FORM 10-K
CYTRX CORP - CYTR
Filed: April 02, 2007 (period: December 31, 2006)
Annual report which provides a comprehensive overview of the company for the
past year
Table of Contents
PART I
1
Item 1. BUSINESS 1
PART I
RISK FACTORS
Item 1. BUSINESS
Item
1A.
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
PART II
Item 5. MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF E
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item
7A.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item
9A.
CONTROLS AND PROCEDURES
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
EX-4.3 (EX-4.3)
EX-21.1 (EX-21.1)
EX-23.1 (EX-23.1)
EX-31.1 (EX-31.1)
EX-31.2 (EX-31.2)
EX-32.1 (EX-32.1)
EX-32.2 (EX-32.2)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:254)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
or
Commission file number 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:
Title of each class
Common Stock, $0.001 par value per share
Series A Junior Participating Preferred Stock Purchase
Rights
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark with the Registrant is a well-known seasoned issuer (as defined in Securities Act Rule 405). Yes o No
(cid:254)
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 o No (cid:254)
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:254) No o
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:254)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer o Accelerated filer (cid:254) Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 2b-2 of the Act). Yes o No (cid:254)
The aggregate market value of the Registrant’s common stock held by non-affiliates on June 30, 2006, the last business day of the
Registrant’s most recently completed second fiscal quarter, was approximately $86.4 million. On March 23, 2007, there were
outstanding 76,788,694 shares of the Registrant’s common stock, exclusive of treasury shares.
Source: CYTRX CORP, 10-K, April 02, 2007
Source: CYTRX CORP, 10-K, April 02, 2007
CYTRX CORPORATION
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
“SAFE HARBOR” STATEMENT
PART I
Item 1. BUSINESS
Item 1A. RISK FACTORS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9A. CONTROLS AND PROCEDURES
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-4.3
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
i
ii
1
1
16
26
26
27
27
30
32
46
47
47
50
50
55
70
71
71
72
72
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Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
“SAFE HARBOR” STATEMENT
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, the forward-looking statements made in this
Annual Report, as well as those made in our other filings with the SEC.
All statements in this Annual Report, including under the captions “Business,” “Risk Factors,” “Compensation Discussion and
Analysis,” and “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 statements of our current views with respect
to the recent developments regarding our RXi Pharmaceuticals Corporation subsidiary, our business strategy, business plan and
research and development activities, our future financial results, and other future events. These statements include forward-looking
statements both with respect to us, specifically, and the biotechnology industry, in general. In some cases, forward-looking statements
can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential” or
“could” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the
forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the
forward-looking statements.
All forward-looking statements involve inherent risks and uncertainties, and there are or will be important factors that could cause
actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to,
those factors set forth in this Annual Report under the captions “Business,” “Risk Factors,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” all of which you should review carefully. If one or more of these or other
risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what
we anticipate. Please consider our forward-looking statements in light of those risks as you read this Annual Report. We undertake no
obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or
otherwise.
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Table of Contents
Item 1. BUSINESS
PART I
In this Annual Report, we sometimes refer to CytRx Corporation as “CytRx” and to our majority-owned subsidiary, RXi
Pharmaceuticals Corporation, as “RXi.” References to the “company,” “we,” “us” or “our” refer to CytRx and RXi, unless the context
suggests otherwise.
CYTRX CORPORATION
CytRx is a biopharmaceutical research and development company engaged in developing human therapeutic products based
primarily upon our small molecule molecular “chaperone” co-induction technology. We recently completed a Phase IIa clinical trial of
our lead small molecule product candidate, arimoclomol, for the treatment of amyotrophic lateral sclerosis, which is commonly known
as ALS or Lou Gehrig’s disease. We plan to initiate a Phase IIb trial of arimoclomol for this indication during the second half of 2007,
subject to clearance by the U.S. Food and Drug Administration. We also are pursuing clinical development of our other small
molecule product candidates, as well as 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 with funding from the
National Institutes of Health. We have previously entered into strategic alliances with respect to the development of products using
our other technologies.
In October 2004, we acquired all of the clinical and pharmaceutical and related intellectual property assets of Biorex Research &
Development, RT, a Hungarian company which we refer to as Biorex. The Biorex assets consist primarily of novel small molecules
based on molecular chaperone co-induction technology, which we believe may have broad therapeutic applications in neurology, type
2 diabetes, cardiology and diabetic complications. One of these assets is arimoclomol, which has received Orphan Drug and Fast
Track designation from the U.S. Food and Drug Administration (FDA) and orphan medicinal product status from the European
Commission for the treatment of ALS. These assets also included two other oral, clinical stage drug candidates and a library of small
molecule product candidates.
We also are engaged in developing therapeutic products based upon ribonucleic acid interference, or RNAi, which has the potential
to effectively treat a broad array of diseases by interfering with the expression of targeted disease-associated genes. In order to fully
realize the potential value of our RNAi technologies, in January 2007 we transferred to RXi Pharmaceuticals Corporation, our
majority-owned subsidiary, substantially all of our RNAi-related technologies and assets in exchange for equity in RXi. These
consisted primarily of our licenses from UMMS and the Carnegie Institution of Washington relating to fundamental RNAi
technologies, as well as research and other equipment situated at our Worcester, Massachusetts, laboratory. RXi will focus solely on
developing and commercializing therapeutic products based upon RNAi technologies for the treatment of human diseases, with an
initial focus on neurodegenerative diseases, cancer, type 2 diabetes and obesity. See, “RXi Pharmaceuticals Corporation,” below for a
description of the technologies, research and development activities and current business plan of RXi.
Molecular Chaperone Co-Induction Platform
The synthesis of proteins is a normal part of essential human cell activity. Proteins are linear chains of amino acids. In order to
function normally in a cell, these proteins must fold into particular three-dimensional shapes. During stressful conditions such as
certain disease states, proteins can fold improperly, resulting in aggregation of protein that can be toxic to the cell. It is believed, for
example, that mis-folding and aggregation of certain mutated forms of a particular protein known as superoxide dismutase 1, or
SOD1, leads to the death of motor neurons that causes certain forms of ALS.
In nature, the cell has developed “chaperone” proteins to deal with these potentially toxic mis-folded proteins. Chaperones are a
key component of the human body’s universal cellular protection, maintenance and repair mechanism. They help to ensure that newly
synthesized proteins are complete, situated correctly within the cell’s structure and correctly folded. Molecular chaperones detect
proteins that are mis-folded, and have the
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Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
ability to refold those proteins into the appropriate, non-toxic shape. 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 within the human body.
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 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, now more commonly referred to as the stress response, increases the synthesis of molecular chaperones that then
repair or degrade the mis-folded proteins.
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. It appears, however, 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 such as ALS may be slowed,
halted or perhaps even reversed. In test tube experiments, mammalian cells engineered to have increased amounts of molecular
chaperones have been shown to be resistant to a variety of otherwise lethal stresses. In animal studies, genetically engineered mice
with 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 scientific studies support the possibility that drugs such as arimoclomol may be capable of boosting the
stress response in humans.
Among the assets that we acquired from Biorex are several drug candidates whose mechanism of action is believed to be the
“co-induction” of the stress response; meaning that they amplify the production of molecular chaperone proteins that are already
activated by disease-induced cellular stress, but do not seem to activate the stress response by themselves. In doing so, the drug
candidates may selectively amplify molecular chaperone proteins specifically in diseased tissue, which may minimize potential drug
side-effects. If confirmed, this amplification of the cell’s own fundamental protective mechanism may have powerful therapeutic and
prophylactic potential in a broad array of medical applications.
We believe that our molecular chaperone co-induction drug candidates can potentially improve the cell’s natural ability to resist the
toxic effects of protein mis-folding caused by both acute and chronic diseases. These orally available small molecule drug candidates
may accomplish some of the same goals as RNAi described below, but would do so by a mechanism of repairing or degrading the
offending proteins, instead of degrading their corresponding messenger RNA, or mRNAs. Since the ability to recognize mis-folded
proteins is an intrinsic feature of the amplified molecular chaperones, molecular chaperone therapy may not require identifying the
actual molecular target of the stress-induced damage. As a result, these product candidates may have broader therapeutic utility for the
removal of damaged proteins compared to that of RNAi, which requires identifying the actual mis-folded proteins.
We are not aware of another pharmaceutical company engaged in developing small molecule co-inducers of molecular chaperones.
At least a few potential drug candidates have been reported in scientific papers as activating molecular chaperone expression, but they
appear to activate stress response in all cells rather than to amplify the cell’s own protective mechanisms that are activated only in
stressed or diseased cells.
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Product Development
ALS Clinical Trials
We are pursuing directly and indirectly through RXi the development of therapeutics for the treatment of various forms of ALS.
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. Worldwide, approximately 120,000 people
are living with ALS.
We recently completed the initial Phase II clinical trial, which we refer to as the Phase IIa trial, for arimoclomol for ALS. The
Phase IIa trial was a multicenter, double-blind, placebo-controlled study of approximately 80 ALS patients enrolled at ten clinical
centers across the U.S. Patients received either a placebo in the form of a capsule without drug, or one of three dose levels of
arimoclomol capsules three times daily for a period of 12 weeks, immediately followed by a one-month period without the drug. The
primary endpoints of this Phase IIa trial were safety and tolerability. Secondary endpoints included a preliminary evaluation of
efficacy using two widely accepted surrogate markers, the revised ALS Functional Rating Scale, or ALSFRS-R, which is used to
determine patients’ capacity and independence in 13 functional activities, and Vital Capacity, or VC, an assessment of lung capacity.
The trial was designed to monitor only extreme responses in these two categories. We have extended the initial Phase IIa trial on an
“open-label” basis, meaning that the medication was no longer blinded to the patients or their doctors, in order to provide additional
data regarding safety and tolerability. As a result, approximately 70 patients who completed the Phase IIa study and who met the
eligibility criteria received arimoclomol at the highest investigative dose for up to an additional six months. We expect the results of
this open-label extension to be available in the second quarter of 2007.
We are encouraged by the results of our recently completed Phase IIa clinical trial of arimoclomol for the treatment of ALS, which
appeared to be safe and well tolerated by the patients in that trial even at the highest administered dose. Arimoclomol also was found
to effectively enter the cerebral spinal fluid, demonstrating that it passed the “blood:brain barrier.” We plan to determine the highest
dose that can be well tolerated in healthy volunteers in a multiple ascending dose study, and then plan to initiate a subsequent Phase II
trial, which we refer to as the Phase IIb trial, that will be designed to detect more subtle efficacy responses. On February 5, 2007, we
entered into with Pharmaceutical Research Associates, or PRA, a Master Agreement for Clinical Trials Management Services under
which PRA will provide clinical research services in connection with the design, management and conduct of both the multiple
ascending dose study and the Phase IIb clinical trial. Although the Phase IIb efficacy trial is still in the planning stages and will be
subject to FDA clearance, at present we expect it to include approximately 400 ALS patients recruited from 30-35 clinical sites to take
approximately 18 months after initiation to complete. Our agreement with PRA is part of our business plan to pursue our product
development efforts primarily by contract with clinical research companies and other third parties.
Obesity and Type 2 Diabetes
Obesity and type 2 diabetes are major 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.
One of our product candidates, iroxanadine, was shown to be well tolerated and demonstrated significant improvement of vascular
function in the brachial artery of hypertensive patients in Phase I and Phase II clinical trials conducted prior to our acquisition of
iroxanadine. We intend to evaluate the preclinical efficacy of this product candidate for diabetic complications, including wound
healing. If this compound
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Source: CYTRX CORP, 10-K, April 02, 2007
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proves to be efficacious in preclinical work, we would consider initiation of a Phase II clinical trial for one of these indications.
Although we initially intend to develop arimoclomol primarily for the treatment of ALS, it also showed efficacy in preclinical
animal models of diabetes. If efficacy greater than that of currently available medications is observed in additional preclinical models,
we would consider beginning a Phase II clinical trial for diabetes, as arimoclomol has already been tested in two Phase I clinical trials.
Stroke Recovery
CytRx recently announced data indicating that arimoclomol improved functional recovery in experimental animal models of stroke.
If, through additional preclinical testing, we confirm that arimoclomol improves functional recovery even significantly after the initial
stroke event, we would consider clinical development of arimoclomol for stroke.
Cardiovascular Disease
Preclinical results by third parties with our product 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.
HIV
Our HIV subunit vaccine technology 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, or agent to increase
effectiveness, 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 promising
Phase I clinical trial results that indicate its ability to produce potent antibody responses with neutralizing activity against multiple
HIV viral strains, and we are continuing to analyze the Phase I results to determine how, or if, to proceed with clinical development.
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.
Other Technologies and Strategic Arrangements
Our other primary technologies, which we acquired or developed prior to the acquisition of our molecular chaperone technology,
are CRL-5861, 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 CRL-5861. We have licensed our TranzFect technology to two other companies. We 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 or for use as a non-clinical research reagent to increase transfection in vitro or in laboratory animals. Adjuvants are
agents added to a vaccine to increase its effectiveness.
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Therapeutic Copolymer Program
CRL-5861 (purified poloxamer 188) is an intravenous agent for the treatment of sickle cell disease and other acute vaso-occlusive
disorders. Sickle cell disease is an 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 CRL-5861, on an exclusive basis, to
SynthRx, Inc., a Houston, Texas-based biopharmaceutical company, in exchange for a cash payment and and ownership interest in
SynthRx. Upon commercialization of any products developed under our alliance with SynthRx, we may also receive milestone
payments and royalties.
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. The limited revenues that we generated prior to 2006
have been due primarily to license fees paid to us with respect to our TranzFect technology, which represented 54% and 93% of our
total revenues for the years ended December 31, 2005 and 2004, respectively.
Merck License
In November 2000, we entered into an exclusive, worldwide license agreement with Merck & Co., Inc. under which we granted
Merck the right to use our TranzFect technology in DNA-based vaccines for HIV and three other targets. In July 2003, Merck returned
to us the rights to the three other targets covered by its license, which we are able to license to other third parties. Merck has
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.
Vical License
We are party to a license agreement with Vical Incorporated under which we grant to 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 the four targets previously licensed by us to Merck, DNA
vaccines or therapeutics based on prostate-specific membrane antigen, or PSMA, and 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 are entitled to receive milestone and royalty payments
in the future based on criteria described in the agreement.
RXI PHARMACEUTICALS CORPORATION
Our board of directors periodically reviews and assesses strategic alternatives for our company and has determined that the best
strategy for realizing the potential value of our RNAi technologies was to create a subsidiary focused on RNAi therapeutics. RXi, our
RNAi therapeutics subsidiary, was formed by CytRx and four leading RNAi researchers, including Craig C. Mello, Ph.D., who was
awarded the 2006 Nobel Prize in Medicine for his co-discovery of RNAi. To date, RXi’s principal activities have consisted of
acquiring our RNAi-related assets, entering into four new RNAi technology licenses and an invention disclosure agreement with
UMMS, developing research and clinical development plans for its RNAi therapeutic platform, assessing and negotiating licenses to
additional theraputic RNAi technology, recruiting a RNAi-focused management and scientific/clinical advisory team and completing
its organizational activities.
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Recent Developments
We recently have entered into the following agreements relating to RXi:
Contribution Agreement
On January 8, 2007, we entered into a Contribution Agreement with RXi under which we assigned and contributed to RXi
substantially all of our RNAi-related technologies and assets. The assigned assets consisted primarily of our licenses from UMMS and
from the Carnegie Institution of Washington relating to fundamental RNAi technologies, as well as equipment situated at our
Worcester, Massachusetts, laboratory. The licensed technologies include patent applications on RNAi target sequences, chemical
modifications and delivery to cells, field-specific licenses to a patent application on chemical modification of RNAi invented by Tariq
M. Rana, Ph.D., the “Tuschl I” patent, and our exclusive licenses to patent applications that disclose gene targets for diabetes and
obesity, including RIP140 (see, “Material Licenses and Other Agreements,” below). In connection with the contribution of the
licenses and other assets, RXi assumed primary responsibility for all payments to UMMS and other obligations under the contributed
licenses and assets (See footnote 4 to the table of contractual obligations at page 41).
Voting Agreement
As part of our new business strategy, RXi began operating as a stand-alone company in January 2007 and is focused solely on
developing and commercializing therapeutic products based upon RNAi technologies for the treatment of human diseases. In order to
facilitate this strategy, and as an inducement to UMMS to enter the new licenses and the invention disclosure agreement with RXi
described below under “Material Licenses and Other Agreements,” on January 10, 2007, we entered into a letter agreement with
UMMS regarding the management of RXi. Under the letter agreement, we have agreed that, during the term of our new UMMS
licenses, we will vote our shares of RXi common stock for the election of directors of RXi and take other actions to ensure that a
majority of the RXi board of directors are independent of CytRx.
Our letter agreement with UMMS will become effective only upon RXi’s achievement of a funding milestone in the coming few
months. Following that time, if we own at any time a majority of the outstanding voting power of RXi, we have agreed in the letter
agreement that we will reduce our ownership interest in RXi’s capital stock to less than a majority as soon as reasonably practicable. If
it becomes necessary to reduce our ownership of RXi in order to comply with the letter agreement, we may seek to dispose of a
portion of our RXi shares through a dividend or distribution of such shares to our stockholders, a sale or other disposition to one or
more third parties, or other means, subject to compliance with SEC rules and other legal requirements and the requirements of the
Delaware General Corporation Law. We have no commitment or agreement with respect to the possible disposition of any of our RXi
shares.
Stockholder and Preemptive Rights Agreement
On February 23, 2007, we entered into a letter agreement with RXi and the other current stockholders of RXi. Under the
stockholders agreement, RXi has agreed to grant to CytRx preemptive rights to acquire any “new securities” (as defined) that RXi
proposes to sell or issue so that we may maintain our percentage ownership of RXi. The preemptive rights will become effective if
CytRx owns at any time less than 50% of the outstanding shares of RXi common stock, and will expire on January 8, 2012, or such
earlier time at which CytRx owns less than 10% of the outstanding RXi common stock.
Under the stockholders agreement, we also undertake to vote our shares of RXi stock in the election of directors of RXi and
dispose of our RXi shares in accordance with the terms of our letter agreement with UMMS described above. We have further agreed
in the stockholders agreement to approve of actions that may be adopted and recommended by RXi’s board of directors to facilitate
any future financing of RXi.
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Reimbursement Agreement
As of January 8, 2007, we entered into a letter agreement with RXi under which RXi has agreed to reimburse us, following its
initial funding, for all organizational and operational expenses incurred by us in connection with the formation, initial operations and
funding of RXi. As of February 28, 2007, we have advanced approximately $592,000 to RXi for which it will be obligated to
reimburse us.
RNAi Therapeutic Platform
RNAi technology 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 may effectively silence targeted genes without impacting other, non-targeted, genes. RNAi
is regarded as a significant advancement in gene silencing and was featured in Science magazine as the “Breakthrough of the Year” in
2002.
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 offers a novel approach to the drug development process that can target any one of the genes in the human genome. In
contrast, only a small subset of the proteins encoded in the genome can be targeted by traditional medicinal chemistry or antibody
based approaches. The specificity of RNAi is achieved via a well-understood biological mechanism based on matching the sequence
of an RNAi to the sequence of the targeted gene. The specificity of RNAi may be sufficient to permit therapeutic targeting of only a
single gene or even the mutant form of a gene. The ability to specifically target mutant forms of a gene is critical in many diseases,
such as cancer and neurodegenerative disorders, where spontaneous or inherited changes in otherwise necessary genes are the
underlying cause of disease.
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). Within the cell, dsRNA is thought to 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.
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 five clinical trials using
RNAi, namely trials for age-related macular degeneration by Acuity Pharmaceuticals, Allergan Inc. and Quark
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Biotech Inc., for respiratory syncytial virus by Alnylam Pharmaceuticals and for diabetic macular edema by Acuity Pharmaceuticals.
RXi has determined that the initial indication that it plans to pursue is a form of ALS caused by a defect in the SOD1 gene. Early
preclinical studies in a mouse model of SOD1 mediated ALS conducted by Dr. Tariq Rana of UMMS, one of RXi’s scientific
founders and a member of our scientific advisory board and Dr. Zuoshang Xu of UMMS showed promising results using an RNAi
therapeutic to inhibit the defective SOD1 gene. RXi’s second planned indication is the treatment of obesity and type 2 diabetes. RXi
has in-licensed intellectual property regarding the RIP140 gene, which appears to be an important regulator of metabolism, and may
target this gene in future therapeutic product development programs.
Although RXi’s near-term focus will be on ALS and type 2 diabetes, RXi plans to leverage its experience related to local delivery
of RNAi therapeutics to seek to develop RNAi-based treatments for neurodegenerative diseases other than ALS. For example, in
addition to ALS, many neurodegenerative diseases exist for which no effective therapies are available, including Alzheimers,
Huntington’s and Parkinson’s diseases. In many of these cases, molecular targets have been identified that are difficult to access by
conventional small molecule or antibody based approaches. RXi believes that the knowledge gained in its discovery and development
activities related to ALS will allow RXi to rapidly move into additional related therapeutic areas.
RXi may also pursue preclinical studies in several additional disease areas, with the goal of creating multiple clinical development
programs. For example, RXi founding scientist Greg Hannon, Ph.D. is a leader in the understanding of tumor-suppressor and
oncogene pathways, and RXi expects that Dr. Hannon’s involvement with RXi will provide insight into potential cancer therapeutic
targets. Many well-studied targets exist for numerous diseases that RXi believes will be difficult to target with normal medicinal
chemistry. RXi will focus on combining its expertise in RNAi with existing disease models through collaborative interactions with
academic, biotech and pharmaceutical industry scientists.
Material Licenses and Other Agreements
License Agreements
Through our initial strategic alliance with UMMS that we initiated in 2003, we acquired the rights to a portfolio of technologies,
including the rights to use UMMS’s proprietary RNAi technology as a potential therapeutic in certain defined areas that include
obesity, type 2 diabetes, ALS and cytomegalovirus, or CMV, and in the identification and screening of novel protein targets. Pursuant
to the Contribution Agreement that we entered into with RXi on January 8, 2007, we assigned those rights to RXi.
In addition to the RNAi licenses and rights that we contributed to RXi, on January 10, 2007, RXi entered into three exclusive,
worldwide, sublicenseable licenses with UMMS for three different patent families and one non-exclusive, worldwide,
non-sublicensable license for a fourth patent family, which we refer to collectively as the “2007 UMMS licenses,” pursuant to which
UMMS granted RXi rights under certain UMMS patent applications to make, use and sell products related to applications of RNAi
technologies. The 2007 UMMS licenses include an exclusive license covering nanotransporters, which may be effective in the
delivery of RNAi compounds, as well as methods and potential compounds for the potential treatment of ALS that can be delivered
locally to the central nervous system.
As consideration for the 2007 UMMS licenses, we paid UMMS an aggregate up-front fee of $75,000 and reimbursed UMMS
$103,000 for previously incurred patent expenses. RXi also agreed under the 2007 UMMS licenses to undertake to complete an initial
funding of RXi in the coming few months, and UMMS may terminate the 2007 UMMS licenses if RXi does not achieve that funding
milestone in that timeframe. If we elect to provide RXi with all or a substantial portion of the initial funding, our current working
capital will be depleted accordingly. Upon the completion of RXi’s initial funding, RXi will be obligated to pay UMMS an additional
license fee of $175,000 and issue to UMMS an aggregate of $1,600,000 of RXi common stock that is to be valued on a per share basis
for this purpose based on the valuation of RXi in its initial funding.
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The foregoing license agreements with UMMS require us to make aggregate payments of up to $300,000 in 2007. In subsequent
periods, we will be required to make aggregate payments ranging from $250,000 to $1.7 million per year to maintain the licenses
through 2018. We are obligated to pay legal expenses for the prosecution of patents licensed from UMMS, which we anticipate will be
approximately $175,000 during 2007, and to make milestone payments to UMMS based upon our progress in the clinical development
and marketing of products utilizing the technologies licensed from UMMS. In the event that we were to successfully develop a
product in each of the categories of obesity/type 2 diabetes and ALS, these milestone payments could aggregate up to $27.4 million.
We do not anticipate the occurrence of an event that would require a milestone payment during 2007. We also would be required to
pay royalties to UMMS based on the net sales of those products. The actual milestone payments will vary, perhaps significantly, based
upon the milestones we achieve and the products, if any, we develop.
New Invention Disclosure Agreement
On January 10, 2007, RXi also entered into an invention disclosure agreement with UMMS pursuant to which UMMS is obligated
for a three-year period to disclose to RXi any unrestricted inventions conceived or reduced to practice by UMMS related to therapeutic
applications of RNAi technologies. Under the invention disclosure agreement, UMMS also grants to RXi an option to negotiate the
terms of a license to any disclosed inventions. If RXi exercises the option and the parties are unable to reach agreement on the terms
of any such license, RXi may elect to have an arbitrator determine the terms of the license. The invention disclosure agreement will
become effective only upon RXi’s achievement of a funding milestone in the coming few months. Upon effectiveness, RXi will be
obligated to pay UMMS $100,000 in cash and issue to UMMS $800,000 of RXi common stock that is to be valued on a per share
basis for this purpose based on the valuation of RXi in the initial funding, and RXi will also be obligated to pay UMMS $100,000 on
each of the first and second anniversaries of the effective date of the invention disclosure agreement. RXi also will be obligated to pay
UMMS a fee each time RXi exercises its right to negotiate a license under the invention disclosure agreement. Once effective, the
invention disclosure agreement will be terminable by either party upon an uncured breach by the other party and by RXi at any time
for any reason.
Manufacturing
CytRx Corporation
We have no capability to manufacture supplies of any of our products, and rely on third-party contract manufacturers to produce
materials needed for research and clinical trials, including clinical supplies of arimoclomol for our planned Phase IIb trial. To be
commercialized, our products also must be capable of being manufactured in commercial quantities in compliance with stringent
regulatory requirements and at an acceptable cost. We intend to rely on third-party manufacturers to produce commercial quantities of
any products for which we are able to obtain marketing approval. We have not commercialized any product, and so have not
demonstrated that any of our product candidates can be manufactured in commercial quantities in accordance with regulatory
requirements or at an acceptable cost.
