e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-15327
CytRx Corporation
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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58-1642740
(I.R.S. Employer
Identification No.) |
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11726 San Vicente Blvd, Suite 650,
Los Angeles, California
(Address of principal executive offices)
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90049
(Zip Code) |
Registrants telephone number, including area code: (310) 826-5648
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of exchange on which registered |
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Common Stock, $0.001 par value per share
Series A Junior Participating Preferred Stock Purchase Rights
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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 þ
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 þ
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 þ 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 Registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 2b-2 of
the Act). Yes o No þ
The aggregate market value of the Registrants common stock held by non-affiliates on June 29,
2007, the last business day of the Registrants most recently completed second fiscal quarter, was
approximately $260.2 million. On March 28, 2008, there were
outstanding 90,743,553 shares of the
Registrants common stock, exclusive of treasury shares.
CYTRX CORPORATION
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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SAFE HARBOR STATEMENT
Some of the information contained in this Annual Report may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We base
these forward-looking statements on our current views with respect to our research and development
activities, business strategy, business plan, financial performance and other matters, both with
respect to us, specifically, and the biotechnology sector, in general. Statements that include the
words expect, intend, plan, believe, project, estimate, may, should, anticipate,
will and similar statements of a future or forward-looking nature identify forward-looking
statements for purposes of the federal securities laws or otherwise, but the absence of these words
does not necessarily mean that a statement is not forward-looking.
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 the sections entitled Business, Risk Factors, Legal Proceedings, Managements
Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and
Qualitative Disclosures About Market Risk and Controls and Procedures in this Annual Report, all
of which you should review carefully. 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, except as required by law.
If one or more of these or other risks or uncertainties materializes, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we anticipate. All
subsequent written and oral forward-looking statements attributable to us or individuals acting on
our behalf are expressly qualified in their entirety by the cautionary language above. You should
consider carefully all of the factors set forth or referred to in this Annual Report that could
cause actual results to differ.
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PART I
Item 1. BUSINESS
In this Annual Report, we sometimes refer to CytRx Corporation as CytRx and to our former
subsidiary, RXi Pharmaceuticals Corporation, as RXi. References in this Annual Report to the
company, we, us or our refer to CytRx, alone, unless otherwise indicated.
COMPANY OVERVIEW
We are a clinical-stage biopharmaceutical company engaged in developing human therapeutic
products based primarily upon our small-molecule molecular chaperone amplification technology.
Molecular chaperone proteins occur normally in human cells and are key components of the bodys
defenses against potentially toxic mis-folded cellular proteins. Since damaged toxic proteins
called aggregates are thought to play a role in many diseases, we believe that amplification of
molecular chaperone proteins could have therapeutic efficacy for a broad range of indications.
Currently, we are using our chaperone amplification technology to develop treatments for
neurodegenerative disorders and diabetic complications.
In December 2007, we began enrolling patients in our Phase IIb efficacy clinical trial of our
lead product candidate, arimoclomol, for amyotrophic lateral sclerosis, which is commonly known as
ALS, or Lou Gehrigs disease. That Phase IIb clinical trial was placed on clinical hold by the
U.S. Food and Drug Administration, or FDA, in January 2008. Based on written correspondence we
received from the FDA, their decision pertained to a previously completed animal toxicology study
in rats and was not related to data generated from any human studies with arimoclomol. Subject to
our ability to provide satisfactory information to the FDA to remove the clinical hold, we
currently anticipate that data regarding the primary efficacy endpoint of this trial will be
available approximately 18 months following the resumption of the trial. The results from our
completed Phase IIa clinical trial and open-label trial extension indicated that arimoclomol was
safe and well tolerated by ALS patients. Based on preliminary discussions with the FDA, we plan to
conduct a second efficacy trial of arimoclomol for ALS, possibly overlapping with the Phase IIb
efficacy trial, to provide additional data to support a possible approval decision by the FDA.
Arimoclomol for treating ALS has received Orphan Drug and Fast Track designation from the FDA and
orphan medicinal product status from the European Medicines Agency.
The results from preclinical efficacy studies completed by us in April 2007 indicated that
arimoclomol accelerated recovery time, and improved recovery, in experimental animal models of
stroke, even when administered as long as 48 hours after onset. We are currently planning to
commence in the second half of 2008 a Phase II clinical trial of arimoclomol for stroke recovery,
subject to FDA clearance.
Iroxanadine, our second small-molecule product candidate, has completed Phase I clinical
trials. The results from the Phase I trials indicated that orally-administered iroxanadine was
safe and well tolerated in healthy volunteers. The results from an open-label Phase II clinical
trial in patients with chronic high blood pressure indicated that oral iroxanadine improved the
functioning of endothelial cells that line the interior of blood vessels and are thought to be
damaged by conditions of stress such as chronic high blood pressure and diabetes. Animal studies
completed by us in May 2007 indicated that iroxanadine accelerated the healing of skin wounds in
diabetic animals. Subject to FDA clearance, we plan to initiate a Phase II clinical trial of oral
iroxanadine for diabetic ulcers in the second half of 2008.
We also own several other small-molecule compounds that we believe may amplify molecular
chaperone proteins in human cells. In July 2007, we opened a research and development facility in
San Diego, California, to serve as a dedicated laboratory to accelerate development of our pipeline
of molecular chaperone amplification product candidates.
Our Molecular Chaperone Amplification Platform
The synthesis of proteins is a normal part of essential human cell activity. In order to
function normally, proteins must fold into particular three-dimensional shapes. In response to
trauma or other
stressful conditions, proteins can fold improperly, resulting in the aggregation of mis-folded
proteins that can be toxic to the cell and cause or contribute to disease. 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. Similar protein aggregates also are present in motor neurons of all other ALS patients.
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In nature, the cell has developed molecular chaperone proteins to respond to mis-folded
proteins. As a cell comes under stress, proteins begin to mis-fold into toxic shapes, and the cell
responds by increasing the synthesis of molecular chaperone proteins that detect the mis-folded
proteins and refold them into the appropriate, non-toxic shape, or identify, or tag, the toxic
protein for destruction by the cell.
By boosting the cells own molecular chaperone response to higher levels, we believe that the
progression of chronic diseases such as ALS that are thought to be caused by protein mis-folding
may be slowed or halted, or perhaps even reversed. In in-vitro studies, for example, mammalian
cells engineered to have increased amounts of molecular chaperone proteins showed resistance to a
variety of otherwise lethal stresses. Increased molecular chaperone proteins also significantly
extended the lifespan of mice with spinal and bulbar muscular atrophy, a disease with a pathology
believed to be similar to ALS.
Some potential drug candidates have been reported in scientific papers as activating molecular
chaperone expression, but they appear to activate the response of molecular chaperone proteins in
all cells, including normal cells. We are not aware of another pharmaceutical company engaged in
developing small-molecule amplifiers of molecular chaperone proteins that are activated only in
stressed or diseased cells.
OUR PRODUCT CANDIDATE PIPELINE
The following tables summarize the current pipeline of our product candidates:
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Product |
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Stage of |
Technology |
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candidate |
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Indication |
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development |
Molecular
chaperone
amplification
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Arimoclomol
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ALS (Lou Gehrigs disease)
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Phase IIb |
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Arimoclomol
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Stroke recovery
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Phase II (2H 2008) |
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Iroxanadine
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Diabetic foot ulcers
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Phase II (2H 2008) |
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CYT-092
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Multiple indications
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Preclinical |
OUR CLINICAL DEVELOPMENT PROGRAMS
Our clinical development programs consist of our ongoing efforts to develop arimoclomol for
ALS and stroke recovery and to develop iroxanadine for diabetic ulcers.
Arimoclomol. Arimoclomol is an orally-administered small-molecule product candidate that we
believe functions by stimulating a normal cellular protein repair pathway by amplifying activated
molecular chaperone proteins implicated in neurological disorders.
Arimoclomol for the treatment of ALS. ALS, or Lou Gehrigs disease, is a debilitating and
ultimately deadly disease involving the progressive degeneration of motor neurons believed to be
caused by toxic mis-folding of proteins. According to the ALS Association, approximately 30,000
people in the United States are living with ALS and 5,600 new cases are diagnosed each year.
Worldwide, an estimated 120,000 people are living with ALS. According to the ALS Survival Guide,
50% of ALS patients die within 18 months of diagnosis and 80% die within five years of diagnosis.
The following is a summary of our clinical development of arimoclomol for treating ALS:
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in July 2006, we completed an 84-patient, multi-center, double-blind,
placebo-controlled, multi-dose Phase IIa clinical trial of safety and tolerability of
arimoclomol in volunteers with ALS, which we refer to as the Phase IIa trial; |
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in May 2007, we completed an open-label extension of the Phase IIa trial in
approximately 70 ALS patients from the trial who were administered the highest
investigational dose (100 mg three times daily) of arimoclomol for an additional six
months; |
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in June 2007, we completed a multiple ascending-dose clinical trial of safety and
tolerability involving 40 healthy volunteers; |
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in November 2007, we completed a 28-day safety clinical trial with 400 mg of
arimoclomol three times daily involving 16 healthy volunteers; and |
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in December 2007, we initiated patient screening in a double blind, placebo-controlled
Phase IIb clinical study. In this trial, we expect to enroll 390 ALS patients at 30 to 40
clinical sites in the United States and Canada. The primary purpose of this trial is to
evaluate the safety and efficacy of a 400 mg dose of arimoclomol administered orally three
times daily. The Phase IIb clinical trial was placed on clinical hold by the FDA in
January 2008. Based on written correspondence we received from the FDA, their decision
pertained to a previously completed animal toxicology study in rats and was not related to
data generated from any human studies with arimoclomol. |
Phase IIa clinical trial. Participants in the Phase IIa clinical trial of arimoclomol were
administered either a placebo capsule, or one of three dosage 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 the Phase IIa trial were safety and tolerability. Secondary endpoints
included a preliminary evaluation of efficacy using two widely accepted disease-progression
markers. The first marker, the revised ALS Functional Rating Scale, or ALSFRS-R, is used to
determine patients overall functional capacity and independence in 13 activities. The second
marker measures vital capacity, an assessment of lung capacity, which is an important disease
indicator since ALS sufferers eventually lose the ability to breathe on their own. The trial was
designed to be able to detect only extreme responses in these two markers.
The results from our Phase IIa trial and open-label extension clinical trial indicated that
arimoclomol was safe and well tolerated in ALS volunteers, even at the highest administered dose.
Arimoclomol was detected in participants cerebral spinal fluid, demonstrating that it passed the
so-called blood:brain barrier, and participants treated with arimoclomol experienced a
statistically significant decrease in adverse events of weakness compared with the placebo group.
As would be expected based upon the small size and short duration of the Phase IIa trial, we
observed no statistically significant effects in disease progression markers. We did, however,
observe a trend toward slower disease progression in the highest dosage group. Since there was no
concurrent placebo control group in our open-label extension clinical trial, we compared the
results with results in an untreated placebo group with similar characteristics in a prior ALS
clinical trial published in July 2006 in Annals of Neurology. The results indicated a trend toward
a slower average progression in every disease marker in the patients treated with arimoclomol
compared to the historical placebo control. In particular, we observed a decrease of 21% in the
rate of decline for ALSFRS-R, 8% for vital capacity, 23% for total body weight and 20% for body
mass index when compared with that historical control. No definitive conclusions can be drawn from
these data without a concurrent placebo control group, and investors are cautioned against relying
on these data as an indication of arimoclomols potential efficacy.
The favorable safety and tolerability profile observed in our Phase IIa trial, open-label
extension clinical trial and animal toxicology studies of arimoclomol suggested that we may be able
to safely increase the dose of arimoclomol without causing significant side effects. The results
from the subsequent multiple ascending-dose study indicated that arimoclomol was safe and well
tolerated, even at doses of 600 mg three times daily (six times higher than the highest dose used
in the Phase IIa and open-label studies), when administered to healthy volunteers over a seven-day
period. Results from the 28-day safety clinical trial in healthy volunteers indicated that the
dosage of 400 mg administered three times daily also was safe and well tolerated.
Phase IIb efficacy trial. The Phase IIb efficacy trial will evaluate the safety and efficacy
in ALS patients of a 400 mg dose of arimoclomol administered orally three times daily. We expect
to enroll in the
trial 390 ALS patients in two stages. We first expect to enroll 24 patients in a four-week
safety lead-in stage involving weekly clinical monitoring to assure that the safety previously
observed in healthy volunteers is also observed in the ALS volunteers. Unless serious safety
issues are observed during this lead-in stage, dosing will continue uninterrupted for these
participants, but clinical monitoring will be reduced to a four-week basis for the remainder of the
study. An independent data monitoring committee will review all safety data from the four-week
lead-in stage. If no substantial safety issues are identified, we expect to enroll the remaining
366 ALS volunteers in the second stage. With the exception of the 24 participants in the first
stage of the trial, all of the ALS trial volunteers will be monitored every four weeks for the
initial nine-month trial period. After collecting primary efficacy endpoint data, we plan to
continue double-blind administration of arimoclomol in trial patients with monitoring at eight-week
intervals for an additional nine months in order to provide additional data on secondary endpoints
and on long-term safety and efficacy.
