 29, 2003 regarding
office space rental and shared services
Consulting Agreement, dated February 21, 2003 between CytRx Corporation and Corporate Capital
Group International Ltd. Inc
Securities Purchase Agreement, dated as of May 29, 2003, between CytRx Corporation and the
Purchasers identified on the signatory page thereof
Registration Rights Agreement, dated as of May 29, 2003, between CytRx Corporation and the
Purchasers identified on the signature page thereof
Non-Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts
Medical School and CytRx Corporation covering RNA sequence specific mediators of RNA
interference
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering in vivo production of small interfering RNAs
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering inhibitation of gene expression in adipocytes using
interference RNA
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering RNAi targeting of viruses
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering primary and polyvalent HIV-1 envelope glycoprotein DNA
vaccines
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering gene based therapeutics for solid tumor treatments
Exclusive License Agreement dated as of April 15, 2003 between University of Massachusetts Medical
School and CytRx Corporation covering selective silencing of a dominant ALS gene by RNAi
Investment Banking Agreement dated April 1, 2003 between Rockwell Asset Management Inc. and
CytRx Corporation
Investment Banking Agreement dated April 3, 2003 between J.P. Turner & Company, LLC and CytRx
Corporation
First Amendment to Investment Banking Agreement dated June 4, 2003 between J.P. Turner &
Company, LLC and CytRx Corporation
Exclusive Financial Advisor Engagement Agreement dated May 16, 2003 between Cappello Capital
Corp. and CytRx Corporation
(x)
(x)
(j)
(k)
(l)
(p)
(p)
(p)
(p)
(p)
(r)
(r)
(s)
(s)
(t)
(t)
(t)
(t)
(t)
(t)
(t)
(u)
(u)
(u)
(u)
47
10.39
10.40
10.41*
10.42
10.43
10.44
10.45†
10.46
10.47*
10.48*
10.49*
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58†
10.59†
10.60†
10.61†
10.62†
Modification letter dated June 6, 2003 to Engagement Agreement between Cappello Capital Corp. and
CytRx Corporation
Engagement Letter dated May 27, 2003 between Cardinal Securities, LLC and CytRx Corporation
Second Amended and Restated Employment Agreement dated June 10, 2003 between Steven A.
Kriegsman and CytRx Corporation
Financial Consulting Agreement dated May 10, 2003 between James Skalko and CytRx Corporation
Form of Securities Purchase Agreement, dated as of September 15, 2003, between CytRx Corporation
and the Purchasers identified on the signatory page thereof
Form of Registration Rights Agreement, dated as of September 15, 2003, between CytRx Corporation
and the Purchasers identified on the signature page thereof
Amended and Restated License Agreement dated as of September 15, 2003 between University of
Massachusetts Medical School and CytRx Corporation covering inhibition of gene expression in
adipocytes using interference RNA, certain data bases, the use of endoplasmic reticulum stress
response pathway of adipose cells to enhance whole body insulin sensitivity, and receptor-activated
reporter systems
Second Amendment to Investment Banking Agreement dated as of August 13, 2003 between J.P.
Turner & Company, LLC and CytRx Corporation
Agreement dated as of July 17, 2003 between Dr. Louis J. Ignarro and CytRx Corporation
Employment Agreement dated as of August 1, 2003 between C. Kirk Peacock and CytRx Corporation
Employment Agreement dated as of September 17, 2003 between Mark A. Tepper and Araios, Inc
Agreement of Settlement and Release dated August 8, 2003 among Corporate Capital Group
International Ltd., Inc, Peter Simone and CytRx Corporation
Confirming letter dated September 19, 2003 to the engagement agreement dated May 16, 2003
between Cappello Capital Corp. and CytRx Corporation
Preferred Stock Purchase Agreement dated as of September 16, 2003 between Araios, Inc. and CytRx
Corporation
Stockholders Agreement dated as of September 17, 2003 among Araios, Inc., Dr. Michael Czech and
CytRx Corporation
Private Placement Agent Agreement dated September 15, 2003 between Dunwoody Brokerage
Services, Inc. and CytRx Corporation
Private Placement Agent Agreement dated September 15, 2003 between Gilford Securities
Incorporated and CytRx Corporation
Agreement dated as of September 16, 2003 between Maxim Group, LLC and CytRx Corporation
Amended and Restated Professional Services Agreement among CytRx Corporation, The Kriegsman
Group and Kriegsman Capital Group, dated as of July 1, 2003
Agreement among University of Massachusetts, Advanced BioScience Laboratories, Inc and CytRx
Corporation, dated as of December 3, 2003
Amended and Restated Exclusive License Agreement among University of Massachusetts Medical
School, CytRx Corporation and Advanced BioScience Laboratories, Inc., dated as of December 22,
2003
Collaboration Agreement among University of Massachusetts, Advanced BioScience Laboratories, Inc.
and CytRx Corporation, dated as of December 22, 2003
Sublicense Agreement between CytRx Corporation and Advanced BioScience Laboratories, Inc., dated
as of December 22, 2003
Agreement between CytRx Corporation and Dr. Robert Hunter regarding SynthRx, Inc dated October
20, 2003
10.63
Office Lease between The Kriegsman Group and Douglas Emmett, dated April 13, 2000
(u)
(u)
(u)
(u)
(v)
(v)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(w)
(x)
(x)
(x)
(x)
(x)
(x)
(x)
48
10.64
10.65*
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73†
10.74*
10.75*
10.76
10.77
10.78†
10.79*
10.80*
Assignment to CytRx Corporation effective July 1, 2003 of Office Lease between The Kriegsman
Group and Douglas Emmett, dated April 13, 2000
Amendment dated October 18, 2003 to Agreement between Dr. Louis J. Ignarro and CytRx
Corporation dated as of July 17, 2003
Consulting Agreement dated December 1, 2003 between CytRx Corporation and MBN Consulting,
LLC
Office Lease between Araios, Inc. and Are-One Innovation Drive, LLC dated 11-19-03
Registration Rights Agreement, dated as of January 29, 2004, by and between CytRx Corporation and
Advanced BioScience Laboratories, Inc
Consulting Agreement, dated as of February 9, 2004, between CytRx Corporation and The Investor
Relations Group, Inc
Investment Banking Agreement, dated as of February , 2004, between CytRx Corporation and Gunn
Allen Financial, Inc
Scientific Advisory Board Agreement, effective as of March 3, 2004, by Tariq M. Rana, Ph.D., CytRx
Corporation and Araios, Inc
Scientific Advisory Board Agreement, effective as of March 3, 2004, by Craig Mello, Ph.D., CytRx
Corporation and Araios, Inc
Patent License Agreement, dated May, 2004, among CytRx Corporation, Imperial College of Science
and Technology and Imperial College Innovations Limited
Mutual General Release and Severance Agreement, dated May 12, 2004, between CytRx Corporation
and C. Kirk Peacock
Mutual General Release and Severance Agreement, dated May12, 2004, between CytRx Corporation
and Gregory Liberman
Settlement and Release Agreement dated May 10, 2004, by and between MBN Consulting, LLC and
CytRx Corporation
Registration Rights Agreement dated May 10, 2004, by and between MBN Consulting, LLC and CytRx
Corporation
Collaboration and Invention Disclosure Agreement dated July 8, 2004, by and between the University of
Massachusetts, as represented solely by the Medical School at its Worcester campus, and CytRx
Corporation
Employment Agreement dated July 6, 2004, by and between Jack Barber and CytRx Corporation
Employment Agreement dated July 12, 2004, by and between Matthew Natalizio and CytRx
Corporation
10.81*
Employment Agreement dated July 15, 2004, by and between Benjamin Levin and CytRx Corporation
10.82
10.83
10.84
10.85
10.86
10.87
Mutual and General Release of All Claims effective as of May 29, 2004, by and between Madison &
Wall Worldwide, Inc. and CytRx Corporation
Registration Rights Agreement dated May , 2004, by and between Madison & Wall Worldwide, Inc. and
CytRx Corporation
Investment Banking Agreement dated September 13, 2004, by and between CytRx Corporation and J.P.