If our product candidates cannot be manufactured in suitable quantities and in accordance with regulatory standards, our clinical
trials, regulatory approvals and marketing efforts for such products may be delayed. Such delays could adversely affect our
competitive position and our chances of generating significant recurring revenues. If our products are not able to be manufactured at
an acceptable cost, the commercial success of our products may be adversely affected.
RXi Pharmaceuticals Corporation
RXi currently plans to manufacture its RNAi compounds through contract oligonucleotide manufacturers. The speciality
oligonucleotide manufacturing companies with whom RXi’s management has previously worked offer research grade and GMP
(Good Manufacturing Practices) grade RNAi for clinical use. However, if RXi’s product candidates cannot be manufactured in
suitable quantities and in accordance with regulatory standards, RXi’s clinical trials, regulatory approvals and marketing efforts for
such products may be
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delayed. If RXi’s compounds and products are not able to be manufactured at an acceptable cost, the commercial success of any
products that it may develop could be adversely affected.
Patents and Proprietary Technology
CytRx Corporation
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 acquired patents and patent applications, and have filed several new patent
applications, in connection with our molecular chaperone program, and we have licensed additional technologies, including patents or
patent applications, most of which are in the RNAi field.
We regularly evaluate the patentability of new inventions and improvements developed by us or our collaborators, and, whenever
appropriate, will endeavor to file United States and international patent applications to protect these new inventions and
improvements. 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. There also is no assurance that any
issued patents will be effective to prevent others from using our products or processes. It is also possible that any patents issued to us,
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 that may be competitive with ours.
In addition to patent protection, we 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, but there is no
assurance that these agreements will afford significant protection against misappropriation or unauthorized disclosure of our trade
secrets and confidential information.
RXi Pharmaceuticals Corporation
RXi has secured exclusive and non-exclusive rights to develop RNAi therapeutics by licensing key RNAi technologies and patent
rights. The patents, patent applications and exclusive rights to intellectual property rights are directed to key therapeutic targets,
chemistry and configurations of RNAi and delivery of RNAi within the body in a therapeutically effective manner.
Intellectual Property Rights to Key Therapeutic Targets
RXi’s portfolio of licenses from UMMS consist of certain inventions and technologies developed primarily by Drs. Craig Mello,
Michael Czech and Tariq Rana directed to RXi’s key therapeutic areas. These areas are: genetic diseases involving a dominant
mutation (such as ALS); disorders and diseases of metabolic control such as diabetes and obesity; and infectious agent related diseases
such as disorders related to CMV.
RXi has an exclusive license from UMMS to technology, patents and pending patent applications directed to the design and
synthesis of chemically modified RNAi, and in vivo methods using RNAi to treat allele-specific genetic diseases such as ALS.
RXi also has an exclusive license from UMMS to technology, patents and pending patent applications directed to RNAi that targets
RIP140, a co-repressor of many nuclear receptors and a key factor involved in sugar uptake and oxidative metabolism, and
consequently, diabetes and obesity. RXi is an exclusive licensee of UMMS’s technology establishing the key role of RIP140 in
diabetes and insulin action. RXi is also entitled
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to obtain first rights to cellular targets involved in diabetes and obesity as they are identified in Dr. Czech’s laboratory at UMMS. In
addition, RXi has rights to technology, patents and pending patent applications directed to the use of the endoplasmic reticulum stress
response pathway in adipose cells to enhance whole body insulin sensitivity.
RNAi based therapeutics may be used to combat infectious diseases, especially viral diseases. RXi has exclusive rights from
UMMS to technology, patents and pending patent applications directed to treatment of CMV-related disorders using RNAi.
Intellectual Property Rights to Chemistry and Configurations of Therapeutically Useful RNAi
In addition to a non-exclusive license to Dr Andrew Fire’s and Dr. Mello’s foundational patent covering the use of dsRNA to
induce gene silencing, RXi has secured exclusive and co-exclusive rights from UMMS to technologies, patents and pending patent
applications related to fundamental technologies with the potential to produce stable and therapeutically effective RNAi therapeutics
in the key areas of RXi’s business focus, which are ALS, diabetes, obesity, and conditions associated with CMV infection. These
licensed technologies include:
•
•
•
Dr. Tariq Rana’s inventions regarding the fundamental rules of designing chemically-modified RNAi sequences that are
suitable for in vivo gene silencing;
Dr. Tuschl’s invention regarding RNAi therapeutics using double-stranded RNAs of 19 to 23 nucleotides; and
Drs. Mello and Zamore’s invention regarding in vivo production of siRNA.
Intellectual Property Rights to Delivery of RNAi to Cells
RXi also has obtained exclusive and non-exclusive licenses to technologies potentially necessary for the efficient delivery of RNAi
therapeutics to cells in vitro and in vivo. These technologies include:
•
•
methods and compositions, including use of nanotransporters, for efficient RNAi delivery for therapeutic gene silencing in
cells and animals; and
inhibition of gene expression in adipocytes using RNAi.
Competition
CytRx Corporation
We are aware of only one drug, Rilutek, developed by Aventis Pharma AG, that has been approved by the FDA for the treatment of
ALS, which is now available in generic form. 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, Forest Laboratories, Inc., H. Lundbeck A/S, Phytopharm plc, and
Schwarz Pharma AG.
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.
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Many companies, including large pharmaceutical and biotechnology firms with financial resources, research and development
staffs, and facilities that may 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.
RXi Pharmaceuticals Corporation
RXi faces significant competition in its research and development of RNAi-related pharmaceuticals. Competitors will include large
and small pharmaceutical, chemical and biotechnology companies, as well as universities, government agencies, and other private and
public research organizations who are focusing their efforts in the RNAi field or are developing pharmaceuticals for similar diseases
as RXi is targeting through their research and development efforts.
The RNAi field, though at an early stage of development, is already a competitive one and the competition is expected to increase.
Companies that are focusing their commercial efforts in the RNAi field include: Merck & Co., Inc., through its recent acquisition of
Sirna Therapeutics, Alnylam Pharmaceuticals, Quark, SR Pharma plc, Acuity Pharmaceuticals, Nastech Pharmaceutical Company
Inc., Nucleonics, Inc., Tacere Therapeutics, 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.
This competition from other firms and institutions will manifest itself not only in RXi’s potential product markets but also, and
importantly at this stage in development of RNAi technology, in recruiting and retaining key scientific and management personnel and
in obtaining rights to key intellectual property.
RXi’s RNAi-focused competitors, as well as companies in other fields, may be targeting the same diseases as RXi. Competitive
products for a number of the disease indications that RXi has 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. With respect to ALS, Rilutek, which was developed by Aventis Pharma AG, is the only
drug of which we are currently aware that has been approved by the FDA for the treatment of ALS. Other companies are working to
develop pharmaceuticals to treat ALS, including CytRx (RXi’s parent company), Aeolus Pharmaceuticals, Ono Pharmaceuticals,
Trophos SA, FaustPharmaceuticals SA and Oxford BioMedica plc. Also, since ALS belongs to a family of similar diseases called
neurodegenerative disease, which includes Alzheimer’s, Parkinson’s and Huntington’s 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, Forest
Laboratories, Inc., H. Lundbeck A/S, Phytopharm plc, and Schwarz Pharma AG.
In addition, a number of products are currently being marketed by a variety of the multinational or other pharmaceutical companies
for treating type 2 diabetes, including among others, the diabetes drug Avandia by GlaxoSmithKline PLC, Actos by Eli Lilly & Co.,
Glucophage and Junavia by Bristol-Myers Squibb Co., Symlin and Byetta by Amylin Pharmaceuticals, Inc. and Starlix by Novartis.
For obesity, the drugs Acomplia by Sanofi-Aventis SA, Xenical by F. Hoffman-La Roche Ltd. and Meridia by Abbott
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Laboratories are presently on the market. Many major pharmaceuticals companies are also seeking to develop new therapies for these
disease indications.
Competitors both in and outside of the RNAi field have financial resources, research and development staffs, and facilities that are,
in most cases, substantially greater than those of RXi or its strategic partners or licensees and are engaged in the research and
development of pharmaceutical products that could compete with our potential products. To the extent that RXi seeks to acquire,
through license or otherwise, existing or potential new products, it will be competing with numerous other companies that may have a
competitive advantage over RXi in identifying and evaluating these drug acquisition opportunities. Any products that RXi acquires
will compete with products marketed by companies that, in many cases, will have substantially greater marketing resources than RXi
has. 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 RXi’s strategic
partners or licensees.
Government Regulation
The United States and other developed countries extensively regulate the preclinical and clinical testing, manufacturing, labeling,
storage, record-keeping, advertising, promotion, export, marketing and distribution of drugs and biologic products. The United States
Food and Drug Administration, under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal
statutes and regulations, regulates pharmaceutical and biologic products.
To obtain approval of our product candidates from the FDA, we must, among other requirements, submit data supporting safety
and efficacy for the intended indication as well as detailed information on the manufacture and composition of the product candidate.
In most cases, this will require extensive laboratory tests and preclinical and clinical trials. The collection of these data, as well as the
preparation of applications for review by the FDA involve significant time and expense. The FDA also may require post-marketing
testing to monitor the safety and efficacy of approved products or place conditions on any approvals that could restrict the therapeutic
claims and commercial applications of these products. Regulatory authorities may withdraw product approvals if we fail to comply
with regulatory standards or if we encounter problems at any time following initial marketing of our products.
The first stage of the FDA approval process for a new biologic or drug involves completion of preclinical studies and the
submission of the results of these studies to the FDA. This data, together with proposed clinical protocols, manufacturing information,
analytical data and other information submitted to the FDA, in an investigational new drug application (“IND”), must become
effective before human clinical trials may commence. Preclinical studies generally involve FDA regulated laboratory evaluation of
product characteristics and animal studies to assess the efficacy and safety of the product candidate.
After the IND becomes effective, a company may commence human clinical trials. These are typically conducted in three
sequential phases, but the phases may overlap. Phase I trials consist of testing of the product candidate in a small number of patients or
healthy volunteers, primarily for safety at one or more doses. Phase II trials, in addition to safety, evaluate the efficacy of the product
candidate in a patient population somewhat larger than Phase I trials. Phase III trials typically involve additional testing for safety and
clinical efficacy in an expanded population at multiple test sites. A company must submit to the FDA a clinical protocol, accompanied
by the approval of the Institutional Review Boards at the institutions participating in the trials, prior to commencement of each clinical
trial.
To obtain FDA marketing authorization, a company must submit to the FDA the results of the preclinical and clinical testing,
together with, among other things, detailed information on the manufacture and composition of the product candidate, in the form of a
new drug application, or NDA, or, in the case of a biologic, a biologics license application, or BLA.
The amount of time taken by the FDA for approval of an NDA or BLA will depend upon a number of factors, including whether
the product candidate has received priority review, the quality of the submission and
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studies presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and
the workload at the FDA.
The FDA may, in some cases, confer upon an investigational product the status of a fast track product. A fast track product is
defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to
address unmet medical needs for this condition. The FDA can base approval of an NDA or BLA for a fast track product on an effect
on a surrogate endpoint, or on another endpoint that is reasonably likely to predict clinical benefit. If a preliminary review of clinical
data suggests that a fast track product may be effective, the FDA may initiate review of entire sections of a marketing application for a
fast track product before the sponsor completes the application. The FDA has granted fast track designation and orphan drug status to
arimoclomol for the treatment of ALS.
We anticipate that our products will be manufactured by our strategic partners, licensees or other third parties. Before approving a
BLA, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the
manufacturing facilities are in compliance with the FDA’s cGMP, which are regulations that govern the manufacture, holding and
distribution of a product. Manufacturers of biologics also must comply with the FDA’s general biological product standards. 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.
Following approval, the FDA periodically inspects drug and biologic manufacturing facilities to ensure continued compliance with the
good manufacturing practices regulations. Our manufacturers will have to continue to comply with those requirements. Failure to
comply with these requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing
or recall or seizure of product. Adverse patient experiences with the product must be reported to the FDA and could result in the
imposition of marketing restrictions through labeling changes or market removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
The labeling, advertising, promotion, marketing and distribution of a drug or biologic product also must be in compliance with
FDA and Federal Trade Commission requirements which include, among others, standards and regulations for off-label promotion,
industry sponsored scientific and educational activities, promotional activities involving the internet, and direct-to-consumer
advertising. We also will be subject to a variety of federal, state and local regulations relating to the use, handling, storage and
disposal of hazardous materials, including chemicals and radioactive and biological materials. In addition, we will be subject to
various laws and regulations governing laboratory practices and the experimental use of animals. In each of these areas, as above, the
FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of
product approvals, seize or recall products, and deny or withdraw approvals.
We will also be subject to a variety of regulations governing clinical trials and sales of our products outside the United States.
Whether or not FDA approval has been obtained, approval of a product candidate by the comparable regulatory authorities of foreign
countries and regions must be obtained prior to the commencement of marketing the product in those countries. The approval process
varies from one regulatory authority to another and the time may be longer or shorter than that required for FDA approval. In the
European Union, Canada and Australia, regulatory requirements and approval processes are similar, in principle, to those in the United
States.
Beneficial Ownership of RXi’s Securities
As of March 23, 2007, RXi had outstanding 4,865 shares of common stock, of which 4,153 shares were owned by CytRx. The
remaining 712 outstanding shares were owned by the current members of RXi’s scientific advisory board.
Upon completion of its initial funding, RXi will be obligated to issue to UMMS a total of $2,400,000 of RXi common stock that is
to be valued on a per share basis for this purpose based upon the valuation of RXi
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in its initial funding. Since the value of RXi for purposes of the initial funding intends has not yet been established, it is not known
how many shares UMMS will receive or what percentage of the outstanding shares those shares will represent. However, the stock
issuance to UMMS will dilute the percentage ownership of RXi’s stockholders, including the shares CytRx owns.
Employees
As of January 31, 2007, we had 25 employees, 14 of whom were engaged in research and development activities and 11 of whom
were involved in management and administrative operations.
Available Information
We maintain a website at www.cytrx.com and make available there, free of charge, our periodic reports filed with the SEC, as soon
as is reasonably practicable after filing. The public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http:/www.sec.gov that contains our reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC. We post on our
website our Code of Business Conduct and Ethics.
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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.
Risks Associated With Our Business
We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable Future
We have operated at a loss due to our lack of significant recurring revenue and substantial expenditures for research and
development on our products and for general and administrative expenses. We incurred net losses of $16.8 million, $15.1 million and
$16.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. We had an accumulated deficit of approximately
$139.6 million as of December 31, 2006. We are likely to continue to incur losses unless and until, if ever, we are able to
commercialize one or more of our products and generate significant recurring revenue.
We Have No Source of Significant Recurring Revenue, Which Makes Us Dependent on Financing to Sustain Our Operations
Our revenue was $2.1 million, $184,000 and $428,000 during the years ended December 31, 2006, 2005 and 2004, respectively. Of
the $2.1 million of revenues recognized in 2006, $1.8 million represented revenue recognized related to our sale to the ALS Charitable
Remainder Trust of a one-percent royalty interest in worldwide sales of arimoclomol. We will not have other significant recurring
revenue until at least one of the following occurs:
•
•
•
We are able to commercialize one or more of our products in development, which may require us to first enter into license or
other arrangements with third parties.
One or more of our licensed products is commercialized by our licensees, thereby generating royalty revenue for us.
We are able to acquire products from third parties that are already being marketed or are approved for marketing.
We have relied primarily upon selling equity securities and upon proceeds received upon the exercise of options and warrants and,
to a much lesser extent, upon payments from our strategic partners and licensees, to generate funds needed to finance our business and
operations. At December 31, 2006, we had cash and cash equivalents of $30.4 million, and as of March 23, 2007, we had received
approximately $11.0 million in connection with the exercise of warrants and options since December 31, 2006. We believe that we
have adequate financial resources to support our currently planned level of operations into the first quarter of 2009, which expectation
is based in part on projected expenditures for 2007 of: $6.5 million for our Phase IIb trial for arimoclomol for ALS and related studies,
$3.9 million for our other ongoing and planned preclinical programs, $8.8 million for general and administrative expenses, and
$1.6 million to provide interim funding for RXi’s first few months of operations. We estimate RXi will expend approximately
$6.2 million on development activities for 2007 (including approximately $400,000 in payments under agreements with UMMS,
$3.2 million in other research and development expenses and $2.6 million in general and administrative expenses). If, in addition to
the interim funding for which we have already budgeted, we elect to provide RXi with all or a substantial portion of its initial funding
for 2007 and beyond in the coming few months, and if we are unable to raise funds in the future to replenish any amounts that we
provide to RXi, our current working capital will be depleted accordingly. We anticipate it will take a minimum of three years and
possibly longer for us to generate recurring revenue, and we will be dependent on obtaining future financing until such time, if ever, as
we can generate significant recurring revenue. We have no commitments from third parties to provide us with any additional future
financing, and may not be able to obtain future financing on
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favorable terms, or at all. A lack of needed financing might force us to reduce the scope of our long-term business plans.
Our Current Financial Resources May Be Diminished If We Elect To Provide RXi with Initial Financing
In order to retain the 2007 UMMS licenses and effectuate the new UMMS invention disclosure agreement, RXi is required to
obtain significant funding in the coming few months. If we elect to provide RXi with all or a substantial portion of the initial funding,
our current working capital will be depleted accordingly. As of March 23, 2007, we had received approximately $11.0 million in
connection with the exercise of outstanding options and warrants since December 31, 2006, but there is no assurance that we will
receive similar amounts from future exercises of options and warrants or be able to raise funds in the future to replenish any amounts
that we provide to RXi. Failure to raise funds to replenish our funding or RXi could materially and adversely affect our ability to
continue the development of our other technologies.
We Will Be Reliant Upon Third Parties for the Development and Eventual Marketing of Our Products
Our business plan is to enter into strategic alliances, license agreements or other collaborative arrangements with other
pharmaceutical companies under which those companies will be responsible for the commercial development and eventual marketing
of our products. Although we plan to continue the development of arimoclomol for the treatment of ALS and may market it ourselves
if it is approved by the FDA, the completion of the development of our current product candidates, as well as the manufacture and
marketing of these products, will likely require us to enter into strategic arrangements with other pharmaceutical or biotechnology
companies.
There can be no assurance that any of our products will have sufficient potential commercial value to enable us to secure strategic
arrangements with suitable companies on attractive terms, or at all. If we are unable to enter into such arrangements, we may not have
the financial or other resources to complete the development of any of our products. We do not have a commercial relationship with
the company that provided an adjuvant for the vaccine for the 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. If we are not able to enter into
such a relationship, 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 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 FDA and other regulatory requirements, the timing of receipt or amount of
revenue 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 Will Incur Substantial Expenses and May Be Required to Pay Substantial Milestone Payments Relating to Our Product
Development Efforts
We estimate that our planned Phase IIb trial of arimoclomol for the treatment of ALS and related activities will require us to incur
approximately $26.8 million (including amounts payable under the Master Agreement for Clinical Trials Management Services we
have entered into with Pharmaceutical Research Associates) over the 24 to 30 months beginning December 2006, assuming we
receive FDA clearance for this trial. In addition, the agreement by which we acquired our molecular chaperone co-induction drug
candidates
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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 those products, these milestone payments could aggregate as much as $3.7 million,
with the most significant of those payments due upon the first commercialization of any of those products. The actual costs of our
planned Phase IIb trial could significantly exceed the expected amount due to a variety of factors associated with the conduct of
clinical trials, including those described in the Risk Factor section below under “If Our Products Are Not Successfully Developed and
Approved by the FDA, We May Be Forced to Reduce or Curtail Our Operations.”
Under our license for our HIV vaccine candidate, we are responsible for all of the costs for any subsequent clinical trials for this
vaccine. The costs of subsequent trials for the HIV vaccine, if initiated, would be very substantial. Although we are seeking National
Institutes of Health or other governmental funding for these future trials, there can be no assurance that we will be able to secure any
such funding. We also will be responsible for milestone payments based upon the development of the vaccine.
If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to Reduce or Curtail Our
Operations
All of our products in development 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.
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
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failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from the particular drug
candidate.
Our Molecular Chaperone Co-Induction Drug Candidates May Not Receive Regulatory Marketing Approvals
In September 2006, we announced results of our Phase IIa clinical testing of arimoclomol for the treatment of ALS. We reported
that arimoclomol had met the trial’s primary endpoints of safety and tolerability at all three doses tested in the Phase IIa trial, and that
the trial results indicated a non-statistically-significant trend of improvement in functional capacity as measured by the Revised ALS
Functional Ration Scale in the arimoclomol high dose group as compared with untreated patients. There is no assurance, however, that
the results and achievements described will be supported by further analysis of the Phase IIa trial or open-label extension data, or by
the results of any subsequent clinical trials, or that the FDA will permit us to commence our planned Phase IIb clinical on a timely
basis or at all. The requirements imposed by the FDA in connection with our planned Phase IIb trial could add to the time and expense
for us to carry out this trial.
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 is no assurance 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 also will be significantly 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 will show any efficacy for any indication.
Iroxanadine has been tested in two Phase I clinical trials and one Phase II clinical trial which indicated improvement in the function
of endothelial cells in blood vessels of patients at risk of cardiovascular disease. We might develop this product 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 licensing it on terms that are attractive 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 may 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.
We Have Identified Material Weaknesses in our Internal Control over Financial Reporting
In this Annual Report, we are reporting material weaknesses in the effectiveness of our internal controls over financial reporting
related to the application of generally accepted accounting principles arising from our accounting for historical warrant anti-dilution
adjustments as deemed dividends, and in the effectiveness of our internal controls over quarterly and annual financial statement
reporting arising from our accounting for research and development expenses related to our laboratory facility in Worcester,
Massachusetts, which are described in more detail below under the heading “Controls and Procedures.” Despite our substantial efforts
to ensure the integrity of our financial reporting process, we cannot guarantee that we will not identify additional weaknesses as we
continue to work with the new systems that we have
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implemented over the past year. Any continuing material weaknesses in our internal control over financial reporting could result in
errors in our financial statements, which could erode market confidence in our company, adversely affect the market price of our
common stock and, in egregious circumstances, result in possible claims based upon such financial information.
We Are Subject to Intense Competition, and There is No Assurance that We Can Compete Successfully
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 we can obtain 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 and other 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.
We are aware of only one drug, Rilutek, which was developed by Aventis Pharma AG, that has been approved by the FDA for the
treatment of ALS, which is now available in generic form. Other companies are working to develop pharmaceuticals to treat ALS,
including Aeolus Pharmaceuticals, Celgene Corporation, Mitsubishi Pharma Corporation, Ono Pharmaceuticals, Trophos SA,
FaustPharmaceuticals SA, Oxford BioMedica plc, and Teva Pharmaceutical Industries Ltd. 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 also 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, Forest Laboratories, Inc., H. Lundbeck A/S,
Phytopharm plc, and Schwarz Pharma AG.
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A number of products currently are being marketed by a variety of the multinational or other pharmaceutical companies for treating
type 2 diabetes, including among others the diabetes drugs Avandia by GlaxoSmithKline PLC, Actos by Eli Lilly & Co., Glucophage
and Junavia by Bristol-Myers Squibb Co., Symlin and Byetta by Amylin Pharmaceuticals, Inc. and Starlix by Novartis and the obesity
drugs Acomplia by Sanofi-Aventis SA, Xenical by F. Hoffman-La Roche Ltd. and Meridia 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, GlaxoSmithKline, Sanofi Pasteur, VaxGen, Inc.,
AlphaVax, Inc. and Immunitor Corporation. These competitors have substantially greater research and product development
capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other resources than RXi.
We Will Rely upon Third Parties for the Manufacture of Our Clinical Product Supplies
We do not have the facilities or expertise to manufacture supplies of any of our product candidates, including the clinical supply of
arimoclomol used in our Phase II clinical trials. Accordingly, we are dependent upon contract manufacturers or our strategic alliance
partners to manufacture these supplies. We have a manufacturing supply arrangement in place with respect to the clinical supplies for
the Phase II clinical program for arimoclomol for ALS. We have no manufacturing supply arrangements for any of our other product
candidates, and there can be no assurance that we will be able to secure needed manufacturing supply arrangements on attractive
terms, or at all. Our failure to secure these arrangements as needed 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 have patents and patent applications
directed to our molecular chaperone co-induction technologies, there can be no assurance that these patents and applications will
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 related to our
molecular chaperone co-induction drug candidates, and received certain representations and warranties from the seller in connection
with the acquisition, the patents and patent applications related to our molecular chaperone co-induction drug candidates 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.
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.
We Are Subject to Potential Liabilities From Clinical Testing and Future 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 obtained clinical trial insurance for our Phase IIa clinical
trial of arimoclomol for the treatment of ALS, and will seek to obtain similar insurance for the planned Phase IIb
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clinical trial of arimoclomol and any other clinical trials that we conduct, as well as liability insurance for any products that we
market. 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. There is no assurance, however, that any insurance maintained by us or our licensees will prove adequate in the event of a
claim against us. 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.
We May Be Unable to Acquire Products Approved For Marketing
In the future, we may seek to acquire products from third parties that already are being marketed or have been approved for
marketing. We have not identified any of these products, and we do not have any prior experience in acquiring or marketing products
and may need to find third parties to market any products that we might acquire. 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.
Risks Associated With Our Ownership of RXi
The value of our ownership interest in RXi will depend upon RXi’s success in developing and commercializing products based
upon its RNAi technologies, which is subject to significant risks and uncertainties, including the following:
RXi Will Be Subject to Risks of a New Business
RXi is a start-up company with no operating history. RXi will focus solely on developing and commercializing therapeutic
products based upon its RNAi technologies, and there is no assurance that RXi will be able to successfully implement its business
plan. While RXi’s management collectively possesses substantial business experience, including experience in taking start-up
companies from early stage to an operational stage, there is no assurance that they will be able to manage RXi’s business effectively,
or that they will be able to identify, hire and retain any needed additional management or scientific personnel, to develop and
implement RXi’s product development plans, obtain third-party contracts or any needed financing, or achieve the other components of
RXi’s business plan.