That Phase IIb clinical trial was placed on clinical hold by the FDA in January 2008. Based
on written correspondence we received from the FDA, their decision pertained to a previously
completed animal toxicology study in rats and was not related to data generated from any human
studies with arimoclomol. Subject to our ability to provide satisfactory information to the FDA to
remove the clinical hold, we currently expect to complete patient enrollment in the Phase IIb
efficacy trial approximately nine months following the resumption of the trial, and anticipate and
that data regarding the trials primary efficacy endpoint will be available approximately 18 months
following the resumption of the trial.
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Based on preliminary discussions with the FDA, we plan to conduct a second efficacy clinical
trial for ALS, possibly overlapping with the Phase IIb efficacy trial, to provide additional data
to support possible FDA approval.
Arimoclomol for the treatment of stroke. Stroke results from an acute loss of normal blood
flow to the brain caused most often by a blockage in a blood vessel (ischemic) or due to leaking of
blood from a vessel (hemorrhagic). According to the American Heart Association: stroke is the
third leading cause of death and the number one cause of long-term disability in the United States;
between 50% and 70% of stroke survivors regain functional independence, but between 15% and 30% are
permanently disabled and 20% require institutional care within three months after stroke; and the
direct and indirect stroke cost in the United States totaled approximately $58 billion in 2006.
After the normal flow of blood is restored to the brain after the initial event, post-stroke
neurological function continues to decline. We believe that this continuing decline in
neurological function is the consequence of mis-folded protein aggregates generated as a result of
oxygen deprivation during the original event.
Preclinical efficacy studies completed by us in April 2007 indicated that arimoclomol
accelerated the time to recovery, and improved recovery, in experimental animal models of stroke.
These results were obtained even when arimoclomol was administered as long as 48 hours after onset.
By comparison, tissue plasminogen activator, or t-PA, the only treatment currently approved in
the United States for acute ischemic stroke, must be administered within three hours of stroke,
which substantially limits the number of patients who qualify for this treatment. In light of
these preclinical data, we plan to commence a Phase II clinical trial for arimoclomol in stroke
recovery in the second half of this year, subject to FDA clearance.
Iroxanadine. Iroxanadine also is an orally-administered small-molecule product candidate. We
believe it functions by stimulating the molecular chaperone protein response in the endothelium,
the thin layer of cells that line the interior surface of human blood vessels.
Iroxanadine for the treatment of diabetic ulcers. Type 2 diabetes is a major health problem
with significant secondary complications. The American Diabetes Association estimates that there
are 21 million type 2 diabetes sufferers in the United States. The World Health Organization
estimates that there are more than 162 million cases of type 2 diabetes worldwide. According to
the American Diabetes
Association, 15% of all diabetics will develop a foot ulcer during their lifetime, and over
82,000 non-traumatic lower-limb amputations were performed on diabetics in the United States in
2002 due to such ulcers and other complications. We believe there is strong support in the
scientific literature for the assertion that diabetic foot ulcers fail to heal efficiently, in
part, due to the dysfunction of endothelial cells lining the blood vessels caused by protein
mis-folding.
Animal studies completed by us in May 2007 indicated that iroxanadine significantly decreased
the time it took for wounds to heal in diabetic mice without affecting healing in healthy mice.
Wound healing in the diabetic mice, which normally required twice the time to heal as healthy mice,
was accelerated to the extent that healing time of diabetic mice treated with iroxanadine was
indistinguishable from that in untreated healthy mice.
In Phase I clinical trials in healthy volunteers and Phase II clinical trials in patients with
chronic high blood pressure conducted prior to our acquisition of iroxanadine, iroxanadine was
determined to be safe and well tolerated and demonstrated significant improvement in the function
of endothelial cells in the brachial artery, a major blood vessel of the upper arm. Based on our
preclinical results and the earlier clinical study data, we plan to commence a Phase II clinical
trial with oral iroxanadine for the treatment of diabetic foot ulcers in the second half of 2008,
subject to FDA clearance.
Our Research Programs and Other Technologies
We are actively conducting scientific research at our research and development facility in San
Diego, California. Our research is aimed at discovering and validating novel drug targets,
analyzing our current product candidates and library of related compounds and developing backup
compounds and new therapies based on the amplification of molecular chaperone proteins.
Our other current technologies, which we acquired or developed prior to the acquisition of our
molecular chaperone amplification 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-based and conventional vaccines and other potential uses.
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Our Separation from RXi Pharmaceuticals Corporation
RXi Pharmaceuticals Corporation, or RXi, was founded in April 2006 by us and four researchers
in the field of RNAi, including Dr. Craig Mello, recipient of the 2006 Nobel Prize for Medicine for
his co-discovery of RNAi. RNAi is a naturally occurring mechanism for the regulation of gene
expression that has the potential to selectively inhibit the activity of any human gene. As
evidenced by Kim and Rossis review published in March 2007 in Nature Reviews Genetics, it is
believed that this inhibition may potentially treat human diseases by silencing genes that lead
to disease.
In January 2007, we transferred to RXi substantially all of our RNAi-related technologies and
assets, and RXi began operating on a stand-alone basis for the purpose of accelerating the
discovery of RNAi therapeutics previously sponsored by us. RXis initial focus is on developing
RNAi-based product candidates for treating neurological and metabolic disorders and cancer.
Until recently, we owned approximately 85% of the outstanding shares of common stock of RXi
and our consolidated financial statements, including our consolidated financial statements as of
and for the year ended December 31, 2007 included in this Annual Report, reflected the consolidated
financial condition and results of operations of RXi. On February 14, 2008, our board of directors
declared a dividend, payable to our stockholders as of March 6, 2008, the record date, of one share
of RXi common stock for each approximately 20.05 shares of our common stock held by such
stockholders. The dividend was paid on March 11, 2008. The RXi shares distributed by us to our
stockholders constituted approximately 36% of the currently outstanding RXi shares, so we currently
own approximately 49% of the outstanding shares of RXi common stock. As a result, our financial
statements will no longer consolidate the financial condition and results of operation of RXi, but
instead will account for our ongoing investment in RXi based
on the equity method of accounting as discussed in the Managements Discussion and Analysis
of Financial Condition and Results of Operations section of this Annual Report.
In connection with our distribution of RXi shares to our stockholders, RXi became a public
reporting company and its common stock was listed for trading on The NASDAQ Capital Market under
the symbol RXII.
On February 15, 2007, we entered into a letter agreement with RXi and certain of RXis current
stockholders under which RXi agreed to grant to us preemptive rights to acquire any new
securities (as defined) that RXi proposes to sell or issue so that we may maintain our percentage
ownership in RXi at any time that we own less than 50% of the outstanding shares of RXi common
stock. Our preemptive rights will expire on January 8, 2012 or such earlier time at which we own
less than 10% of RXis outstanding common stock.
Under this letter agreement, we agreed that we will vote our RXI shares for the election of
RXi directors and take other actions to ensure that a majority of the board of directors of RXi are
independent of us. We further agreed to approve of actions that may be adopted and recommended by
the RXi board of directors to facilitate any future financing by RXi.
Manufacturing
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 current 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.
Patents and Proprietary Technology
We actively seek patent protection for our technologies, processes, uses, and ongoing
improvements and consider our patents and other intellectual property to be critical to our
business. We acquired patents and patent applications, and have filed several new patent
applications, in connection with our molecular chaperone program.
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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 amplification 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.
Competition
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. Many companies are working to develop
pharmaceuticals to treat ALS, including Aeolus Pharmaceuticals, Celgene Corporation, Mitsubishi
Tanabe Pharma Corporation, Ono Pharmaceuticals, Trophos SA, Knopp Neurosciences Inc., Faust Pharmaceuticals SA, Oxford
BioMedica plc, Phytopharm plc and Teva Pharmaceutical Industries Ltd., as well as RXi. ALS patients
often take over-the-counter supplements, including vitamin E, creatine and coenzyme Q10, or drugs
such as lithium that are approved for other indications. ALS belongs to a family of
neurodegenerative diseases that includes Alzheimers, Parkinsons and Huntingtons diseases. Due
to similarities between these diseases, a new treatment for one such disease potentially could be
useful for treating others. There are many companies producing and developing drugs used to treat
neurodegenerative diseases other than ALS, including Amgen, Inc., Biogen Idec, Boehringer
Ingelheim, Cephalon, Inc., Ceregene, Inc., Elan Pharmaceuticals, plc, Forest Laboratories, Inc., H.
Lundbeck A/S, Phytopharm plc, UCB Group and Wyeth.
Current drug classes used to treat stroke include antiplatelet agents, anticoagulants,
salycylates, neuroprotectants and thrombolytic agents. Prescription antiplatelet agents include
Aggrenox by Boehringer Ingelheim, Plavix by Sanofi-Aventis and Bristol-Myers Squibb, and Ticlid by
Roche Pharmaceuticals. Coumadin by Bristol-Myers Squibb and Jantoven by Upsher-Smith Laboratories
are branded forms of warfarin, an anticoagulant. Moreover, Salicylates, like aspirin, are commonly
used to treat patients after stroke. In Europe, Ferrer Grupo markets the neroprotectant, Somazina.
Activase, also known as tissue plasminogen activator, or t-PA, is a thrombolytic agent marketed by
Genentech. Many new drug candidates are in development by pharmaceutical and biotech companies,
including GlaxoSmithKline, Indeveus Pharmaceuticals, Ipsen, Merck & Co., Neurobiological
Technologies, Ono Pharmaceuticals, PAION AG and Wyeth. In addition to drug therapy, companies such
as Medtronic and Northstar Neurosciences are developing neurostimulation medical devices to aid in
recovery after stroke.
The wound care market is highly competitive, and there are many products available for
treating skin wounds, including diabetic foot ulcers. Prescription and over-the-counter products
for the prevention and treatment of infections include topical anti-infectives, such as Betadine,
silver sulfadiazine, hydrogen peroxide, Dakins solution and hypochlorous acid, and topical
antibiotics, such as Neosporine, Mupirocin and Bacitracin. Skin substitute products include
Apligraf, manufactured by Organogenesis, Inc., which is an FDA-cleared product using human dermal
and epidermal cells placed on a collagen matrix, for the treatment of both venous stasis and
diabetic foot ulcers, and Dermagraft®, produced by Advanced BioHealing, Inc., which uses human
derived dermal cells placed on a polyglactin matrix and is FDA cleared to treat diabetic foot
ulcers. In addition, a number of companies are working to develop proprietary pharmaceuticals and
cell-based therapies to treat diabetic wound healing, including Agennix, Inc., BioSyntech, Inc.,
CardioVascular BioTherapeutics, Inc., Cardium Therapeutics, Inc., Genentech Inc., KeraCure, Inc.,
King Pharmaceuticals, Inc., MacroChem Corporation, Oculus Innovative Sciences, Inc., Rovi
Pharmaceutical Laboratories, SanuWave, Inc. and Wyeth.
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
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of which will have substantially greater financial
resources, large acquisition and research and development staffs that may give those companies a
competitive advantage over us in identifying and evaluating these
drug acquisition opportunities. Any products that we acquire will be competing with products
marketed by companies that in many cases will have substantially greater marketing resources than
we have. The industry is characterized by rapid technological advances and competitors may develop
their products more rapidly and such products may be more effective than those currently under
development or that may be developed in the future by our strategic partners or licensees.
Competitive products for a number of the disease indications that we have targeted are currently
being marketed by other parties, and additional competitive products are under development and may
also include products currently under development that we are not aware of or products that may be
developed in the future.
Government Regulation
The 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, or 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 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
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manufacturing facilities are in
compliance with the FDAs cGMP, which are regulations that govern the manufacture, holding and
distribution of a product. Manufacturers of biologics also must comply with the FDAs 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.
Employees
As of March 28, 2008, we had 27 employees, 14 of whom were engaged in research and development
activities and 13 of whom were involved in management and administrative operations. RXi had 17
employees, 9 of whom were engaged in research and development activities and 8 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 Securities and Exchange Commission, or SEC, as soon as is reasonably
practicable after filing. The public may read and copy any materials we file with the SEC at the
SECs 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 reports, proxy and information statements, and other
information regarding issuers such as us 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
We are subject to a number of risks and uncertainties, including the risks and uncertainties
discussed below, as well as any modification, replacement or update to these risks and
uncertainties that are reflected in any subsequent filings we make with the Securities and Exchange
Commission, or SEC. If any of these risks or uncertainties actually occur, our business, results
of operations, financial condition and prospects could be materially and adversely affected. In
that case, the trading price of our common stock could decline. These risks and uncertainties are
not the only ones facing us. Additional risks and uncertainties not presently known to us, or that
we currently perceive as immaterial, also may adversely affect us.
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 substantial expenditures for research and development of
our product candidates and for general and administrative purposes and our lack of significant
recurring revenue. We incurred net losses of $21.9 million, $16.8 million and $15.1 million for
the years ended December 31, 2007, 2006, and 2005, respectively, and we had an accumulated deficit
as of December 31, 2007 of approximately $161.5 million. We are likely to continue to incur losses
unless and until we are able to commercialize one or more of our product candidates. These losses,
among other things, have had and will continue to have an adverse effect on our stockholders
equity and working capital. Because of the numerous risks and uncertainties associated with our
product development efforts, we are unable to predict when we may become profitable, if at all. If
we are unable to achieve and then maintain profitability, the market value of our common stock will
likely decline.
Because we have no source of significant recurring revenue, we must depend on financing to
sustain our operations.