Turner & Company, LLC
Investment Banking Agreement dated September 30, 2004, by and between CytRx Corporation and
Rodman & Renshaw, LLC
Asset Sale and Purchase Agreement dated October 4, 2004, by and among CytRx Corporation, Biorex
Research & Development, RT and BRX Research and Development Company Ltd
Securities Purchase Agreement dated as of October 4, 2004 among CytRx Corporation and the
Purchasers identified on the signatory page thereof
(x)
(x)
(x)
(x)
(y)
(y)
(y)
(y)
(y)
(z)
(z)
(z)
(aa)
(aa)
(aa)
(aa)
(aa)
(aa)
(aa)
(aa)
(bb)
(cc)
(dd)
(dd)
49
10.88
10.89
10.90
10.91
10.91*
10.92*
10.93*
10.94*
10.95*
Registration Rights Agreement dated as of October 4, 2004 among CytRx Corporation and the
Purchasers identified on the signatory page thereof
Securities Purchase Agreement, dated as of January 20, 2005, by and among CytRx Corporation and the
Investors named therein
Registration Rights Agreement, dated as of January 20, 2005, by and among CytRx Corporation and the
Investors named therein
Investment Banking Agreement dated January 20, 2005 between CytRx Corporation and Rodman &
Renshaw, LLC
Employment Agreement dated April 29, 2005 between CytRx Corporation and Dr. Scott Wieland
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Steven A. Kriegsman
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Matthew Natalizio
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Dr. Jack Barber
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Benjamin S. Levin
10.96*
Employment Agreement dated October 6, 2005 between CytRx Corporation and Dr. Mark A. Tepper
10.97
10.98*
First Amendment to Office Lease dated October 14, 2005, by and between CytRx Corporation and
Douglas Emmett 1993, LLC
Schedule of Non-Employee Director Compensation adopted on October 24, 2005 Securities Purchase
Agreement, dated as of March 2, 2006, by and among CytRx Corporation and the
10.99
purchasers named therein
10.100
10.101
10.102
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Registration Rights Agreement, dated as of March 2, 2006, by and among CytRx Corporation and the
purchasers named therein.
Lock-Up Agreement, dated as of March 2, 2006, by and among CytRx Corporation, Steven A.
Kriegsman and American Stock Transfer & Trust Company.
Investment Banking Agreement dated February ___, 2006 between CytRx Corporation and T.R.
Winston & Company LLC.
Code of Ethics.
Subsidiaries.
Consent of BDO Seidman, LLP.
Certification of Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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
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
(dd)
(ee)
(ee)
(ee)
(ff)
(gg)
(gg)
(gg)
(gg)
(hh)
(ii)
(jj)
(kk)
(kk)
(kk)
(kk)
(x)
____________
*
Indicates a management contract or compensatory plan or arrangement.
†
Confidential treatment has been requested or granted for certain portions which have been blanked out in the copy of the
exhibit filed with the Securities and Exchange Commission. The omitted information has been filed separately with the
Securities and Exchange Commission.
50
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (File No. 333-39607) filed on November 5,
1997
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-37171) filed on July 21, 1997
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 21, 1997
Incorporated by reference to the Registrant’s Registration Statement on Form S-l (File No. 33-8390) filed on November 5,
1986
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 1997
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 27, 1996
Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 33-93818) filed on June 22, 1995
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 30, 1998
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 30, 2000
Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed on March 16, 2001
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 27, 2001
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 21, 2001
(m)
Incorporated by reference to the Registrant’s Proxy Statement filed June 10, 2002
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
Incorporated by reference to the Registrant’s Form S-8 (File No. 333-91068) filed on June 24, 2002
Incorporated by reference to the Registrant’s 8-K filed on August 1, 2002
Incorporated by reference to the Registrant’s 10-Q filed on November 14, 2002
Incorporated by reference to the Registrant’s 10-K filed on March 31, 2003
Incorporated by reference to the Registrant’s 10-Q filed on May 15, 2003
Incorporated by reference to the Registrant’s 8-K filed on May 30, 2003
Incorporated by reference to the Registrant’s S-3 Amendment No. 4 (File No. 333-100947) filed on August 5, 2003
Incorporated by reference to the Registrant’s 10-Q filed on August 14, 2003
Incorporated by reference to the Registrant’s 8-K filed on September 17, 2003
(w)
Incorporated by reference to the Registrant’s 10-Q filed on November 12, 2003
(x)
(y)
(z)
Incorporated by reference to the Registrant’s 10-K filed on May 14, 2004
Incorporated by reference to the Registrant’s 10-Q filed on May 17, 2004
Incorporated by reference to the Registrant’s Post-Effective Amendment No. 1 to Registration Statement on Form S-1 to
Form S-3 (Reg. No. 333-109708) filed on June 2, 2004
(aa)
Incorporated by reference to the Registrant’s 10-Q filed on August 16, 2004
51
(bb)
Incorporated by reference to the Registrant’s 8-K filed on September 17, 2004
(cc)
Incorporated by reference to the Registrant’s 10-Q filed on November 3, 2004
(dd)
Incorporated by reference to the Registrant’s 8-K filed on October 5, 2004
(ee)
Incorporated by reference to the Registrant’s 8-K filed on January 21, 2005
(ff)
Incorporated by reference to the Registrant’s 8-K filed on May 4, 2005
(gg)
Incorporated by reference to the Registrant’s 10-Q filed on August 15, 2005
(hh)
Incorporated by reference to the Registrant’s 8-K filed on October 7, 2005
(ii)
(jj)
Incorporated by reference to the Registrant’s 8-K filed on October 20, 2005
Incorporated by reference to the Registrant’s 10-Q filed on November 14, 2005
(kk)
Incorporated by reference to the Registrant’s 8-K filed on March 3, 2006
(ll)
Incorporated by reference to the Registrant’s Proxy Statement filed June 7, 2005
52
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
CYTRX CORPORATION
By:
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
President and Chief Executive Officer
Date: March 30, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
President and Chief Executive
Officer and Director
/s/ MATTHEW NATALIZIO
Matthew Natalizio
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
/s/ LOUIS J. IGNARRO, Ph.D
Louis J. Ignarro, Ph.D
/s/ MAX LINK
Max Link
/s/ JOSEPH RUBINFELD, Ph.D
Joseph Rubinfeld, Ph.D
/s/ MARVIN R. SELTER
Marvin R. Selter
/s/ RICHARD L. WENNEKAMP
Richard L. Wennekamp
Director
Director
Director
Director
Director
Date
March 30, 2006
March 30, 2006
March 30, 2006
March 30, 2006
March 30, 2006
March 30, 2006
March 30, 2006
53
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CytRx Corporation
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statement Schedule Schedule II — Valuation and Qualifying Accounts
F-
F-
F-
F-
F-
F-
F-
54
CYTRX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts Receiveable
Prepaid compensation, current portion
Prepaid and other current assets
Total current assets
Equipment and furnishings, net
Molecular library, net
Goodwill
Other assets:
Prepaid and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Accrued loss on facility abandonment
Deferred gain on sale of building
Deferred revenue
Total liabilities
Minority interest
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized, including 5,000 shares of Series
A Junior Participating Preferred Stock; no shares issued and outstanding
Common stock, $.001 par value, 125,000,000 shares authorized; 59,283,960 and 40,189,688
shares issued and outstanding at December 31, 2005 and 2004, respectively
Additional paid-in capital
Treasury stock, at cost (633,816 shares held, at cost, at December 31, 2005 and 2004,
respectively)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2005
2004
$
8,299,390 $
—
172,860
27,813
287,793
8,787,856
352,641
372,973
183,780
1,987,595
1,011,814
—
604,750
351,396
3,955,555
447,579
447,567
—
$
$
241,660
9,938,910 $
198,055
5,048,756
815,626 $
1,639,922
2,455,548
—
—
275,000
2,730,548
—
—
1,661,104
1,074,146
2,735,250
206,833
65,910
275,000
3,282,993
170,671
—
—
—
59,284
130,715,363
40,190
110,028,327
(2,279,238)
(121,287,047)
7,208,362
9,938,910 $
(2,279,238)
(106,194,187)
1,595,092
5,048,756
$
The accompanying notes are an integral part of these consolidated balance sheets.