The Approach RXi is Taking to Discover and Develop Novel Therapeutics Using RNAi is Unproven and May Never Lead to
Marketable Products
The RNAi technologies that RXi has licensed from UMMS have not yet been clinically tested by RXi or by us, nor are we aware of
any clinical trials having been completed by third parties involving similar technologies. To date, neither we nor any other company
has received regulatory approval to market therapeutics utilizing RNAi. The scientific discoveries that form the basis for RXi’s 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 by RXi 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. RXi may spend large amounts of money trying to solve these issues, and never succeed in doing so. In addition, any
compounds that RXi develops 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 even harmful ways.
RXi May Be Unable to Protect Its Intellectual Property Rights Licensed From UMMS or May Need to License Additional
Intellectual Property from Others.
The assets we contributed to RXi include a non-exclusive license to the fundamental Fire and Mello patent owned by UMMS and
the Carnegie Institution of Washington, which claims various aspects of gene
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silencing, or genetic inhibition by double-stranded RNA, but there can be no assurance that this patent or other pending applications or
issued patents belonging to its patent family will withstand possible legal challenges or otherwise protect the covered technologies
from competition. Therapeutic applications of gene silencing technology and other technologies that RXi licenses from UMMS are
also claimed in a number of UMMS pending patent applications, but there can be no assurance that these applications will result in
any issued patents or that those patents would withstand possible legal challenges or protect RXi’s technologies from competition. We
are aware of a number of third party-issued patents directed to various particular forms and compositions of RNAi-mediating
molecules, and therapeutic methods using them, that RXi will not use. Third parties may, however, hold or seek to obtain additional
patents that could make it more difficult or impossible for RXi to develop products based on the gene silencing technology that RXi
has licensed.
RXi has entered into an invention disclosure agreement with UMMS under which UMMS has agreed to disclose to RXi certain
inventions it makes and to give RXi the exclusive right to negotiate licenses to the disclosed technologies. There can be no assurance,
however, that any such inventions will arise, that RXi will be able to negotiate licenses to any inventions on satisfactory terms, or at
all, or that any negotiated licenses will prove commercially successful.
RXi may need to license additional intellectual property rights from third parties in order to be able to complete the development or
enhance the efficacy of its product candidates or avoid possible infringement of the rights of others. There is no assurance that RXi
will be able to acquire any additional intellectual property rights on satisfactory terms, or at all.
RXi May Not Be Able to Obtain Sufficient Financing
In order to retain the 2007 UMMS licenses and effectuate the new UMMS invention disclosure agreement, RXi is required to
obtain significant funding in the coming few months. Although CytRx has the resources to provide that funding, if necessary, CytRx is
not committed to do so, and RXi has no commitments or arrangements for any third-party financing. The loss of the 2007 UMMS
licenses and new UMMS invention disclosure agreement could have a material adverse effect on the market price of our common
stock and could materially and adversely affect RXi’s ability to develop the RNAi technologies that we contributed to RXi.
Following the initial funding, RXi will require substantial additional financing in the future in connection with its RNAi research
and development activities and any commercialization of its products. We contributed all of our RNAi-related technologies to RXi in
order to accelerate the development and commercialization of drugs based upon these and RXi’s other RNAi technologies. Although
we believe that this will facilitate obtaining additional financing to pursue RXi’s RNAi development efforts, RXi has no commitments
or arrangements for any financing, and there is no assurance that it will be able to obtain any future financing.
Under our agreement with RXi and its other current stockholders, with some exceptions, CytRx will have preemptive rights to
acquire a portion of any new securities sold or issued by RXi so as to maintain our percentage ownership of RXi. Depending upon the
terms and provisions of any proposed sale of new securities by RXi, we may be unable or unwilling to exercise our preemptive rights,
in which event our percentage ownership of RXi will be diluted. In order to maintain our percentage ownership of RXi, we may need
to obtain our own financing, which may or may not be available to us on satisfactory terms, or at all.
We Will Be Required To Dispose of Some of Our RXi Shares, and May Not Be Able To Do So On Attractive Terms
Following RXi’s initial funding, we have agreed under our letter agreement with UMMS and our separate stockholders agreement
with RXi and its other current stockholders to reduce our share of ownership of RXi to less than a majority of the outstanding voting
power as soon as reasonably practicable. We may seek to dispose of a portion of our RXi shares through a dividend or distribution of
such shares to our stockholders, a sale or other disposition to one or more third parties, or other means. Any proposed dividend or
other distribution to our stockholders of RXi shares would be subject to SEC rules and the requirements of the
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Delaware General Corporation Law. We may be unable to comply with these rules and requirements, or may experience delays in
complying. Any such dividend or distribution also would likely be taxable to our stockholders. We have no agreement, understanding
or arrangement with respect to the possible disposition of any of our RXi shares.
RXi Will Retain Discretion Over Its Use of Any Funds That We Provide To It
Although RXi currently is a majority-owned subsidiary of ours, we do not control the day-to-day operations of RXi. Accordingly,
all funds received by RXi, whether or not from us, will be used by RXi in any manner its management deems appropriate, including
for its own working capital and general corporate purposes, including the payment of salaries and employee expenses of its officers
and other employees, amounts called for under the UMMS licenses and invention disclosure agreement, and for other costs and
expenses of its RNAi research and development activities. Our interests will be represented by two members of the board of directors
of RXi who may be able to influence RXi’s decisions regarding the use of RXi’s funds and any proceeds we contribute to RXi.
However, we will have no right to control RXi’s use of its funds.
We Will Not Control RXi, And The Officers, Directors and Other RXi Stockholders May Have Interests That Are Different
From Ours
We have entered into a letter agreement with UMMS and a separate agreement with RXi and its other current stockholders under
which we agree during the term of RXi’s new licenses from UMMS to vote our shares of RXi common stock for the election of
directors of RXi and to take other actions to ensure that a majority of the RXi board of directors are independent of us. These
agreements will become effective only upon RXi’s initial funding. Upon the initial funding, if we own at any time a majority of the
outstanding voting power of RXi, we have agreed that we will reduce our ownership to less than a majority as soon as reasonably
practicable. At any time at which we own less than a majority of the voting power RXi, we will not be able to solely determine the
outcome of matters submitted to a vote of RXi stockholders. The other stockholders of RXi also may have interests that are different
from ours. Accordingly, RXi may engage in actions or develop its business and operations in a manner that we believe are not in our
best interests.
Products Developed by RXi Could Eventually Compete With Our Products For ALS, Type 2 Diabetes and Obesity and Other
Disease Indications
RXi has determined to focus its initial efforts on developing an RNAi therapeutics for the treatment of a specific form of ALS
caused by a defect in the SOD1 gene. Although arimoclomol is being developed by CytRx for all forms of ALS, it is possible that any
products developed by RXi for the treatment of ALS could compete with any ALS products that CytRx may develop. RXi also plans
to pursue the development of RNAi therapeutics for the treatment of obesity and type 2 diabetes, which could compete with any
products that CytRx may develop for the treatment of these diseases. The potential commercial success of any products that CytRx
may develop for these and other diseases may be adversely effected by competing products that RXi may develop.
RXi Will Be Subject to Competition, and It May Not Be Able To Compete Successfully
A number of medical institutions and pharmaceutical companies are seeking to develop products based on gene silencing
technologies. Companies working in this area include Alnylam Pharmaceuticals, Sirna Therapeutics (which was recently acquired by
Merck), Acuity Pharmaceuticals, Nastech Pharmaceutical Company Inc., Nucleonics, Inc., Tacere Therapeutics Inc. and Benitec Ltd.
and a number of the multinational pharmaceutical companies. These competitors have substantially greater research and development
capabilities and financial, scientific, technical, manufacturing, marketing, distribution, and other resources than RXi, and RXi may not
be able to compete successfully.
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Risks Associated with Our Common Stock
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. We recently extended the stockholder rights plan through April 2017. 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 means 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.
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 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 and Our Private Financings May
Adversely Affect the Trading Price of Our Common Stock
As of February 28, 2007, there were outstanding stock options and warrants to purchase approximately 23.4 million shares of our
common stock at exercise prices ranging from $0.20 to $2.70 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. Warrants to purchase approximately 2.8 million shares contain anti-dilution
provisions that are triggered upon any issuance of securities by us below the prevailing market price of our common stock. Warrants
to purchase approximately 23.4 million shares contain anti-dilution provisions pertaining to dividends or distributions with respect to
our common stock that could be triggered if we were to make a dividend or distribution of RXi shares while the warrants remain
outstanding. In the event that these 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.
25
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Since 2003, we have registered with the SEC for resale by the holders a total of approximately 51.1 million outstanding shares of
our common stock and an additional approximately 22.6 million shares of our common stock issuable upon exercise of options and
warrants. The availability for public resale of these various shares, as well as actual resales 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.
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 ranged from $0.87 to $5.49 per share during the 52-week period ended March 23, 2007,
and may continue to experience significant volatility from time to time. Factors such as the following may affect such volatility:
•
•
•
•
•
•
•
•
announcements of regulatory developments or technological innovations by us or our competitors;
changes in our relationship with our licensors and other strategic partners;
changes in our ownership or other relationships with RXi;
our quarterly operating results;
developments in patent or other technology ownership rights;
public concern regarding the safety of our products;
government regulation of drug pricing; and
other factors which may affect our stock price are general changes in the economy, the financial markets or the
pharmaceutical or biotechnology industries.
Item 2. PROPERTIES
Our headquarters are located in leased facilities in Los Angeles, California. The lease covers approximately 4,700 square feet of
office space and expires in June 2008.
We also lease approximately 6,900 square feet of office and laboratory space in Worcester, Massachusetts, which CytRx shares
with RXi. The lease expires in December 2007. Our headquarters and laboratory facilities are sufficient for our current purposes.
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.
26
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is 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:
Fiscal Year 2007:
First Quarter through March 23
Fiscal Year 2006:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year 2005:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
High
Low
$5.49
$1.74
$2.04
$1.94
$2.30
$1.92
$1.21
$0.87
$1.06
$1.01
$1.13
$1.22
$1.44
$2.07
$0.85
$0.76
$0.75
$1.14
On March 23, 2007, there were approximately 8,800 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.
Dividends
We have not paid any dividends since our inception and do not contemplate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Since the last current report on Form 8-K that we filed with the Securities and Exchange Commission on February 28, 2007, we
have issued a total of 652,734 shares of our common stock in unregistered sales of our equity securities. The 652,734 shares were
issued to four holders of warrants in connection with the exercise by such warrant holders of outstanding common stock purchase
warrants. The 652,734 shares were issued for the following consideration: 5,000 shares were issued upon the payment of the $2.25 per
share warrant exercise price; 136,504 shares were issued upon the payment of the $2.00 per share warrant exercise price; 43,563
shares were issued upon the payment of the $1.86 per share warrant exercise price; 175,000 shares were issued upon the payment of
the $1.69 per share warrant exercise price, and 292,667 shares were issued upon the payment of the $1.54 per share warrant exercise
price. We received approximately $1.1 million in the aggregate upon the exercise of the foregoing warrants. Our issuance of the
652,734 shares of our common stock upon exercise of the foregoing warrants was exempt from registration under the Securities Act of
1933 pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.
27
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Comparison of Cumulative Total Returns
The following line graph presentation compares cumulative total stockholder returns of CytRx with the Nasdaq Stock Market Index
and the Nasdaq Pharmaceutical Index (the “Peer Index”) for the five-year period from December 31, 2001 to December 31, 2006. The
graph and table assume that $100 was invested in each of CytRx’s common stock, the Nasdaq Stock Market Index and the Peer Index
on December 31, 2001, and that all dividends were reinvested. This data was furnished by Zacks Investment Research.
Comparison of Cumulative Total Returns
CytRx Corporation
Nasdaq Stock Market Index
Nasdaq Pharmaceutical Index
2003
286
104
95
December 31,
2004
216
113
101
2005
158
116
111
2006
294
128
109
2002
38
69
65
28
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Equity Compensation Plans
The following table sets forth certain information as of December 31, 2006, 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:
Outstanding warrants(1)
Total:
(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
9,167
—
100,041
6,749,000
3,783,315
10,641,523
$
$
1.00
—
1.02
1.66
1.56
1.64
(c)
Number of Securities
Remaining Available
for Issuance Under
Equity
Compensation
Plans (Excluding
Securities
Reflected in Column (a))
—
—
29,517
2,822,750
—
2,852,267
(1) The warrants shown were issued as compensation for various services and do not include warrants sold in private placement
transactions. The material terms of such warrants were determined based upon arm’s-length negotiations with the recipients of
the warrants. The warrant exercise prices approximated the market price of our common stock at or about the date of grant, and
the warrant terms range from 5 to 10 years from the grant date. The warrants contain customary anti-dilution adjustments in the
event of a stock split, reverse stock split, reclassification or combination of our outstanding common stock and similar events.
29
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Item 6. SELECTED FINANCIAL DATA
General
The following selected financial data are derived from our audited financial statements. Our financial statements for 2006, 2005
and 2004 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”
sections of this Annual Report. Financial information provided below has been rounded to the nearest thousand.
2006
2005
(restated)
2004
2003
2002
Statement of Operations Data:
Revenues
Recruiting revenues
License fees
Grant income
Service revenues
Total revenues
Deemed dividend for anti-dilution
adjustments made to outstanding
common stock warrants
Net loss applicable to common
stockholders
Basic and diluted loss per share
applicable to common stock
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total stockholders’ equity
Factors Affecting Comparability
$
$
—
101,000
106,000
1,859,000
2,066,000
(488,000)
$ (17,240,000)
$
(0.25)
$ 30,381,000
$ 31,636,000
5,150,000
$
$
$
$
$
$
$
$
—
101,000
—
83,000
184,000
$
$
—
428,000
—
—
428,000
$
$
—
94,000
—
—
94,000
$
23,000
1,051,000
46,000
—
$ 1,120,000
(1,076,000)
—
—
—
(16,169,000)
$ (16,392,000)
$ (17,845,000)
$ (6,176,000)
(0.28)
8,299,000
9,939,000
7,208,000
$
$
$
$
(0.48)
$
(0.65)
$
(0.39)
1,988,000
5,049,000
1,595,000
$ 11,644,000
$ 12,324,000
$ 10,193,000
$
387,000
$ 9,284,000
$ 7,959,000
In August 2006, we received approximately $24.5 million in marketable securities (which were sold by us for approximately
$24.3 million) from the privately-funded ALS Charitable Remainder Trust, or ALSCRT, in exchange for our commitment to continue
research and development of arimoclomol and other potential treatments for ALS and a one percent royalty from worldwide sales of
arimoclomol. We have recorded the value received under the arrangement as deferred service revenue. We are recognizing the service
revenue using the proportional performance method of revenue recognition, under which service revenue will be recognized as a
percentage of actual research and development expense. During 2006, we recognized approximately $1.8 million of service revenue
related to this transaction.
Our Statement of Operations as of and for the year ended December 31, 2006 reflects the impact of SFAS 123(R). In accordance
with the modified prospective transition method, our results of operations for prior periods have not been restated to reflect the impact
of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was
$1.2 million. As of December 31, 2006, there was $952,000 of unrecognized compensation cost related to outstanding options that is
expected to be recognized as a component of our operating expenses through 2009. Compensation costs will be adjusted for future
changes in estimated forfeitures.
30
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
On March 2, 2006, we completed a $13.4 million private equity financing in which we issued 10,650,795 shares of our common
stock and warrants to purchase an additional 6,070,953 shares of our common stock at an exercise price of $1.54 per share. Net of
investment banking commissions, legal, accounting and other expenses related to the transaction, we received approximately $12.4
million of proceeds.
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 connection with our adjustment to the exercise terms of certain outstanding warrants to purchase common stock on March 2,
2006 and January 20, 2005, we recorded deemed dividends of $488,000 and $1.1 million, respectively. These deemed dividends are
reflected as an adjustment to net loss for the first quarter of 2006 and the year ended 2005, as restated, to arrive at net loss applicable
to common stockholders on the consolidated statement of operations and for purposes of calculating basic and diluted earnings per
shares.
In the fourth quarter of 2004, we completed our acquisition of all of the clinical, pharmaceutical and related intellectual property
assets of Biorex Research & Development, RT. We paid Biorex $3.0 million in cash for the assets and incurred approximately
$500,000 in expenses related to the transaction. The assets acquired from Biorex include three drug candidates, including
arimoclomol, that had completed the Europeans’ equivalent of a Phase I clinical trial, as well as a molecular library. With the
assistance of an outside appraiser, we evaluated the assets acquired from Biorex and their current state of development, the
severability of the assets, and alternative uses of the compounds. Based on our evaluation, the $3.0 million value allocated to the three
drug candidates was written off at the time of acquisition as in-process research and development and the $500,000 value attributable
to the compound molecular library was included in our assets at December 31, 2004.
31
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 the caption “Risk Factors” and elsewhere in this
Annual Report.
Overview
CytRx Corporation
CytRx is a biopharmaceutical research and development company engaged in developing human therapeutic products based
primarily upon our small molecule molecular “chaperone” co-induction technology. We recently completed a Phase IIa clinical trial of
our lead small molecule product candidate, arimoclomol, for the treatment of amyotrophic lateral sclerosis, which is commonly known
as ALS or Lou Gehrig’s disease. We plan to initiate a Phase IIb trial of arimoclomol for this indication during the second half of 2007,
subject to clearance from the U.S. Food and Drug Administration. We also are pursuing clinical development of our other small
molecule product candidates, as well as a novel HIV DNA + protein vaccine. We previously entered into strategic alliances with
respect to the development of products using our other technologies.
We also are engaged in developing therapeutic products based upon ribonucleic acid interference, or RNAi, which has the potential
to effectively treat a broad array of diseases by interfering with the expression of targeted disease-associated genes. In order to fully
realize the potential value of our RNAi technologies, in January 2007 we transferred to RXi Pharmaceuticals Corporation, our
majority-owned subsidiary, substantially all of our RNAi-related technologies and assets. RXi will focus solely on developing and
commercializing therapeutic products based upon RNAi technologies for the treatment of human diseases, including
neurodegenerative diseases, cancer, type 2 diabetes and obesity.
We have relied primarily upon selling equity securities and upon proceeds received upon the exercise of options and warrants and,
to a much lesser extent, upon payments from our strategic partners and licensees, to generate funds needed to finance our business and
operations. At December 31, 2006, we had cash and cash equivalents of $30.4 million, and as of March 23, 2007, we had received
approximately $11.0 million in connection with the exercise of warrants and options since December 31, 2006. We believe that we
have adequate financial resources to support our currently planned level of operations into the first quarter of 2009, which expectation
is based in part on projected expenditures for 2007 of: $6.5 million for our Phase IIb trial for arimoclomol for ALS and related studies,
$3.9 million for our other ongoing and planned preclinical programs, $8.8 million for general and administrative expenses, and
$1.6 million to provide interim funding for RXi’s first few months of operations. We estimate RXi will expend approximately
$6.2 million on development activities for 2007 (including approximately $400,000 in payments under agreements with UMMS,
$3.2 million in other research and development expenses and $2.6 million in general and administrative expenses). If, in addition to
the interim funding for which we have already budgeted, we elect to provide RXi with all or a substantial portion of its initial funding
for 2007 and beyond in the coming few months, and if we are unable to raise funds in the future to replenish any amounts that we
provide to RXi, our current working capital will be depleted accordingly. We have no significant revenue, and we expect to have no
significant revenue and to continue to incur significant losses over the next several years. Our net losses may increase from current
levels primarily due to expenses related to our ongoing and planned clinical trials, research and development programs, possible
technology acquisitions, and other general corporate activities. We anticipate, therefore, that our operating results will fluctuate for the
foreseeable future and period-to-period comparisons should not be relied upon as predictive of the results in future periods.
32
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
RXi Pharmaceuticals Corporation
In addition to transferring to RXi our RNAi-related technologies and assets, we have recently entered into a number of agreements
relating to RXi as described in Part I, Item 1, of this Annual Report under the caption “RXi Pharmaceuticals Corporation – Recent
Developments,” which will affect our future financial condition and results of operations.
On January 8, 2007, we entered into a letter agreement with RXi under which RXi has agreed to reimburse us, following its initial
funding, for all organizational and operational expenses incurred by us in connection with the formation, initial operations and funding
of RXi. As of February 28, 2007, we had advanced approximately $592,000 to RXi for which it will be obligated to reimburse us.
We have agreed to reduce our share of ownership of RXi to less than a majority of the outstanding voting power as soon as
reasonably practicable following RXi’s initial funding in the coming few months. In order to reduce our ownership interest in RXi, we
may seek to dispose of a portion of our RXi shares through a dividend or distribution of such shares to our stockholders, a sale or other
disposition to one or more third parties, or other means. We have no agreement, understanding or arrangement with respect to the
possible disposition of any of our RXi shares. Any proposed dividend or other distribution to our stockholders of RXi shares would be
subject to SEC rules and the requirements of the Delaware General Corporation Law. We may be unable to comply with these rules
and requirements, or may experience delays in complying. Any such dividend or distribution may be taxable to CytRx. There is no
assurance that we will be able to satisfy our obligations to UMMS to reduce our ownership of RXi in a manner that would be
advantageous to us or our stockholders.
RXi began operating as a stand-alone company with its own management, business, and operations in January 2007. Following
RXi’s initial funding, we have agreed under our letter agreement with UMMS and our separate stockholders agreement with RXi and
its other current stockholders to reduce our share of ownership of RXi to less than a majority of the outstanding voting power as soon
as reasonably practicable. During the time that RXi is majority-owned, the consolidated financial statements of CytRx will include
100% of the assets and liabilities of RXi and the ownership of the interests of the minority shareholders will be recorded as “minority
interests.” In the future, if CytRx owns more than 20% but less than 50% of the outstanding shares of RXi, CytRx would account for
its investment in RXi using the equity method. Under the equity method, CytRx would record its pro-rata share of the gains or losses
of RXi against its historical basis investment in RXi. For 2007, we expect RXi’s research and development expenses will be
approximately $6.2 million, which, if RXi were to remain a consolidated subsidiary of CytRx, would result in an increase in our
consolidated research and development expenses and a corresponding decrease in our consolidated cash position.
Research and Development
Expenditures for research and development activities related to continuing operations were $9.8 million, $9.1 million and
$9.0 million for the years ended December 31, 2006, 2005 and 2004, respectively, with research and development expenses
representing approximately 50%, 58% and 53% of our total expenses for the years ended December 31, 2006, 2005 and 2004,
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. Research and development expenses are further discussed
below under “Critical Accounting Policies and Estimates” and “Results of Operations.”
We presently expect to incur expenses of approximately $6.5 million for our Phase II clinical program with arimoclomol for ALS
during 2007, and an additional $10.3 million in 2008 and $10.0 million in 2009. The actual cost of our clinical program for ALS could
differ significantly from our current projections due to any additional requirements imposed by the FDA 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.
33
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 our molecular
chaperone co-induction technology and RXi’s RNAi-related technologies. The successful development of any product candidate 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;
and
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 our business is 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, 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 of the Notes to Financial Statements included in this Annual Report.
We believe the following critical accounting policies are affected by our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
34
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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
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.
In August 2006, we received approximately $24.5 million in marketable securities (which were sold by us for approximately
$24.3 million in cash) from the privately-funded ALS Charitable Remainder Trust (ALSCRT) in exchange for the commitment to
continue research and development of arimoclomol and other potential treatments for ALS and a one-percent royalty in the worldwide
sales of arimoclomol. Under the arrangement, we retain the rights to any products or intellectual property funded by the arrangement
and the proceeds of the transaction are non-refundable. Further, the ALSCRT has no obligation to provide any further funding to us.
We have analyzed the transaction and concluded that, due to the research and development components of the transaction, it is
properly accounted for under SFAS No. 68, Research and Development Arrangements. Accordingly, we have recorded the value
received under the arrangement as deferred service revenue and will recognize service revenue using the proportional performance
method of revenue recognition, meaning that service revenue is recognized on a dollar for dollar basis for each dollar of expense
incurred for the research and development of arimoclomol and then the development of other potential ALS treatments. We believe
that this method best approximates the efforts expended related to the services provided. We adjust our estimates quarterly as better
information becomes available. As of December 31, 2006, we recognized approximately $1.8 million of service revenue related to this
transaction.
We adjust our estimates of ALS-related research and development costs incurred on a quarterly basis. Any significant change in
ALS-related research and development expense in any particular quarterly or annual period will result in a change in the recognition
of revenue for that period and consequently affect the comparability or revenue from period to period.
Research and Development Expenses
Research and development expenses consist of costs incurred for direct and overhead-related research expenses and are expensed
as incurred. Research and development expenses include costs to acquire technologies which are utilized in research and development
and which have no alternative future use. Until technological feasibility has been established, technology developed for use in our
products also is expensed as incurred.
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.
Share-based Compensation
Our share-based employee compensation plans are described in Note 13 of the Notes to our Financial Statements. On January 1,
2006, we adopted SFAS 123(R), “Accounting for Stock-based Compensation, revised 2004” (“123(R)”), which requires the
measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee
directors, and consultants, including employee
35
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
stock options. SFAS 123(R) differs from our previous accounting under APB 25 and SFAS 123 for periods prior to January 2006. In
March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 107, “Share-Based Payment,” relating
to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).
Our Statement of Operations as of and for the year ended December 31, 2006 reflects the impact of SFAS 123(R). In accordance
with the modified prospective transition method, our results of operations for prior periods have not been restated to reflect the impact
of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was
$1.2 million. As of December 31, 2006, there was $952,000 of unrecognized compensation cost related to outstanding options that is
expected to be recognized as a component of our operating expenses through 2009. Compensation costs will be adjusted for future
changes in estimated forfeitures.