Developing products and conducting clinical trials require substantial amounts of capital. To
date, we have relied primarily upon proceeds from sales of our equity securities and the exercise
of options and warrants, and to a much lesser extent, upon payments from our strategic partners and
licensees, to generate funds needed to finance our business and operations. We will need to raise
additional capital to, among other things:
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fund our clinical trials and pursue regulatory approval of our existing and possible
future product candidates; |
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expand our research and development activities; |
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finance our general and administrative expenses; |
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acquire or license technologies; |
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prepare, file, prosecute, maintain, enforce and defend our patent and other proprietary
rights; and |
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develop and implement sales, marketing and distribution capabilities to successfully
commercialize any product for which we obtain marketing approval and choose to market
ourselves. |
Our revenues were $7.5 million, $2.1 million and $0.2 million, respectively, for years ended
December 31, 2007, 2006 and 2005. Our revenues for the years ended December 31, 2007 and 2006
included $7.2
million and $1.8 million, respectively, of deferred revenue recognized from our sale in August
2006 of a one-percent royalty interest in worldwide sales of arimoclomol for the treatment of ALS.
We will have no significant recurring revenue unless we are able to commercialize one or more of
our product candidates in development, which may require us to first enter into license or other
strategic arrangements with third parties.
At December 31, 2007, we had cash, cash equivalents and short-term investments of $60.4
million, including $11.7 million held by RXi. We believe that CytRxs current resources will be
sufficient to support our currently planned level of operations into the second half of 2009. This
estimate is based, in part, upon our currently projected expenditures for 2008 of approximately
$29.2 million, including approximately $5.1 million for our clinical program for arimoclomol for
ALS and related studies, approximately $6.4 million for our planned Phase II clinical trial of
arimoclomol in stroke patients and Phase II clinical trial of iroxanadine for diabetic ulcers,
approximately $9.2 million for equipping and operating our research laboratory in San Diego,
California, and approximately $8.5 million for other general and administrative expenses.
Management believes that RXis current resources will be sufficient to support its currently
planned level of operations into the second quarter of 2009. As described in the risk factor that
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follows below in this section, these projected expenditures are based upon numerous assumptions and
subject to many uncertainties, and our actual expenditures may be significantly different from
these projections.
If we obtain marketing approval as currently planned and successfully commercialize our
product candidates, we anticipate it will take a minimum of three years, and possibly longer, for
us to generate significant recurring revenue, and we will be dependent on 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 financing, and we may not be able to obtain future
financing on favorable terms, or at all. If we raise additional funds by issuing equity
securities, dilution to stockholders may result and new investors could have rights superior to
holders of the shares issued in this offering. In addition, debt financing, if available, may
include restrictive covenants. If adequate funds are not available to us, we may have to liquidate
some or all of our assets or to delay or reduce the scope of or eliminate some portion or all of
our development programs or clinical trials. We also may have to license to other companies our
product candidates or technologies that we would prefer to develop and commercialize ourselves.
If we do not achieve our projected development goals in the time frames we announce and
expect, or if our financial projections prove to be materially inaccurate, the commercialization of
our products may be delayed and our stock price may significantly decline.
From time to time, we estimate the timing of the accomplishment of various scientific,
clinical, regulatory and other product development goals, which we sometimes refer to as
milestones. These milestones may include the commencement or completion of scientific studies and
clinical trials and the submission of regulatory filings. For example, we have disclosed in this
Annual Report the expected timing of certain milestones relating to our arimoclomol and iroxanadine
clinical development program.
We also may disclose projected expenditures or other forecasts for future periods. For
example, we have stated above in this Annual Report that we currently project total expenditures
for fiscal year 2008 to be approximately $29.2 million, including approximately $5.1 million for
our clinical program for arimoclomol for ALS and related studies, approximately $6.4 million for
our planned Phase II clinical trial of arimoclomol in stroke patients and Phase II clinical trial
of iroxanadine for diabetic ulcers, approximately $9.2 million for equipping and operating our
research laboratory in San Diego, California and approximately $8.5 million for other general and
administrative expenses. Our financial projections are based on managements current expectations
and do not contain any cushion for any specific uncertainties, or for the uncertainties inherent
in all financial forecasting. The assumptions management has used to produce these projections may
significantly change or prove to be inaccurate. Accordingly, you should not unduly rely on any of
these projections.
The actual timing of milestones and actual expenditures or other financial results can vary
dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not
meet milestones or
financial projections as announced from time to time, our stock price may significantly
decline and the development and commercialization of our products may be delayed.
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 product candidates in development must be approved by the FDA or similar foreign
governmental agencies before they can be marketed. The process for obtaining FDA and foreign
government approvals 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,
including post-approval testing, which may take longer or cost more than we or our licensees, if
any, 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 product
candidates may not necessarily be predictive of 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 product development efforts,
including the following:
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difficulty in securing centers to conduct trials; |
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difficulty in enrolling patients in conformity with required protocols or projected timelines; |
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unexpected adverse reactions by patients in trials; |
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difficulty in obtaining clinical supplies of the product; |
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changes in or our inability to comply with FDA or foreign governmental product testing,
manufacturing or marketing requirements; |
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regulatory inspections of clinical trials or manufacturing facilities, which may, among
other things, require us or our manufacturers or licensees to undertake corrective action
or suspend or terminate the affected clinical trials if investigators find them not to be
in compliance with applicable regulatory requirements; |
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inability to generate statistically significant data confirming the safety and efficacy
of the product being tested; |
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modification of the product during testing; and |
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reallocation of our limited financial and other resources to other clinical programs. |
In addition, the FDA and other regulatory agencies may lack experience in evaluating product
candidates to treat ALS. For example, we are aware of only one drug that the FDA has approved to
treat ALS. This inexperience may lengthen the regulatory review process, increase our development
costs and delay or prevent commercialization of arimoclomol or our other product candidates. It is
possible that none of the product candidates we develop will obtain the regulatory approvals
necessary for us to begin selling them. The time required to obtain FDA and foreign governmental
approvals is unpredictable, but often can take years following the commencement of clinical trials,
depending upon the complexity of the product candidate. Any analysis we perform on data from
clinical activities is subject to confirmation and interpretation by regulatory authorities, which
could delay, limit or prevent regulatory approval. Furthermore, even if we obtain regulatory
approvals, our products and the manufacturing facilities used to produce them will be subject to
continual review, including periodic inspections and mandatory post-
approval clinical trials by the FDA and other US and foreign regulatory authorities. Any
delay or failure in obtaining required approvals or to comply with post-approval regulatory
requirements could have a material adverse effect on our ability to generate revenue from the
particular product candidate. The failure to comply with any post-approval regulatory requirements
also could also result in the rescission of the related regulatory approvals or the suspension of
sales of the offending product.
Our current and planned clinical trials of our molecular chaperone amplification product
candidates may fail to show that these product candidates are clinically safe and effective.
The results of our Phase IIa clinical trial and open-label extension clinical trial of
arimoclomol for the treatment of ALS indicated that arimoclomol was safe and well-tolerated in
patients. However, the results of the open-label extension clinical trial indicated only a
non-statistically significant trend of improvement in the ALSFRS in the arimoclomol high-dose group
as compared with reports of previous studies of untreated patients. Because this trial did not
have concurrent placebo control group, we can draw no definitive conclusions with respect to
efficacy. In December 2007, we initiated a Phase IIb efficacy trial of arimoclomol for the
treatment of ALS, and we plan to undertake a second efficacy trial of arimoclomol for ALS, possibly
overlapping with the Phase IIb efficacy trial, to provide additional data to support possible FDA
approval. In addition, we plan to conduct a Phase II clinical trial of arimoclomol in stroke
patients and to pursue clinical development of iroxanadine for diabetic ulcers, both of which would
require significant additional testing. The FDA may also require additional, larger Phase III
clinical trials before we may submit an application for marketing approval. None of these trials
may yield favorable safety and efficacy data, and the FDA may disagree with how we interpret the
data from these clinical trials. For example, the favorable safety data we observed in earlier
trials may not be reproduced in these later trials, and these later trials may not yield
statistically significant data indicating that the product candidates are clinically effective.
Accordingly, we may ultimately be unable to provide the FDA with satisfactory data on clinical
safety and efficacy sufficient to enable the FDA to approve arimoclomol or iroxanadine for these
indications.
The FDA recently placed a clinical hold on our Phase IIb efficacy trial of arimoclomol, which
will delay the trial and could lead to a requirement that we conduct additional toxicology studies
or alter the trial design.
In January 2008, the FDA placed a clinical hold on our Phase IIb clinical efficacy trial of
arimoclomol for the treatment of ALS due to concerns relating to previous toxicology studies of
arimoclomol in rats. Although we have submitted additional information to the FDA regarding these
concerns, we cannot predict how long it may take to resolve them. Depending on the outcome of the
FDAs review, we may be:
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required to conduct additional toxicology or human studies prior to or in parallel with
the resumption of our clinical trial, which would result in substantial additional
expenses and possible significant delays in completing the clinical trial; |
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required to alter the design including reducing the dosage of arimoclomol, of the
clinical trial, which could significantly delay the completion of the trial, increase the
cost of the trial, adversely affect our ability to demonstrate the efficacy of arimoclomol
in the trial or cause us to cancel the trial altogether due to one or more of these
consideration; or |
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prohibited by the FDA from resuming our current planned clinical trial or initiating
any other clinical trial of arimoclomol for the treatment of ALS or any other indication
due to safety concerns. |
We also planned to commence a Phase II clinical trial for arimoclomol for stroke recovery in
the second half of 2008. In light of the FDAs concerns regarding toxicity of arimoclomol, our
planned Phase I trial for this indication is subject to similar risks.
Even if we obtain regulatory approval for arimoclomol or iroxanadine, these product candidates
may not achieve market acceptance or be profitable.
We do not expect to receive regulatory approvals for the commercial sale of arimoclomol or
iroxanadine for several years, if at all. Even if we do receive regulatory approvals, the future
commercial success of these drug candidates will depend, among other things, on their acceptance by
physicians, patients, healthcare payors and other members of the medical community as therapeutic
and cost-effective alternatives to commercially available products. If our product candidates fail
to gain market acceptance, we may not be able to earn sufficient revenues to continue our business.
Any drugs we develop may become subject to unfavorable pricing regulations, third-party
reimbursement practices or healthcare reform initiatives, which could have a material adverse
effect on our business.
We intend to sell our products primarily to hospitals which receive reimbursement for the
health care services they provide to their patients from third-party payors, such as Medicare,
Medicaid and other domestic and international government programs, private insurance plans and
managed care programs. Most third-party payors may deny reimbursement if they determine that a
medical product was not used in accordance with cost-effective treatment methods, as determined by
the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse
to reimburse for experimental procedures and devices. Furthermore, because our programs are in the
early stages of development, we are unable at this time to determine their cost-effectiveness and
the level or method of reimbursement. Increasingly, the third-party payors who reimburse patients
are requiring that drug companies provide them with predetermined discounts from list prices, and
are challenging the prices charged for medical products. If the price we are able to charge for any
products we develop is inadequate in light of our development and other costs, our profitability
could be adversely effected.
We currently expect that any drugs we develop may need to be administered under the
supervision of a physician. Under currently applicable law, drugs that are not usually
self-administered may be eligible for coverage by the Medicare program if:
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they are incidental to a physicians services, |
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they are reasonable and necessary for the diagnosis or treatment of
the illness or injury for which they are administered according to
accepted standard of medical practice, |
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they are not excluded as immunizations, and |
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they have been approved by the FDA. |
Our current financial resources may be diminished if we elect to provide RXi with additional
future funding.
We have no obligation to provide any additional funding to RXi, but we might seek to do so in
order to protect our investment in RXi if RXi is unable to obtain sufficient funding on its own or
to maintain our relative ownership interest if RXi consummates a financing. If we provide RXi with
any additional funding, we will have less funds available for our own business and operations.
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We may rely upon third parties in connection with the commercialization of our products.
We currently plan to continue the development of arimoclomol for the treatment of ALS under
our Master Agreement with Pharmaceutical Research Associates for clinical trials management
services, and may retain the services of site management and clinical research organizations to
help conduct our clinical trials. We may seek to complete the development of arimoclomol and
market it ourselves if it is approved by the FDA. However, the completion of the development of
arimoclomol and our other product candidates, as well as the marketing of these products, may
require us to enter into strategic alliances,
license agreements or other collaborative arrangements with other pharmaceutical companies
under which those companies will be responsible for one or more aspects of the commercial
development and eventual marketing of our products.
Our products may not 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 and may have to sell our rights in them to a third party or
abandon their development altogether.
To the extent 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, we may not obtain
regulatory approvals as planned, if at all, and the timing of receipt or the 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, the
profitability to us of these products may decline.
We may be unable to protect our intellectual property rights, which could adversely affect our
ability to compete effectively.
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. We will be able to protect our technologies from unauthorized use by
third parties only to the extent that we have rights to valid and enforceable patents or other
proprietary rights that cover them. Although we have patents and patent applications directed to
our molecular chaperone amplification technologies, these patents and applications may not prevent
third parties from developing or commercializing similar or identical technologies. In addition,
our patents may be held to be invalid if challenged by third parties, and our patent applications
may not result in the issuance of patents.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions for which important legal principles remain unresolved.