55
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Income:
Service revenues
License fees
Expenses:
Research and development (includes non-cash stock compensation of
$219,718, $1,387,645 and $2,902,484 in 2005, 2004, and 2003
respectively)
In-process research and development
Common stock, stock options and warrants issued for general and
administrative
General and administrative
Depreciation and amortization
Loss before other income
Other income —
Gain on lease termination
Interest income
Equity in losses from minority-owned entity
Minority interest in losses of subsidiary
Net loss
Basic and diluted loss per common share
Basic and diluted weighted average shares outstanding
2005
Year Ended December 31,
2004
2003
$
$
82,860
101,500
184,360
$
—
428,164
428,164
—
94,000
94,000
9,087,270
—
6,012,903
3,021,952
4,387,599
—
366,753
6,057,353
217,095
15,728,471
(15,544,111)
1,977,330
5,923,910
103,851
17,039,946
(16,611,782)
3,148,047
3,840,620
2,130
11,378,396
(11,284,396)
(16,551,805)
—
59,977
163,604
206,195
(15,174,312)
—
82,064
(11,202,332)
(6,662,031)
19,763
$ (15,092,860) $ (16,392,189) $ (17,844,600)
$
(0.65)
27,324,794
—
159,616
—
81,452
56,852,402
34,325,636
(0.27) $
(0.48) $
The accompanying notes are an integral part of these consolidated financial statements.
56
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional
Balance at December 31, 2002
Issuance of common stock for research and
development
Common stock and warrants issued in
connection with private placements
Issuance of common stock for services
Issuance of stock options/warrants
Options and warrants exercised
Net loss
Balance at December 31, 2003
Common stock and warrants issued in
connection with private placements
Issuance of common stock for services
Issuance of stock options/warrants
Options and warrants exercised
Net loss
Balance at December 31, 2004
Common stock and warrants issued in
connection with private placements
Issuance of stock options/ warrants:
For services
For minority interest
Options and warrants exercised
Net loss
Balance at December 31, 2005
Common Stock
Shares Issued
22,143,927
Amount
$ 22,144 $
Paid-In
Capital
82,173,839 $
Accumulated
Deficit
Treasury
Stock
(71,957,398) $ (2,279,238) $
Total
7,959,347
1,828,359
1,828
2,550,606
—
—
2,552,434
7,081,025
700,000
—
2,638,689
—
34,392,000
4,100,000
800,000
—
897,688
—
40,189,688
7,081
700
—
2,639
—
34,392
4,100
800
—
898
—
40,190
12,485,543
1,534,050
1,613,297
1,882,125
—
102,239,460
—
—
—
—
(17,844,600)
(89,801,998)
3,899,900
1,252,950
2,111,225
524,792
—
110,028,327
—
—
—
—
(16,392,189)
(106,194,187)
—
—
—
—
—
(2,279,238)
—
—
—
—
—
(2,279,238)
18,084,494
18,084
19,572,362
—
—
—
1,009,778
—
59,283,960
—
—
1,010
—
586,471
273,000
255,203
—
—
—
—
(15,092,860)
$ 59,284 $ 130,715,363 $ (121,287,047) $ (2,279,238) $
—
—
—
—
—
12,492,624
1,534,750
1,613,297
1,884,764
(17,844,600)
10,192,616
3,904,000
1,253,750
2,111,225
525,690
(16,392,189)
1,595,092
19,590,446
586,471
273,000
256,213
(15,092,860)
7,208,362
The accompanying notes are an integral part of these consolidated financial statements.
57
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating
$ (15,092,860) $ (16,392,189) $ (17,844,600)
2005
Years Ended December 31,
2004
2003
activities:
Depreciation and amortization
Equity in losses from minority-owned entity
Minority interest in losses of subsidiary
Gain on lease termination
Stock option and warrant expense
Common stock issued for services
Non-cash research and development
Changes in assets and liabilities:
Accounts receivable
Note receivable
Prepaid and other assets
Accounts payable
Other liabilities
Total adjustments
Net cash used in operating activities
Cash flows from investing activities:
Purchases of short-term investments
Redemption of short-term investments
Net cash paid related to acquisition Purchases of property and equipment
Disposals of property and equipment, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net proceeds from exercise of stock options and warrants
Net proceeds from issuance of common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of non-cash investing and financing activities:
Fair market value of options and warrants provided for goods and services
Fair market value of common stock exchanged for minority interest in
subsidiary
217,095
—
(81,452)
(163,604)
366,753
—
219,718
103,851
—
(159,616)
—
1,104,730
872,600
1,387,645
(172,860)
—
596,935
(845,477)
456,637
593,745
(14,499,115)
—
16,608
(768,433)
922,969
558,643
4,038,997
(12,353,192)
—
1,011,814
(47,563)
—
964,251
(961,765)
—
(771,584)
—
(1,733,349)
2,130
6,662,031
(19,763)
—
1,613,297
1,534,750
2,902,484
—
365,249
14,123
658,188
(181,044)
13,551,445
(4,293,155)
—
1,401,358
(228,459)
—
1,172,899
256,213
19,590,446
19,846,659
6,311,795
1,987,595
8,299,390
$
525,690
3,904,000
4,429,690
(9,656,851)
11,644,446
1,987,595
1,884,764
12,492,624
14,377,388
11,257,132
387,314
$ 11,644,446
586,471
$
1,104,730
$
1,613,297
273,000
$
—
$
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
58
CYTRX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
CytRx Corporation (“CytRx” or the “Company”) is a biopharmaceutical research and development company, based in Los
Angeles, California, with an obesity and type 2 diabetes research laboratory in Worcester, Massachusetts (see Note 11). On September
30, 2005, the Company completed the merger of CytRx Laboratories, Inc., previously a wholly owned subsidiary of the Company and
the owner of its Massachusetts laboratory (the “Subsidiary”), with and into the Company. The Company’s small molecule therapeutics
efforts include the clinical development of three, oral drug candidates that it acquired in October 2004, as well as a drug discovery
operation conducted by its laboratory in Worcester, Massachusetts. The Company owns the rights to a portfolio of technologies,
including ribonueleic acid interference (RNAi or gene silencing) technology in the treatment of specified diseases, including those
within the areas of amyotrophic lateral sclerosis (ALS or Lou Gehrig’s disease), obesity and type 2 diabetes and human
cytomegalovirus (CMV). In addition, the Company recently announced that a novel HIV DNA + protein boost vaccine exclusively
licensed to the Company and developed by researchers at University of Massachusetts Medical School and Advanced BioScience
Laboratories, and funded by the National Institutes of Health, demonstrated promising interim Phase I clinical trial results that indicate
its potential to produce potent antibody responses with neutralizing activity against multiple HIV viral strains. The Company has
entered into strategic alliances with third parties to develop several of the Company’s other products.