The fair value of each option grant is estimated using the Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in 2006, 2005 and 2004, respectively: risk-free interest rates of 4.9%, 4.1% and 3.7%, respectively;
expected volatility of 111.6%, 109.0% and 117.0%, respectively; expected life of the options of 6.0 years, 8.0 years and 8.0 years,
respectively; and no dividends made in any year. Based on historical experience, for 2006, we estimated an annualized forfeiture rate
of 10% for options granted to employees and 3% for options granted to senior management and directors. For 2005 and 2004, we
accounted for forfeitures on an as-occurred basis. Any change in actual forfeitures from our historical experience could result in an
adjustment of our forfeiture estimate and a corresponding change in the amount of compensation expenses recorded in any single
quarterly or annual period. The weighted average fair value of stock options granted during 2006, 2005 and 2004 was $1.11, $0.95 and
$1.73, respectively.
Prior to January 1, 2006, we accounted for share-based compensation under the recognition and measurement provisions of
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations for all awards
granted to employees. Under APB 25, when the exercise price of options granted to employees under these plans equals or exceeds the
market price of the common stock on the date of grant, no compensation expense is recorded. When the exercise price of options
granted to employees under these plans is less than the market price of the common stock on the date of grant, compensation expense
is recognized over the vesting period.
We account for equity instruments issued to non-employees in accordance with the provisions of SFAS 123(R) 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, which require that such equity instruments be recorded at their fair value
on the measurement date. The measurement of share-based compensation generally is subject to periodic adjustment as the underlying
equity instruments vest. Non-employee share-based compensation charges generally are amortized over the vesting period on a
straight-line basis. In certain circumstances, however, option grants to non-employees are immediately vested and are therefore
recorded as an expense if the service has been provided, or capitalized as a prepaid asset and amortized over the period of service if
the services has not been provided as of the vesting date. Additionally, in our estimates, we consider the achievement of performance
by non-employee service providers at the grant date.
We have adopted the simplified method provided in SFAS 123(R) to use for calculating the beginning balance of the additional
paid in capital pool, or APIC pool, related to the tax effects of employee stock-based compensation, and to determine the subsequent
impact on the APIC pool and Statement of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123(R). We have not recognized excess tax benefits related to employee stock-based
compensation and, therefore, do not currently have an APIC pool.
In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
(“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration
under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument
or other agreement, should be
36
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. For registration
payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of EITF
00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. We have elected
to reflect early adoption of FSP 00-19-2 in our 2006 financial statements, and the adoption did not have an effect on our financial
statements. In adopting FSP 00-19-2, we concluded that it was not probably that we would be required to pay any penalties under the
existing registration rights agreements entered into in January 2005 and March 2006.
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.
Earnings Per 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 30.2 million shares, 24.7 million shares
and 14.5 million shares at December 31, 2006, 2005 and 2004, respectively. In connection with our adjustment to the exercise terms of
certain outstanding warrants to purchase common stock on March 2, 2006 and January 20, 2005, we recorded deemed dividends of
$488,000 and $1.1 million, respectively. These deemed dividends are reflected as an adjustment to net loss for the first quarter of 2006
and the year ended 2005, as restated, to arrive at net loss applicable to common stockholders on the consolidated statement of
operations and for purposes of calculating basic and diluted earnings per shares.
Quarterly Financial Data
The following table sets forth unaudited statement of operations data for each quarter during our most recent two 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.
2006
Total revenues
Net loss
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants
Net loss applicable to common stockholders
Basic and diluted loss per share applicable to common
stock
2005
Total revenues
Net loss
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants
Net loss applicable to common stockholders
Basic and diluted loss per share applicable to common
stock
Quarter Ended
March 31
June 30
September 30
December 31
(In thousands, except per share data)
(restated)
$
$
$
$
$
61
(4,166)
$
—
(5,465)
(488)
(4,654)
—
$ (5,465)
(0.07)
$
(0.08)
(restated)
1
(3,527)
$
—
(4,509)
(1,076)
(4,603)
—
$ (4,509)
(0.09)
$
(0.08)
$
37
$
$
$
$
$
$
776
(2,972)
—
(2,972)
(0.04)
10
(3,492)
—
(3,492)
(0.06)
$
$
$
$
$
$
1,229
(4,148)
—
(4,148)
(0.06)
173
(3,565)
—
(3,565)
(0.06)
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Quarterly and yearly loss per share amounts are computed independently of each other. Therefore, the sum of the per share
amounts for the quarters may not equal the per share amounts for the year. In 2006, we adopted SFAS 123(R), and incurred
$1.2 million in employee non-cash compensation expense. No corresponding expenses were recorded in 2005 or 2004.
In connection with our adjustment to the exercise terms of certain outstanding warrants to purchase common stock on March 2,
2006 and January 20, 2005, we recorded deemed dividends of $488,000 and $1.1 million, respectively. These deemed dividends are
reflected as an adjustment to net loss for the first quarter of 2006 and the year ended 2005, as restated, to arrive at net loss applicable
to common stockholders on the consolidated statement of operations and for purposes of calculating basic and diluted earnings per
shares. Our quarterly financial data has been restated to reflect the impact of the deemed dividend upon the calculation of basic and
diluted earnings per share for the three-month periods ended March 31, 2006 and 2005, respectively.
Liquidity and Capital Resources
General
At December 31, 2006, we had cash and cash equivalents of $30.4 million and total assets of $31.6 million compared to
$8.3 million and $9.9 million, respectively, at December 31, 2005. Our working capital totaled $20.3 million at December 31, 2006,
compared to $6.3 million at December 31, 2005.
We have relied primarily upon selling equity securities and upon proceeds received upon the exercise of options and warrants and,
to a much lesser extent, upon payments from our strategic partners and licensees, to generate funds needed to finance our business and
operations. As of March 23, 2007, we also had received approximately $11.0 million in connection with the exercise of warrants and
options since December 31, 2006. We believe that we have adequate financial resources to support our currently planned level of
operations into the first quarter of 2009, which expectation is based in part on projected expenditures for 2007 of: $6.5 million for our
Phase IIb trial for arimoclomol for ALS and related studies, $3.9 million for our other ongoing and planned preclinical programs,
$8.8 million for general and administrative expenses, and $1.6 million to provide interim funding for RXi’s first few months of
operations. We estimate RXi will expend approximately $6.2 million on development activities for 2007 (including approximately
$400,000 in payments under agreements with UMMS, $3.2 million in other research and development expenses and $2.6 million in
general and administrative expenses). If, in addition to the interim funding for which we have already budgeted, we elect to provide
RXi with all or a substantial portion of its initial funding for 2007 and beyond in the coming few months, and if we are unable to raise
funds in the future to replenish any amounts that we provide to RXi, our current working capital will be depleted accordingly. We
anticipate it will take a minimum of three years and possibly longer for us to generate recurring revenue, and we will be dependent on
obtaining future financing until such time, if ever, as we can generate significant recurring revenue. We have no commitments from
third parties to provide us with any additional future financing, and may not be able to obtain future financing on favorable terms, or at
all.
RXi Initial Funding Requirements
UMMS may terminate the 2007 UMMS licenses and the new UMMS invention disclosure agreement with RXi will not become
effective unless RXi achieves a funding milestone in the coming few months. We are not obligated to provide RXi with any of the
initial funding, and neither CytRx nor RXi has any commitment or agreement from any source to provide funding to RXi. No
assurance can be given that RXi will, in fact, receive initial funding. In the event that RXi does not receive the initial funding either
from CytRx or one or more third parties in the coming few months, UMMS will be entitled to terminate the 2007 UMMS licenses and
the new UMMS invention disclosure agreement will not become effective. The loss of
38
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
the 2007 UMMS licenses and new UMMS invention disclosure agreement could have a material adverse effect on the market price of
our common stock. In that event, RXi’s ability to develop the RNAi technologies that we contributed to RXi also could be materially
and adversely affected.
In our letter agreement with UMMS and our separate stockholders agreement with RXi and its other current stockholders, we have
agreed to reduce our share of ownership of RXi to less than a majority of the outstanding voting power as soon as reasonably
practicable following RXi’s receipt of initial funding. In order to reduce our ownership interest in RXi, we may seek to dispose of a
portion of our RXi shares through a dividend or distribution of such shares to our stockholders, a sale or other disposition to one or
more third parties, or other means. We have no agreement, understanding or arrangement with respect to the possible disposition of
any of our RXi shares. Any proposed dividend or other distribution to our stockholders of RXi shares would be subject to SEC rules
and the requirements of the Delaware General Corporation Law. We may be unable to comply with these rules and requirements, or
may experience delays in complying. Any such dividend or distribution may be taxable to CytRx, and would likely be taxable to our
stockholders. There is no assurance that we will be able to satisfy our obligations to UMMS to reduce our ownership of RXi in a
manner that would be advantageous to us or our stockholders.
Discussion of 2006 Activities and Future Capital Requirements
Net loss for the year ended December 31, 2006 was $16.8 million, and cash provided from operating activities for that period was
$9.4 million.
The $9.4 million in cash provided from operating activities includes net proceeds of $24.3 million received from the ALS
Charitable Remainder Trust in August 2006 in connection with the sale of a one-percent royalty interest in our worldwide sales of
arimoclomol for ALS. Included in the net loss of $16.8 million is the $1.8 million of revenue recognized in 2006 in connection with
that sale. The remaining $22.5 million of the net proceeds from that sale were recorded as deferred revenues. Other non-cash items
included in our net loss necessary to reconcile cash provided from operating activities include a net change in assets and liabilities of
$1.4 million, $1.7 million in stock option expense related to options granted to employees and consultants, $263,000 related to the
issuance of stock pursuant to a license agreement with UMMS, $228,000 of depreciation and amortization expense and $3,000 of
retirements. Included in the $1.7 million in stock option expense related to options granted to employees and consultants is
$1.2 million of expenses for employee options recorded under SFAS 123(R), which we adopted in 2006, and accordingly no
corresponding amount was recorded in earlier periods.
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 were
primarily $586,000 of stock option expense related to options granted to consultants, 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 $1,977,000 of common stock, options and warrants issued in lieu of cash for general and administrative services,
as well as a net change in assets and liabilities of $570,000 and depreciation of $104,000. Additionally, we issued $388,000 of
common stock in lieu of cash in connection with certain license fees and $1.0 million of common stock in connection with research
and development activities, as well as a net change.
For the year ended December 31, 2006, only a small amount of cash was used in investing activities. For the year ended
December 31, 2005, the only significant investing activity was the redemption of an approximately $1.0 million certificate of deposit.
Other investing activities consisted primarily of the purchase of small amounts of computers and laboratory equipment. We expect
capital spending to increase during 2007 over our 2006 levels to support our increasing research and development efforts. In the year
ended December
39
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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.
Cash provided by financing activities for the year ended December 31, 2006 was $12.8 million compared to $19.8 million in the
year ended December 31, 2005. During 2006, we raised $12.4 million through the sale of common stock and an additional $359,000
as a result of the exercise of stock options and warrants. The decrease in cash provided from financing activities of $7.0 million is due
to a greater amount of cash being raised from the issuance of common stock in the year ended December 31, 2005. During the year
ended December 31, 2005, we raised $19.6 million through the sale of common stock. 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 $3.9 million private equity financing completed in October 2004.
We believe that we have adequate working capital to allow us to operate at our currently planned levels into the second quarter of
2009. We estimate RXi’s expenditures for 2007 will be approximately $5.1 million.
We may require additional capital in order to fund the completion of our Phase II clinical program for arimoclomol for the
treatment of ALS, and the other ongoing research and development related to the drug candidates acquired from Biorex in
October 2004. We spent $5.0 million on the arimoclomol clinical program in 2006, and we estimate that the overall program,
including the ongoing studies and the planned Phase IIb trial that we expect to initiate in the second half of 2007, subject to clearance
from the FDA, will require us to expend an additional $26.8 million. We expect to incur expenses of approximately $6.5 million in
2007, and $20.3 million thereafter over the following 12 to 18 months of the program. 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.
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. 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future
effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
Contractual Obligations
We acquire assets still in development and enter into research and development arrangements with third parties that often require
milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the
asset in development. Milestone payments may be required, contingent upon the successful achievement of an important point in the
development life-cycle of the pharmaceutical product (e.g., approval of the product for marketing by a regulatory agency). If required
by the arrangement, we may have to make royalty payments based upon a percentage of the sales of the pharmaceutical product in the
event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in
the table of contractual obligations.
40
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these
arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations in any
one period. In addition, these arrangements often give us the discretion to unilaterally terminate development of the product, which
would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound
successfully achieves clinical testing objectives. We also note that, from a business perspective, we view these payments as positive
because they signify that the product is successfully moving through development and is now generating or is more likely to generate
cash flows from sales of products.
Our current contractual obligations that will require future cash payments are as follows:
Non-Cancelable
Operating
Leases
Employment
Agreements
Research
and
Subtotal
Development
(In thousands)
(1)
534
138
26
10
5
713
$
$
(2)
1,735
876
490
240
120
3,461
$
$
$
$
2,269
1,014
516
250
125
4,174
(3)
$ 5,583
7,424
914
—
—
$13,921
Cancelable
License
Agreements
(4)
1,267
332
332
282
7,455
9,668
$
$
Subtotal
$
6,850
7,756
1,246
282
7,455
$ 23,589
Total
$ 9,119
8,770
1,762
532
7,580
$ 27,763
2007
2008
2009
2010
2011 and thereafter
Total
(1) Operating leases are primarily facility lease related obligations, as well as equipment and software lease obligations with third
party vendors.
(2) Employment agreement obligations include management contracts, as well as scientific advisory board member compensation
agreements.
(3) Research and development obligations relate primarily to our Phase IIb clinical trial for arimoclomol for ALS. Most of these
purchase obligations are cancelable.
(4) License agreements generally relate to our obligations for licenses with UMMS associated with RNAi, which we are developing
through our majority-owned RXi subsidiary. Included in the 2007 license obligations is an $800,000 payment that may be made
in cash or common stock of RXi to UMMS. We anticipate making that payment in common stock of RXi following RXi’s initial
funding.
License and Collaboration Agreements
In May 2006, we expanded our relationship with UMMS by entering into a new co-exclusive license agreement related to a patent
application for chemical modifications of RNAi invented by Tariq M. Rana, Ph.D. In consideration of that license, we made a cash
payment of $75,000 and, in December 2006, issued it a total of 150,000 shares of our common stock which were valued, for financial
statement purposes, at approximately $263,000.
On January 8, 2007, we entered into a Contribution Agreement with RXi under which we assigned and contributed to RXi
substantially all of our RNAi-related technologies and assets, including the license described above. The assigned assets consisted
primarily of our licenses from UMMS and from the Carnegie Institution of Washington relating to fundamental RNAi technologies, as
well as equipment situated at our Worcester, Massachusetts, laboratory. The licensed technologies include patent applications on
RNAi target sequences, chemical modifications and delivery to cells, field-specific licenses to a patent application on chemical
modification of RNAi, the “Tuschl I” patent, and our exclusive licenses to patent applications that
41
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
disclose gene targets for diabetes and obesity, including RIP140 (see, “Material Licenses and Other Agreements,” below). In
connection with the contribution of the licenses and other assets, RXi assumed primary responsibility for all payments to UMMS and
other obligations under the contributed licenses and assets.
In addition to the RNAi licenses and rights that we contributed to RXi, on January 10, 2007, RXi entered into three exclusive,
worldwide, sublicenseable licenses with UMMS for three different patent families and one non-exclusive, worldwide,
non-sublicensable license for a fourth patent family, which we refer to collectively as the “2007 UMMS licenses,” pursuant to which
UMMS granted RXi rights under certain UMMS patent applications to make, use and sell products related to applications of RNAi
technologies. The 2007 UMMS licenses include an exclusive license covering nanotransporters, which may be effective in the
delivery of RNAi compounds, as well as methods and potential compounds for the potential treatment of ALS that can be delivered
locally to the central nervous system.
As consideration for the 2007 UMMS licenses, we paid UMMS an aggregate up-front fee of $75,000 and reimbursed UMMS
$103,000 for previously incurred patent expenses. RXi also agreed under the 2007 UMMS licenses to undertake to complete an initial
funding of RXi in the coming few months. Upon the completion of RXi’s initial funding, RXi will be obligated to pay UMMS an
additional license fee of $175,000 and issue to UMMS an aggregate of $1,600,000 of RXi common stock that is to be valued on a per
share basis for this purpose based on the valuation of RXi in its initial funding.
The foregoing license agreements with UMMS require us to make aggregate payments of up to $300,000 in 2007. In subsequent
periods, we will be required to make aggregate payments ranging from $250,000 to $1.7 million per year to maintain the licenses. We
are obligated to pay legal expenses for the prosecution of patents licensed from UMMS, which we anticipate will be approximately
$175,000 during 2007, and to make milestone payments to UMMS based upon our progress in the clinical development and marketing
of products utilizing the technologies licensed from UMMS. In the event that we were to successfully develop a product in each of the
categories of obesity/type 2 diabetes and ALS, these milestone payments could aggregate up to $27.4 million. We also would be
required to pay royalties to UMMS based on the net sales of those products. The actual milestone payments will vary, perhaps
significantly, based upon the milestones we achieve and the products, if any, we develop.
On January 10, 2007, RXi also entered into an invention disclosure agreement with UMMS pursuant to which UMMS is obligated
for a three-year period to disclose to RXi any unrestricted inventions conceived or reduced to practice by UMMS related to therapeutic
applications of RNAi technologies. Upon completion of RXi’s initial funding, RXi will be obligated to pay UMMS $100,000 in cash,
and additionally either pay UMMS another $800,000 in cash or issue to UMMS $800,000 of RXi common stock that is to be valued
on a per share basis for this purpose based on the valuation of RXi in the initial funding. RXi also will be obligated to pay UMMS
$100,000 on each of the first and second anniversaries of the effective date of the invention disclosure 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 $108,000.
Because the technologies licensed from UMMS and Imperial College UMMS had not achieved technological feasibility at the time
that we licensed them, had no alternative future uses and, therefore, had no separate economic value, the total cost of all cash
payments and stock issued for acquisition of the technology was expensed as research and development.
42
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Net Operating Loss Carryforward
At December 31, 2006, we had United States federal and state net operating loss carryforwards of $87.2 million and $28.0 million,
respectively, available to offset against future taxable income, which expire in 2007 through 2026. As a result of a change in-control
that occurred in our shareholder base in July 2002, approximately $51.8 million in federal net operating loss carryforwards became
limited in their availability to $747,000 annually. The remaining $35.4 million in federal net operating loss carryforwards, and the
$27.4 million in state net operating loss carryforwards, are unrestricted. Additionally, due to the change-in-control, approximately
$6.3 million of research and development tax credits will not be available for utilization and were written off. As of December 31,
2006, we also had research and development and orphan drug credits for federal and state purposes of approximately $2.1 million and
$200,000, respectively, available for offset against future income taxes, which expire in 2007 through 2026. 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 $16.8 million, $15.1 million and $16.4 million during the years ended December 31,
2006, 2005 and 2004, respectively.
We recognized $1.9 million in service revenues, of which $1.8 million resulted from our $24.3 million sale to the ALS Charitable
Remainder Trust of a one-percent royalty interest in the worldwide sales of arimoclomol in the year ended December 31, 2006.
Additionally, during 2006 we earned an immaterial amount of license fees and grant revenue. In the year ended December 31, 2005,
we earned an immaterial amount of service and license fee revenue. All future licensing fees under our current licensing agreements
are dependent upon successful development milestones being achieved by the licensor. During fiscal 2007, we are not anticipating the
receipt of any significant service or licensing fees, although we estimate that we will recognize an additional $6.5 million in service
revenues from that arimoclomol royalty transaction. We will continue to recognize the balance of the deferred revenue recorded from
the royalty transaction with the ALS Charitable Remainder Trust based on actual research and development costs incurred over the
development period of our arimoclomol research.
Research and Development
Research and development expense
Non-cash research and development expense
Employee stock option expense
Acquired in-process research and development expense
2006
$ 8,858
674
249
—
$ 9,781
Years Ended December 31,
2005
(In thousands)
$ 8,867
220
—
—
$ 9,087
2004
$ 4,624
1,388
—
3,022
$ 9,034
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.
Research and development expenses incurred during 2006 and 2005 relate primarily to (i) 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
43
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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. All research and development
costs related to the activities of RXi and our laboratory were expensed.
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 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 sometimes 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 $700,000, $200,000, and $1.4 million in this regard during 2006, 2005, and 2004, respectively. With our adoption of SFAS
123(R) during 2006, we recorded $249,000 of employee stock option expense. No corresponding expense existed in 2005 or 2004.
In 2007, 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 and our continued development of our RNAi assets by our
majority-owned subsidiary RXi. We currently estimate that the Phase IIb trial for arimoclomol for ALS and related studies will cost
approximately $26.8 million over the 24 to 30 months beginning December 2006. Additionally, we estimate RXi will expend
approximately $6.2 million on development activities for 2007.
General and administrative expenses
General and administrative expenses
Stock, stock option and warrant expenses to non-employees and consultants
Employee stock option expense
2006
$ 8,622
60
975
$ 9,657
Years Ended December 31,
2005
(In thousands)
$ 6,057
367
—
$ 6,424
2004
$ 5,924
1,977
—
$ 7,901
General and administrative expenses include all administrative salaries and general corporate expenses, including legal expenses
associated with the prosecution of our intellectual property. Our general and administrative expenses, excluding common stock, stock
options and warrants issued, and excluding depreciation expenses, were $8.6 million in 2006, $6.1 million in 2005 and $5.9 million in
2004. General and administrative expenses increased by $2.6 million in 2006 as compared to 2005 as a result of our ongoing
Sarbanes-Oxley Act compliance efforts, an increase in administrative salaries and legal expenses. The legal expenses increase of
$600,000 was associated with maintenance of our patent portfolio and the formation of
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Table of Contents
RXi. During 2007, we expect legal expenses to remain consistent with 2006 levels, as we expect patent expenses to increase, while
being off-set by a decline in legal expenses associated with the formation of RXi. In our efforts to comply with Sarbanes-Oxley for the
year-ended December 31, 2006 we incurred approximately $800,000 in consulting, audit and accounting system conversion expense.
CytRx was required to comply with the attestation requirements under Section 404 of the Sarbanes-Oxley Act for the first time for the
year ended December 31, 2006; therefore there are no corresponding expenses in 2005. We expect to incur in 2007 a similar level of
expense associated with our Sarbanes-Oxley compliance. Our general and administrative salaries increased by $600,000 over the 2005
expense level as a result of a higher bonuses, additional regulatory and accounting personnel and annual salary increases. During
2005, we 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 expense in 2005. With our adoption of SFAS 123(R) during 2006, we recorded
$975,000 of employee stock option expense. No corresponding expense existed in 2005 or 2004.
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 we can measure more reliably. We recorded non-cash charges of $0.1 million during 2006, $0.4 million during 2005 and
$2.0 million during 2004. These charges relate primarily to common stock, stock options and warrants issued for licensing fees and in
connection with the engagement and retention of financial, business development and scientific advisors.
Depreciation and amortization
Depreciation and amortization expenses were $228,000, $217,000 and $104,000 in 2006, 2005 and 2004, respectively. The
depreciation expense reflects the depreciation of our fixed assets and the amortization expenses related to our molecular library, which
was placed in service in March 2005.
Severance and other contractual payments to officers
In accordance with Mutual General Release and Severance Agreements entered into in May 2004, we paid our former General
Counsel and our former Chief Financial Officer, approximately $52,000 and 12 months of related benefits and approximately
$150,000 and 18 months of related benefits, respectively. In addition, as part of the same agreements, the General Counsel and Chief
Financial Officer were vested in options to purchase 87,500 and 105,000 shares, respectively, of our common stock.
Interest income
Interest income was $997,000 in 2006, as compared to $206,000 in 2005 and $60,000 in 2004. The variances between years are
attributable primarily to the amount of cash available for investment each year and, to a lesser extent, changes in prevailing market
rates.
Minority interest in losses of subsidiary
We recorded $81,000 in 2005 and $160,000 in 2004 related to the 5% minority interest in losses of our former CytRx Laboratories
subsidiary. On June 30, 2005, we repurchased the 5% minority interest from Dr. Michael Czech, and on September 30, 2005, we
merged CytRx Laboratories into CytRx.
RXi is approximately 85%-owned by CytRx, and began operating as a stand-alone company with its own management, business,
and operations in January 2007. Following RXi’s initial funding, we have agreed under our letter agreement with UMMS and our
separate stockholders agreement with RXi and its other current stockholders to reduce our share of ownership of RXi to less than a
majority of the outstanding voting power as soon as reasonably practicable. During the time that RXi is majority-owned, the
consolidated financial statements of CytRx will include 100% of the assets and liabilities of RXi and the ownership interests of the
minority shareholders will be recorded as “minority interests.” In the future, if CytRx owns more than 20% but less than 50% of the
outstanding shares of RXi, CytRx would account for its investment in RXi using the equity method. Under the equity method, CytRx
would record its pro-rata share of the gains or losses of RXi against its historical cost basis investment in RXi. For 2007, we expect
RXi’s research and development expenses will be approximately $5.1 million, which, if RXi were to remain a consolidated subsidiary
of CytRx,
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would result in an increase in our consolidated research and development expenses and a corresponding decrease in our consolidated
working capital.
Recently Issued Accounting Standards
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (“FIN No. 48”), to create a single model to address accounting for
uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold in
which a tax position be reached before financial statement recognition. FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. We will adopt FIN No. 48 as of January 1, 2007, as required. While we have not yet
completed our analysis, we do not expect that the adoption of FIN No. 48 will have a significant impact on our financial position and
results of operations.
On September 15, 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not
expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We does not expect SFAS No. 157 will have a significant impact on our consolidated
financial statements.
In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet
and income statement approach when quantifying a misstatement. SAB 108 is effective for our fiscal year ending December 31, 2006.
We have adopted SAB 108 with no effect on our consolidated financial statements.