No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged
to date in the United States and in many foreign countries. The application and enforcement of
patent laws and regulations in foreign countries is even more uncertain. Accordingly, we may not be
able to effectively file, protect or defend our proprietary rights on a consistent basis. In
particular, the patents and patent applications related to our molecular chaperone amplification
product candidates were issued or filed by third parties prior to the time we acquired rights to
them, and they begin to expire in 2016. The validity, enforceability and ownership of those
patents and patent applications may be challenged, and if a court decides that our patents are not
valid, we will not have the right to stop others from using our inventions. There is also the risk
that, even if the validity of our patents is upheld, a court may refuse to stop others on the
ground that their activities do not infringe our patents.
Any litigation brought by us to protect our intellectual property rights 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 also rely on certain proprietary trade secrets and know-how, especially where we believe
patent protection is not appropriate or obtainable. However, trade secrets and know-how are
difficult to protect. Although we have taken measures to protect our unpatented trade secrets and
know-how, including the use of confidentiality and invention assignment agreements with our
employees, consultants and some of our contractors, it is possible that these persons may disclose
our trade secrets or know-how or that our competitors may independently develop or otherwise
discover our trade secrets and know-how.
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If our product candidates infringe the rights of others, we could be subject to expensive
litigation or be required to obtain licenses from others to develop or market them.
Our competitors or others may have patent rights that they choose to assert against us or our
licensees, suppliers, customers or potential collaborators. Moreover, we may not know about
patents or patent applications that our products would infringe. For example, because patent
applications can take many years to issue, there may be currently pending applications, unknown to
us, that may later result in issued patents that our arimoclomol, iroxanadine or other product
candidates would infringe. In addition, if third parties file patent applications or obtain
patents claiming technology also claimed by us in issued patents or pending applications, we may
have to participate in interference proceedings in the US Patent and Trademark Office to determine
priority of invention. If third parties file oppositions in foreign countries, we may also have to
participate in opposition proceedings in foreign tribunals to defend the patentability of our
foreign patent applications.
If a third party claims that we infringe its proprietary rights, any of the following may
occur:
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we may become involved in time-consuming and expensive litigation, even if the claim is
without merit; |
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we may become liable for substantial damages for past infringement if a court decides
that our technology infringes a competitors patent; |
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a court may prohibit us from selling or licensing our product without a license from
the patent holder, which may not be available on commercially acceptable terms, if at all,
or which may require us to pay substantial royalties or grant cross licenses to our
patents; and |
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we may have to redesign our product candidates or technology so that it does not
infringe patent rights of others, which may not be possible or commercially feasible. |
If any of these events occurs, our business and prospects will suffer and the market price of
our common stock will likely decline substantially.
We have reported several material weaknesses in the effectiveness of our internal controls
over financial reporting, and if we cannot maintain effective internal controls or provide reliable
financial and other information, investors may lose confidence in our SEC reports.
In this Annual Report, we are reporting material weaknesses in the effectiveness of our internal
controls over financial reporting related to failures on the part of our accounting personnel to
follow established practices and procedures and a failure to keep current our legal database for
contracts relating to our arimoclomol development program, which are described in more detail below
under the heading Controls and Procedures. Additionally, within the past three years:
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We identified a material weakness related to our accounting for an equity transaction
by RXi and our tax withholding in connection with exercises of employee stock options. As
a result, we restated our financial statements for the quarter ended June 30, 2007 and
extended the filing of our quarterly report for the quarter ended September 30, 2007. |
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We identified a material weakness related to our accounting for transactions at our
former laboratory facility in Worcester, Massachusetts. As a result, we restated our
financial statements for the quarters ended March 31, 2006, June 30, 2006 and September
30, 2006. |
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We improperly applied generally accepted accounting principles related to our
accounting for deemed dividends incurred in connection with anti-dilution adjustments made
to our outstanding warrants. This misapplication of accounting principles constituted a
material weakness and caused us to twice restate our financial statements for the quarters
ended March 31, 2005, June 30,
2005 and September 30, 2005 and for the year ended December 31, 2005, as well as restate
our financial statements for the quarters ended March 31, 2006, June 30, 2006 and September
30, 2006. |
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We miscalculated pro forma employee stock option compensation figures disclosed in the
footnotes to our financial statements. As a result, we restated our financial statements
for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 and for the
year ended December 31, 2005. |
17
In addition, we concluded in our quarterly reports for the quarters ended June 30, 2007 and
September 30, 2007, that our disclosure controls and procedures were ineffective as of those dates.
Disclosure controls generally include controls and procedures designed to ensure that information
required to be disclosed by us in the reports we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. We also
recently filed an amendment to an SEC report to correct certain form errors.
Effective internal controls over financial reporting and disclosure controls and procedures
are necessary for us to provide reliable financial and other reports and effectively prevent fraud.
If we cannot maintain effective internal controls or provide reliable financial or SEC reports or
prevent fraud, investors may lose confidence in our SEC reports, our operating results and the
trading price of our common stock could suffer and we may become subject to litigation.
We are subject to intense competition, and we may not 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 industries
are 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 us and at least some of our present or future strategic partners or licensees.
As a result, these competitors may:
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succeed in developing competitive products sooner than us or our strategic partners or
licensees; |
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obtain FDA or foreign governmental approvals for their products before we can obtain
approval of any of our products; |
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obtain patents that block or otherwise inhibit the development and commercialization of
our product candidate candidates; |
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develop products that are safer or more effective than our products; |
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devote greater resources than us to marketing or selling products; |
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introduce or adapt more quickly than us to new technologies and other scientific advances; |
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introduce products that render our products obsolete; |
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withstand price competition more successfully than us or our strategic partners or licensees; |
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negotiate third-party strategic alliances or licensing arrangements more effectively than us; and |
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take better advantage than us of other opportunities. |
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. Many companies are working to develop
pharmaceuticals to treat ALS, including Aeolus Pharmaceuticals, Celgene Corporation, Mitsubishi
Tanabe Pharma Corporation, Ono Pharmaceuticals, Trophos SA, Knopp Neurosciences Inc., Faust Pharmaceuticals SA, Oxford
BioMedica plc, Phytopharm plc and Teva Pharmaceutical Industries Ltd., as well as RXi. ALS patients
often take over-the-counter supplements, including vitamin E, creatine and coenzyme Q10, or drugs
such as lithium that are approved for other indications. ALS belongs to a family of
neurodegenerative diseases that includes Alzheimers, Parkinsons and Huntingtons diseases. Due
to similarities between these diseases, a new treatment for one such disease potentially could be
useful for treating others. There are many companies producing and developing drugs used to treat
neurodegenerative diseases other than ALS, including Amgen, Inc., Biogen Idec, Boehringer
Ingelheim, Cephalon, Inc., Ceregene, Inc., Elan Pharmaceuticals, plc, Forest Laboratories, Inc., H.
Lundbeck A/S, Phytopharm plc, UCB Group and Wyeth.
18
Current drug classes used to treat stroke include antiplatelet agents, anticoagulants,
salycylates, neuroprotectants and thrombolytic agents. Prescription antiplatelet agents include
Aggrenox by Boehringer Ingelheim, Plavix by Sanofi-Aventis and Bristol-Myers Squibb, and Ticlid by
Roche Pharmaceuticals. Coumadin by Bristol-Myers Squibb and Jantoven by Upsher-Smith Laboratories
are branded forms of warfarin, an anticoagulant. Moreover, Salicylates, like aspirin, are commonly
used to treat patients after stroke. In Europe, Ferrer Grupo markets the neroprotectant, Somazina.
Activase, also known as tissue plasminogen activator, or t-PA, is a thrombolytic agent marketed by
Genentech. Many new drug candidates are in development by pharmaceutical and biotech companies,
including GlaxoSmithKline, Indeveus Pharmaceuticals, Ipsen, Merck & Co., Neurobiological
Technologies, Ono Pharmaceuticals, PAION AG and Wyeth. In addition to drug therapy, companies such
as Medtronic and Northstar Neurosciences are developing neurostimulation medical devices to aid in
recovery after stroke.
The wound care market is highly competitive, and there are many products available for
treating skin wounds, including diabetic foot ulcers. Prescription and over-the-counter products
for the prevention and treatment of infections include topical anti-infectives, such as Betadine,
silver sulfadiazine, hydrogen peroxide, Dakins solution and hypochlorous acid, and topical
antibiotics, such as Neosporine, Mupirocin and Bacitracin. Skin substitute products include
Apligraf, manufactured by Organogenesis, Inc., which is an FDA-cleared product using human dermal
and epidermal cells placed on a collagen matrix, for the treatment of both venous stasis and
diabetic foot ulcers, and Dermagraft, produced by Advanced BioHealing, Inc., which uses human
derived dermal cells placed on a polyglactin matrix and is FDA cleared to treat diabetic foot
ulcers. In addition, a number of companies are working to develop proprietary pharmaceuticals and
cell-based therapies to treat diabetic wound healing, including Agennix, Inc., BioSyntech, Inc.,
CardioVascular BioTherapeutics, Inc., Cardium Therapeutics, Inc., Genentech Inc., KeraCure, Inc.,
King Pharmaceuticals, Inc., MacroChem Corporation, Oculus Innovative Sciences, Inc., Rovi
Pharmaceutical Laboratories, SanuWave, Inc. and Wyeth.
Most of our competitors have substantially greater research and product development
capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other
resources than us.
We may be required to pay milestone and other payments relating to the commercialization of
our products.
Our agreement by which we acquired rights to arimoclomol and our other molecular chaperone
amplification product candidates provides for milestone payments by us upon the occurrence of
certain regulatory filings and approvals related to the acquired products. In the event that we
successfully develop arimoclomol or any of these other product candidates, these milestone payments
could aggregate as much as $3.7 million, with the most significant payments due upon the first
commercialization of any of these products. In addition, our agreement with the ALS Charitable
Remainder Trust requires us to pay a one-percent royalty interest on worldwide sales of arimoclomol
for the treatment of ALS. Also, any future license, collaborative or other agreements we may enter
into in connection with our development and
commercialization activities may require us to pay significant milestone, license and other
payments in the future.
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 arimoclomol or iroxanadine. Accordingly, we are dependent upon contract
manufacturers, or potential future strategic alliance partners, to manufacture these supplies. We
have manufacturing supply arrangements in place with respect to a portion of the clinical supplies
needed for the Phase II clinical program for arimoclomol for ALS and stroke recovery and for
iroxanadine for diabetic ulcers. However, we have no supply arrangements for the commercial
manufacture of these product candidates or any manufacturing supply arrangements for any other
potential product candidates, and we may not be able to secure needed 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 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, if we obtain marketing approval and
commercialize our products, 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 our product candidates. We obtained clinical trial insurance
for our Phase IIa clinical trial and Phase IIb efficacy trial of arimoclomol for the treatment of
ALS, and we plan to seek to obtain similar insurance for any other clinical trials that we conduct,
as well as liability insurance for any products that we may market. However, we may not be able to
obtain additional insurance in the amounts we seek, if at all. In addition, any insurance
maintained by us or our licensees may not prove adequate in the event of a claim against us. Even
19
if claims asserted against us are unsuccessful, they may divert managements 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 currently identified any of these
products, however, 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.
We use hazardous materials and must comply with environmental, health and safety laws and
regulations, which can be expensive and restrict how we do business.
Our research and development and manufacturing processes involve the controlled storage, use
and disposal of hazardous materials, including biological hazardous materials. We are subject to
federal, state and local regulations governing the use, manufacture, storage, handling and disposal
of these materials and waste products. Although we believe that our safety procedures for handling
and disposing of these hazardous materials comply with the standards prescribed by law and
regulation, we cannot completely eliminate the risk of accidental contamination or injury from
hazardous materials. In the event of an accident, we could be held liable for any damages that
result. We could incur significant costs to comply with current or future environmental laws and
regulations.
Risks Associated With Our Investment in RXi
The distribution of RXi common stock to our stockholders will be taxable to us.
On March 11, 2008, we distributed to our stockholders a total of approximately 4,526,624
shares of RXi common stock. We will recognize gain for income tax purposes on the distribution of
shares of RXi common stock in an amount equal to the excess of the fair market value of the stock
distributed over our basis. This gain will be included in determining whether we have current year
earnings and profits subject to taxation. Although we will ascribe a value to RXi shares in the
distribution for tax purposes, our valuation will not be binding on the Internal Revenue Service or
any state taxation agency, which could ascribe a different valuation to the distributed RXi shares.
Based upon our anticipated loss from operations for 2008 and currently available loss
carryforwards, we expect to pay no taxes in connection with the distribution.
Our ownership interest in RXi may be diluted.
RXi has indicated that it has sufficient working capital to fund its currently planned
expenditures into the second quarter of 2009. RXi also anticipates that it will need to raise
substantial amounts of money to fund a variety of future activities integral to the development of
its business. Under our agreement with RXi and its other current stockholders, with some
exceptions, we 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, our financial condition and other
factors, we may be unwilling or unable to exercise our preemptive rights. If RXi raises funds
through the issuance of additional equity securities, therefore, our percentage ownership interest
in RXi may be diluted.
We may be required to dispose of some of our remaining RXi shares, and may not be able to do
so on attractive terms.
As of March 11, 2008, we owned approximately 6,268,881 shares of common stock of RXi, or
approximately 49% of the outstanding RXi common stock. We may be deemed to be an investment
company within the meaning of the Investment Company Act of 1940, and become subject to the
stringent regulations applicable to investment companies, if at any time we own or propose to
acquire investment securities having a value that exceeds 40% of our total assets. Any RXi shares
held by us will generally constitute investment securities, and accordingly, if the value of the
RXis shares we own at any time, when taken together with the value of any other investment
securities we then hold, approaches 40% of the value of our assets, then we would likely seek to
sell or otherwise dispose of some of our RXi shares in order to avoid becoming an inadvertent
investment company.