On October 4, 2004, CytRx acquired all of the clinical and pharmaceutical and related intellectual property assets of Biorex
Research & Development, RT, or Biorex, a Hungary-based company focused on the development of novel small molecules based on
molecular “chaperone” co-induction technology, with broad therapeutic applications in neurology, diabetes and cardiology. The
acquired assets include three oral, clinical stage drug candidates and a library of 500 small molecule drug candidates. The Company
recently entered the clinical stage of drug development with the initiation of a Phase II clinical program with its lead small molecule
product candidate arimoclomol for the treatment of ALS. Arimoclomol has received Orphan Drug and Fast Track designation from
the U.S. Food and Drug Administration.
To date, the Company has relied primarily upon selling equity securities and, to a much lesser extent, upon payments from its
strategic partners and licensees and upon proceeds received upon the exercise of options and warrants to generate the funds needed to
finance its operations. Management believes the Company’s cash and cash equivalents balances are sufficient to meet projected cash
requirements into the third quarter of 2007. The Company will be required to obtain significant 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 capital. The
Company cannot assure that additional funding will be available on favorable terms, or at all. If the Company fails to obtain
significant 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.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation — The consolidated financial statements include the accounts of CytRx
together with those of its majority-owned subsidiaries. The accounts of the Subsidiary, less the minority interest, are included from
September 17, 2003 until June 30, 2005, when the Company purchased the outstanding 5% interest in the Subsidiary (see Note 11)
and the Subsidiary became wholly owned by the Company. The accounts of Global Genomics are included since July 19, 2002 (see
Note 12).
Revenue Recognition — Biopharmaceutical revenues consist of license fees and milestone payments from strategic alliances from
pharmaceutical companies as well as contract research. Service revenues consist of government grants, and laboratory consulting.
Monies received for license fees are deferred and recognized ratably over the performance period in accordance with Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments will be recognized upon achievement of the
milestone as long as the milestone is deemed substantive and the Company has no other performance obligations related to the
milestone and collectibility is reasonably assured, which is generally upon receipt, or recognized upon termination of the agreement
and all related obligations. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts
received prior to revenue recognition.
59
Revenues from contract research, government grants, and consulting fees are recognized over the respective contract periods as the
services are performed, provided there is persuasive evidence or an arrangement, the fee is fixed or determinable and collection of the
related receivable is reasonably assured. The percentage of services performed related to contract research, government grants and
consulting services is based upon the ratio of the number of direct labor hours performed to date to the total hours the Company is
obligated to perform under the related contract.
Cash Equivalents — The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents consist primarily of amounts invested in money market accounts.
Investments — Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are
classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to-maturity are classified
as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate
component of stockholders’ equity. Realized gains and losses are included in investment income and are determined on a first-in, first-
out basis.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash and cash equivalents, short-
term investments, accounts receivable and accounts payable approximate their fair values.
Property and Equipment — Property and equipment are stated at cost and depreciated using the straight-line method based on the
estimated useful lives (generally five years for equipment and furniture) of the related assets. Whenever there is a triggering event that
might suggest an impairment, management evaluates the realizability of recorded long-lived assets to determine whether their carrying
values have been impaired. The Company records impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the nondiscounted cash flows estimated to be generated by those assets
are less than the carrying amount of those assets. Any impairment loss is measured by comparing the fair value of the asset to its
carrying amount.
Molecular Library—The Molecular Library, a collection of chemical compounds that we believe may be developed into drug
candidates, are stated at cost and depreciated over five years; the estimated useful life of the molecular library, which is less than the
remaining life of the related patents. On an annual basis, or whenever there is a triggering event that might suggest an impairment,
management evaluates the realizability of the molecular library to determine whether its carrying value has been impaired. The
Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets
might be impaired and the nondiscounted cash flows estimated to be generated by those assets are less than the carrying amount of
those assets. Any impairment loss is measured by comparing the fair value of the asset to its carrying amount.
Patents and Patent Application Costs — Although the Company believes that its patents and underlying technology have
continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are therefore expensed as
incurred.
Basic and Diluted Loss per Common Share — Basic and diluted loss per common share are computed based on the weighted
average number of common shares outstanding. Common share equivalents (which consist of options and warrants) are excluded from
the computation of diluted loss per share since the effect would be antidilutive. Common share equivalents which could potentially
dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled
approximately 24.7 million shares, 14.5 million shares and 10.1 million shares at December 31, 2005, 2004 and 2003, respectively.
Shares Reserved for Future Issuance — As of December 31, 2005, the Company has reserved approximately 3.96 million of its
authorized but unissued shares of common stock for future issuance pursuant to its employee stock option plans and warrants issued to
consultants and investors.
Stock-based Compensation — The Company accounts for stock-based compensation using the intrinsic value method in
accordance with APB No. 25 (Note 14), Accounting for Stock Issued to Employees (“APB 25”). Under APB 25, when stock options
are issued with an exercise price equal to the market price of the underlying stock price on the date of grant, no compensation expense
is recognized. The Company continues to follow the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), as amended by SFAS No. 148, which requires the disclosure of proforma net income and earnings per
share as if the Company had applied the fair value recognition provisions of SFAS 123. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee
compensation (amounts in thousands except per share data):
60
Net loss, as reported
Total stock-based employee compensation expense determined under fair value-based method
for all awards
Pro forma net loss
Loss per share, as reported (basic and diluted)
Loss per share, pro forma (basic and diluted)
2005
2004
$ (15,092) $ (16,392) $ (17,845)
2003
(619)
(1,376)
(928)
$ (15,711) $ (17,768) $ (18,773)
(0.65)
$
(0.69)
$
(0.48) $
(0.52) $
(0.27) $
(0.27) $
The fair value for the Company’s options and warrants was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
Weighted average risk free interest rate
Dividend yields
Volatility factors of the expected market price of the Company’s common stock
Weighted average years outstanding
2005
2004
2003
4.25% 4.25% 2.82%
0%
109% 109% 99%
5.8
4.8
5.1
0%
0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its
warrants and employee stock options.
Research and Development Expenses — Research and development expenses consist of costs incurred for direct and overhead-
related research expenses and are expensed as incurred. Costs to acquire technologies which are utilized in research and development
and which have no alternative future use are expensed when incurred. Technology developed for use in our products is expensed as
incurred until technological feasibility has been established. Expenditures to date have been classified as research and development
expense.
Income Taxes — Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial
statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will
more than likely not be realized.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of cash and cash equivalents, short-term investments and note receivable. The Company maintains cash and
cash equivalents in large well-capitalized financial institutions and the Company’s investment policy disallows investment in any debt
securities rated less than “investment-grade” by national ratings services. The Company has not experienced any losses on its deposits
of cash and cash equivalents. The Company is at risk to the extent accounts receivable and note receivable amounts become
uncollectible.
Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from those estimates.
Segment Information — Management uses consolidated financial information in determining how to allocate resources and assess
financial performance. For this reason, the Company has determined that it is principally engaged in one industry segment.
Other comprehensive income/(loss) — The Company follows the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 130, “Reporting Comprehensive Income,” which requires separate representation of certain transactions, which are
recorded directly as components of shareholders’ equity. The Company has no other comprehensive income/(loss).
61
3. Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),
“Share-Based Payment,” or SFAS 123(R), which is a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation.” SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB
Statement No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in
Statement 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative.
SFAS 123(R) requires a company using the modified prospective transition method to recognize share-based employee costs from
the beginning of the fiscal period in which the recognition provisions are first applied as if the fair value-based accounting method had
been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not
fully vested as of the effective date. Measurement and attribution of compensation cost for awards that are nonvested as of the
effective date of SFAS 123(R) would be based on the same estimate of the grant-date fair value and the same attribution method used
previously under SFAS 123.
The Company expects the adoption of SFAS 123(R) to result in recognition of additional non-cash stock-based compensation
expense which will increase net losses in amounts which likely will be considered material, although it will not impact its cash
position (see Note 2).
In December 2004, the FASB issued SFAS 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets, an amendment of APB No.
29, Accounting for Nonmonetary Transactions.” SFAS 153 requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Adoption of this standard did not have a material effect on the Company’s
consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error
Corrections”, (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change
in accounting principle. We are required to adopt SFAS 154 in 2006. the Company’s results of operations and financial condition will
only be impacted by SFAS 154 if it implements changes in accounting principles that are addressed by the standard or correct
accounting errors in future periods.
4. Investments
At December 31, 2005, the Company did not have any investments. At December 31, 2004, the Company held approximately $1.0
million in short-term investments. The contractual maturities of securities held at December 31, 2004 were one year or less. At
December 31, 2004, the Company classified all of its investments (consisting entirely of Certificates of Deposit) as held-to-maturity.
The fair market value approximated the carrying costs and gross unrealized and realized gains/losses were immaterial.
5. Restricted Assets
At December 31, 2005, the Company had $150,000 on deposit with its landlords related to its leased facilities, which were
classified as other assets. At December 31, 2004 the Company held approximately $51,000 in investments (consisting entirely of
Certificates of Deposit), reported in Prepaid and Other Current Assets in the accompanying consolidated balance sheets. The
contractual maturities of securities held at December 31, 2004 were one year or less. At December 31, 2004, the investments were
pledged as collateral for a letter of credit for the same amount issued in connection with one of the Company’s lease agreements.
During 2005, the letter of credit was replaced by a cash deposit for the lease on the rental property.
62
6. Property and Equipment
Property and equipment at December 31, 2005 and 2004 consist of the following (in thousands):
Equipment and furnishings
Less — accumulated depreciation
Equipment and furnishings, net
Molecular library
Less — accumulated amortization
Molecular library, net
Property and equipment, net
2004
(248)
353
2005
$ 601 $ 554
(106)
448
$ 447 $ 447
(75) —
372
447
$ 725 $ 895
At December 31, 2004, the molecular library had been purchased from Biorex, but was not placed in service by the Company, as
the compounds were not physically received until March 2005. Therefore, no amortization of the related patents was recorded in 2004.
The molecular library is being amortized over 60 months, which is less than the estimated effective life of the patents. The result will
be that the Company will incur approximately $89,000 in amortization over the next four years and approximately $16,000 in 2010,
the final year.
7. Accrued Expenses
Accrued expenses and other current liabilities at December 31, 2005 and 2004 are summarized below (in thousands).
Deferred gain on sale of building (current portion)
Accrued loss on facility abandonment (current portion)
Professional fees
Research and development costs
Accrued bonuses
Accrued settlement fee
Other miscellaneous
Total
8. Termination of the Atlanta Facility Lease
2004
2005
$ — $
28
106
359
140
181
200
60
$ 1,640 $ 1,074
—
205
911
163
253
108
Subsequent to the Company’s merger with Global Genomics in 2002, it recorded a loss of $563,000 associated with the closure of
the Atlanta headquarters and its relocation to Los Angeles. This loss represented the total remaining lease obligations and estimated
operating costs through the remainder of the lease term, less estimated sublease rental income and deferred rent at the time. In August
2005, the Company entered into a lease termination agreement pursuant to which it was released from all future obligations on the
lease in exchange for a one-time $110,000 payment and the forfeiture of a $49,000 security deposit. As a result of this agreement the
Company realized $164,000 in other income.
9. Commitments and Contingencies
Minimum annual future obligations under operating leases, minimum annual future obligations under various license agreements
and minimum annual future obligations under employment agreements consist of the following (in thousands):
Operating
Leases
License
Agreements
Employment
Agreements
Total
2006
2007
2008
2009
2010 and thereafter
Total
$
507
389
108
1
2
$ 1,007
63
$
(In thousands)
971
235
339
339
1,070
$ 2,954
$ 1,264
887
590
—
—
$ 2,741
$ 2,742
1,511
1,037
340
1,072
$ 6,702
Under the various license agreements and sponsored research agreements with University of Massachusetts Medical School
(“UMMS”) (see Note 17) and other institutions, CytRx will be required to make annual license maintenance payments as well as
milestone payments, ranging from $11 million to $14 million per approved product, to UMMS and/or other institutions based on the
development of products utilizing the licensed technology and will be required to pay royalties, based on future sales of those
products, which will generally range from 3% to 7.5% of such sales, depending upon the product and the technology being utilized. In
connection with the sponsored research agreements, CytRx agreed to fund certain pre-clinical research at UMMS and other
institutions related to the use of CytRx’s licensed technologies for the development of therapeutic products.
The Company has employment agreements with its executive officers, the terms of which expire at various times through July
2008. Certain agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually at the
Compensation Committee’s determination, as well as for minimum bonuses that are payable. The reported commitment for
employment agreements includes, among other things, a total of $0.9 million of compensation payable to members of CytRx’s
Scientific Advisory Board, and a total of $1.6 million of salary and guaranteed bonuses payable to CytRx’s executives.
Rent expense under operating leases during 2005, 2004 and 2003 was approximately $380,000, $364,000 and $258,000,
respectively.
The Company applies the disclosure provisions of FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“ FIN 45”), to its agreements that contain
guarantee or indemnification clauses. The Company provides (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. These indemnifications and guarantees give rise only to the disclosure provisions of FIN 45. To date, the Company has
not incurred material costs as a result of these obligations and does not expect to incur material costs in the future. Accordingly, the
Company has not accrued any liabilities in its consolidated financial statements related to these indemnifications or guarantees.
10. Private Placements of Common Stock
In January 2005, the Company entered into a Stock Purchase Agreement with a group of institutional and other investors (the
“January 2005 Investors”). The January 2005 Investors purchased, for an aggregate purchase price of $21.3 million, 17,334,494 shares
of the Company’s common stock and warrants to purchase an additional 8,667,247 shares of the Company’s common stock, at $2.00
per share, expiring in 2010. After consideration of offering expenses, net proceeds to the Company were approximately $19.4 million.
The shares and the shares underlying the warrants issued to the January 2005 Investors were subsequently registered. In addition, the
Company issued approximately $158,000 worth of common stock in February 2005.