In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
(“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration
under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument
or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies. For registration payment arrangements and financial instruments subject to those arrangements that were entered into
prior to the issuance of EITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after
December 15, 2006. We have elected to reflect early adoption of FSP 00-19-2 in our 2006 financial statements, and the adoption did
not have an effect on our financial statements.
We do not believe that any other recently issued, but not yet effective, accounting standards would have a material effect on our
consolidated financial position, results of operations or cash flows
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 institutional money market funds. The
objective of our investment activities is to optimize our interest income consistent with preserving principal. We do not have any
derivative financial instruments or foreign currency instruments. If interest rates had varied by 10% in 2006, it would have had an
impact of
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Table of Contents
approximately $100,000 on our statement of operations and cash flows for 2006 based upon our December 31, 2006 cash and cash
equivalents balance.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplemental schedule and notes thereto as of December 31, 2006 and 2005, and for
each of the three years ended December 31, 2006, 2005 and 2004, together with the independent registered public accounting firms’
reports thereon, are set forth on pages F-1 to F-25 of this Annual Report.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information disclosed in the reports we file
with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures, as of December 31, 2006, in accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on
that evaluation and the existence of certain material weaknesses discussed below under “Management’s Report on Internal Control
Over Financial Reporting,” our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were not effective as of December 31, 2006.
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2006 that
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements and related disclosures in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions of our company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the consolidated financial statements and related disclosures in
accordance with generally accepted accounting principles; (3) provide reasonable assurance that our receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and (4) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our
consolidated financial statements and related disclosures.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies and procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.
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Based upon management’s assessment using the criteria contained in COSO, and for the reasons discussed below, our management
has concluded that, as of December 31, 2006, our internal control over financial reporting was not effective.
Pursuant to standards established by the Public Company Accounting Oversight Board, a “material weakness” is a “significant
deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be presented or detected.” Management identified the following material weaknesses in
our internal control over financial reporting as of December 31, 2006:
A. Until the third quarter of 2005, our laboratory in Worcester, Massachusetts was operated by our subsidiary, CytRx Laboratories,
Inc. (“CytRx Labs”). CytRx Labs maintained a separate accounting system, although the general ledger accounts in its system and our
accounting system were identically numbered. On September 30, 2005, CytRx Labs was merged into CytRx, and we continued to
operate the laboratory as an integrated part of CytRx.
In the first quarter of 2006, for the sake of administrative efficiency, CytRx Labs’ general ledger system was integrated into our
general ledger system by combining the laboratory’s general ledger accounts with our identically numbered accounts. In the process,
expenses of the laboratory relating to rent, payroll and related employee benefits, which should properly have been classified as
research and development expenses due to the nature of our activities carried on at the laboratory, were improperly classified as
general and administrative expenses and reported as such in our consolidated financial statements for the first three quarters of 2006,
because they were combined with corresponding accounts of CytRx, whose corporate offices and personnel are devoted primarily to
administrative activities. Our management concluded that the foregoing constituted a material weakness in the effectiveness of our
internal controls over quarterly and annual financial statement reporting.
B. In May and September of 2003, we completed private placements of securities that included warrants to purchase approximately
2.8 million shares of our common stock. These warrants contain provisions for anti-dilution adjustments based upon future sales of
our common stock or common stock equivalents at an effective price per share below the prevailing market price of our common
stock at the time of the sale. We subsequently completed private placement transactions in January 2005 and in March 2006 involving
our sale of securities at prices which triggered the foregoing anti-dilution adjustments to the warrants in question, and we recorded
those adjustments as deemed dividends. Based upon a reevaluation of our historical accounting for those anti-dilution adjustments,
management determined that, by analogy to the guidance provided by SFAS No. 128, Earnings Per Share, the deemed dividends
should be subtracted from our net earnings (loss) (i.e., added to our net loss) to arrive at net loss allocable to common stockholders and
for the purpose of calculating our net earnings (loss) per share. Our management concluded that the foregoing constituted a material
weakness in the effectiveness of our internal controls over financial reporting related to the application of generally accepted
accounting principles.
Having completed our review and evaluation of the integration of the former separate accounting system of our laboratory facility
in connection with the preparation of our annual financial statements for 2006, we believe that the remediation of this weakness has
been completed. In addition, we intend to pursue actions to enhance internal review of all equity transactions to ensure the
effectiveness of all aspects of our controls related to the accounting for anti-dilution adjustments to our outstanding warrants and other
securities.
We continuously seek to improve and strengthen our control processes to ensure that all of our controls and procedures are
adequate and effective. Any failure to implement and maintain improvements in the controls over our financial reporting could cause
us to fail to meet our reporting obligations under the Securities and Exchange Commission’s rules and regulations. Any failure to
improve our internal controls to address the weakness we have identified could also cause investors to lose confidence in our reported
financial information, which could have a negative impact on the trading price of our common stock.
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Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been
audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
49
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning our directors and executive officers:
PART III
Class of
Name
Max Link, Ph.D.
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 Director(1)
66
65
79
65
74
64
49
52
51
31
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)
III
II
II
I
I
II
— Senior Vice President — Drug Discovery
— Chief Financial Officer, Treasurer
— Chief Scientific Officer
—
Tod Woolf, Ph.D.
42
—
General Counsel, Vice President — Legal Affairs and Corporate
Secretary
President and Chief Executive Officer of RXi Pharmaceuticals
Corporation
(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 2009 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, Ph.D 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 also serves as a
director of our majority-owned subsidiary, RXi Pharmaceuticals Corporation. He previously served as Director and Chairman of
Global Genomics from June 2000. Mr. Kriegsman is an inactive 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 in the healthcare
industry. He has advised such companies as SuperGen Inc., Closure Medical Corporation, Novoste Corporation, Miravant Medical
Technologies, and Maxim Pharmaceuticals. Mr. Kriegsman has a BS degree with honors from New York University in Accounting
and completed the Executive Program in Mergers and Acquisitions at New York University, The Management Institute. Mr.
Kriegsman was formerly a Certified Public Accountant with KPMG in New York City. He serves as a Director and is the former
Chairman of the Audit
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Table of Contents
Committee of Bradley Pharmaceuticals, Inc. In February 2006, Mr. Kriegsman received the Corporate Philanthropist of the Year
Award from the Greater Los Angeles Chapter of the ALS Association and in October 2006, he received the Lou Gehrig Memorial
Corporate Award from the Muscular Dystrophy Association. Mr. Kriegsman has been active in various charitable organizations
including the Biotechnology Industry Organization, the ALS Association, the Los Angeles Venture Association, the Southern
California Biomedical Council, and the Palisades-Malibu YMCA.
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, 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 February 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,
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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, and was recently named Chief
Scientific Officer. 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.
Tod Woolf, Ph.D., has served as President and Chief Executive Officer of our majority-owned subsidiary, RXi Pharmaceuticals
Corporation, since January 2007. Dr. Woolf has twenty years’ experience developing and commercializing innovative biomedical
technologies, including twelve years of biotechnology management experience. He founded Sequitur, an RNAi company acquired by
Invitrogen (Nasdaq: IVGN) in 1996 and served from 1996 until 2003 as Chief Executive. From November 2003 until November 2006
he served as an advisor to Invitrogen and he has served as an advisor to other biotechnology companies including Praecis (acquired by
GlaxoSmithkine) and Signet Laboratories (acquired by Covance). While at Sequitur, Dr. Woolf co-invented and commercialized
STEALTH RNAi, one of the most widely used second generation RNAi products. Previously, he helped to develop and partner the
core therapeutic technology at now public companies Genta, RPI (now SIRNA) and Ontogeny (now Curis). Dr. Woolf holds a Masters
Degree and Doctorate in Biology from Harvard University. He has authored 40 patent applications and scientific publications and has
given drug development lectures throughout the world.
Director Independence
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
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directors serving on our Audit Committee, also is an audit committee financial expert as defined by the SEC’s rules.
The Audit Committee must pre-approve all auditing services and all permitted non-auditing services to be provided by our outside
auditors. In general, the Audit Committee’s policy is to grant such approval where it determines that the non-audit services are not
incompatible with maintaining the auditors’ independence and there are cost or other efficiencies in obtaining such services from the
auditors as compared to other possible providers. During the year ended 2006, the Audit Committee approved all of the non-audit
services proposals submitted to it.
Transactions with Related Persons
General
Our Audit Committee is responsible for reviewing and approving, as appropriate, all transactions with related persons, in
accordance with its Charter and Nasdaq Marketplace Rules. We had no transactions with related persons in 2006, and there are no
transactions currently proposed for 2007.
Transactions between us, or our RXi subsidiary, and one or more related persons may present risks or conflicts of interest or the
appearance of conflicts of interest. Our Code of Ethics requires all employees, officers and directors to avoid activities or relationships
that conflict, or may be perceived to conflict, with our interests or adversely affect our reputation. It is understood, however, that
certain relationships or transactions may arise that would be deemed acceptable and appropriate so long as there is full disclosure of
the interest of the related parties in the transaction and review and approval by disinterested directors to ensure there is a legitimate
business reason for the transaction and that the transaction is fair to us and our stockholders.
As a result, the procedures followed by the Audit Committee to evaluate transactions with related persons require:
•
•
that all related person transactions, all material terms of the transactions, and all the material facts as to the related person’s
direct or indirect interest in, or relationship to, the related person transaction must be communicated to the Audit Committee;
and
that all related person transactions, and any material amendment or modification to any related person transaction, be
reviewed and approved or ratified by the Audit Committee, as required by Nasdaq Marketplace Rules.
Our Audit Committee will evaluate related person transactions based on:
•
•
•
•
information provided by members of our board of directors in connection with the required annual evaluation of director
independence;
pertinent responses to the Directors’ and Officers’ Questionnaires submitted periodically by our officers and directors and
provided to the Audit Committee by our management;
background information on nominees for director provided by the Nominating and Corporate Governance Committee of our
board of directors; and
any other relevant information provided by any of our directors or officers.
In connection with its review and approval or ratification, if appropriate, of any related person transaction, our Audit Committee is
to consider whether the transaction will compromise standards included in our Code of Ethics. In the case of any related person
transaction involving an outside director or nominee for
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Table of Contents
director, the Audit Committee also is to consider whether the transaction will compromise the director’s status as an independent
director as prescribed in the Nasdaq Marketplace Rules.
From time to time, there were receivables in immaterial amounts owed between us and our Chief Executive Officer related to travel
and entertainment expense reimbursement, including personal charges to be reimbursed to us by our Chief Executive Officer. During
2005 and 2006, the largest amount owing to us was approximately $27,000, and the largest amount that we owed him was
approximately $21,000. All amounts were subsequently repaid, and we did not deem the foregoing to constitute a related person
transaction.
All of our related person transactions will be disclosed in our filings with the SEC in accordance with SEC rules.
Exemption Clause
Item 404(a)(7)(a) of Securities and Exchange Commission Regulation S-K states that: Disclosure need not be provided if the
transaction is one where the rates or charges involved in the transaction are determined by competitive bid, or the transaction involves
rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or
governmental authority.
Applicable Definitions
For purposes of our Audit Committee’s revew:
•
•
“related person” has the meaning given to such term in Item 404(a) of Securities and Exchange Commission Regulation S-K
(“Item 404(a)”); and
“related person transaction” means any transaction for which disclosure is required under the terms of Item 404(a) involving
the Company and any related persons.
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 under 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 our directors and executive officers and
greater than 10% shareholders for 2006 complied with all applicable Section 16(a) filing requirements.
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 available on our website at www.cytrx.com. We will furnish, without charge, a copy of our
Code of Ethics upon request. Such requests should be directed to Attention: Corporate Secretary, 11726 San Vicente Boulevard,
Suite 650, Los Angeles, California, or by telephone at 310-826-5648.
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Table of Contents
Item 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Executive Compensation Program
The Compensation Committee of our board of directors has responsibility for establishing, implementing and monitoring our
executive compensation program philosophy and practices. The Compensation Committee seeks to ensure that the total compensation
paid to our named executive officers is fair, reasonable and competitive. Generally, the types of compensation and benefits provided to
named executive officers are similar to those provided to our other officers.
Throughout this Annual Report, the individuals who served as our Chief Executive Officer and Chief Financial Officer during
2006, as well as the other individuals included in the Summary Compensation Table on page 60, are referred to as the “named
executive officers.”
Compensation Philosophy and Objectives
The Compensation Committee believes that an effective executive compensation program should provide base annual
compensation that is reasonable in relation to individual executive’s job responsibilities and reward the achievement of both annual
and long-term strategic goals of our company. The Compensation Committee uses annual and other periodic cash bonuses to reward
an officer’s achievement of specific goals and stock options as a retention tool and as a means to align the executive’s long-term
interests with those of our stockholders, with the ultimate objective of improving stockholder value. The Compensation Committee
evaluates both performance and compensation to maintain our company’s ability to attract and retain excellent employees in key
positions and to assure that compensation provided to key employees remains competitive relative to the compensation paid to
similarly situated executives of comparable companies. To that end, the Compensation Committee believes executive compensation
packages provided by us to our named executive officers should include both cash and share-based compensation.
Because of the size of our company, the small number of executive officers in our company, and our company’s financial priorities,
the Compensation Committee has decided not to implement or offer any retirement plans, pension benefits, deferred compensation
plans, or other similar plans for our executive officers. Accordingly, the components of the executive compensation consist of salary,
year-end cash bonuses awarded based on the Compensation Committee’s subjective assessment of each individual executive’s job
performance during the past year, stock option grants to provide executives with longer-term incentives, and occasional special
compensation awards (either cash or stock options) to reward extraordinary efforts or results.
As a biopharmaceutical company engaged in developing potential products that, to date, have not generated significant revenues
and are not expected to generate significant revenues or profits for several years, the Compensation Committee also takes the
company’s financial and working capital condition into account in its compensation decisions. Accordingly, the Compensation
Committee historically has weighted bonuses more heavily with stock options rather than cash. The Compensation Committee may
reassess the proper weighting of equity and cash compensation in light of the company’s improved working capital situation.
Role of Executive Officers in Compensation Decisions
The Compensation Committee makes all compensation decisions for the named executive officers and approves recommendations
regarding equity awards to all of our officers. Decisions regarding the non-equity compensation of other officers are made by the
Chief Executive Officer.
The Compensation Committee and the Chief Executive Officer annually review the performance of each named executive officer
(other than the Chief Executive Officer, whose performance is reviewed only by
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the Compensation Committee). The conclusions reached and recommendations based on these reviews, including with respect to
salary adjustments and annual award amounts, are presented to the Compensation Committee. The Compensation Committee can
exercise its discretion in modifying any recommended adjustments or awards to executives.
Setting Executive Compensation
Based on the foregoing objectives, the Compensation Committee has structured the Company’s annual cash and incentive-based
cash and non-cash executive compensation to motivate executives to achieve the business goals set by the Company, to reward the
executives for achieving such goals, and to retain the executives. In doing so, the Compensation Committee historically has not
employed outside compensation consultants. However, during 2006, the Compensation Committee did obtain and use in its
compensation deliberations several third-party industry compensation surveys to establish cash and equity compensation for our
executive officers. The Compensation Committee utilized this data to set compensation for our executive officers at levels targeted at
or around the average of the compensation amounts provided to executives at comparable companies considering, for each individual,
their individual experience level related to their position with us. There is no pre-established policy or target for the allocation between
either cash and non-cash incentive compensation.
2006 Executive Compensation Components
For 2006, the principal components of compensation for the named executive officers were:
•
•
•
base salary;
performance-based cash compensation; and
long-term equity incentive compensation.
Base Salary
The Company provides named executive officers and other employees with base salary to compensate them for services rendered
during the year. Base salary ranges for the named executive officers are determined for each executive based on his or her position and
responsibility.
During its review of base salaries for executives, the Compensation Committee primarily considers:
•
•
•
the negotiated terms of each executive employment agreement;
internal review of the executive’s compensation, both individually and relative to other executive officers; and
individual performance of the executive.
Salary levels are typically considered annually as part of the company’s performance review process, as well as upon a change in
job responsibility. Merit-based increases to salaries are based on the Compensation Committee’s assessment of the individual’s
performance. Base salaries for the named executive officers in 2006 were increased from the base salaries in effect during the prior
year by amounts ranging from 8.75% for the Chief Executive Officer to 12.8% for the Senior Vice President of Legal Affairs. Unless
increased by the Compensation Committee, the salary increase for Mr. Kriegsman will remain in effect until the expiration of his
employment agreement on July 1, 2008, while the other salary increases remain in effect until the expiration of their employment
agreements on December 31, 2007.
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Performance-Based Compensation
The Compensation Committee has not established an incentive compensation program with fixed performance targets. Because the
company does not generate significant revenues and has not commercially released any products, the Compensation Committee bases
its performance and achievement compensation awards on the achievement of product development targets and milestones, effective
fund-raising efforts, and effective management of personnel and capital resources, among other criteria. During 2006, the
Compensation Committee granted Mr. Kriegsman a special cash bonus of $200,000 in recognition of his role in negotiating our sale to
the privately-funded ALS Charitable Remainder Trust of a one percent royalty in the worldwide sales of our small molecule drug
candidate arimoclomol. During 2006, the Compensation Committee also granted Mr. Kriegsman an annual cash bonus of $200,000
and granted various cash bonuses to other executive officers, each in conjunction with the end of their employment contract years,
because of their efforts in helping us advance the development of our products, raise working capital and achieve other corporate
goals.
Long-Term Equity Incentive Compensation
As indicated above, the Compensation Committee also aims to encourage the company’s executive officers to focus on long-term
company performance by allocating to them stock options that vest over a period of several years. In 2006, the Compensation
Committee granted to Mr. Kriegsman a nonqualified option to purchase 200,000 shares of our common stock at a price of $1.38 per
share, which equaled the closing market price on the date of grant. The option vests monthly over three years, provided that
Mr. Kriegsman continues in our employ through such monthly vesting periods. In addition, in connection with entering into new
employment agreements with three of the other executive officers, the Compensation Committee also granted stock options to those
executive officers. All of these other stock options also had an exercise price of $1.38 per share, which equaled the closing market
price on the date of grant, and also vest monthly over three years, provided that such executives remained in our employ through such
monthly vesting periods.
Retirement Plans, Perquisites And Other Personal Benefits
We currently maintain no retirement plan for the named executive officers or other employees. In addition, we do not provide any
of our executive officers with any perquisites or other personal benefits, other than benefits that we offer Mr. Kriegsman provided for
in his employment agreement. As required by his employment agreement, during 2006 we paid insurance premiums with respect to a
life insurance policy for Mr. Kriegsman which had a face value of approximately $1.4 million as of December 31, 2006 and under
which Mr. Kriegsman’s designee is the beneficiary.
Except as follows, we do not have in effect any change of control provisions for payment to any executive officer in the event of a
change in control of CytRx. Our stock option plans provide that all unvested options held by our employees, including the named
executive officers, immediately vest upon a change of control. In addition, under our employment agreement with Mr. Kriegsman, 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, we have agreed to pay Mr. Kriegsman 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.
Ownership Guidelines
The Compensation Committee has no requirement that each named executive officer maintain a minimum ownership interest in our
company.
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Our long-term incentive compensation consists of the grant of stock options to our named executive officers. The stock option
program assists the company to:
•
•
•
•
establish the link between the creation of stockholder value and long-term executive incentive compensation;
provide an opportunity for increased equity ownership by executives;
function as a retention tool because of the vesting features included in all options granted by the Compensation Committee;
and
maintain competitive levels of total compensation.
We normally grant stock options to new executive officers when they join our company based upon their position with us and their
relevant prior experience. The options granted by the Compensation Committee generally vest monthly over the first three years of the
ten-year option term. Vesting and exercise rights cease upon termination of employment (or, in the case of exercise rights, 90 days
thereafter), except in the case of death (subject to a one-year limitation), disability or retirement. Prior to the exercise of an option, the
holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive
dividends or dividend equivalents. In addition to the initial option grants, our Compensation Committee may grant additional options
to retain our executives and reward, or provide incentive for, the achievement of corporate goals and strong individual performance.
Our Board of Directors has also granted our Chief Executive Officer discretion to grant up to 100,000 options to employees upon
joining our company, and to grant an additional “discretionary pool” of up to 100,000 incentive options during each employee review
cycle. Options are granted based on a combination of individual contributions to our company and on general corporate achievements,
which may include the attainment of product development milestones and attaining other annual corporate goals and objectives. On an
annual basis, the Compensation Committee assesses the appropriate individual and corporate goals for our new executives and
provides additional option grants based upon the achievement by the new executives of both individual and corporate goals. We
expect that we will continue to provide new employees with initial option grants in the future to provide long-term compensation
incentives and will continue to rely on performance-based and retention grants to provide additional incentives for current employees.
Additionally, in the future, the Compensation Committee may consider awarding additional or alternative forms of equity incentives,
such as grants of restricted stock, restricted stock units and other performance-based awards.
It is our policy to award stock options at an exercise price equal to the Nasdaq Capital Market’s closing price of our common stock
on the date of the grant. In certain limited circumstances, the Compensation Committee may grant options to an executive at an
exercise price in excess of the closing price of the common stock on the grant date. The Compensation Committee has never granted
options with an exercise price that is less than the closing price of our common stock on the grant date, nor has it granted options
which are priced on a date other than the grant date. For purposes of determining the exercise price of stock options, the grant date is
deemed to be the date on which the Compensation Committee approves the stock option grant.
We have no program, practice or plan to grant stock options to our executive officers, including new executive officers, in
coordination with the release of material nonpublic information. We also have not timed the release of material nonpublic information
for the purpose of affecting the value of stock options or other compensation to our executive officers, and we have no plan to do so.
In light of recent changes to the SEC’s rules regarding executive compensation disclosure, during 2007 we intend to consider
whether it may be advisable to adopt additional policies and procedures regarding the grant of stock options.
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Tax and Accounting Implications
Deductibility of Executive Compensation
As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section
162(m) of the Internal Revenue Code, which provides that corporations may not deduct compensation of more than $1,000,000 that is
paid to certain individuals. We believe that compensation paid to our executive officers generally is fully deductible for federal
income tax purposes.
Accounting for Share-Based Compensation
Beginning on January 1, 2006, the company began accounting for share-based compensation in accordance with the requirements
of FASB Statement 123(R). This accounting treatment has not significantly affected our compensation decisions. The Compensation
Committee takes into consideration the tax consequences of compensation to the named executive officers, but tax considerations are
not a significant part of the company’s compensation policy.
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.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis”
required by Item 402(b) of Regulation S-K and, based on such review and discussions, has recommended to our board of directors that
the foregoing “Compensation Discussion and Analysis” be included in this Annual Report.
Joseph Rubinfeld, Ph.D., Chairman
Marvin R. Selter
59
Richard L. Wennekamp
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Table of Contents
Summary Compensation Table
The following table presents summary information concerning all compensation paid or accrued by us for services rendered in all
capacities during 2006 by Steven A. Kriegsman and Matthew Natalizio, who are the only individuals who served as our principal
executive and financial officers during the year ended December 31, 2006, and our three other most highly compensated executive
officers who were serving as executive officers as of December 31, 2006:
Name and Position
Steven A. Kriegsman
President and Chief Executive
Officer
Matthew Natalizio
Chief Financial Officer and
Treasurer
Jack R. Barber, Ph.D.
Chief Scientific Officer
Benjamin S. Levin
General Counsel, Vice President –
Legal Affairs and Secretary
Mark A. Tepper, Ph.D.
Senior Vice President – Drug
Discovery
Summary Compensation Table
Year
2006
Salary ($)
417,175
Bonus
($) (1)
400,000
Option
Awards
($) (2)
340,426
Total
($)
1,157,601
2006
204,115
43,000
78,472
325,587
2006
261,750
68,750
90,544
421,044
2006
208,170
68,750
120,550
397,470
2006
249,093
—
205,777
454,870
(1) Bonuses to the named executive officers reported above were paid in June 2006, which corresponded to the end of the
contractual employment year for those officers. For future years, we plan to determine and award bonuses at the fiscal year end,
and we will report any bonuses awarded for the latter half of 2006 when made in a Current Report on Form 8-K.
(2) The values shown in this column represent the dollar amount recognized for financial statement reporting purposes with respect
to the 2006 fiscal year for the fair value of stock options granted in 2006 and prior fiscal years in accordance with SFAS 123(R).
Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting
conditions. The amount recognized for these awards was calculated using the Black Scholes option-pricing model, and reflect
grants from our 2000 Long-Term Incentive Plan, which is described in Note 13 of the Notes to Consolidated Financial
Statements.
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2006 Grants of Plan-Based Awards
In 2006, we granted stock options to our named executive officers under our 2000 Long-Term Incentive Plan as follows:
2006 Grants of Plan-Based Awards
Grant Date
6/16/2006
All Other
Option Awards
(# of CytRx
Shares)
200,000
6/16/2006
50,000
6/16/2006
100,000
6/16/2006
90,000
Exercise Price of
Option Awards
($/Sh)
1.38
Grant Date
Fair Value of
Option Awards
($)
$ 236,000
$
$
$
$
1.38
$ 59,000
1.38
$ 118,000
1.38
$ 106,200
—
—
—
—
Name
Steven A. Kriegsman
President and Chief Executive Officer
Matthew Natalizio
Chief Financial Officer and Treasurer
Jack R. Barber, Ph.D.
Chief Scientific Officer
Benjamin S. Levin
General Counsel, Vice President – Legal
Affairs and Secretary
Mark A. Tepper, Ph.D.
Senior Vice President – Drug Discovery
2000 Long-Term Incentive Plan
The purpose of our 2000 Long-Term Incentive Plan is to promote our success and enhance our value by linking the personal
interests of our employees, officers, consultants and directors to those of our stockholders, and by providing our employees, officers,
consultants and directors with an incentive for outstanding performance. The Plan was originally adopted by our board of directors on
August 24, 2000 and by our stockholders on June 7, 2001, with certain amendments to the Plan having been subsequently approved by
our board of directors and stockholders.