20
If it becomes necessary or advisable for us to sell our RXi shares, we may have to sell RXi
shares pursuant to Rule 144 under the Securities Act, which includes certain manner of sale and
volume limitations, or negotiate private sales with third parties who are willing to buy those
shares. We may be unable to sell or divest of RXi shares at attractive prices, if at all. In
addition, any sales or other disposition of RXi shares by us, or the possibility of such sales or
disposition, could adversely affect the market price of our RXi shares.
RXi retains discretion over its use of the funds that we have provided to it.
All funds previously provided by us to RXi may be used by RXi in any manner its management
deems appropriate. None of these uses may yield a significant or any return at all for RXi
stockholders, including us.
We do not and will not control RXi, and the officers, directors and other RXi stockholders may
have interests that are different from ours.
Although we currently own a significant portion of RXis outstanding common stock, we do not
control its management or operations. RXi has its own board of directors and management, who are
responsible for the affairs and policies of RXi and its development plans. We have entered into
letter agreements with the University of Massachusetts Medical School, or UMMS, RXi and RXis other
founding stockholders
under which we agree 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 RXis board of directors are independent
of us. The other stockholders of RXi may have interests that are different from ours, and RXi may
engage in actions in connection with its business and operations that we believe are not in our
best interests.
Products developed by RXi could eventually compete with our products for ALS, type 2 diabetes,
obesity and other disease indications.
RXi is focusing 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 we are developing arimoclomol
for treatment for all forms of ALS, it is possible that products developed by RXi for the treatment
of ALS could compete with ALS products that we may develop. RXi also plans to pursue the
development of RNAi therapeutics for the treatment of other neurodegenerative diseases and type 2
diabetes, which could compete with products that we may develop for the treatment of these
diseases. The potential commercial success of any products that we may develop for these and other
diseases may be adversely affected by competing products that RXi may develop.
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 are intended to protect
our stockholders interests by encouraging anyone seeking control of our company to negotiate with
our board of directors. These provisions may discourage or prevent a person or group from
acquiring us without the approval of our board of directors, even if the acquisition would be
beneficial to our stockholders.
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 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 potential acquirers to lose interest in a
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
21
with more time to prepare an opposition to a proposed change in control. By making
it more difficult to remove or install new directors, these 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.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which may also prevent or delay a takeover of us that may be beneficial to you.
Our outstanding options and warrants and the availability for resale of our shares issued in
our private financings may adversely affect the trading price of our common stock.
As of December 31, 2007, there were outstanding stock options and warrants to purchase
approximately 19.0 million shares of our common stock at a weighted-average exercise price of $2.00
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. The issuance of shares upon the exercise of outstanding options and warrants will
also dilute the ownership interests of our existing stockholders. Many of our outstanding warrants
contain anti-dilution provisions pertaining to dividends or distributions with respect to our
common stock. Our outstanding warrants to purchase approximately 1.5 million shares also contain
anti-dilution provisions that are triggered upon any issuance of securities by us below the
prevailing market price of our common stock, and our outstanding warrants to purchase approximately
11.5 million shares contain anti-dilution provisions that are triggered upon any dividend of cash
or property, including our recent distribution to our stockholders of approximately 36% of the
common stock of RXi on March 11, 2008 that will require us to reduce the exercise price of those
warrants. 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.
We have registered with the SEC the resale by the holders of all or substantially all shares
of our common stock issuable upon exercise of our outstanding options and warrants. The
availability of these shares for public resale, 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 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 since January 1,
2006, and it may continue to experience significant volatility from time to time. Factors such as
the following may affect such volatility:
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announcements of regulatory developments or technological innovations by us or our
competitors; |
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changes in our relationship with our licensors and other strategic partners; |
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changes in our ownership of or other relationships with RXi; |
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our quarterly operating results; |
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litigation involving or affecting us; |
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shortfalls in our actual financial results compared to our guidance or the forecasts of
stock market analysts; |
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developments in patent or other technology ownership rights; |
22
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acquisitions or strategic alliances by us or our competitors; |
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public concern regarding the safety of our products; and |
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government regulation of drug pricing. |
Other factors which may affect our stock price are general changes in the economy, the
financial markets or the pharmaceutical or biotechnology industries.
We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have not declared or paid any cash dividends on our common stock or other securities, and
we currently do not anticipate paying any cash dividends in the foreseeable future. Because we do
not anticipate paying cash dividends for the foreseeable future, our stockholders will not realize
a return on their investment in our common stock except to the extent of any appreciation in the
value of our common stock. Our common stock may not appreciate in value, or may decline in value.
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 have notified our
landlord of our exercise of an option to extend the term of the lease for an additional three
years, and are in the process of negotiating that lease extension.
We also lease approximately 10,000 square feet of office and laboratory space in San Diego,
California. The lease expires in July 2010, and we have the option to extend the lease for up to
two additional three-year terms. Our headquarters and laboratory facilities are sufficient for our
current purposes.
Item 3. LEGAL PROCEEDINGS
We are occasionally involved in claims arising in the normal course of business. As of March
28, 2008, there were no such claims that we expect, individually or in the aggregate, to have a
material adverse affect on us.
23
PART II
Item 5. MARKET FOR REGISTRANTS 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:
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High |
|
Low |
Fiscal Year 2007: |
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Fourth Quarter |
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$ |
4.70 |
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|
$ |
2.60 |
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Third Quarter |
|
$ |
4.09 |
|
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$ |
3.00 |
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Second Quarter |
|
$ |
5.36 |
|
|
$ |
2.97 |
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First Quarter |
|
$ |
5.49 |
|
|
$ |
1.74 |
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|
|
|
|
|
|
|
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Fiscal Year 2006: |
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|
|
|
|
|
|
Fourth Quarter |
|
$ |
2.04 |
|
|
$ |
1.21 |
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Third Quarter |
|
$ |
1.94 |
|
|
$ |
0.87 |
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Second Quarter |
|
$ |
2.30 |
|
|
$ |
1.06 |
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First Quarter |
|
$ |
1.92 |
|
|
$ |
1.01 |
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Holders
On March 28, 2008, there were approximately 760 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 nominees.
Dividends
We have not paid any dividends since our inception and do not contemplate paying any cash
dividends in the foreseeable future.
24
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, 2002 to December 31, 2007. The graph and table assume that $100
was invested in each of CytRxs common stock, the NASDAQ Stock Market Index and the Peer Index on
December 31, 2002, and that all dividends were reinvested. This data was furnished by Zacks
Investment Research and the Center for Research and Security Prices.
Comparison of Cumulative Total Returns
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December 31, |
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
CytRx Corporation |
|
|
744 |
|
|
|
560 |
|
|
|
412 |
|
|
|
764 |
|
|
|
1,136 |
|
NASDAQ Stock Market Index |
|
|
151 |
|
|
|
165 |
|
|
|
168 |
|
|
|
186 |
|
|
|
211 |
|
NASDAQ Pharmaceutical Index |
|
|
147 |
|
|
|
156 |
|
|
|
172 |
|
|
|
168 |
|
|
|
177 |
|
25
Equity Compensation Plans
The following table sets forth certain information as of December 31, 2007, regarding
securities authorized for issuance under our equity compensation plans:
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® |
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Number of Securities |
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Remaining Available |
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(a) |
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for Issuance Under |
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Number of Securities |
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(b) |
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Equity |
|
|
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to be Issued Upon |
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Weighted-Average |
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Compensation |
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Exercise of |
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Exercise Price of |
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Plans (Excluding |
|
|
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Outstanding Options, |
|
|
Outstanding Options, |
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Securities Reflected |
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Plan Category |
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Warrants and Rights |
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Warrants and Rights |
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in Column (a)) |
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Equity compensation plans
approved by our security
holders: |
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|
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1994 Stock Option Plan |
|
|
9,167 |
|
|
$ |
1.00 |
|
|
|
|
|
1998 Long-Term Incentive Plan |
|
|
100,041 |
|
|
|
1.02 |
|
|
|
29,517 |
|
2000 Long-Term Incentive Plan |
|
|
5,999,300 |
|
|
|
2.31 |
|
|
|
2,192,000 |
|
Equity compensation plans not
approved by our security
holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants(1) |
|
|
13,031,515 |
|
|
|
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19,140,023 |
|
|
$ |
2.00 |
|
|
|
2,221,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The warrants shown were issued in discreet transactions from time to time as compensation for
services rendered by consultants, advisors or other third parties, and do not include warrants
sold in private placement transactions. The material terms of such warrants were determined
based upon arms-length negotiations with the service providers. 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 five to ten 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 and certain of the warrants
contain anti-dilution adjustments triggered by other corporate events, such as dividends and
sales of equity below market price. |
Item 6. SELECTED FINANCIAL DATA
General
The following selected financial data are derived from our audited financial statements. Our
financial statements for 2007, 2006 and 2005 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 Managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue |
|
$ |
7,242,000 |
|
|
$ |
1,859,000 |
|
|
$ |
83,000 |
|
|
$ |
|
|
|
$ |
|
|
Licensing revenue |
|
|
101,000 |
|
|
|
101,000 |
|
|
|
101,000 |
|
|
|
428,000 |
|
|
|
94,000 |
|
Grant revenue |
|
|
116,000 |
|
|
|
106,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
7,459,000 |
|
|
$ |
2,066,000 |
|
|
$ |
184,000 |
|
|
$ |
428,000 |
|
|
$ |
94,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend for anti-dilution
adjustments made to outstanding common
stock warrants |
|
|
|
|
|
|
(488,000 |
) |
|
|
(1,076,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(21,890,000 |
) |
|
$ |
(17,240,000 |
) |
|
$ |
(16,169,000 |
) |
|
$ |
(16,392,000 |
) |
|
$ |
(17,845,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
applicable to common stock |
|
$ |
(0.26 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash, cash equivalents and short-term
investments |
|
$ |
60,450,000 |
|
|
$ |
30,381,000 |
|
|
$ |
8,299,000 |
|
|
$ |
1,988,000 |
|
|
$ |
11,644,000 |
|
Total assets |
|
$ |
64,146,000 |
|
|
$ |
31,636,000 |
|
|
$ |
9,939,000 |
|
|
$ |
5,049,000 |
|
|
$ |
12,324,000 |
|
Total stockholders equity |
|
$ |
40,224,000 |
|
|
$ |
5,150,000 |
|
|
$ |
7,208,000 |
|
|
$ |
1,595,000 |
|
|
$ |
10,193,000 |
|
Factors Affecting Comparability
On April 19, 2007, we completed a $37.0 million private equity financing in which we issued
8.6 million shares of our common stock at $4.30 per share. Net of investment banking commissions,
legal, accounting and other expenses related to the transaction, we received approximately $34.2
million of proceeds.
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 2007 and 2006, we recognized approximately $7.2 million
and $1.8 million of service revenue related to this transaction, respectively.
Our Statements of Operations as of and for the years ended December 31, 2007 and 2006 reflect
the impact of Statement of Financial Accounting Standards 123(R), Share Based
Payment (SFAS123(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 years ended
December 31, 2007 and 2006 were $2.7 million and $1.2 million, respectively. As of December 31,
2007, there was $3.4 million of unrecognized compensation cost related to outstanding options that
is expected to be recognized as a component of our operating expenses through 2010. Compensation
costs will be adjusted for future changes in estimated forfeitures.
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 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.
Item 7. MANAGEMENTS 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.
27
Overview
CytRx Corporation
We are a clinical-stage biopharmaceutical company engaged in developing human therapeutic
products based primarily upon our small-molecule molecular chaperone amplification technology.
Molecular chaperone proteins occur normally in human cells and are key components of the bodys
defenses against potentially toxic mis-folded cellular proteins. Since damaged toxic proteins
called aggregates are thought to play a role in many diseases, we believe that amplification of
molecular chaperone proteins could have therapeutic efficacy for a broad range of indications.
Currently, we are using our chaperone amplification technology to develop treatments for
neurodegenerative disorders and diabetic complications.
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, 2007, we had cash, cash equivalents and short-term investments of $60.4
million, including $11.7 million held by RXi. We believe that CytRxs current resources will be
sufficient to support our currently planned level of operations into the second half of 2009. This
estimate is based, in part, upon our currently projected expenditures for 2008 of approximately
$29.2 million, including approximately $5.1 million for our clinical program for arimoclomol for
ALS and related studies, approximately $6.4 million for our planned Phase II clinical trial of
arimoclomol in stroke patients and Phase II clinical trial of iroxanadine for diabetic ulcers,
approximately $9.2 million for equipping and operating our research laboratory in San Diego,
California, and approximately $8.5 million for other general and administrative expenses.
Management believes that RXis current resources will be sufficient to support its currently
planned level of operations into the second quarter of 2009. As described in the risk factor above,
these projected expenditures are based upon numerous assumptions and subject to many uncertainties,
and our actual expenditures may be significantly different from these projections. 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.
Our Separation from RXi Pharmaceuticals Corporation
RXi Pharmaceuticals Corporation, or RXi, was founded in April 2006 by us and four researchers
in the field of RNAi, including Dr. Craig Mello, recipient of the 2006 Nobel Prize for Medicine for
his co-discovery of RNAi. RNAi is a naturally occurring mechanism for the regulation of gene
expression that has the potential to selectively inhibit the activity of any human gene. As
evidenced by Kim and Rossis review published in March 2007 in Nature Reviews Genetics, it is
believed that this inhibition may potentially treat human diseases by silencing genes that lead
to disease.