In October 2004, the Company entered into a Stock Purchase Agreement with a group of institutional and other investors (the
“October 2004 Investors”). The October 2004 Investors purchased, for an aggregate purchase price of $4.0 million, 4,000,000 shares
of the Company’s common stock and warrants to purchase an additional 3,080,000 shares of the Company’s common stock, at $1.69
per share, expiring in 2009. After consideration of offering expenses, net proceeds to the Company were approximately $3.7 million.
The shares and the shares underlying the warrants issued to the October 2004 Investors were subsequently registered. In addition, the
Company issued approximately $204,000 worth of common stock in January 2004.
In September 2003, the Company entered into a Stock Purchase Agreement with a group of institutional and other investors (the
“September 2003 Investors”). The September 2003 Investors purchased, for an aggregate purchase price of $8.7 million, 4,140,486
shares of the Company’s common stock and warrants to purchase an additional 1,035,125 shares of the Company’s common stock, at
$3.05 per share, expiring in 2008. After consideration of offering expenses, net proceeds to the Company were approximately $7.7
million. The shares and the shares underlying the warrants issued to the September 2003 Investors were subsequently registered.
In May 2003, the Company entered into a Stock Purchase Agreement with a group of institutional investors (the “May 2003
Investors”). The May 2003 Investors purchased, for an aggregate purchase price of $5.4 million , 2,940,539 shares of the Company’s
common stock and warrants to purchase an additional 735,136 shares of the Company’s common stock, at $3.05 per share, expiring in
2008. After consideration of offering expenses, net proceeds to the Company were approximately $4.8 million. The shares and the
shares underlying the warrants issued to the May 2003 Investors were subsequently registered.
64
11. Investment in Subsidiary
On June 30, 2005, the Company issued 650,000 shares of its common stock to Dr. Michael Czech as part of a transaction in which
the Company purchased Dr. Czech’s 5% interest in the Subsidiary, which, as a result of the purchase, became a wholly-owned
subsidiary of CytRx. The Subsidiary was subsequently merged with and into the Company on September 30, 2005. The purchase of
Dr. Czech’s interest in the Subsidiary was consummated pursuant to the terms of the Stockholders Agreement dated September 17,
2003, by and among CytRx, the Subsidiary and Dr. Czech, 300,000 of the shares of CytRx common stock issued to Dr. Czech were
unrestricted and in exchange for his 5% interest in the Subsidiary. That stock is valued at $0.91 per share, the then fair value of the
common stock, for financial statement purposes. The non-cash transaction was accounted for using purchase accounting, and resulted
in $184,000 of goodwill for financial statement purposes, which represents the difference between the market value of the 300,000
unrestricted shares issued to Dr. Czech and the fair value of the minority interest at June 30, 2005.
12. Merger with Global Genomics
In July 2002, CytRx acquired Global Genomics, a privately-held genomics holding company, through a merger of GGC Merger
Corporation, a wholly-owned subsidiary of CytRx, into Global Genomics. Global Genomics is a genomics holding company that at
the time of the merger owned a 40% ownership interest in Blizzard and a 5% ownership interest in Psynomics. CytRx’s primary
reasons for the acquisition were to (a) expand its business into the genomics field to diversify its product and technology base, and (b)
gain the management and directors of Global Genomics, who could assist CytRx in developing corporate partnerships and acquisition,
investment and financing opportunities not previously available to CytRx.
Equity in Losses of Blizzard. The Company recorded its portion of the losses of Blizzard using the equity method. The equity in
losses of Blizzard and the amortization of the acquired developed technology are reported as a separate line item in the accompanying
consolidated statement of operations.
Impairment Test of Intangible Assets. In accordance with the provisions of Accounting Principles Board Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock (“APB 18”), the Company reviewed the net values on its balance
sheet as of September 30, 2003 assigned to Investment in Minority — Owned Entity — Acquired Developed Technology resulting
from its acquisition of Global Genomics. CytRx’s analysis consisted of a review of current financial projections prepared by Blizzard,
application of a discounted cash flow valuation model of Blizzard’s projected cash flows, and consideration of other qualitative
factors. Based upon the quantitative and qualitative factors described above and in addition to others, CytRx’s management
determined its investment in Blizzard had no value, and that an impairment charge of $5,868,000 was necessary in 2003.
As of December 31, 2003, the following assets related to Blizzard were reflected in CytRx’s balance sheets:
Investment in minority owned entity — acquired developed technology
Receivable from Blizzard
Less: Accumulated amortization
Less: Equity-method losses to date
Less: Impairment charge
13. Severance Payments to Officers
$ 7,309,250
16,640
(883,311)
(574,381)
(5,868,198)
—
$
In accordance with a Mutual General Release and Severance Agreement in May 2004, the Company paid the Company’s former
General Counsel, $52,000 and 12 months of related benefits, and immediately vested options to purchase 87,500 shares of its common
stock that were granted upon the commencement of his employment. In accordance with a Mutual General Release and Severance
Agreement in May 2004, the Company paid the Company’s former Chief Financial Officer, $150,000 and 18 months of related
benefits, and immediately vested options to purchase 105,000 shares of its common stock that were granted upon the commencement
of his employment.
65
14. Stock Options and Warrants
CytRx has stock option plans pursuant to which certain key employees, directors and consultants are eligible to receive incentive
and/or nonqualified stock options to purchase shares of CytRx’s common stock. Fixed options granted under the plans generally
become exercisable over a three-year period from the dates of grant and have lives of ten years. The Company may also grant stock
options and/or warrants to its Chief Executive Officer and other executive officers containing alternative or additional vesting
provisions based on the achievement of corporate objectives. Exercise prices of all stock options and warrants for employees and
directors are set at the fair market values of the common stock on the dates of grant.
In connection with the Company’s private equity financings that were consummated on October 4, 2004 and January 20, 2005, the
Company re-priced warrants to purchase approximately 2.8 million shares as a result of anti-dilution provisions in those warrants that
were triggered by the Company’s issuance of common stock in these equity financings at a price below the closing market price on the
date of the transaction. The warrants were issued in connection with the Company’s May and September 2003 private investment in
public equity (PIPE) transactions. The antidilution provision is required to be accounted for as a liability under SFAS 150 and is
adjusted on a mark to market basis. To date the fair value of the liability has been immaterial. Pursuant to the anti-dilution provision,
the exercise price of these warrants was reduced from $3.05 per share, to $2.70 per share, and the number of shares underlying the
warrants was increased to approximately 3.1 million shares.
In connection with the Company’s acquisition of Global Genomics in July 2002 (see Note 12), CytRx issued 1,014,677 warrants to
the holders of Global Genomics warrants in return for the cancellation of all of their outstanding Global Genomics warrants. The new
warrants were 100% vested upon their issuance, have an exercise price of $0.01 per share and expire on January 31, 2007.
Additionally, the acquisition of Global Genomics triggered the “Change of Control” provisions contained in the Company’s stock
option plans and in the warrants held by the Company’s Former CEO, resulting in the immediate vesting of all outstanding warrants
held by the Former CEO and of all outstanding stock options issued pursuant to the Company’s various stock options plans.
We recorded approximately $586,000, $1.1 million and $1.6 million of non-cash charges related to the issuance of stock options
and warrants to certain consultants in exchange for services during 2005, 2004 and 2003, respectively.
A summary of the Company’s stock option and warrant activity and related information for the years ended December 31 is shown
below.