The Plan authorizes the granting of awards to our employees, officers, consultants and directors and to employees, officers,
consultants and directors of our subsidiaries. The following awards are available under the Plan:
•
•
•
•
•
•
options to purchase shares of common stock, which may be incentive stock options or non-qualified stock options;
stock appreciation rights;
restricted stock;
performance units;
dividend equivalents; and
other stock-based awards.
The aggregate number of shares of our common stock reserved and available for awards under the Plan is 10,000,000 shares. As of
February 28, 2007, there were 6,749,000 shares previously issued or subject to outstanding Plan awards, and 2,822,750 shares were
reserved for issuance pursuant to future awards under the Plan. The maximum number of shares of common stock with respect to one
or more options and stock appreciation rights that we may grant during any one calendar year under the Plan to any one participant is
1,000,000; except that in connection with his or her initial employment with the company or an affiliate, a participant may be granted
options for up to an additional 1,000,000 shares. The maximum fair market value of any awards that any one participant may receive
during any one calendar year under the Plan is $1,000,000, not including the value of options and stock appreciation rights (less any
consideration paid by the participant
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for such award). We also have two other plans, the 1994 Stock Option Plan and the 1998 Long Term Incentive Plan, which include
9,167 and 100,041 shares subject to outstanding stock options. As the terms of the plans provide that no options may be issued after
10 years, no options are available under the 1994 Plan. Under the 1998 Long Term Incentive Plan, 29,517 shares are available for
future grant.
Administration
The Plan is administered by the Compensation Committee of our board of directors. The Compensation Committee has the power,
authority and discretion to:
•
•
•
•
designate participants;
determine the types of awards to grant to each participant and the number, terms and conditions of any award;
establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and
make all other decisions and determinations that may be required under, or as the Compensation Committee deems necessary
or advisable to administer, the Plan.
Awards
The following is summary description of financial instruments that may be granted to participants by the Compensation Committee
of our board of directors. The Compensation Committee to date has only granted stock options to participants in the Plan.
Stock Options. The Compensation Committee is authorized to grant both incentive stock options and non-qualified stock options.
The terms of any incentive stock option must meet the requirements of Section 422 of the Internal Revenue Code. The exercise price
of an option may not be less than the fair market value of the underlying stock on the date of grant, and no option may have a term of
more than 10 years from the grant date.
Stock Appreciation Rights. The Compensation Committee may grant stock appreciation rights to participants. Upon the exercise of
a stock appreciation right, the participant has the right to receive the excess, if any, of (1) the fair market value of one share of
common stock on the date of exercise, over (2) the grant price of the stock appreciation right as determined by the Compensation
Committee, which will not be less than the fair market value of one share of common stock on the date of grant.
Restricted Stock. The Compensation Committee may make awards of restricted stock, which will be subject to such restrictions on
transferability and other restrictions as the Compensation Committee may impose (including limitations on the right to vote restricted
stock or the right to receive dividends, if any, on the restricted stock).
Performance Units. The Compensation Committee may grant performance units on such terms and conditions as may be selected
by the Compensation Committee. The Compensation Committee will have the complete discretion to determine the number of
performance units granted to each participant and to set performance goals and other terms or conditions to payment of the
performance units which, depending on the extent to which they are met, will determine the number and value of performance units
that will be paid to the participant.
Dividend Equivalents. The Compensation Committee is authorized to grant dividend equivalents to participants subject to such
terms and conditions as may be selected by the Compensation Committee. Dividend equivalents entitle the participant to receive
payments equal to dividends with respect to all or a portion of the number of shares of common stock subject to an option or other
award, as determined by the
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Compensation Committee. The Compensation Committee may provide that dividend equivalents be paid or distributed when accrued
or be deemed to have been reinvested in additional shares of common stock, or otherwise reinvested.
Other Stock-Based Awards. The Compensation Committee may grant other awards that are payable in, valued in whole or in part
by reference to, or otherwise based on or related to shares of common stock, as deemed by the Compensation Committee to be
consistent with the purposes of the Plan. These stock-based awards may include shares of common stock awarded as a bonus and not
subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into
shares of common stock, and awards valued by reference to book value of shares of common stock or the value of securities of or the
performance of our subsidiaries. The Compensation Committee will determine the terms and conditions of any such awards.
Performance Goals. The Compensation Committee in its discretion may determine awards based on:
•
•
•
•
•
the achievement by CytRx or a parent or subsidiary of a specific financial target;
CytRx’s stock price;
the achievement by an individual or a business unit of CytRx or a subsidiary of a specific financial target;
the achievement of specific goals with respect to (i) product development milestones, (ii) corporate financings, (iii) merger
and acquisition activities, (iv) licensing transactions, (v) development of strategic partnerships or alliances, or (vi) acquisition
or development of new technologies; and
any combination of the goals set forth above.
The Compensation Committee has the right for any reason to reduce (but not increase) any award, even if a specific goal has been
achieved. If an award is made on the basis of the achievement of a goal, the Compensation Committee must have established the goal
before the beginning of the period for which the performance goal relates (or a later date as may be permitted under Internal Revenue
Code Section 162(m)). Any payment of an award for achieving a goal will be conditioned on the written certification of the
Compensation Committee in each case that the goals and any other material conditions were satisfied.
Limitations on Transfer; Beneficiaries. Awards under the Plan may not be transferred or assigned by Plan participants other than
by will or the laws of descent and distribution and, in the case of an incentive stock option, pursuant to a qualified domestic relations
order, provided that the Compensation Committee may (but need not) permit other transfers where the Compensation Committee
concludes that such transferability (1) does not result in accelerated taxation, (2) does not cause any option intended to be an incentive
stock option to fail to qualify as such, and (3) is otherwise appropriate and desirable, taking into account any factors deemed relevant,
including any state or federal tax or securities laws or regulations applicable to transferable awards. A Plan participant may, in the
manner determined by the Compensation Committee, designate a beneficiary to exercise the participant’s rights and to receive any
distribution with respect to any award upon the participant’s death.
Acceleration Upon Certain Events. In the event of a “Change in Control” of CytRx, which is a term defined in the Plan, all
outstanding options and other awards in the nature of rights that may be exercised will become fully vested and exercisable and all
restrictions on all outstanding awards will lapse. The Compensation Committee may, however, in its sole discretion declare all
outstanding options, stock appreciation rights and other awards in the nature of rights that may be exercised to become fully vested
and exercisable, and all restrictions on all outstanding awards to lapse, in each case as of such date as the
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Compensation Committee may, in its sole discretion, declare. The Compensation Committee may discriminate among participants or
among awards in exercising such discretion.
Termination and Amendment
Our board of directors or the Compensation Committee may, at any time and from time to time, terminate or amend the Plan
without stockholder approval; provided, however, that our board or the Compensation Committee may condition any amendment on
the approval of our stockholders if such approval is necessary or deemed advisable with respect to tax, securities or other applicable
laws, policies or regulations. No termination or amendment of the Plan may adversely affect any award previously granted without the
written consent of the participants affected. The Compensation Committee may amend any outstanding award without the approval of
the participants affected, except that no such amendment may diminish the value of an award determined as if it has been exercised,
vested, cashed in or otherwise settled on the date of such amendment, and, except as otherwise permitted in the Plan, the exercise price
of any option may not be reduced and the original term of any option may not be extended.
Holdings of Previously Awarded Equity
Equity awards held as of December 31, 2006 by each of our named executive officers were issued under our 2000 Long-Term
Incentive Plan. The following table sets forth outstanding equity awards held by our named executive officers as of December 31,
2006:
2006 Outstanding Equity Awards at Year-End
Option Awards
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
(1)
(2)
(2)
(1)
(1)
(2)
(1)
(1)
(2)
(1)
(1)
(2)
(2)
(2)
166,620
141,683
—
—
41,655
70,841
33,333
83,310
70,841
33,333
74,979
70,841
53,333
—
—
Option
Exercise
Price
($)
1.38
.79
2.47
2.47
1.38
.79
1.11
1.38
.79
1.13
1.38
.79
1.39
2.41
2.41
Exercisable
33,380
158,317
250,000
750,000
8,345
79,159
66,667
16,690
79,159
66,667
15,021
79,159
106,667
280,000
120,000
Option
Expiration
Date
6/16/16
5/17/15
6/20/13
6/20/13
6/16/16
5/17/15
7/12/14
6/16/16
5/17/15
7/06/14
6/16/16
5/17/15
7/15/14
9/16/13
10/09/13
Name
Steven A. Kriegsman
President and Chief Executive
Officer
Matthew Natalizio
Chief Financial Officer and
Treasurer
Jack R. Barber, Ph.D.
Chief Scientific Officer
Benjamin S. Levin
General Counsel, Vice
President – Legal Affairs and
Secretary
Mark A. Tepper, Ph.D.
Senior Vice President – Drug
Discovery
(1) These options vest in 36 equal monthly installments, subject to the option holder’s remaining in our continuous employ through
such dates.
(2) These options vest in three annual installments, subject to the option holder’s remaining in our continuous employ through such
dates.
64
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Employment Agreements and Potential Payment upon Termination or Change in Control
Employment Agreement with Steven A. Kriegsman
Mr. Kriegsman is employed as our Chief Executive Officer and President pursuant to an employment agreement that was amended
and restated as of May 17, 2005 to continue through July 1, 2008. 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 receive 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. On
June 16, 2006, our Compensation Committee completed its annual review of Mr. Kriegsman’s compensation, and we increased his
annual base salary to $435,000, effective July 1, 2006. 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 President 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 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.
65
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Potential Paymenta upon Termination or Change in Control for 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, in
addition to the severance benefits described above, 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.
Employment Agreement with Matthew Natalizio
Matthew Natalizio is employed as our Chief Financial Officer and Treasurer pursuant to an employment agreement that was
amended and restated as of June 16, 2006, to continue through December 31, 2007. Mr. Natalizio is entitled under his amended and
restated employment agreement to receive an annual base salary of $215,000 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 June 16, 2006, a ten-year, nonqualified option under our 2000 Long-Term
Incentive Plan to purchase 50,000 shares of our common stock at a price of $1.38 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 Chief Scientific Officer pursuant to an employment agreement that was amended and
restated as of June 16, 2006, to continue through December 31, 2007. Dr. Barber is entitled under his amended and restated
employment agreement to receive an annual base salary of $275,000 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 June 16, 2006, a ten-year, nonqualified option under our 2000 Long-Term
Incentive Plan to purchase 100,000 shares of our common stock at a price of $1.38 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 on a month-to-month basis following the
expiration of an employment agreement on September 17, 2006. Dr. Tepper is paid 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.
66
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 June 16, 2006, to continue through December 31, 2007. Mr. Levin is entitled under his
amended and restated employment agreement to receive an annual base salary of $220,000 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 June 16, 2006, a ten-year, nonqualified option under our 2000
Long-Term Incentive Plan to purchase 90,000 shares of our common stock at a price of $1.38 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.
RXi Employment Agreements
CytRx and RXi have entered into an employment agreement with Tod Woolf, Ph.D. dated February 22, 2007, under which
Dr. Woolf is engaged to continue his employment as RXi’s President and Chief Executive Officer through December 31, 2008.
Dr. Woolf is entitled under his employment agreement to receive an annual base salary of $250,000 and, upon RXi’s initial funding,
will be granted by RXi a ten-year option to purchase a number of shares of RXi common stock equal to 3/70ths of the number of RXi
shares held by CytRx immediately prior to the initial funding at an exercise price equal to the fair market value of the shares at the
time of grant. This option will vest in equal monthly installments over three years, subject to accelerated vesting in certain events.
In the event Dr. Woolf’s employment is terminated without “cause” (as defined) or Dr. Woolf terminates his employment for
“good reason” (as defined), RXi has agreed to pay him a lump sum equal to his base salary for the longer of twelve months and the
remainder of the term of his employment agreement, but in no event less than $125,000.
Under Dr. Woolf’s employment agreement, CytRx agrees to indemnify and hold Dr. Woolf and IPIFINI, Inc., an entity affiliated
with him, harmless for any claims which arise from his services as RXi’s President and Chief Executive Officer prior to the effective
date of his employment agreement.
RXi may seek to negotiate and enter into written employment agreements with one or more of its other officers following RXi’s
initial funding. The terms of such employment agreements have not been determined, and there is no assurance as to whether or on
what terms RXi will be able to enter into such employment agreements.
Quantification of Termination Payments and Benefits
The table below reflects the amount of compensation to each of our named executive officers in the event of termination of such
executive’s employment by his voluntary resignation or termination, by a termination of the executive’s employment without “cause”
or his resignation for “good reason,” termination following a change in control and in the event of the executive’s permanent disability
or death of the executive is shown below. The amounts assume that such termination was effective as of December 31, 2006, and thus
includes amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their
termination. The actual amounts to be paid out can only be determined at the time of such executive’s separation.
67
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Termination Payments and Benefits
Before Change in After Change in
Termination w/o Cause or for
Good Reason
Name
Steven A.
Benefit
Severance Payment
Control ($)
870,000
Control ($)
870,000
Death ($)
870,000
Disability
$
870,000
Change in
Control ($)
—
Stock Options (1)
246,993
—
246,993
246,993
246,993
Kriegsman
President and
Chief
Executive
Officer
Matthew Natalizio
Chief Financial
Officer and
Treasurer
Health Insurance (2)
Life Insurance
Bonus
Tax Gross Up (3)
45,704
11,350
300,000
—
Severance Payment
Stock Options (1)
53,750
—
45,704
11,350
300,000
0
53,750
—
Jack R. Barber,
Severance Payment
68,750
68,750
Ph.D.
Chief Scientific
Officer
Stock Options (1)
—
—
Benjamin S. Levin Severance Payment
Stock Options (1)
General Counsel,
Vice President
–
Legal Affairs and
Secretary
110,000
—
110,000
—
Mark A. Tepper,
Severance Payment
125,000
125,000
Ph.D.
Senior Vice
President –
Drug
Discovery
Health Insurance (2)
7,338
7,338
Stock Options (1)
—
—
45,704
—
300,000
—
45,704
11,350
300,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
128,086
—
149,496
—
146,814
—
—
—
(1) Represents the aggregate value of stock options that vest and become exercisable immediately upon each of the triggering events
listed as if such events took place on December 31, 2006, determined by the aggregate difference between the stock price as of
December 31, 2006 and the exercise prices of the underlying options.
(2) Represents the cost as of December 31, 2006 for the family health benefits provided to Messrs. Kriegsman and Tepper for
periods of two years and six months, respectively.
(3) Mr. Kriegsman’s employment agreement provides that if 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 will 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. Based on Mr. Kriegsman’s past
compensation and the estimated payment that would result from a termination of his employment following a change in control,
we have estimated that a gross-up payment would not be required.
68
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Compensation of Directors
The following table sets forth the compensation paid to our directors other than our Chief Executive Officer for 2006:
Director Compensation Table
Name (1)
Max Link, Ph.D.
Chairman
Marvin R. Selter
Vice Chairman
Louis Ignarro, Ph.D.
Director
Joseph Rubinfeld, Ph.D.
Director
Richard Wennekamp
Director
Fees Earned or
Paid in Cash
($) (2)
48,250
Option
Awards
($) (3)
37,772
Total
($)
86,022
63,250
37,772
101,022
8,000
37,772
45,772
45,500
37,772
83,272
48,250
37,772
86,022
(1) Steven A. Kriegsman does not receive additional compensation for his role as a Director. For information relating to
Mr. Kriegsman’s compensation as President and Chief Executive Officer, see the Summary Compensation Table above.
(2) The amounts in this column represent cash payments made to Non-Employee Directors for attendance at meetings during the
year.
(3) In July 2006, we granted stock options to purchase 25,000 shares of our common stock at an exercise price equal to the current
market value of our common stock to each non-employee director. The values shown in this column represent the dollar amount
recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the fair value of stock options
granted in 2006 and prior fiscal years in accordance with SFAS 123(R). Pursuant to SEC rules, the amounts shown exclude the
impact of estimated forfeitures related to service-based vesting conditions. The amount recognized for these awards was
calculated using the Black Scholes option-pricing model, and reflect grants from our 2000 Long-Term Incentive Plan, which is
described in Note 13 of the Notes to Consolidated Financial Statements.
We use a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on our board of
directors. Directors who also are employees of our company currently receive no compensation for their service as directors or as
members of board committees. In setting director compensation, we consider the significant amount of time that directors dedicate to
the fulfillment of their director responsibilities, as well as the competency and skills required of members of our board. The directors’
current compensation schedule has been in place since July 2006. The directors’ annual compensation year begins with the annual
election of directors at the annual meeting of stockholders. The annual retainer year period has been in place for directors since 2003.
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.
Our non-employee directors receive a quarterly retainer of $2,500 ($8,500 for the Chairman of the Board and $7,500 for the
Chairman of the Audit Committee), 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 of a board
69
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
committee receive an additional $1,500 for each meeting of the nomination and governance committee or the compensation committee
attended and an additional $2,000 for each meeting attended of the audit committee. In July 2006, we granted stock options to
purchase 25,000 shares of our common stock at an exercise price equal to the current market value of our common stock to each
non-employee director. The options were vested, in full, upon grant.
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 23, 2007 by (1) each person who is known by us to beneficially own more than five
percent of our common stock; (2) each of our directors; (3) the named executive officers listed in the Summary Compensation Table
under Item 11; and (4) all of our 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 23, 2007 (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 76,788,694 shares of our common stock
outstanding as of March 23, 2007. 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 (eleven persons)(11)
Shares of
Common Stock
Number
503,916
5,282,230
97,083
62,000
407,451
55,000
181,945
197,232
400,000
234,175
7,421,032
Percent
*
6.8%
*
*
*
*
*
*
*
*
9.3%
(1) Includes 412,000 shares subject to options or warrants.
(2) Includes 1,261,130 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 67,876 shares subject to options or warrants.
(4) Includes 62,000 shares subject to options or warrants.
(5) The shares shown are owned, of record, by the Selter Family Trust or Selter IRA Rollover. Includes 50,000 shares subject to
options or warrants owned by Mr. Selter.
(6) Includes 50,000 shares subject to options or warrants.
(7) Includes 181,945 shares subject to options or warrants.
(8) Includes 197,232 shares subject to options or warrants.
70
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
(9) Includes 400,000 shares subject to options or warrants.
(10) Includes 234,175 shares subject to options or warrants.
(11) Includes 2,916,358 shares subject to options or warrants.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RXi was incorporated jointly in April 2006 by CytRx and the four current members of RXi’s scientific advisory board for the
purpose of pursuing the possible development or acquisition of RNAi-related technologies and assets. As described elsewhere in this
Annual Report, we recently have entered into the following agreements with RXi:
Contribution Agreement
On January 8, 2007, we entered into a Contribution Agreement with RXi under which we assigned and contributed to RXi
substantially all of our RNAi-related technologies and assets. The assigned assets consisted primarily of our licenses from UMMS and
from the Carnegie Institution of Washington relating to fundamental RNAi technologies, as well as equipment situated at our
Worcester, Massachusetts, laboratory. In connection with the contribution of the licenses and other assets, RXi assumed primary
responsibility for all payments to UMMS and other obligations under the contributed licenses and assets.
Reimbursement Agreement
On January 8, 2007, we entered into a letter agreement with RXi under which RXi has agreed to reimburse us, following its initial
funding, for all organizational and operational expenses incurred by us in connection with the formation, initial operations and funding
of RXi. As of February 28, 2007, we had advanced approximately $592,000 to RXi for which it will be obligated to reimburse us. We
cannot predict the future amounts that we may contribute to RXi under this arrangement.
Tod Woolf, Ph.D., the President and Chief Executive Officer of RXi, is one of our executive officers. As described above in
Item 11, “Executive Compensation – RXi Employment Agreements,” we recently entered into an employment agreement with
Dr. Woolf under which he is entitled to base annual compensation and other employee benefits, including the right to receive, upon
completion of RXi’s initial funding, a grant by RXi of stock options to purchase a number of shares of RXi common stock equal to
3/70ths of the number of RXi shares held by CytRx immediately prior to the initial funding at an exercise price equal to the fair
market value of the shares at the time of grant.
Dr. Woolf may be deemed to have a material interest in our transactions with RXi described above, and in our future dealings with
RXi, by reason his status as RXi’s President and Chief Executive Officer and in light of any stock options granted to him by RXi upon
completion of its initial funding or otherwise.
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, 2004, 2005 and 2006.
Audit Fees
The fees for 2006 and 2005 billed to us by BDO for professional services rendered for the audit of our annual financial statements,
and in the case of 2006, for the audit of management’s assessment of internal controls over financial reporting, are $815,000 and
$170,000, respectively.
71
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Audit Related Fees
In 2006, BDO rendered $113,000 of other audit-related services related to a registration statement filed in 2005, SFAS 123/123(R)
testing and our restatement of our 2005 financial statements. BDO rendered no other audit-related services for 2005.
Tax Fees
The aggregate fees billed by BDO for professional services for tax compliance, tax advice and tax planning for 2006 were $25,000.
We did not engage BDO to perform any tax-related services for 2005.
All Other Fees
No other services were rendered by BDO for 2006 or 2005.
Pre-Approval Policies and Procedures
It is the policy of our Audit Committee that all services to be provided by our independent registered public accounting firm,
including audit services and permitted audit-related and non-audit services, must be pre-approved by our Audit Committee. Our Audit
Committee pre-approved all services, audit and non-audit, provided or to be provided to us by BDO for 2006 and 2005.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this 10-K:
(1) Financial Statements
PART IV
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-25 of this Annual Report. These consolidated financial statements are as follows:
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
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-25 of this Annual Report.
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004
72
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 74 of this Annual Report, which is incorporated herein by reference.
73
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Exhibit
Number
Description
CytRx Corporation
Form 10-K Exhibit Index
3.1
3.2
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
Corrected Restated Certificate of Incorporation
Restated By-Laws
Certificate of Amendment to 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
Amendment No. 2 to Shareholder Protection 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
10.1
Agreement with Emory University, as amended
10.2*
1994 Stock Option Plan, as amended and restated
10.3*
1995 Stock Option Plan
10.4*
1998 Long-Term Incentive Plan
10.5*
2000 Long-Term Incentive Plan
10.6*
Amendment No. 1 to 2000 Long-Term Incentive Plan
10.7*
Amendment No. 2 to 2000 Long-Term Incentive Plan
10.8*
Amendment No. 3 to 2000 Long-Term Incentive Plan
10.9*
Amendment No. 4 to 2000 Long-Term Incentive Plan
10.10† License Agreement dated November 1, 2000 by and between CytRx Corporation and Merck & Co., Inc
Source: CYTRX CORP, 10-K, April 02, 2007
Footnote
(l)
(b)
(l)
(gg)
(cc)
(c)
(i)
(m)
(o)
(p)
(t)
(v)
(w)
(x)
(bb)
(d)
(e)
(f)
(g)
(i)
(k)
(k)
(t)
(t)
(h)
10.11† License Agreement dated December 7, 2001 by and between CytRx Corporation and Vical Incorporated
10.12
Registration Rights Agreement, dated as of May 29, 2003, between CytRx Corporation and the Purchasers
identified on the signature page thereof
74
(j)
(p)
Source: CYTRX CORP, 10-K, April 02, 2007
Description
Footnote
Table of Contents
Exhibit
Number
10.13†
10.14†
10.15†
10.16
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
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 selective silencing of a dominant ALS gene by RNAi
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
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
10.23
Office Lease between The Kriegsman Group and Douglas Emmett, dated April 13, 2000
10.24
Assignment to CytRx Corporation effective July 1, 2003 of Office Lease between The Kriegsman Group
and Douglas Emmett, dated April 13, 2000
10.25
Office Lease between Araios, Inc. and Are-One Innovation Drive, LLC dated 11-19-03
10.26†
Patent License Agreement, dated May, 2004, among CytRx Corporation, Imperial College of Science and
Technology and Imperial College Innovations Limited
10.27
10.28
10.29
10.30
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
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
10.31* Employment Agreement dated October 6, 2005 between CytRx Corporation and Dr. Mark A. Tepper
75
Source: CYTRX CORP, 10-K, April 02, 2007
(q)
(q)
(q)
(r)
(s)
(t)
(t)
(t)
(t)
(t)
(t)
(t)
(t)
(u)
(w)
(w)
(x)
(x)
(y)
Description
Footnote
Table of Contents
Exhibit
Number
10.32*
10.33
10.34
10.35
10.36*
10.37*
10.38*
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Steven A. Kriegsman
First Amendment to Office Lease dated October 14, 2005, by and between CytRx Corporation and Douglas
Emmett 1993, LLC
Registration Rights Agreement, dated as of March 2, 2006, by and among CytRx Corporation and the
purchasers named therein.
First Amendment to Lease Agreement dated March 24, 2006, by and between CytRx Corporation and
ARE-One Innovation Drive, LLC
Second Amended and Restated Employment Agreement dated June 16, 2006 between CytRx Corporation
and Dr. Jack Barber
Second Amended and Restated Employment Agreement dated June 16, 2006 between CytRx Corporation
and Matthew Natalizio
Second Amended and Restated Employment Agreement dated June 16, 2006 between CytRx Corporation
and Benjamin S. Levin
10.39* Schedule of Non-Employee Director Compensation adopted on June 20, 2006
10.40
Royalty Agreement dated August 28, 2006 between CytRx Corporation and Kenneth Council, as Trustee of
the ALS Charitable Remainder Trust
21.1
Subsidiaries
23.1
Consent of BDO Seidman, LLP
31.1
31.2
32.1
32.2
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
(z)
(aa)
(bb)
(dd)
(ee)
(ee)
(ee)
(ee)
(ff)
*
†
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.