In January 2007, we transferred to RXi substantially all of our RNAi-related technologies and
assets, and RXi began operating on a stand-alone basis for the purpose of accelerating the
discovery of RNAi therapeutics previously sponsored by us. RXis initial focus is on developing
RNAi-based product candidates for treating neurological and metabolic disorders and cancer.
Until recently, we owned approximately 85% of the outstanding shares of common stock of RXi
and our consolidated financial statements, including our consolidated financial statements as of
and for the year ended December 31, 2007 included in this Annual Report, reflected 100% of the
assets, liabilities and results of operations of RXi, and the interest of the minority shareholders
was recorded as minority interest. On February 14, 2008, our board of directors declared a
dividend, payable to our stockholders as of March 6, 2008, the record date, of one share of RXi
common stock for each approximately 20.05 shares of our common stock held by such stockholders.
The dividend was paid on March 11, 2008. The RXi shares distributed by us to our stockholders
constituted approximately 36% of the currently outstanding RXi shares, so we currently own
approximately 49% of the outstanding shares of RXi common stock.
For periods beginning with the first quarter of 2008, if CytRx owns more than 20% but less
than 50% of the outstanding shares of RXi, CytRx will account for its investment in RXi using the
equity method. Under the equity method, CytRx will record its pro-rata share of the gains or losses
of RXi against its historical basis investment in RXi.
Research and Development
Expenditures for research and development activities related to continuing operations were
$18.8 million, $9.8 million and $9.1 million for the years ended December 31, 2007, 2006, and 2005,
respectively, with research and development expenses representing approximately 55%, 50% and 58% of
our total expenses for the years ended December 31, 2007, 2006 and 2005, respectively.
28
Research and development expenses are further discussed below under Critical Accounting
Policies and Estimates and Results of Operations.
Our currently projected expenditures for 2008 include approximately $5.1 million for our
clinical program for arimoclomol for ALS and related studies, approximately $6.4 million for our
planned clinical trial of arimoclomol in stroke patients and our clinical trial of iroxanadine for
diabetic ulcers. The actual cost of our clinical programs could differ significantly from our
current projections due to any additional requirements or delays imposed by the FDA in connection
with our planned trials, or if actual costs are higher than current management estimates for other
reasons. In the event that actual costs of our clinical program, 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.
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 amplification
technology and RXis 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
Managements 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 of America. 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, stock options, 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.
29
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:
Revenue Recognition
Biopharmaceutical revenues consist of license fees from strategic alliances with
pharmaceutical companies as well as service and grant 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 we have no other performance obligations related to the milestone and
collectability 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. Once all conditions of the grant are met and no contingencies
remain outstanding, the revenue is recognized as grant fee revenue and an earned but unbilled
revenue receivable is recorded.
In August 2006, we received approximately $24.3 million in proceeds 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
concluded that due to the research and development components of the transaction that it is
properly accounted for under Statement of Financial Accounting Standards 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 other
potential ALS treatments. We believe that this method best approximates the efforts expended
related to the services provided. We adjust our estimates of expense incurred for this research and
development on a quarterly basis. For the years ended December 31, 2007 and 2006, we recognized
approximately $7.2 million and $1.8 million, respectively, of service revenue related to this
transaction. 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.
The amount of deferred revenue, current portion is the amount of deferred revenue that is
expected to be recognized in the next twelve months and is subject to fluctuation based upon
managements estimates. Managements estimates include an evaluation of what pre-clinical and
clinical trials are necessary, the timing of when trials will be performed and the estimated
clinical trial expenses. These estimates are subject to changes and could have a significant effect
on the amount and timing of when the deferred revenues are recognized.
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, including licenses,
that are utilized in research and development and that 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.
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
30
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. If our estimates are incorrect, clinical trial expenses
recorded in any particular period could vary.
Stock-based Compensation
Our share-based employee compensation plans are described in Note 12 of the Notes to our
Financial Statements. Effective January 1, 2006, we adopted the provisions of SFAS 123(R),
Share-Based Payment. SFAS 123(R), which requires that companies recognize compensation expense
associated with stock option grants and other equity instruments to employees in the financial
statements. SFAS 123(R) applies to all grants after the effective date and to the unvested portion
of stock options outstanding as of the effective date. We adopted SFAS 123(R) using the
modified-prospective method and use the Black-Scholes valuation model for valuing share-based
payments. We will continue to account for transactions in which services are received in exchange
for equity instruments based on the fair value of such services received from non-employees, in
accordance with SFAS 123(R), Emerging Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting
for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction
with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain Transactions
involving Equity Instruments Granted to Other Than Employees, as amended.
Our Statement of Operations as of and for the years ended December 31, 2007 and 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). 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.
Non-employee share-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances, option grants to non-employees are immediately
vested and have no future performance requirements by the non-employee and the total share-based
compensation charge is recorded in the period of the measurement date.
The fair value of each CytRx and RXi common stock option grant is estimated using the
Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest
rates, expected volatility, expected life of the common stock options and future dividends.
Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing
model, based on an expected forfeiture rate that is adjusted for actual experience. If our
Black-Scholes option pricing model assumptions or our actual or estimated forfeiture rate are
different in the future, that could materially affect compensation expense recorded in future
periods.
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. If our estimates
used in the determination of either discounted future cash flows or other appropriate fair value methods are
not accurate as compared to actual future results we may be required to record an impairment charge.
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 17.1 million shares, 30.2 million shares and 24.7 million shares at December 31, 2007, 2006 and 2005,
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 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.
31
Quarterly Financial Data
The following table sets forth unaudited consolidated statements of operations data for each
quarter during our most recent two fiscal years. This quarterly information has been derived from
our unaudited consolidated 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 consolidated financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,563 |
|
|
$ |
2,371 |
|
|
$ |
2,046 |
|
|
$ |
1,479 |
|
Net loss |
|
|
(4,546 |
) |
|
|
(6,285 |
) |
|
|
(4,597 |
) |
|
|
(6,462 |
) |
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(4,546 |
) |
|
$ |
(6,285 |
) |
|
$ |
(4,597 |
) |
|
$ |
(6,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common stock |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
61 |
|
|
$ |
|
|
|
$ |
776 |
|
|
$ |
1,229 |
|
Net loss |
|
|
(4,166 |
) |
|
|
(5,465 |
) |
|
|
(2,972 |
) |
|
|
(4,148 |
) |
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants |
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(4,654 |
) |
|
$ |
(5,465 |
) |
|
$ |
(2,972 |
) |
|
$ |
(4,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common stock |
|
$ |
(0.07 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in 2007 and 2006 we incurred $2.7 million and
$1.2 million, respectively, in employee non-cash compensation expenses. No corresponding expense
was recorded in 2005.
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 to arrive at net loss applicable to
common stockholders on the consolidated statements of operations and for purposes of calculating
basic and diluted earnings per shares.
Fourth Quarter Adjustment
During the fourth quarter of 2007, the Company recorded adjustments for: (i) additional
compensation expense of $236,000 related to previously granted non-employee stock options, (ii) additional
compensation expense of $350,000 related to stock options previously granted to Directors and (iii) additional
general and administrative expense of $192,000 related to legal fees rendered during the third quarter. Management concluded
the effect of these adjustments was not material to any previously reported quarterly period.
Liquidity and Capital Resources
General
At December 31, 2007, we had cash, cash equivalents and short-term investments of $60.4
million, including $11.7 million held by RXi) compared to $30.4 million at December 31, 2006. Our
working capital totaled $47.4 million and our total assets were $64.4 million at December 31, 2007,
compared to $20.3 million and $31.6 million, respectively, at December 31, 2006. As of March 28,
2008, we also had received approximately $1.0 million in connection with the exercise of warrants
and options since December 31, 2007.
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. We believe
that our current resources will be sufficient to support our currently planned level of operations
into the second half of 2009. This estimate is based, in part, upon our currently projected
expenditures for 2008 of approximately $29.2 million, including approximately $5.1 million for our
clinical program for arimoclomol for ALS and related studies, approximately $6.4 million for our
planned Phase II clinical trial of arimoclomol in stroke patients and Phase II clinical trial of
iroxanadine for diabetic ulcers, approximately $9.2 million for equipping and operating our
research laboratory in San Diego, California, and approximately $8.5 million for other general and
administrative expenses. Management believes that RXis current resources will be sufficient to
support its currently planned level of operations into the second quarter of 2009. We anticipate it
will take a minimum of
32
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.
Discussion of Operating, Investing and Financing Activities
Net loss for the year ended December 31, 2007 was $21.9 million, and cash used for operating
activities for that period was $22.4 million. The net loss for the year reflects $7.2 million of
non-cash revenue recognized under the 2006 agreement with ALSCRT and $3.5 million for stock option
and warrant expense.
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 cash provided from operating activities
includes net proceeds of $24.3 million received from ALSCRT reflected in August 2006 in connection
with the sale of a one-percent royalty interest in our worldwide sales of arimoclomol for ALS.
Reflected in the net loss of $16.8 million is $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 $1.7 million in stock option expense related to
options granted to employees and consultants, of which $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.
For the year ended December 31, 2007, $11.0 million was used in investing activities. Of this
amount, $9.8 million was used by RXi for the purchase of
short-term investments. The other $1.3
million was used for the purchase of equipment and furnishings, primarily associated with equipping
the new San Diego laboratory. 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
Cash provided by financing activities for the year ended December 31, 2007 was $53.5 million
compared to $12.8 million and $19.8 million in the years ended December 31, 2006 and 2005,
respectively. During 2007, we raised $34.2 million in a private placement of our common stock and
an additional $18.8 million from the exercise of previously outstanding stock options and warrants.
During 2006, we raised $12.4 million through a private placement of our common stock and an
additional $0.4 million from the exercise of stock options and warrants. During the year ended
December 31, 2005, we raised $19.6 million through a private placement of common stock.
We believe that we have adequate working capital to allow us to operate at our currently
planned levels into the second half of 2009. We may require additional capital in order to fund the
completion of our clinical programs for arimoclomol for the treatment of ALS and for stroke
recovery and iroxanadine for diabetic ulcers, and the other ongoing research and development
related to our molecular chaperone amplification drug candidates. We may incur substantial
additional expense and our clinical programs may be delayed if the FDA requires us to generate
additional pre-clinical or clinical data in connection with the clinical trials, or the FDA
requires us to revise significantly our planned protocols for our planned clinical trials.
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.
33
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.
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.
As a result of RXis separation from CytRx in March 2008 (see discussion in the Our
Separation from RXi Pharmaceuticals Corporation section on page 8), each of CytRx and RXi will be
responsible for their respective future contractual obligations, therefore, they are shown
separately below.
CytRxs current contractual obligations that will require future cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable |
|
|
Cancelable |
|
|
|
|
|
|
|
Operating |
|
|
Employment |
|
|
|
|
|
|
Research and |
|
|
License |
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
Agreements |
|
|
Subtotal |
|
|
Development |
|
|
Agreements |
|
|
Subtotal |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
(1) |
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
Total |
|
2008 |
|
$ |
446 |
|
|
$ |
900 |
|
|
$ |
1,346 |
|
|
$ |
4,035 |
|
|
$ |
|
|
|
$ |
4,035 |
|
|
$ |
5,381 |
|
2009 |
|
|
236 |
|
|
|
650 |
|
|
|
886 |
|
|
|
3,279 |
|
|
|
|
|
|
|
3,279 |
|
|
|
4,165 |
|
2010 |
|
|
145 |
|
|
|
|
|
|
|
145 |
|
|
|
3,045 |
|
|
|
|
|
|
|
3,045 |
|
|
|
3,190 |
|
2011 |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
2,188 |
|
|
|
|
|
|
|
2,188 |
|
|
|
2,199 |
|
2012 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
|
|
|
|
681 |
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
838 |
|
|
$ |
1,550 |
|
|
$ |
2,388 |
|
|
$ |
13,228 |
|
|
$ |
|
|
|
$ |
13,228 |
|
|
$ |
15,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RXis current contractual obligations that will require future cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable |
|
|
Cancelable |
|
|
|
|
|
|
|
Operating |
|
|
Employment |
|
|
|
|
|
|
Research and |
|
|
License |
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
Agreements |
|
|
Subtotal |
|
|
Development |
|
|
Agreements |
|
|
Subtotal |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
(1) |
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
Total |
|
2008 |
|
$ |
180 |
|
|
$ |
942 |
|
|
$ |
1,122 |
|
|
$ |
|
|
|
$ |
716 |
|
|
$ |
716 |
|
|
$ |
1,838 |
|
2009 |
|
|
105 |
|
|
|
448 |
|
|
|
553 |
|
|
|
|
|
|
|
666 |
|
|
|
666 |
|
|
|
1,219 |
|
2010 |
|
|
|
|
|
|
290 |
|
|
|
290 |
|
|
|
|
|
|
|
616 |
|
|
|
616 |
|
|
|
906 |
|
2011 |
|
|
|
|
|
|
105 |
|
|
|
105 |
|
|
|
|
|
|
|
816 |
|
|
|
816 |
|
|
|
921 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
1,126 |
|
|
|
1,126 |
|
2013 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,325 |
|
|
|
10,325 |
|
|
|
10,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285 |
|
|
$ |
1,785 |
|
|
$ |
2,070 |
|
|
$ |
|
|
|
$ |
14,265 |
|
|
$ |
14,265 |
|
|
$ |
16,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases are primarily facility lease related obligations, as well as equipment and
software lease obligations with third party vendors. |
34
|
|
|
(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 our
Compensation Committee, as well as for minimum bonuses. |
|
(3) |
|
Research and development obligations relate primarily to clinical trials. Most of these
purchase obligations are cancelable. |
|
(4) |
|
License agreements generally relate to RXis obligations with UMMS associated with RNAi and,
for future periods, represent minimum annual royalty payment obligations. Not included in the
table are milestone payment amounts that may be required under RXis license agreements, due
to their contingent nature. RXi has determined that a hypothetical product candidate attaining
all possible product milestones would have aggregate potential milestone payments of $36
million. This hypothetical product analysis was undertaken since RXi has not yet named a lead
product candidate. RXi determined what would be a like product candidate based on its current
research and ran an analysis of the milestone payments due under its current licenses for this
hypothetical product. As a part of this analysis, due to the fact that certain of its licenses
are for technologies that are mutually exclusive, if any two licenses are mutually exclusive
and only one would be applicable to any single product, RXi selected the milestone payments
that would result in higher fees to include in its analysis. |
Net Operating Loss Carryforwards
At December 31, 2007, we had United States federal and state net operating loss carryforwards
of $109 million and $52 million, respectively, available to offset against future taxable income,
which expire in 2010 through 2027. As a result of a change in-control that occurred in our
shareholder base in July 2002, approximately $45 million in federal net operating loss
carryforwards became limited in their availability to $0.7 million annually. Management currently believes that
the remaining $64
million in federal net operating loss carryforwards, and the $52 million in state net operating
loss carryforwards, are unrestricted. However, we are reviewing our recent equity transactions to determine if
they may have resulted in any further restrictions on our net operating loss carryforwards.