2005
Stock Options
2004
2003
Weighted Average
Exercise Price
2004
2005
2003
Outstanding — beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding — end of year
Exercisable at end of year
Weighted average fair value of stock options granted
during the year:
4,741,042
1,516,500
2,778,042
2,318,000
(17,000)
(38,000)
—
6,202,542
3,438,157
(55,000)
(285,000)
(15,000)
4,741,042
2,136,898
1,194,038
2,463,000
$ 1.93
0.95
0.92
(817,484)
(50,000)
1.52
(11,512) —
1.69
$ 1.89
2,778,042
650,816
$ 2.08
1.73
0.89
2.00
3.16
1.93
$ 1.94
$ 1.10
2.26
0.71
1.00
1.00
2.08
$ 1.69
$
0.95 $
1.73 $
2.26
2005
Warrants
2004
2003
Weighted Average
2005
Exercise Price
2004
2003
Outstanding — beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding — end of year
Exercisable at end of year
Weighted average fair value of warrants granted during the
9,735,416
10,267,887
7,352,077
3,884,778
(1,294,354)
—
(200,000)
(976,439)
(500,000)
(25,000)
18,508,949
18,508,949
9,735,416
9,735,416
5,432,787 $ 1.64 $ 1.61 $ 1.10
5,611,917
1.96 1.58 1.81
(2,083,397) 0.55 0.74 0.81
(825,000) — 2.25 0.32
(784,230) 1.00 0.80 2.32
7,352,077
1.94 1.64 1.61
6,752,070 $ 1.94 $ 1.58 $ 1.57
year:
$
2.00 $
1.36 $
1.81
66
The following table summarizes additional information concerning stock options and warrants outstanding and exercisable at
December 31, 2005:
Range of Exercise Prices
$0.25 - 1.05
1.06 - 1.79
1.80 - 2.63
Range of Exercise Prices
$0.20 - 1.05
1.06 - 1.79
1.80 - 2.67
2.68 - 2.73
Stock Options Outstanding
Stock Options Exercisable
Number of
Shares
1,307,043
918,000
3,980,499
6,205,542
Weighted Average
Remaining
Contractual Life
(years)
7.5
6.8
7.5
7.4
Weighted Average
Exercise Price
$ 0.82
1.27
2.08
$ 1.69
Warrants Outstanding
Weighted Average
Remaining
Contractual Life
Weighted Average
(years)
3.3
1.6
2.0
2.7
2.1
Exercise Price
$ 0.68
1.57
2.00
2.73
$ 1.89
Number of
Shares
1,319,367
4,341,803
10,735,282
2,112,497
18,508,949
Number of
Shares
Exercisable
401,099
350,868
2,686,191
3,438,158
Weighted Average
Exercise Price
$ 0.84
1.27
2.11
$ 1.88
Warrants
Exercisable
Number of
Shares
Exercisable
1,319,367
4,341,803
10,735,282
2,112,497
18,508,949
Weighted Average
Exercise Price
$ 0.68
1.57
2.00
2.73
$ 1.89
15. Stockholder Protection Rights Plan
Effective April 16, 1997, the Company’s Board of Directors declared a distribution of one right (“Rights”) for each outstanding
share of the Company’s common stock to stockholders of record at the close of business on May 15, 1997 and for each share of
common stock issued by the Company thereafter and prior to a Flip-in Date (as defined below). Each Right entitles the registered
holder to purchase from the Company one-ten thousandth (1/10,000th) of a share of Series A Junior Participating Preferred Stock, at
an exercise price of $30. The Rights are generally not exercisable until 10 business days after an announcement by the Company that a
person or group of affiliated persons (an “Acquiring Person”) has acquired beneficial ownership of 15% or more of the Company’s
then outstanding shares of common stock (a “Flip-in Date”). In connection with the merger agreement with Global Genomics, the
Company’s Board of Directors amended the stockholders protection rights agreement to exempt the merger from triggering a Flip-in
Date.
In the event the Rights become exercisable as a result of the acquisition of shares, each Right will enable the owner, other than the
Acquiring Person, to purchase at the Right’s then-current exercise price a number of shares of common stock with a market value
equal to twice the exercise price. In addition, unless the Acquiring Person owns more than 50% of the outstanding shares of common
stock, the Board of Directors may elect to exchange all outstanding Rights (other than those owned by such Acquiring Person) at an
exchange ratio of one share of common stock per Right. All Rights that are owned by any person on or after the date such person
becomes an Acquiring Person will be null and void.
The Rights have been distributed to protect the Company’s stockholders from coercive or abusive takeover tactics and to give the
Board of Directors more negotiating leverage in dealing with prospective acquirors.
16. Income Taxes
For income tax purposes, CytRx and its subsidiaries have an aggregate of approximately $35.6 million of net operating losses
available to offset against future taxable income, subject to certain limitations. Such losses expire in 2006 through 2025 as of
December 31, 2005. CytRx also has an aggregate of approximately $6.4 million of research and development and orphan drug credits
available for offset against future income taxes that expire in 2006 through 2025. The amount of net operating loss carryforwards and
research tax credits available to reduce income taxes in any particular year may be limited in certain circumstances. Based on an
assessment of all available evidence including, but not limited to, the Company’s limited operating history in its core business and
lack of profitability, uncertainties of the commercial viability of its technology, the impact of government regulation and healthcare
reform initiatives, and other risks normally associated with biotechnology companies, the Company has concluded that it is more
likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred tax
valuation allowance has been recorded against these assets.
67
Deferred income taxes reflect the net effect of temporary differences between the financial reporting carrying amounts of assets
and liabilities and income tax carrying amounts of assets and liabilities. The components of the Company’s deferred tax assets and
liabilities, all of which are long-term, are as follows (in thousands):
December 31,
2005
2004
Deferred tax assets:
Net operating loss carryforward
Tax credit carryforward
Property and equipment and capital losses
Total deferred tax assets
Deferred tax liabilities — Depreciation and other
Net deferred tax assets
Valuation allowance
$ 35,607 $ 30,231
6,363
4,559
41,153
(2,665)
38,488
(38,488)
—
6,443
4,476
46,526
(2,730)
43,796
(43,796)
— $
$
Based on assessments of all available evidence as of December 31, 2005 and 2004, management has concluded that the respective
deferred income tax assets should be reduced by valuation allowances equal to the amounts of the net deferred income tax assets since
it is management’s conclusion that it is more likely than not that the deferred tax assets will not be realized. Furthermore, it is likely
the July 19, 2002 acquisition of Global Genomics, and the Company’s subsequent private investment in public equity transactions,
caused a change of ownership as defined by Internal Revenue Code Section 382 which may substantially limit the ability of the
Company to utilize net operating losses incurred prior to the dates of those transactions. Generally, the net operating losses will be
limited to an annual utilization of approximately 4.9% of the purchase price of Global Genomics.
For all years presented, the Company did not recognize any deferred tax assets or liabilities and deferred tax provision or benefit.