(a) Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (File No. 333-39607) filed on November 5,
1997
(b) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-37171) filed on July 21, 1997
(c) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 17, 1997
(d) Incorporated by reference to the Registrant’s Registration Statement on Form S-l (File No. 33-8390) filed on November 5, 1986
(e) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 1997
76
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 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 27, 2001
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 21, 2001
(f)
(g) Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 30, 1998
(h) Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed on March 16, 2001
(i)
(j)
(k) Incorporated by reference to the Registrant’s Proxy Statement filed June 10, 2002
(l)
(m) Incorporated by reference to the Registrant’s 10-Q filed on November 14, 2002
(n) Incorporated by reference to the Registrant’s 10-K filed on March 31, 2003
(o) Incorporated by reference to the Registrant’s 10-Q filed on May 15, 2003
(p) Incorporated by reference to the Registrant’s 8-K filed on May 30, 2003
(q) Incorporated by reference to the Registrant’s S-3 Amendment No. 4 (File No. 333-100947) filed on August 5, 2003
(r)
(s)
(t)
(u) Incorporated by reference to the Registrant’s Post-Effective Amendment No. 1 to Registration Statement on Form S-1 to Form
Incorporated by reference to the Registrant’s 8-K filed on September 17, 2003
Incorporated by reference to the Registrant’s 10-Q filed on November 12, 2003
Incorporated by reference to the Registrant’s 10-K filed on May 14, 2004
S-3 (Reg. No. 333-109708) filed on June 2, 2004
(v) Incorporated by reference to the Registrant’s 10-Q filed on August 16, 2004
(w) Incorporated by reference to the Registrant’s 8-K filed on October 5, 2004
(x) Incorporated by reference to the Registrant’s 8-K filed on January 21, 2005
(y) Incorporated by reference to the Registrant’s 8-K filed on October 7, 2005
(z) Incorporated by reference to the Registrant’s 10-Q filed on August 15, 2005
(aa) Incorporated by reference to the Registrant’s 8-K filed on October 20, 2005
(bb) Incorporated by reference to the Registrant’s 8-K filed on March 3, 2006
(cc) Incorporated by reference to the Registrant’s Proxy Statement filed June 7, 2005
(dd) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 24, 2006
(ee) Incorporated by reference to the Registrant’s 10-Q filed on August 3, 2006
77
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
(ff) Incorporated by reference to the Registrant’s 10-Q filed on November 13, 2006
(gg) Incorporated by reference to the Registrant’s Proxy Statement filed September 17, 2003
78
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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
Date: March 31, 2007
CYTRX CORPORATION
By:
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
President and Chief Executive Officer
79
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CytRx Corporation
Consolidated Balance Sheets
Consolidated Statements of Operations (restated)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Financial Statement Schedule Schedule II — Valuation and Qualifying Accounts
F-1
F-2
F-2
F-3
F-4
F-5
F-6
F-22
F-23
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
CYTRX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Accounts Receivable
Prepaid insurance, current portion
Prepaid expenses and other current assets
Total current assets
Equipment and furnishings, net
Molecular library, net
Goodwill
Other assets:
Deposits and prepaid insurance expense
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue, current portion
Total current liabilities
Deferred revenue, non-current portion
Total liabilities
Commitment and contingencies
Stockholders’ equity:
December 31,
2006
2005
(restated)
$
$
$
30,381,393
105,930
189,193
44,130
30,720,646
252,719
283,460
183,780
195,835
31,636,440
955,156
2,722,478
6,733,350
10,410,984
16,075,117
26,486,101
$
$
$
8,299,390
172,860
192,797
122,809
8,787,856
352,641
372,973
183,780
241,660
9,938,910
815,626
1,639,922
—
2,455,548
275,000
2,730,548
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; 70,788,586 and
59,283,960 shares issued and outstanding at December 31, 2006 and 2005,
respectively
Additional paid-in capital
Treasury stock, at cost (633,816 shares held, at December 31, 2006 and 2005,
respectively)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
70,789
146,961,657
59,284
131,790,932
(2,279,238)
(139,602,869)
5,150,339
31,636,440
$
(2,279,238)
(122,362,616)
7,208,362
9,938,910
$
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Source: CYTRX CORP, 10-K, April 02, 2007
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Table of Contents
Income:
License fees
Grant revenue
Service revenue
Expenses:
Research and development (includes non-cash stock
compensation to consultants of $674,030, $219,718 and
$1,387,645 in 2006, 2005, and 2004, respectively; employee
stock option expense of $248,908 in 2006)
In-process research and development
General and administrative (includes non-cash stock
compensation to consultants of $59,578, $366,753 and
$1,977,330 in 2006, 2005 and 2004, respectively; employee
stock option expense of $975,546 in 2006)
Depreciation and amortization
Loss before other income
Other income:
Interest income
Gain on lease termination
Other expense
Minority interest in losses of subsidiary
Net loss before provision for income taxes
Provision for income taxes
Net loss
Deemed dividend for anti-dilution adjustments made to outstanding
common stock warrants
Net loss applicable to common stockholders
Basic and diluted loss per share, as originally stated
Basic and diluted loss per share, as restated
2006
Years Ended December 31,
2005
(restated)
2004
$
101,000
105,930
1,858,772
2,065,702
$
101,500
—
82,860
184,360
$
428,164
—
—
428,164
9,781,007
—
9,087,270
—
6,012,903
3,021,952
9,657,257
227,704
19,665,968
(17,600,266)
996,647
—
(3,205)
(16,606,824)
—
(16,606,824)
(145,000)
(16,751,824)
(488,429)
$ (17,240,253)
(0.25)
$
(0.25)
$
6,424,106
217,095
15,728,471
(15,544,111)
206,195
163,604
—
(15,174,312)
81,452
(15,092,860)
—
(15,092,860)
(1,075,568)
(16,168,428)
(0.27)
(0.28)
$
$
$
7,901,240
103,851
17,039,946
(16,611,782)
59,977
—
—
(16,551,805)
159,616
(16,392,189)
—
(16,392,189)
—
$ (16,392,189)
(0.48)
$
(0.48)
$
Basic and diluted weighted average shares outstanding
68,105,626
56,852,402
34,325,636
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 for
services and licenses
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 and licenses
For minority interest
Options and warrants
exercised
Deemed dividend
Net loss
Balance at December 31,
2005
Common stock and
warrants issued in
connection with private
placements
Issuance of stock
options/warrants for
services and licenses
Options and warrants
exercised
Deemed dividend
Net loss
Balance at December 31,
2006
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Shares Issued
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Treasury
Stock
Total
34,392,000
$
34,392
$ 102,239,460
$
(89,801,998)
$ (2,279,238)
$ 10,192,616
4,100,000
4,100
3,899,900
800,000
800
1,252,950
—
897,688
—
—
898
—
2,111,225
524,792
—
—
(16,392,189)
—
—
—
—
—
—
—
—
3,904,000
1,253,750
2,111,225
525,690
(16,392,189)
40,189,688
40,190
110,028,327
(106,194,187)
(2,279,238)
1,595,092
18,084,494
18,084
19,572,362
—
—
1,009,778
—
—
—
—
1,010
—
—
586,471
273,000
255,203
1,075,569
—
—
—
—
—
(1,075,569)
(15,092,860)
—
19,590,446
—
—
—
—
—
586,471
273,000
256,213
—
(15,092,860)
59,283,960
59,284
131,790,932
(122,362,616)
(2,279,238)
7,208,362
10,650,795
10,651
12,393,709
149,928
703,903
—
—
150
704
—
—
1,930,098
358,489
488,429
—
—
—
—
(488,429)
(16,751,824)
—
12,404,360
—
—
—
—
1,930,248
359,193
—
(16,751,824)
70,788,586
$
70,789
$ 146,961,657
$ (139,602,869)
$ (2,279,238)
$
5,150,339
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization
Loss on retirement of equipment
Minority interest in losses of subsidiary
Gain on lease termination
Stock option and warrant expense
Common stock issued for services
Non-cash stock compensation related to research and
development
Changes in assets and liabilities:
Accounts receivable
Note receivable
Prepaid expenses and other assets
Accounts payable
Deferred revenue
Accrued expenses and other current liabilities
Total adjustments
Net cash provided by (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
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 disclosure of cash flow information:
Cash received during the year for interest received
Supplemental disclosures of non-cash investing 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
Non-cash financing activities:
2006
Years Ended December 31,
2005
2004
$ (16,751,824)
$ (15,092,860)
$ (16,392,189)
227,704
2,864
—
—
1,284,032
262,500
217,095
—
(81,452)
(163,604)
366,753
—
103,851
—
(159,616)
—
1,104,730
872,600
411,530
219,718
1,387,645
66,930
—
100,295
139,530
22,533,467
1,082,557
26,111,409
9,359,585
(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
(961,765)
—
(41,133)
(41,133)
(47,563)
964,251
(771,584)
(1,733,349)
359,191
12,404,360
12,763,551
22,082,003
8,299,390
$ 30,381,393
$
$
$
996,647
705,794
—
256,213
19,590,446
19,846,659
6,311,795
1,987,595
8,299,390
$
$
$
$
206,195
586,471
273,000
525,690
3,904,000
4,429,690
(9,656,851)
11,644,446
1,987,595
$
$
$
$
59,977
1,104,730
—
In connection with the Company’s adjustments to terms of certain outstanding warrants on January 20, 2005 and March 2, 2006, the
Company recorded deemed dividends of $1,075,568 and $488,429, respectively, which were recorded as charges to retained earnings
with corresponding credits to additional paid-in capital.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
1. Nature of Business
CYTRX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (“CytRx Laboratories”), with and into the Company. In 2004, the Company
began a development program based on molecular “chaperone” co-induction technology through the acquisition of novel small
molecules with broad therapeutic applications in neurology, type 2 diabetes, cardiology and diabetic complications. The acquired
assets included three oral, clinical stage drug candidates and a library of small molecule drug candidates. In September 2006, the
Company announced results of its Phase IIa clinical testing of its lead small molecule product candidate arimoclomol for the treatment
of amyotrophic lateral sclerosis (ALS), reporting that arimoclomol had met the trial’s primary endpoints of safety and tolerability at all
three doses tested, and that the trial results indicated a non-statistically-significant trend of improvement in functional capacity as
measured by the Revised ALS Functional Ration Scale in the arimoclomol high dose group as compared with untreated patients.
Arimoclomol has received Orphan Drug and Fast Track designation from the US Food and Drug Administration and orphan medicinal
product status from the European Commission for the treatment of ALS. The Company plans to initiate a Phase IIb trial of
arimoclomol for this indication during the second half of 2007, subject to approval of the U.S. Food and Drug Administration. The
Company is also pursuing clinical development of its other small molecule product candidates, as well as a novel HIV DNA + protein
vaccine, and has entered into strategic alliances with respect to the development of products using its other technologies.
CytRx is also engaged in developing therapeutic products based upon ribonucleic acid interference, or RNAi, which has the
potential to effectively treat a broad array of diseases by interfering with the expression of targeted disease-associated genes. In order
to fully realize the potential value of its RNAi technologies, in January 2007, the Company transferred to RXi Pharmaceuticals
Corporation, its majority-owned subsidiary, substantially all of its RNAi-related technologies and assets. RXi will focus solely on
developing and commercializing therapeutic products based upon RNAi technologies for the treatment of human diseases, including
neurodegenerative diseases, cancer, type 2 diabetes and obesity.
To date, the Company has relied primarily upon selling equity securities and upon proceeds received upon the exercise of options
and warrants and, to a much lesser extent, upon payments from its strategic partners and licensees, to generate funds needed to finance
our business and operations. At December 31, 2006, the Company had cash and cash equivalents of $30.4 million. Management
believes that the Company has adequate financial resources to support its currently planned level of operations into the first quarter of
2009, which expectation is based in part on projected expenditures for 2007 of: $6.5 million for the Company’s Phase IIb trial for
arimoclomol for ALS and related studies, $4.4 million for the Company’s other ongoing and planned preclinical programs,
$8.8 million for general and administrative expenses, and $1.6 million to provide interim funding for RXi’s first few months of
operations. Management estimates that RXi will expend approximately $6.2 million on development activities for 2007 (including
approximately $400,000 in payments under agreements with UMMS, $3.2 million in other research and development expenses and
$2.6 million in general and administrative expenses). If, in addition to the interim funding for which the Company has already
budgeted, the Company elects to provide RXi with all or a substantial portion of its initial funding for 2007 and beyond in the coming
few months, and if the Company is unable to raise funds in the future to replenish any amounts that it provides to RXi, its current
working capital will be depleted accordingly. The Company will be required to obtain additional funding in order to execute its
long-term business plans, although it does not currently have commitments from any third parties to provide it with capital. The
Company cannot assure that additional funding will be available on favorable terms, or at all. If the Company fails to obtain additional
funding when needed, it may not be able to execute its business plans and its business
F-6
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 wholly-owned and majority-owned subsidiaries. The accounts of CytRx Laboratories, less the minority
interest, are included from September 17, 2003 until June 30, 2005, when the Company purchased the outstanding 5% interest in
CytRx Laboratories (see Note 11) and CytRx Laboratories became wholly owned by the Company. The accounts of Global Genomics
are included since July 19, 2002 (see Note 12). RXi had no operations during 2006 (see Note 19).
Revenue Recognition — Biopharmaceutical revenues consist of license fees from strategic alliances from pharmaceutical
companies as well as service revenues. Service revenues consist of contract research and laboratory consulting. Grant revenues consist
of government and private grants.
Monies received for license fees are deferred and recognized ratably over the performance period in accordance with Staff
Accounting Bulletin (SAB) No. 104, 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. Deferred revenue represents amounts received prior to revenue recognition.
Revenues from contract research, government grants, and consulting fees are recognized over the respective contract periods as the
services are performed, provided there is persuasive evidence or an arrangement, the fee is fixed or determinable and collection of the
related receivable is reasonably assured.
In August 2006, the Company received approximately $24.5 million in marketable securities (which were sold by the Company for
approximately $24.3 million in cash) from the privately-funded ALS Charitable Remainder Trust (ALSCRT) in exchange for the
commitment to continue research and development of arimoclomol and other potential treatments for ALS and a one percent royalty
in the worldwide sales of arimoclomol. Under the arrangement, the Company retains the rights to any products or intellectual property
funded by the arrangement and the proceeds of the transaction are non-refundable. Further, the ALS Charitable Remainder Trust has
no obligation to provide any further funding to the Company. Management has analyzed the transaction and concluded that due to the
research and development components of the transaction that it is properly accounted for under SFAS No. 68, Research and
Development Arrangements. Accordingly, the Company has recorded the value received under the arrangement as deferred service
revenue and will recognize service revenue using the proportional performance method of revenue recognition, meaning that service
revenue is recognized on a dollar for dollar basis for each dollar of expense incurred for the research and development of arimoclomol
and then the development of other potential ALS treatments. The Company believes that this method best approximates the efforts
expended related to the services provided. The Company adjusts its estimates quarterly. As of December 31, 2006, the Company
recognized approximately $1.8 million of service revenue related to this transaction.
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.
Fair Value of Financial Instruments — The carrying amounts reported in the balance sheet for cash and cash equivalents
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 three to 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
F-7
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 non-discounted 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 the Company believes 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. The molecular library is presently used as a tool in the Company’s drug discovery
program. 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
non-discounted 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.
Impairment of Long-Lived Assets — The Company reviews 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.
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 30.2 million shares, 24.7 million shares and 14.5 million shares at December 31, 2006, 2005 and 2004, respectively.
In connection with the Company’s adjustment to the exercise terms of certain outstanding warrants to purchase common stock on
March 2, 2006 and January 20, 2005, the Company recorded deemed dividends of $488,000 and $1.1 million, respectively. These
deemed dividends are reflected as an adjustment to net loss for the first quarter of 2006 and the year ended 2005, as restated, to arrive
at net loss applicable to common stockholders on the Consolidated Statement of Operations and for purposes of calculating basic and
diluted earnings per shares.
Shares Reserved for Future Issuance — As of December 31, 2006, the Company has reserved approximately 2.9 million of its
authorized but unissued shares of common stock for future issuance pursuant to its employee stock option plans issued to consultants
and investors.
Share-based Compensation — Prior to January 1, 2006, the Company accounted for its stock based compensation plans under the
recognition and measurement provisions of Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (“APB
25”), and related interpretations for all awards granted to employees. Under APB 25, when the exercise price of options granted to
employees under these plans equals the market price of the common stock on the date of grant, no compensation expense is recorded.
When the exercise price of options granted to employees under these plans is less than the market price of the common stock on the
date of grant, compensation expense is recognized over the vesting period.
The Company’s share-based employee compensation plans are described in Note 13. On January 1, 2006, the Company adopted
SFAS 123(R), “Accounting for Stock-based Compensation (Revised 2004)” (“123(R)”), which requires the measurement and
recognition of compensation expense for all share-based payment awards
F-8
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
made to employees, non-employee directors, and consultants, including employee stock options. SFAS 123(R) supersedes the
Company’s previous accounting under APB 25 and SFAS 123, for periods beginning in fiscal 2006. In March 2005, the Securities and
Exchange Commission issued SAB 107 relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption
of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the
accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Statement of Operations
as of and for the year ended December 31, 2006 reflects the impact of SFAS 123(R). In accordance with the modified prospective
transition method, the Company’s Statements of Operations for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006
was $1,224,454. As of December 31, 2006, there was $952,000 of unrecognized compensation cost related to outstanding options that
is expected to be recognized as a component of the Company’s operating expenses through 2009. Compensation costs will be adjusted
for future changes in estimated forfeitures.
For stock options paid in consideration of services rendered by non-employees, the Company recognizes compensation expense in
accordance with the requirements of SFAS No. 123(R) and EITF 96-18, as amended, and Emerging Issues Task Force Issue
No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” Under SFAS No. 123(R), the compensation associated with stock options paid to non-employees is
generally recognized in the period during which services are rendered by such non-employees. Since its adoption of SFAS 123(R),
there been no change to its equity plans or modifications of its outstanding stock-based awards.
Deferred compensation for non-employee option grants that do not vest immediately upon grant are recorded as an expense over
the vesting period of the underlying stock options, using the method prescribed by FASB Interpretation 28. At the end of each
financial reporting period prior to vesting, the value of these options, as calculated using the Black Scholes option pricing model, will
be re-measured using the fair value of the Company’s common stock and deferred compensation and the non-cash compensation
recognized during the period will be adjusted accordingly. Since the fair market value of options granted to non-employees is subject
to change in the future, the amount of the future compensation expense is subject to adjustment until the stock options are fully vested.
The Company recognized $734,000 of stock based compensation expense related to non-employee stock options in 2006.
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 its 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. 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.
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. Significant estimates include the accrual for research and development expenses, the basis for the
classification of current deferred
F-9
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
revenue and the estimate of expense arising from the common stock options granted to employees and non-employees. Actual results
could differ from those estimates.
Reclassifications — Certain prior year balances have been reclassified to conform with the 2006 presentation.
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 components of other comprehensive income (loss) and
accordingly comprehensive loss is the same as net loss reported.
3. Recent Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (“FIN No. 48”), to create a single model to address accounting for
uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold in
which a tax position be reached before financial statement recognition. FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. The Company will adopt FIN No. 48 as of January 1, 2007, as required. While the
Company has not yet completed its analysis, it does not expect that the adoption of FIN No. 48 will have a significant impact on the
Company’s financial position and results of operations.
On September 15, 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not
expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company does not expect SFAS No. 157 will have a significant impact on the
Company’s consolidated financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet
and income statement approach when quantifying a misstatement. SAB 108 is effective for the Company’s fiscal year ending
December 31, 2006. The Company has adopted SAB 108 with no effect on its consolidated financial statements.
In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements
(“FSP 00-19-2”). FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration
under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument
or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies. For registration payment arrangements and financial instruments subject to those arrangements that were entered into
prior to the issuance of EITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after
December 15, 2006. The Company has elected to reflect early adoption of FSP 00-19-2 in its 2006 financial statements, and the
adoption did not have an effect on its financial statements.
F-10
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
4. Accounts Receivable
At December 31, 2006, the Company’s accounts receivable balance of $106,000 was the result of a grant progress billing to the
National Institutes of Health. Due to the certainty of the collectibility of the account receivable, no allowance was recorded.
5. Other Assets
At December 31, 2006 and 2005, the Company had $171,000 and $150,000, respectively, on deposit with its landlords related to its
leased facilities, which were classified as Other Assets.
6. Equipment, Furnishings and Molecular Library, net
Equipment, furnishings and molecular library, net, at December 31, 2006 and 2005 consist of the following (in thousands):
Equipment and furnishings
Less — accumulated depreciation
Property and equipment, net
Molecular library
Less — accumulated amortization
Molecular library, net
2006
2005
$
$
$
502
(249)
253
447
(164)
283
$
$
$
601
(248)
353
447
(75)
372
The molecular library was purchased from Biorex in 2004, 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 three years and approximately $16,000 in 2010, the final
year.
Depreciation and amortization expense for the years ended December 31, 2006, 2005 and 2004 were $228,000, $217,000 and
$104,000, respectively.
7. Accrued Expenses
Accrued expenses and other current liabilities at December 31, 2006 and 2005 are summarized below (in thousands).
Professional fees
Research and development costs
Bonuses
Settlement fees
Income taxes
Other
Total
8. Termination of the Atlanta Facility Lease
2006
$
900
1,013
276
253
145
135
$ 2,722
2005
$
205
911
163
253
—
108
$ 1,640
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
F-11
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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 in 2005.
9. Commitments and Contingencies
The Company acquires assets still in development and enters into research and development arrangements with third parties that
often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the
success of the asset in development. Milestone payments may be required, contingent upon the successful achievement of an
important point in the development life-cycle of the pharmaceutical product (e.g., approval of the product for marketing by a
regulatory agency). If required by the arrangement, CytRx may have to make royalty payments based upon a percentage of the sales of
the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these
payments, they are not included in the table of contractual obligations.
These arrangements may be material individually, and in the unlikely event that milestones for multiple products covered by these
arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations in any
one period. In addition, these arrangements often give CytRx the discretion to unilaterally terminate development of the product,
which would allow CytRx to avoid making the contingent payments; however, CytRx is unlikely to cease development if the
compound successfully achieves clinical testing objectives. CytRx’s current contractual obligations that will require future cash
payments are as follows:
Non-Cancelable
Operating
Leases
Employment
Agreements
Research
and
Subtotal
Development
(In thousands)
(1)
534
138
26
10
5
713
$
$
(2)
1,735
876
490
240
120
3,461
$
$
$
$
2,269
1,014
516
250
125
4,174
(3)
$ 5,583
7,424
914
—
—
$13,921
Cancelable
License
Agreements
(4)
1,267
332
332
282
7,455
9,668
$
$
Subtotal
$
6,850
7,756
1,246
282
7,455
$ 23,589
Total
$ 9,119
8,770
1,762
532
7,580
$ 27,763
2007
2008
2009
2010
2011 and thereafter
Total
(1) Operating leases are primarily facility lease related obligations, as well as equipment and software lease obligations with third
party vendors. Facility lease expenses during 2006, 2005 and 2004 were approximately $472,000, $380,000 and $364,000,
respectively.
(2) Employment agreement obligations include management contracts, as well as scientific advisory board member compensation
agreements. Certain agreements, which have been revised from time to time, provide for minimum salary levels, adjusted
annually at the discretion of the Company’s Compensation Committee, as well as for minimum bonuses that are payable.
(3) Research and development obligations relate primarily to CytRx’s Phase IIb clinical trial for arimoclomol for ALS. Most of
these purchase obligations are cancelable.
(4) License agreements generally relate to CytRx’s obligations for licenses with UMMS associated with RNAi, which CytRx is
developing through its majority-owned RXi subsidiary. Included in the 2007 license obligations is an $800,000 payment that
may be made in cash or common stock of RXi to UMMS. CytRx anticipates making that payment in common stock of RXi
following RXi’s initial funding.
F-12
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
10. Private Placements of Common Stock
On March 2, 2006, the Company completed a $13.4 million private equity financing in which it issued 10,650,795 shares of its
common stock and warrants to purchase an additional 5,325,397 shares of its common stock at an exercise price of $1.54 per share.
Net of investment banking commissions which included 745,556 warrants to purchase CytRx common stock at $1.54 per share, legal,
accounting and other expenses related to the transaction, the Company received approximately $12.4 million of proceeds.
In connection with the financing, the Company adjusted the price and number of underlying shares of warrants to purchase
approximately 2.8 million shares that had been issued in prior equity financings in May and September 2003. The adjustment was
made as a result of anti-dilution provisions in those warrants that were triggered by the Company’s issuance of common stock in that
financing at a price below the closing market price on the date of the transaction. The Company accounted for the anti-dilution
adjustments as deemed dividends analogous with the guidance in Emerging Issues Task Force Issues (“EITF”) No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27,
Application of 98-5 to Certain Convertible Instruments, recorded an approximate $488,000 charge to retained earnings and a
corresponding credit to additional paid-in capital.
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 connection with the March 2006 and January 2005 private equity financings, the Company entered into a registration rights
agreement with the purchasers of its stock and warrants, which provides among other things, for cash penalties in the event that the
Company were unable to initially register, or maintain the effective registration of the securities. The Company initially evaluated the
penalty provisions in light of EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a
Company’s Own Stock, and determined that the maximum penalty does not exceed the difference between the fair value of a
registered share of CytRx common stock and unregistered share of CytRx common stock on the date of the transaction. The Company
then evaluated the provisions of FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements, which
specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies,
pursuant to which a contingent obligation must be accrued only if it is more likely than not to occur. In management’s estimation, the
contingent payments related to the registration payment arrangement are not likely to occur, and thus no amount need be accrued. The
Company has elected to reflect early adoption of FSP 00-19-2 in its 2006 financial statements, and the adoption did not have an effect
on its financial statements.
In connection with the Company’s private equity financing that was consummated on January 20, 2005, the Company adjusted the
price and number of underlying shares of warrants to purchase approximately 2.8 million shares that had been issued in prior equity
financings in May and September 2003. The adjustment was made as a result of anti-dilution provisions in those warrants that were
triggered by the Company’s issuance of common stock in that financing at a price below the closing market price on the date of the
transaction. Consistent with EITF No. 98-5 and EITF 00-27 the Company accounted for the anti-dilution adjustments as a deemed
dividend, which was recorded as an approximate $1.1 million charge to retained earnings and a corresponding credit to additional
paid-in capital.