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, 2007, we also had research and development and orphan drug credits
for federal and state purposes of approximately $3 million and $2 million, respectively, available
for offset against future income taxes, which expire in 2023 through 2027. 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 income tax valuation allowance has been recorded against these assets.
Results of Operations
We recorded net losses of $21.9 million, $16.8 million and $15.1 million during the years
ended December 31, 2007, 2006 and 2005, respectively.
During fiscal 2007, we recognized $7.2 million in service revenues relating to our $24.3
million sale to the ALSCRT of a one-percent royalty interest in the worldwide sales of arimoclomol
in August 2006. This compares to $1.9 million in services revenues in the year ended December 31,
2006, of which $1.8 million related to the sale of royalty interest sold to ALSCRT. During 2007 and
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 2008, we are not anticipating the receipt of any
significant service or licensing fees, although we estimate that we will recognize an additional
$8.4 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.
35
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Research and development expense |
|
$ |
14,454 |
|
|
$ |
8,858 |
|
|
$ |
8,867 |
|
Non-cash research and development expense |
|
|
3,778 |
|
|
|
674 |
|
|
|
220 |
|
Employee stock option expense |
|
|
592 |
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,824 |
|
|
$ |
9,781 |
|
|
$ |
9,087 |
|
|
|
|
|
|
|
|
|
|
|
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 2007, 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 molecular chaperone amplification drug candidates, (iii) RXis acquisition of
technologies covered by the UMMS license agreements, (iv) our prior collaboration and invention
disclosure agreement pursuant to which UMMS had agreed to disclose certain inventions to us and
provide us with the right to acquire an option to negotiate exclusive licenses for those disclosed
technologies, and (v) the small molecule drug discovery and development operations at our former
Massachusetts and new California laboratory. All research and development costs related to the
activities of RXi and our former laboratory were expensed.
As compensation to members of our scientific advisory board (SAB) and consultants, and in
connection with the acquisition of technology, we and RXi sometimes issue shares of common stock,
stock options and warrants to purchase shares of 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 charges of $3.8 million, $0.7 million, and $0.2 million in this regard
during 2007, 2006, and 2005, respectively. Included in the research and development charges for
2007 were $2.3 million of expense related to RXis issuance of 462,112 shares of common stock to
UMMS for certain license agreement rights and a new invention disclosure agreement and $1.0 million
for non-qualifying stock options to SAB members of RXi. In 2007, we recorded $0.6 million of
employee stock option expense as compared to $0.2 million in 2006 and none in 2005.
In 2008, we expect our research and development expenses to increase primarily as a result of
our clinical program with arimoclomol for ALS and related studies and our planned clinical trials
of arimoclomol for stroke recovery and iroxanadine for diabetic ulcers. Additionally, RXi, our
majority-owned subsidiary, expects to increase their expenditures during 2008 related to their
development of RNAi therapeutics.
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
General and administrative expenses |
|
$ |
12,666 |
|
|
$ |
8,622 |
|
|
$ |
6,057 |
|
Stock, stock option and warrant expenses to non-employees and consultants |
|
|
2 |
|
|
|
60 |
|
|
|
367 |
|
Employee stock option expense |
|
|
2,154 |
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,822 |
|
|
$ |
9,657 |
|
|
$ |
6,424 |
|
|
|
|
|
|
|
|
|
|
|
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 expense, were $12.7 million in 2007, $8.6 million in 2006 and $6.1 million in
2005. General and administrative expenses increased by $4.1 million in 2007 as compared to 2006
primarily due to increased audit, legal and consulting fees and higher employment costs. Audit fees
associated with our annual audit, compliance with the internal control provisions of the
Sarbanes-Oxley Act and RXis registration statement relating to our partial spinoff of RXi
increased by approximately $1.1 million. Legal fees increased by approximately $0.9 million
primarily related to RXis Registration Statement, increased patent work, license negotiation fees
and other legal matters, including possible financing transactions. Recruiting and consulting fees
increased by approximately $0.7 million related to recruiting officers, financial and scientific
personnel and consultants assisting with the preparation of RXis Registration Statement on Form
S-1. Employment costs increased by approximately $1.4 million related to wages and bonuses for
additional personnel for RXi and annual increases for other employees.
36
General and administrative
expenses increased by $2.6 million in 2006 as compared to 2005 as a result of initial
Sarbanes-Oxley Act compliance efforts, an increase in administrative salaries and legal expenses.
The legal expense increase of $0.6 million was associated with maintenance of our patent portfolio
and the formation of RXi. In our efforts to comply with the Sarbanes-Oxley Act for the year ended
December 31, 2006, we incurred approximately $0.8 million in consulting, audit and accounting
system conversion expense. We were 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. In 2006, our general and administrative
salaries increased by $0.6 million over the 2005 expense level as a result of a higher bonuses,
additional regulatory and accounting personnel and annual salary increases.
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 no such charges during 2007, $0.1 million
during 2006 and $0.4 million during 2005 related 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.
Since our adoption of SFAS 123(R) during 2006, we recorded $2.7 million in fiscal 2007 and
$1.0 million in fiscal 2006 of employee stock option expense. No corresponding expense existed in
2005. The increase in 2007 over 2006 primarily related to stock options granted by RXi to recruit
and retain directors, officers and additional employees.
Depreciation and amortization
Depreciation and amortization expenses were $272,000, $228,000 and $217,000 in 2007, 2006 and
2005, 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.
Other Income
In June
2007, we recognized $1.5 million of income arising from a fee received
pursuant to a change-in-control provision included in the purchase
agreement for our 1998 sale of our animal pharmaceutical unit.
Management concluded that the fee did not represent revenue generated
from our normal course of our business, and accordingly we recorded
this fee as other income.
Interest income
Interest income was $2,664,000 in 2007, as compared to $997,000 in 2006 and $206,000 in 2005.
The variances between years are attributable primarily to the amount of funds 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 related to the 5% minority interest in losses of our former CytRx
Laboratories subsidiary. There was no minority interest in losses recorded in 2006, since on June
30, 2005 we repurchased the 5% minority interest from Dr. Michael Czech. On September 30, 2005, we
merged CytRx Laboratories into CytRx. We recorded $0.4 million in 2007 related to the 15% minority
interest in losses of RXi.
Until recently, we owned approximately 85% of the outstanding shares of common stock of RXi
and our consolidated financial statements, including our consolidated financial statements as of
and for the year ended December 31, 2007 included in this Annual Report, reflected 100% of the
assets and liabilities of RXi, and the ownership of the interests of the minority shareholders was
recorded as minority interests. On February 14, 2008, our board of directors declared a
dividend, payable to our stockholders as of March 6, 2008, the record date, of one share of RXi
common stock for each approximately 20.05 shares of our common stock held by such stockholders.
The dividend was paid on March 11, 2008. The RXi shares distributed by us to our stockholders
constituted approximately 36% of the currently outstanding RXi shares, so we currently own
approximately 49% of the outstanding shares of RXi common stock. For periods beginning with the
first quarter of 2008 and for so long as we own more than 20% but less than 50% of the outstanding
shares of RXi, we will account for our investment in RXi using the equity method. Under the equity
method, we will record only our pro-rata share of the assets, liabilities and results of operations
of RXi.
Recent Accounting Pronouncements
In July 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,
37
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 adopted FIN No. 48 as of January 1, 2007, as required. The adoption of FIN
No. 48 did not have an impact on our financial position and results of operations.
In September 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. In February 2008, the FASB issued Staff Position No. FAS 157-1,
which amended SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes of lease classification or
measurement under Statement 13. However, this scope exception does not apply to assets acquired
and liabilities assumed in a business combination. Also in February 2008, the FASB issued Staff
Position No. FAS 157-2, which delayed the effective date of SFAS No. 157 for non-financial assets
and liabilities, except those items recognized at fair value on an annual or more frequently
recurring basis to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. We do not expect SFAS No. 157 will have a significant impact on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. We do not expect SFAS No. 159 will have a
significant impact on our consolidated financial statements.
In June 2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to additional paid-in capital.
EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The adoption is not
expected to have a significant impact on our consolidated financial statements.
In June 2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3), which requires that nonrefundable advance payments for goods
or services that will be used or rendered for future research and development activities be
deferred and amortized over the period that the goods are delivered or the related services are
performed, subject to an assessment of recoverability. EITF 07-3 will be effective for fiscal years
beginning after December 15, 2007. We do not expect that the adoption of EITF 07-3 will have an
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160) and a revision to SFAS No. 141, Business Combinations (SFAS
No. 141R). SFAS No. 160 modifies the accounting for noncontrolling interest in a subsidiary and
the deconsolidation of a subsidiary. SFAS No. 141R establishes the measurements in a business
combination of the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. Both of these related statements are effective for fiscal years
beginning after December 15, 2008. We have not yet determined the impact that the recent adoption
of these two statements may have on our consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin 110 (SAB 110), which expresses
the views of the Staff regarding use of a simplified method, as discussed in SAB 107, in
developing an estimate of expected term of plain vanilla share options in accordance with
Statement of Financial Accounting Standards No. 123. SAB 110 will allow, under certain
circumstances, the use of the simplified method beyond December 31, 2007 when a Company is unable
to rely on the historical exercise data. The Company does not anticipate the adoption of SAB 110 having a material impact on our financial statements.
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet financing arrangements, other than operating
leases.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited primarily to interest income sensitivity, which is
affected by changes in the general level of United States interest rates, particularly because a
significant portion of our investments are in short-term debt securities issued by the
38
U.S.
government and institutional money market funds. The primary objective of our investment activities
is to preserve principal. Due to the nature of our short-term investments, we believe that we are
not subject to any material market risk exposure. We do not have any derivative financial
instruments or foreign currency instruments. If interest rates had varied by 10% in the year ended
December 31, 2007, it would not have had a material effect on our results of operations or cash
flows for that period.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplemental schedule and notes thereto as of
December 31, 2007 and 2006, and for each of the three years in the period then ended December 31,
2007, 2006 and 2005, 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 Commissions 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.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this Annual Report. Based on that evaluation and the existence of certain
material weaknesses discussed below under discussed below under Managements Report on Internal
Control Over Financial Reporting, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of December 31, 2007 to
provide reasonable assurance that information required to be disclosed by us in reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms.
There was no change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2007 that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements 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 and
that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and (3) 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, 2007. 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.
Based upon managements assessment using the criteria contained in COSO, and for the reasons
discussed below, our management has concluded that, as of December 31, 2007, our internal control
over financial reporting was not effective.
39
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, 2007:
There were instances of
our
accounting personnel not following established policies and
procedures, which resulted in ineffective controls over financial
reporting. Additionally, we failed to update our legal database
during the fourth quarter of 2007 for a limited number of drug
development contracts and stock option agreements due to poor
communications among our scientific, legal and accounting
departments. These failures in controls, if not properly addressed, could result in a material
misstatement that would not be detected or prevented by our internal
controls.
Based
on the evaluation of the effectiveness of our disclosure controls and
procedures, and in light of the deficiencies described above, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of
December 31, 2007.
In
assessing the cause of the material weaknesses described above in
order to identify and complete any necessary remedial actions,
management concluded that turnover of several accounting personnel at
both CytRx and RXi during 2007, which coincided with a significant
increase in the workload of the accounting department relating
primarily to our compliance with applicable SEC financial statement
and other reporting requirements in connection with our partial
spin-off of RXi, was a contributing factor to the material weaknesses.