The provision for income taxes differs from the provision computed by applying the Federal statutory rate to net loss before
income taxes as follows (in thousands):
Federal benefit at statutory rate
State income taxes, net of Federal taxes
Permanent differences
Provision (benefit) related to change in valuation allowance
Other
17. License Agreements
2005
2003
December 31,
2004
$ (5,128) $ (5,570) $ (6,066)
(1,070)
1,200
7,414
(1,478)
$ — $ — $ —
(655)
1,103
5,122
—
(603)
736
5,308
(313)
University of Massachusetts Medical School(UMMS) — In April 2003, CytRx acquired the rights to new technologies by entering
into exclusive license arrangements with the UMMS covering potential applications of the medical institution’s proprietary gene
silencing technology in the treatment of specified diseases, including those within the areas of obesity and type 2 diabetes, and
amyotrophic lateral sclerosis, commonly known as Lou Gehrig’s disease (ALS), human cytomegalovirus, and covering UMMS’s
proprietary technology with potential gene therapy applications within the area of cancer. In consideration of the licenses, CytRx made
cash payments to UMMS totaling approximately $186,000 and issued it a total of 1,613,258 shares of CytRx common stock, which
were valued for financial statement purposes at approximately $1,468,000, the then fair value of the common stock. In May 2003,
CytRx broadened its strategic alliance with UMMS by acquiring an exclusive license from that institution covering a proprietary
DNA-based HIV vaccine technology. In consideration of this license, CytRx made cash payments to UMMS totaling approximately
$18,000 and issued it 215,101 shares of CytRx common stock, which were valued for financial statement purposes at approximately
$361,000. In July 2004, CytRx further expanded its strategic alliance with UMMS by entering into a collaboration and invention
disclosure agreement with UMMS under which UMMS will disclose to CytRx certain new technologies developed at UMMS over a
three-year period pertaining to RNAi, diabetes, obesity, neurodegenerative diseases (including ALS) and CMV and will give CytRx an
option, upon making a specified payment, to negotiate an exclusive worldwide license to the disclosed technologies on commercially
reasonable terms. Approximately one year remains on the technology disclosure option. As of December 31, 2005, CytRx has not
acquired or made any payments to acquire any options under that Collaboration Agreement.
68
In May 2004, CytRx licensed from the technology transfer company of the Imperial College of Science, Technology & Medicine,
or Imperial College, the exclusive rights to intellectual property covering a drug screening method using RIP 140, which is a nuclear
hormone co-repressor that is believed to regulate fat accumulation. In consideration of the license, CytRx made cash payments to
Imperial College totaling $87,000 and issued it a total of 75,000 shares of CytRx common stock which were valued, for financial
statement purposes, at $108,000. As the drug screening technology from Imperial College and the RNAi technology from UMMS had
not achieved technological feasibility at the time of their license by CytRx, had no alternative future uses and, therefore, no separate
economic value, the total value of all cash payments and stock issued for acquisition of the technology was expensed as research and
development in our financial statements.
18. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 2005 and 2004 is as follows (in thousands, except per share data):
2005
Total revenues
Net loss
Basic and diluted loss per common share:
Net loss
2004
Total revenues
Net loss
Basic and diluted loss per common share:
Net loss
March 31
June 30
September 30
December 31
(In thousands, except per share data)
Quarter Ended
$
2 $ —
$
(3,527)
(4,509)
10
(3,492)
$
173
(3,565)
$
(0.07) $
(0.08) $
(0.06)
$
(0.06)
$
100 $
(3,774)
228
(4,061)
$ —
(2,796)
$
100
(5,761)
$
(0.11) $
(0.12) $
(0.08)
$
(0.15)
Quarterly and year to date loss per share amounts are computed independently of each other. Therefore, the sum of the per share
amounts for the quarters may not agree to the per share amounts for the year.
19. Related Party Transactions
Dr. Michael Czech, who was until June 30, 2005 a 5% minority shareholder of the Company’s prior subsidiary, CytRx
Laboratories, and who is a member of the Company’s Scientific Advisory Board, is an employee of UMMS and is the principal
investigator for a sponsored research agreement between the Company and UMMS. During each of 2005 and 2004, Dr. Czech was
paid $80,000 for his Scientific Advisory Board services. In addition, during 2005 and 2004, the Company paid UMMS $1,410,000
and $403,000, respectively, under a sponsored research agreement to fund a portion of Dr. Czech’s research.
20. Subsequent Event
On March 2, 2006, the Company completed a $13.4 million private equity financing in which we issued 10,650,794 shares of our
common stock and warrants to purchase an additional 5,325,397 shares of our common stock at an exercise price of $1.54 per share.
Net of investment banking commissions, legal, accounting and other fees related to the transaction, we received proceeds of
approximately $12.4 million.
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
CytRx Corporation
Los Angeles, California
We have audited the accompanying consolidated balance sheets of CytRx Corporation and subsidiaries as of December 31, 2005
and 2004 and the related consolidated statements of operations, stockholders’ equity and cash flow for the three years in the period
ended December 31, 2005. We have also audited the schedule listed in the accompanying index on page F-1. These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and
schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of CytRx Corporation and subsidiaries as of December 31, 2005 and 2004 and the results of its operations and its cash flows for the
three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
March 15, 2006
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
70
CYTRX CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2005, 2004 and 2003
Description
Reserve Deducted in the Balance Sheet from the Asset to
Which it Applies:
Allowance for Bad Debts
Year ended December 31, 2005
Year ended December 31, 2004
Year ended December 31, 2003
Allowance for Deferred Tax Assets
Year ended December 31, 2005
Year ended December 31, 2004
Year ended December 31, 2003
Additions
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
Balance at
End of Period
$
$
— $
— $
—
—
—
4,939
$
$
— $
— $
—
—
16,640 21,579
$
$
—
—
—
$ 38,488,000 $
36,478,000 $
29,064,000
—
—
—
$ 5,308,000 $
$ 2,008,000 $
7,414,000 $
—
—
—
$ 43,796,000
$ 38,488,000
36,478,000
71
GGC Pharmaceuticals, Inc.
SUBSIDIARIES
On September 30, 2005, CytRx Corporation (the “Company”) completed the merger of CytRx Laboratories, Inc., previously a wholly
owned subsidiary of the Company and the owner of its Massachusetts laboratory, with and into the Company.
EXHIBIT 21.1
72
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
CytRx Corporation
Los Angeles, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-100947 and 333-106629)
and in the Registration Statements on Form S-8 (Nos. 333-42259, 333-93816, 333-93818, 333-84657, 333-68200, 333-91068, 333-
93305 and 333-123339) of our report dated March 15, 2006 relating to the consolidated financial statements and the schedule of
CytRx Corporation appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
April 1, 2006
73
Exhibit 31.1
I, Steven A. Kriegsman, Chief Executive Officer of CytRx Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of CytRx Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 30, 2006
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
Chief Executive Officer
74
Exhibit 31.2
I, Matthew Natalizio, Chief Financial Officer of CytRx Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of CytRx Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 30, 2006
/s/ MATTHEW NATALIZIO
Matthew Natalizio
Chief Financial Officer
75
Certification of Chief Executive Officer
Exhibit 32.1
Pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CytRx
Corporation (the “Company”) hereby certifies that:
(i) the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the “Report”) fully
complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;
and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 30, 2006
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
Chief Executive Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), or other
document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided to CytRx Corporation and will be retained by CytRx Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an Exhibit to the Form 10-K and shall
not be considered filed as part of the Form 10-K.
76
Certification of Chief Financial Officer
Exhibit 32.2
Pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CytRx
Corporation (the “Company”) hereby certifies that:
(i) the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2005 (the “Report”) fully
complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;
and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 30, 2006
/s/ MATTHEW NATALIZIO
Matthew Natalizio
Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (Section 906), or other
document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided to CytRx Corporation and will be retained by CytRx Corporation
and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an Exhibit to the Form 10-K and shall
not be considered filed as part of the Form 10-K.
77