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
F-13
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
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.
11. Investment in CytRx Laboratories
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 CytRx Laboratories. As a result of this purchase, CytRx Laboratories became a
wholly-owned subsidiary of CytRx. CytRx Laboratories was subsequently merged with and into the Company on September 30, 2005.
The purchase of Dr. Czech’s interest in CytRx Laboratories was consummated pursuant to the terms of the Stockholders Agreement
dated September 17, 2003, by and among CytRx, CytRx Laboratories and Dr. Czech. Of the shares of CytRx common stock issued to
Dr. Czech 300,000 were unrestricted and in exchange for his 5% interest in CytRx Laboratories. For financial statement purposes, that
stock was valued at $0.91 per share, the then fair value of the common stock. The non-cash transaction was accounted for using
purchase accounting and 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, of $184,000 was recorded as goodwill for financial statement purposes.
12. Severance Payments to Officers
In May of 2004, in accordance with Mutual General Releases and Severance Agreements the Company paid its 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 and paid its 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.
13. Stock Options and Warrants
Options
As of December 31, 2006, an aggregate of 10,000,000 shares of common stock were reserved for issuance under the Company’s
2000 Stock Option Incentive Plan, as amended, including 6,749,000 shares subject to outstanding stock options and 2,822,750 shares
available for future grant. Additionally, the Company has two other plans, the 1994 Stock Option Plan and the 1998 Long Term
Incentive Plan, which include 9,167 and 100,041 shares subject to outstanding stock options. As the terms of its plans provide that no
options may be issued after 10 years, no options are available under the 1994 Plan. Under the 1998 Long Term Incentive Plan, 29,517
shares are available for future grant. Options granted under these plans generally vest and become exercisable as to 33% of the option
grants on each anniversary of the grant date until fully vested. The options will expire, unless previously exercised, not later than ten
years from the grant date.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standard (“SFAS”)
No. 123(R), “Share-Based Payment (Revised 2004)” (“SFAS 123(R)”), that addresses the accounting for, among other things,
transactions in which a company receives employee services in exchange for equity instruments of the company. The statement
precludes accounting for employee share-based compensation transactions using the intrinsic method, and requires that such
transactions be accounted for using a fair-value-based method and that the fair value of the transaction be recognized as expense on a
straight-line basis over the vesting period. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”)
regarding the Staff’s interpretation of SFAS 123(R). This interpretation provides the Staff’s views regarding interactions between
SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public
companies. Effective January 1, 2006, the Company adopted the fair value recognition provision of SFAS 123(R) using the modified-
prospective method.
F-14
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
The Company recorded approximately $1.3 million, $600,000 and $1.1 million of non-cash charges related to the issuance of stock
options to certain consultants in exchange for services during 2006, 2005 and 2004, respectively.
The following table illustrates the pro forma effect on net loss and net loss per share assuming the Company had applied the fair
value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans for the years ending
December 31, 2005 and 2004. For purposes of this presentation, the value of the options is estimated using a Black Scholes
option-pricing model and recognized as an expense on a straight-line basis over the options’ vesting periods. Numbers presented are in
thousands with the exception of per share data.
Net loss applicable to common stockholders
Total stock-based employee compensation expense determined under fair-value based method for
all awards
Pro forma net loss
Loss per share, as originally reported (basic and diluted)
Loss per share, as restated (basic and diluted)
Loss per share, pro forma (basic and diluted)
Years Ended December 31,
2005
2004
(restated)
$ (16,168)
$ (16,392)
(1,388)
$ (17,556)
(0.27)
$
(0.28)
$
(0.31)
$
(1,415)
$ (17,807)
(0.48)
$
(0.48)
$
(0.52)
$
The table above reflects a restatement of the net loss for 2005 to reflect the adjustment of approximately $1.1. million for deemed
dividends in arriving at net loss applicable to common stockholders.
The fair value of stock options at the date of grant was estimated based on the following assumptions:
Weighted average risk free interest rate
Dividend yields
Weighted average volatility
Expected lives (years)
Weighted average years outstanding
2006
4.91%
0%
112%
6
7.5
2005
4.10%
0%
109%
8
4.8
2004
3.65%
0%
117%
8
5.8
The Company’s expected stock price volatility assumption is based upon the historical daily volatility of its publicly traded stock.
For option grants issued during the year ended December 31, 2006, the Company used a calculated volatility for each grant. The
expected life assumption for 2006 was based upon the simplified method provided for under SAB 107, which averages the contractual
term of the Company’s options of ten years with the average vesting term of three years for an average of six years. Prior to our
adoption of SFAS 123(R), the expected life assumption was based on management’s estimate of 8 years. The dividend yield
assumption of zero is based upon the fact the Company has never paid cash dividends and presently has no intention of paying cash
dividends. The risk-free interest rate used for each grant is equal to the U.S. Treasury rates in effect at the time of the grant for
instruments with a similar expected life. Based on historical experience, for 2006, the Company has estimated an annualized forfeiture
rate of 10% for options granted to its employees and 3% for options granted to senior management and directors. The Company will
record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual
forfeiture rates are higher than estimated. Prior to the implementation of SFAS 123(R), the Company accounted for forfeitures on an
as-occurred basis. Management has concluded that the changes in assumptions used between SFAS 123 and SFAS 123(R) do not have
a significant effect on the Company’s recorded expenses. Under provisions of SFAS 123(R), the Company recorded $1,224,454 of
stock-based compensation for the year ended December 31, 2006. No amounts relating to employee stock-based compensation have
been capitalized.
F-15
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
At December 31, 2006, there remained approximately $1 million of unrecognized compensation expense related to unvested
employee stock options to be recognized as expense over a weighted-average period of 6 years. Presented below is the Company’s
stock option activity:
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:
2006
6,205,542
1,033,500
(82,500)
(1,667)
(296,667)
6,858,208
4,758,330
Stock Options
2005
4,741,042
1,519,500
(17,000)
(38,000)
—
6,205,542
3,438,157
2004
2006
2,778,042
2,318,000
(55,000)
(285,000)
(15,000)
4,741,042
2,136,898
$1.71
1.30
0.97
1.00
1.59
1.66
$1.80
Weighted Average
Exercise Price
2005
$1.93
0.95
0.92
1.52
—
1.69
$1.89
2004
$2.08
1.73
0.89
2.00
3.16
1.93
$1.94
$
1.11
$
0.95
$
1.73
A summary of the activity for nonvested stock options as of December 31, and changes during the year is presented below:
Nonvested at January 1,
Granted
Vested
Pre-vested forfeitures
Nonvested at December 31,
2006
2,767,384
1,033,500
(1,497,674)
(203,333)
2,099,877
Stock Options
2005
2,604,161
1,519,500
(1,356,277)
—
2,767,384
2004
2,304,388
2,318,000
(1,753,227)
(265,000)
2,604,161
2006
$1.30
1.11
1.34
1.16
1.19
Weighted Average
Grant Date Fair
Value per Share
2005
$1.72
0.82
1.54
—
1.30
2004
$1.99
1.52
1.81
1.73
1.72
The following table summarizes significant ranges of outstanding stock options under the three plans at December 31, 2006:
Range of
Exercise Prices
$0.25 — 1.00
$1.01 — 1.50
$1.51 — 2.00
$2.01 — 3.00
Weighted Average
Remaining
Contractual Life Weighted Average
Number of Options
1,147,709
1,763,000
2,284,500
1,662,999
6,858,208
(years)
7.50
8.70
7.14
6.61
7.47
$
Exercise Price
0.81
1.25
1.86
2.43
1.66
$
Number of
Options
Exercisable
667,890
905,771
1,534,170
1,650,499
4,758,330
Weighted Average Weighted Average
Contractual Life
7.50
8.70
7.14
6.61
7.47
$
Exercise Price
0.81
1.25
1.86
2.44
1.80
$
The aggregate intrinsic value of outstanding options as of December 31, 2006, was $2,558,000 of which $1,414,000 is related to
exercisable options. The aggregate intrinsic value was calculated based on the positive difference between the closing fair market
value of the Company’s common stock on December 31, 2006 ($1.91) and the exercise price of the underlying options. The intrinsic
value of options exercised was $15,000 and $59,000 for the three and twelve months ended December 31, 2006, and the intrinsic
value of options vested was $117,000 and $775,000 during these same periods.
F-16
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
Warrants
A summary of the Company’s warrant activity and related information for the years ended December 31 is shown below.
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 year:
2006
18,508,949
6,112,870
(1,261,654)
—
—
23,360,165
23,360,165
Warrants
2005
9,735,416
10,267,887
(1,294,354)
—
(200,000)
18,508,949
18,508,949
2004
2006
7,352,077
3,884,778
(976,439)
(500,000)
(25,000)
9,735,416
9,735,416
$1.94
1.54
1.16
—
—
1.83
$1.83
Weighted Average
Exercise Price
2005
$1.64
1.96
0.55
—
1.00
1.94
$1.94
2004
$1.61
1.58
0.74
2.25
0.80
1.64
$1.58
$
1.54
$
2.00
$
1.36
The following table summarizes additional information concerning warrants outstanding and exercisable at December 31, 2006:
Range of Exercise Prices
$0.20 - 1.05
$1.06 - 1.79
$1.80 - 2.67
$2.68 - 2.70
Warrants Outstanding
Weighted
Average
Remaining
Contractual Life
(years)
.05
3.92
3.16
1.66
3.28
Number of
Shares
506,362
10,079,726
10,632,966
2,141,111
23,360,165
Weighted
Average
Exercise Price
$
.21
1.56
2.00
2.70
$ 1.83
Warrants
Number of
Shares
Exercisable
506,362
10,079,726
10,632,966
2,141,111
23,360,165
Exercisable
Weighted Average
Exercise Price
$
$
.21
1.56
2.00
2.70
1.83
14. 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 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. The Company recently extended the stockholder
rights plan through April 2017.
F-17
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
15. Income Taxes
At December 31, 2006, the Company had United States federal and state net operating loss carryforwards of $87.2 million and
$28.0 million, respectively, available to offset against future taxable income, which expire in 2007 through 2026. As a result of a
change in-control that occurred in the CytRx shareholder base in July 2002, approximately $51.8 million in federal net operating loss
carryforwards became limited in their availability to $747,000 annually. The remaining $35.4 million in federal net operating loss
carryforwards, and the $27.4 million in state net operating loss carryforwards, are unrestricted. Additionally, due to the
change-in-control, approximately $6.3 million of research and development tax credits will not be available for utilization and were
written off. As of December 31, 2006, CytRx also had research and development and orphan drug credits for federal and state
purposes of approximately $2.1 million and $200,000, respectively, available for offset against future income taxes, which expire in
2007 through 2026. 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.
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):
Deferred tax assets:
Net operating loss carryforward
Tax credit carryforward
Equipment, furnishings and other
Deferred revenue
Total deferred tax assets
Deferred tax liabilities — Prepaid insurance
Net deferred tax assets
Valuation allowance
December 31,
2006
2005
$ 30,892
2,391
1,547
9,085
43,915
(85)
43,830
(43,830)
$
—
$ 35,607
6,443
4,476
—
46,526
(2,730)
43,796
(43,796)
—
$
For all years presented, the Company did not recognize any deferred tax assets or liabilities. The net change in valuation allowance
for the years ended December 31, 2006 and 2005 were increases of $34,000 and $5,308,000, respectively.
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 related to change in valuation allowance
Net write-off of research and development tax credits
Change in state tax rates
Other, net
F-18
2006
Years ended December 31,
2005
$ (5,646)
(968)
143
34
5,059
2,160
(637)
145
$
$ (5,128)
(603)
736
5,308
—
(313)
—
$
2004
$ (5,570)
(655)
1,103
5,122
—
—
—
$
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
16. License Agreements
In May 2006, CytRx expanded its relationship with UMMS by entering into a new co-exclusive license agreement related to a
patent application for chemical modifications of RNAi invented by Tariq M. Rana, Ph.D. In consideration of that license, CytRx made
a cash payment of $75,000 and, in December 2006, issued it a total of 150,000 shares of CytRx common stock which were valued, for
financial statement purposes, at approximately $263,000.
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 its common stock which were valued, for financial
statement purposes, at $108,000.
Because the technologies licensed from UMMS and Imperial College had not achieved technological feasibility at the time that
CytRx licensed them, had no alternative future uses and, therefore, no separate economic value, the total cost of all cash payments and
stock issued for acquisition of the technology was expensed as research and development.
17. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 2006 and 2005 is as follows (in thousands, except per share data):
2006
Total revenues
Net loss
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants
Net loss applicable to common stockholders
Basic and diluted loss per share applicable to common
stock
2005
Total revenues
Net loss
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants
Net loss applicable to common stockholders
Basic and diluted loss per share applicable to common
stock
March 31
June 30
September 30
December 31
(In thousands, except per share data)
Quarter Ended
(restated)
$
$
$
$
$
$
61
(4,166)
$
—
(5,465)
(488)
(4,654)
—
$ (5,465)
(0.07)
$
(0.08)
(restated)
1
(3,527)
$
—
(4,509)
(1,076)
(4,603)
—
$ (4,509)
(0.09)
$
(0.08)
$
$
$
$
$
$
776
(2,972)
—
(2,972)
(0.04)
10
(3,492)
—
(3,492)
(0.06)
$
$
$
$
$
$
1,229
(4,148)
—
(4,148)
(0.06)
173
(3,565)
—
(3,565)
(0.06)
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.
Our Statement of Operations as of and for the year ended December 31, 2006 reflects the impact of SFAS 123(R). In accordance
with the modified prospective transition method, our results of operations for prior periods have not been restated to reflect the impact
of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was
$1.2 million.
In connection with the Company’s adjustment to the exercise terms of certain outstanding warrants to purchase common stock on
March 2, 2006 and January 20, 2005, the Company recorded deemed dividends of
F-19
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
$488,000 and $1.1 million, respectively. These deemed dividends are reflected as an adjustment to net loss for the first quarter of 2006
and the year ended 2005, as restated, to arrive at net loss applicable to common stockholders on the consolidated statement of
operations and for purposes of calculating basic and diluted earnings per shares. The Company’s quarterly financial data has been
restated to reflect the impact of the deemed dividend upon the calculation of basic and diluted earnings per share for the three-month
periods ended March 31, 2006 and 2005, respectively.
18. Related Party Transactions
Dr. Michael Czech, who is a member of the Company’s Scientific Advisory Board, is an employee of UMMS and was the
principal investigator for a sponsored research agreement between the Company and UMMS. During 2006, 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.
RXi was incorporated jointly in April 2006 by CytRx and the four current members of RXi’s scientific advisory board for the
purpose of pursuing the possible development or acquisition of RNAi-related technologies and assets.
On January 8, 2007, the Company entered into a Contribution Agreement with RXi under which the Company assigned and
contributed to RXi substantially all of its RNAi-related technologies and assets, and entered into a letter agreement with RXi under
which RXi has agreed to reimburse the Company, following its initial funding, for all organizational and operational expenses
incurred by the Company in connection with the formation, initial operations and funding of RXi.
Tod Woolf, Ph.D., the President and Chief Executive Officer of RXi, is one of the Company’s executive officers. The Company
recently entered into an employment agreement with Dr. Woolf under which he is entitled to base annual compensation and other
employee benefits, including the right to receive, upon completion of RXi’s initial funding, a grant by RXi of stock options to
purchase a number of shares of RXi common stock equal to 3/70ths of the number of RXi shares held by CytRx immediately prior to
the initial funding at an exercise price equal to the fair market value of the shares at the time of grant.
Dr. Woolf may be deemed to have a material interest in the Company’s transactions with RXi described above, and in its future
dealings with RXi, by reason his status as RXi’s President and Chief Executive Officer and in light of any stock options granted to
him by RXi upon completion of its initial funding or otherwise.
19. Subsequent Events
On January 8, 2007, CytRx entered into a Contribution Agreement with RXi under which CytRx assigned and contributed to RXi
substantially all of its RNAi-related technologies and assets. The licensed technologies include patent applications on RNAi target
sequences, chemical modifications and delivery to cells, field-specific licenses to a patent application on chemical modification of
RNAi, the “Tuschl I” patent, and CytRx’s exclusive licenses to patent applications that disclose gene targets for diabetes and obesity,
including RIP140. In connection with the contribution of the licenses and other assets, RXi assumed primary responsibility for all
payments to UMMS and other obligations under the contributed licenses and assets.
In addition to the RNAi licenses and rights that CytRx contributed to RXi, on January 10, 2007, RXi entered into three exclusive,
worldwide, sublicenseable licenses with UMMS for three different patent families and one non-exclusive, worldwide,
non-sublicensable license for a fourth patent family, pursuant to which UMMS granted RXi rights under certain UMMS patent
applications to make, use and sell products related to applications of RNAi technologies. The 2007 UMMS licenses include an
exclusive license covering nanotransporters, which may be effective in the delivery of RNAi compounds, as well as methods and
potential compounds for the potential treatment of ALS that can be delivered locally to the central nervous system.
F-20
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
As consideration for the UMMS licenses entered into in 2007, CytRx paid UMMS an aggregate up-front fee of $75,000 and
reimbursed UMMS $103,000 for previously incurred patent expenses. Upon the completion of RXi’s initial funding, RXi will be
obligated to pay UMMS an additional license fee of $175,000 and issue to UMMS an aggregate of $1,600,000 of RXi common stock
that is to be valued, on a per share basis for this purpose based on the valuation of RXi in its initial funding.
The foregoing license agreements with UMMS require the Company to make aggregate payments of up to $300,000 in 2007. In
subsequent periods, the Company will be required to make payments ranging from $250,000 to $1.7 million per year to maintain the
licenses. The Company is obligated to pay legal expenses for the prosecution of patents licensed from UMMS, which the Company
anticipates will be approximately $175,000 during 2007, and to make milestone payments to UMMS based upon its progress in the
clinical development and marketing of products utilizing the technologies licensed from UMMS. In the event that the Company were
to successfully develop a product in each of the categories of obesity/type 2 diabetes and ALS, these milestone payments could
aggregate up to $27.4 million. The Company also would be required to pay royalties to UMMS based on the net sales of those
products. The actual milestone payments will vary, perhaps significantly, based upon the milestones the Company achieves and the
products, if any, the Company develops.
On January 10, 2007, RXi also entered into an invention disclosure agreement with UMMS pursuant to which UMMS is obligated
for a three-year period to disclose to RXi any unrestricted inventions conceived or reduced to practice by UMMS related to therapeutic
applications of RNAi technologies. Upon completion of RXi’s initial funding, RXi will be obligated to pay UMMS $100,000 in cash,
and additionally either pay UMMS another $800,000 in cash or issue to UMMS $800,000 of RXi common stock, that is to be valued
on a per share basis for this purpose based on the valuation of RXi in the initial funding. RXi also will be obligated to pay UMMS
$100,000 on each of the first and second anniversaries of the effective date of the invention disclosure agreement.
As of January 8, 2007, CytRx entered into a letter agreement with RXi under which RXi has agreed to reimburse CytRx, following
its initial funding, for all organizational and operational expenses incurred by CytRx in connection with the formation, initial
operations and funding of RXi. As of February 28, 2007, CytRx has advanced approximately $592,000 to RXi for which it will be
obligated to reimburse CytRx.
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.
As of March 23, 2007, the Company has received approximately $11.0 million in connection with the exercise of warrants and
options since December 31, 2006. The exercise price of the warrants and options ranged from $0.20 to $2.70.
F-21
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CytRx Corporation
Los Angeles, California
We have audited the accompanying consolidated balance sheets of CytRx Corporation as of December 31, 2006 and 2005 and the
related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2006. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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 at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
As more fully described in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment.”
As described in Note 2 to the consolidated financial statements, the Company has restated its statement of operations for the year
ended December 31, 2005 for an error in the presentation of deemed dividends resulting in the presentation of net loss allocable to
common stockholders and correction of basic and diluted earnings per share for the year ended December 31, 2005.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of CytRx Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated April 2, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the
Corporation’s internal control over financial reporting and an adverse opinion on the effectiveness of the Corporation’s internal
control over financial reporting due to material weaknesses.
BDO Seidman, LLP
Los Angeles, California
April 2, 2007
F-22
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CytRx Corporation
Los Angeles, California
We have audited management’s assessment, included in the accompanying Item 9A, Management’s Report on Internal Control
over Financial Reporting, that CytRx Corporation did not maintain effective internal control over financial reporting as of
December 31, 2006, because of the effect of material weaknesses in financial reporting, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). CytRx Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our
audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material
weaknesses have been identified and included in management’s assessment. The Company did not maintain effective controls over the
application of generally accepted accounting principles arising from its accounting for anti-dilution adjustments in its calculation of
loss per share for the quarters ended March 31, June 30 and September 30, 2005 and 2006. Also, the Company did not maintain
effective controls over its
F-23
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
quarterly and annual financial reporting process due to the misclassification of research and development expenses for the quarters
ended March 31, June 30, September 30, and December 31, 2006. As a result of these material weaknesses, there is a more than
remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or
detected. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit
of the 2006 financial statements, and this report does not effect our report dated April 2, 2007.
In our opinion, management’s assessment that CytRx Corporation did not maintain effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, because
of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, CytRx
Corporation has not maintained effective internal control over financial reporting as of December 31, 2006, based on the COSO
criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of CytRx Corporation as of December 31, 2006 and 2005 and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006, and our
report dated April 2, 2007 expressed an unqualified opinion thereon.
BDO Seidman, LLP
Los Angeles, California
April 2, 2007
F-24
Source: CYTRX CORP, 10-K, April 02, 2007
Table of Contents
CYTRX CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2006, 2005 and 2004
Description
Reserve Deducted in the Balance Sheet
from the Asset to Which it Applies:
Allowance for Deferred Tax Assets
Year ended December 31, 2006
Year ended December 31, 2005
Year ended December 31, 2004
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Additions
Deductions
Balance at
End of Year
$43,796,000
38,488,000
36,478,000
$—
—
—
F-25
34,000
$
5,308,000
2,008,000
$ —
—
—
$43,830,000
43,796,000
38,488,000
Source: CYTRX CORP, 10-K, April 02, 2007
CYTRX CORPORATION
11726 San Vicente Boulevard, Suite 650
Los Angeles, California 90049
March 30, 2007
EXHIBIT 4.3
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: Corporate Trust Department
Re: Amendment No. 2 to Shareholder Protection Rights Agreement dated as of April 16, 1997, as amended by Amendment No. 1
thereto dated February 11, 2002 (as so amended, the “Rights Agreement”) between CytRx Corporation (“CytRx”) and
American Stock Transfer & Trust Company
Ladies and Gentlemen:
Pursuant to Section 5.4 of the Rights Agreement, by resolution duly adopted on February 12, 2007 by the Board of Directors of
CytRx, the Rights Agreement is hereby amended as follows:
1. The definition of “Expiration Time” in Section 1.1 of the Rights Agreement is hereby deleted and replaced in its entirely with the
following:
” ‘Expiration Time’ shall mean the earliest of (i) the Exchange Time, (ii) April 16, 2017 and (iii) upon the merger of the Company
into another corporation pursuant to an agreement entered into prior to a “Flip-In Date.”
2. Except as expressly amended hereby, the Rights Agreement shall remain in full force and effect.
3. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement.
4. This Amendment No. 2 shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to
the conflicts of law principles thereof.
5. This Amendment No. 2 may be executed in counterparts. Each such counterpart shall be deemed to be an original, and such
counterparts, together, shall be deemed to be one and the same agreement.
6. This Amendment No. 2 shall be effective as of the date hereof, and all references to the Rights Agreement shall, from and after such
time, be deemed to be references to the Rights Agreement as amended hereby.
Source: CYTRX CORP, 10-K, April 02, 2007
American Stock Transfer & Trust Company
March 30, 2007
Page 2
Accepted and agreed to as of the date
first written above:
American Stock Transfer & Trust Company
/s/ HERBERT L. LEMMER
By:
Name: Herberet L. Lemmer
Title: Vice President
Very truly yours,
/s/ Steven A. Kriegsman
President and Chief Executive Officer
CytRx Corporation
Source: CYTRX CORP, 10-K, April 02, 2007
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.
RXi Pharmaceuticals Corporation (“RXi”) was incorporated in April 2006 by the Company and the four current members of RXi’s
scientific advisory board for the purpose of pursuing the possible development or acquisition of RNAi-related technologies and assets.
On January 8, 2007, the Company entered into a Contribution Agreement with RXi under which the Company assigned and
contributed to RXi substantially all of its RNAi-related technologies and assets. As a result of the contribution, the Company now
owns approximately 85% of RXi’s outstanding shares.
EXHIBIT 21.1
Source: CYTRX CORP, 10-K, April 02, 2007
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CytRx Corporation
Los Angeles, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-100947, 333-106629
and 333-133269) and Form S-8 (Nos.333-42259, 333-93816, 333-93818, 333-84657,333-68200, 333-91068, 333-93305, and
333-1213339) of CytRx Corporation of our reports dated April 2, 2007, relating to the consolidated financial statements and financial
statement schedule and management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting
and ineffectiveness of the Corporation’s internal control over financial reporting due to material weaknesses appearing in this Form
10-K.
EXHIBIT 23.1
BDO Seidman, LLP
Los Angeles, California
April 2, 2007
Source: CYTRX CORP, 10-K, April 02, 2007
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 31, 2007
/s/ STEVEN A. KRIEGSMAN
Steven A. Kriegsman
Chief Executive Officer
Source: CYTRX CORP, 10-K, April 02, 2007
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 31, 2007
/s/ MATTHEW NATALIZIO
Matthew Natalizio
Chief Financial Officer
Source: CYTRX CORP, 10-K, April 02, 2007
Certification of Chief Executive Officer
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, 2006 (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.
Exhibit 32.1
Date: March 31, 2007
/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.
Source: CYTRX CORP, 10-K, April 02, 2007
Certification of Chief Financial Officer
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, 2006 (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.
Exhibit 32.2
Date: March 31, 2007
/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.
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: CYTRX CORP, 10-K, April 02, 2007