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 Commissions rules and regulations. Any
failure to improve our internal controls to address the weaknesses 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.
40
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth information concerning our directors and executive officers:
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Class of |
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Name |
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Age |
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Director(1) |
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Position |
Max Link, Ph.D.
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67 |
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III
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Director, Chairman of the Board(2)(3) |
Steven A. Kriegsman
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66 |
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II
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Director, Chief Executive Officer, President |
Marvin R. Selter
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80 |
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II
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Director, Vice Chairman of the Board(2)(3)(4) |
Louis Ignarro, Ph.D.
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66 |
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I
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Director |
Joseph Rubinfeld, Ph.D.
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75 |
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I
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Director(2)(4) |
Richard L. Wennekamp
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65 |
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II
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Director(2)(3)(4) |
Mitchell K. Fogelman
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56 |
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Chief Financial Officer, Treasurer |
Jack R. Barber, Ph.D.
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52 |
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Chief Scientific Officer |
Shi Chung Ng, Ph.D.
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53 |
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Senior Vice President
Research and Development
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Benjamin S. Levin
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32 |
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General Counsel, Vice President
Legal Affairs and Corporate Secretary |
John Y. Caloz
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56 |
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Chief Accounting Officer |
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(1) |
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Our Class II directors serve until the 2008 annual meeting of stockholders, our Class III
director serves until the 2009 annual meeting of stockholders and our Class I directors serve
until the 2010 annual meeting of stockholders. |
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(2) |
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Members of our Audit Committee. Mr. Selter is the Chairman of the Committee. |
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(3) |
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Members of our Nominating and Corporate Governance Committee. Mr. Wennekamp is Chairman of
the Committee. |
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(4) |
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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 Alexion Pharmaceuticals, Inc., Celsion Corporation and Discovery
Laboratories, Inc., each of which is a public company.
Steven A. Kriegsman has been a director and our President and Chief Executive Officer since
July 2002. He also serves as a director of RXi. He previously served as Director and Chairman of
Global Genomics from June 2000 until our merger with Global Genomics in July 2002. Mr. Kriegsman is
the Chairman of the Board 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 B.S. 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. From June 2003
until February 2008, he served as a Director, and he is the former Chairman of the Audit 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 CommitteeCity of Los Angeles, Small Business
BoardState of California and the Small Business Advisory CommissionState 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
41
past Chairman, the Advisory
Board of the San Fernando Economic Alliance and the California State UniversityNorthridge 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 RutgersThe 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 from 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. degree in pharmacy from Columbia University and his Ph.D. degree
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 M.A. and Ph.D. degrees 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 to that time, 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 United States.
Mr. Wennekamp received his M.B.A. in finance from the University of Southern California and his
B.S. degree from California State University, Long Beach.
Mitchell K. Fogelman joined CytRx as our Chief Financial Officer and Treasurer in September
2007. Previously, he served as Senior Vice President-Finance of International Aluminum Corporation,
a New York Stock Exchange listed manufacturer of commercial and residential building products,
where he had worked for twenty-five years. Mr. Fogelman is a CPA who worked at
PricewaterhouseCoopers LLP as a Senior Manager. He earned his M.B.A. in finance and quantitative
analysis from the Anderson School of Business at the University of California, Los Angeles, and his
B.A. degree in mathematics from the University of California, Los Angeles.
Jack R. Barber, Ph.D. has been our Senior Vice President Drug Development since July 2004,
and was named Chief Scientific Officer in February 2007. 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. degrees 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.
Shi Chung Ng, Ph.D. joined CytRx as our Senior Vice President Research and Development in
April 2007. Previously, he served as Vice President of Molecular Oncology at Ligand
Pharmaceuticals, directing the cancer discovery efforts as well as genomics biomarker studies for
Targretin. Prior to that, he served as Vice President of Drug Discovery Biology and Preclinical
Development of ArQule, Inc., leading novel cell cycle checkpoint activation drug discovery and
development efforts for ARQ-197. From 1993-2004, Dr. Ng co-led efforts in the discovery and
development of multiple oncology drug candidates at Abbott, including a Bcl-2 inhibitor, farnesyl
transferase inhibitors, and novel anti-mitotics as a founding member of Abbott oncology, a Senior
Group Leader and a Volwiler Associate Fellow. Prior to his tenure at Abbott, Dr. Ng worked at
Pfizer, Bristol-Myers Squibb and Harvard Medical School. He was adjunct Assistant Professor at the
Chicago Medical School, and adjunct Faculty Member at Northwestern University. He had also served
as a visiting Professor at Rutgers University, a visiting Research Staff Member at Princeton
University, and an Instructor in Medicine at Harvard Medical School. Dr. Ng received a Ph.D. in
Biochemistry from Purdue University, and a Postdoctoral
42
Fellowship from Howard Hughes Medical
Institute and Harvard Medical School. Dr. Ng has published over 200 papers, abstracts and patent
applications and he was the recipient of multiple scholarships and awards.
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 OMelveny & Myers LLP. Mr. Levin received his
S.B. in Economics from the Massachusetts Institute of Technology, and a J.D. degree from Stanford
Law School.
John Y. Caloz joined CytRx as our Chief Accounting Officer in October 2007. Before joining
CytRx, he most recently served for one year as Chief Financial Officer of Occulogix, Inc., a
NASDAQ-listed medical-therapy company. Prior to that, Mr. Caloz served for three years as Chief
Financial Officer of IRIS International Inc., a California medical device manufacturer. Before
that, he served as Chief Financial Officer of Synarc, Inc., a medical imaging company, and from
1993 to 1999 he was Senior Vice President, Finance and Chief Financial Officer of Phoenix
International Life Sciences Inc. of Montreal, Canada, which was acquired by MDS Inc. in 1999. From
1983 to 1993, Mr. Caloz was a partner at Rooney, Greig, Whitrod, Filion & Associates of Saint
Laurent, Quebec, Canada, a firm of Chartered Accountants specializing in research and development
and technology companies. Mr. Caloz is a Chartered Accountant and holds a degree in Accounting from
York University, Toronto, Canada.
Audit Committee
Our board of directors has a standing Audit Committee currently composed of Messrs. Selter,
Link, Rubinfeld and Wennekamp. Our board of directors has determined that Mr. Selter, one of the
independent directors serving on our Audit Committee, also is an audit committee financial expert
as defined by the SECs rules. 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.
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 2007 complied with all applicable Section 16(a)
filing requirements, except that the initial Form 3 for John Caloz, our Chief Accounting Officer,
was filed late due to an administrative oversight.
Code of Ethics
We have adopted a Code of Ethics applicable to all employees, including 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.
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 the named executive officers are similar to those provided to our other officers.
Throughout this Annual Report, the individuals included in the Summary Compensation Table on
page 48 are referred to as the named executive officers.
43
Compensation Philosophy and Objectives
The components of our executive compensation consist of salary, annual cash bonuses awarded
based on the Compensation Committees subjective assessment of each individual executives 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.
The Compensation Committee believes that an effective executive compensation program should
provide base annual compensation that is reasonable in relation to individual executives 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
officers achievement of specific goals and employee stock options as a retention tool and as a
means to align the executives 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 companys 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 compensation and stock
options.
Because of the size of our company, the small number of executive officers in our company, and
our companys financial priorities, the Compensation Committee has decided not to implement or
offer any pension benefits, deferred compensation plans, or other similar plans for our named
executive officers.
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 companys 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
periodically reassess the proper weighting of equity and cash compensation in light of the
companys working capital situation from time to time.
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 our other officers are made by our President and Chief Executive
Officer.
The Compensation Committee and the President and Chief Executive Officer annually review the
performance of each named executive officer (other than the President and Chief Executive Officer,
whose performance is reviewed only by 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 Companys
annual cash and incentive-based cash and non-cash executive compensation to seek to motivate our
named 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 2007, 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 a range of 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.
2007 Executive Compensation Components
For 2007, the principal components of compensation for the named executive officers were:
44
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annual bonuses; and |
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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 named executive officer based on his position and responsibility.
During its review of base salaries for executives, the Compensation Committee primarily
considers:
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the negotiated terms of each executive employment agreement; |
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internal review of the executives compensation, both individually and relative to
other named executive officers; and |
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individual performance of the executive. |
Salary levels are typically considered annually as part of the companys performance review
process, as well as upon a change in job responsibility. Merit-based increases to salaries are
based on the Compensation Committees assessment of the individuals performance. Base salaries for
the named executive officers in 2007 were increased from the base salaries in effect during the
prior year by amounts ranging from 7% for our prior Chief Financial
Officer to 25% for our Chief
Scientific Officer. Unless increased by the Compensation Committee, the salary for Mr. Kriegsman
will remain in effect until the expiration of his employment agreement on December 31, 2009, while
the salaries of the other named executive officers will remain in effect until the expiration of
their respective employment agreements. The salaries and other terms of employment of Dr. Barber,
our Chief Scientific Officer, and Mr. Levin, our General Counsel, Vice President Legal Affairs
and Corporate Secretary, are in the process of being negotiated with our compensation committee, as
their employment is now month-to-month following the expiration of their employment agreements on
December 31, 2007.
Annual and Special Bonuses
The Compensation Committee has not established an incentive compensation program with fixed
performance targets. Because we do not generate significant revenues and have not commercially
released any products, the Compensation Committee bases its discretionary 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 2007, the
Compensation Committee granted Mr. Levin and Mr. Natalizio special bonuses of 10,000 and 5,000
shares of RXi common stock, respectively, in recognition of their efforts in establishing RXi as a
stand-alone company. During 2007, the Compensation Committee granted Mr. Kriegsman an annual cash
bonus of $400,000 and granted cash bonuses to the other named executive officers ranging from
$15,000 to $151,000, 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.
On March 11, 2008, the record date for our recent distribution of RXi shares to our
stockholders, we awarded approximately 27,700 shares of RXi to our directors, officers and other
employees, including the named executive officers, in connection with our separation from RXi to
compensate those directors, officers and other employees for services performed in connection with
the separation. Each of our directors, officers and other employees who held stock options to
purchase our common stock received that number of RXi shares that such individual would have
received in the separation, assuming such individual had, on the record date for the separation,
exercised, in full, on a net-exercise basis, all such stock options to the extent then
exercisable.
Equity Incentive Compensation
As indicated above, the Compensation Committee also aims to encourage the companys executive
officers to focus on long-term company performance by allocating to them stock options that vest
over a period of several years. In 2007, the Compensation Committee granted to Mr. Kriegsman a
nonqualified option to purchase 350,000 shares of our common stock at a price of $4.51 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 the hiring of Mitchell K. Fogelman as Chief Financial Officer, and the
annual review of our other named executive officers, the Compensation Committee also
45
granted stock
options to those named executive officers. All of these other stock options had an exercise price
equal to the closing market price on the date of grant, and also vest monthly over three years,
provided that such executives remain in our employ through such monthly vesting periods.
Retirement Plans, Perquisites and Other Personal Benefits
We have adopted a tax-qualified employee savings and retirement plan, the 401(k) Plan, for
eligible United States employees, including our named executive officers. Eligible employees may
elect to defer a percentage of their eligible compensation in the 401(k) Plan, subject to the
statutorily prescribed annual limit. We may make matching contributions on behalf of all
participants in the 401(k) Plan in an amount
determined by our board of directors. Matching and profit-sharing contributions, if any, are
subject to a vesting schedule; all other contributions are at all times fully vested. We intend the
401(k) Plan, and the accompanying trust, to qualify under Sections 401(k) and 501 of the Internal
Revenue Code so that contributions by employees to the 401(k) Plan, and income earned (if any) on
plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that
we will be able to deduct our contributions, if any, when made. The trustee under the 401(k) Plan,
at the direction of each participant, may invest the assets of the 401(k) Plan in any of a number
of investment options.
We do not provide any of our executive officers with any other perquisites or personal
benefits, other than benefits that we offer Mr. Kriegsman provided for in his employment agreement.
As required by his employment agreement, during 2007 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, 2007 and under which Mr. Kriegsmans designee is the beneficiary.
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. Kriegsmans 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. Except as described above, we do not have in effect any change of control provisions
for payment to any named executive officer in the event of a change in control of CytRx.
Ownership Guidelines
The Compensation Committee has no requirement that each named executive officer maintain a
minimum ownership interest in our company.
Our long-term incentive compensation consists solely of periodic grants of stock options to
our named executive officers. The stock option program:
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links the creation of stockholder value with executive compensation; |
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provides increased equity ownership by executives; |
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functions as a retention tool, because of the vesting features included in all options
granted by the Compensation Committee; and |
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maintains 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 granted our President and Chief Executive Officer discretion to grant up to 100,000
options to employees
46
upon joining our company, and to grant an additional discretionary pool of
up to 100,000 options during each annual 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 (such as commencement and
completion of clinical trials) 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
Markets 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 first day of employment for newly hired employees, or the date on which the Compensation
Committee or the Chief Executive Officer, as applicable, approves the stock option grant to
existing employees.
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. We have no policy regarding the adjustment or recovery of stock option
awards in connection with the restatement of our financial statements, as our stock option awards
have not been tied to the achievement of specific financial goals.
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, we began accounting for share-based compensation in accordance
with the requirements of FASB Statement 123(R), Share-Based Payment. 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 companys 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 served
as all of the members of the Compensation Committee during 2007.
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.
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Joseph Rubinfeld, Ph.D., Chairman
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Marvin R. Selter
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Richard L. Wennekamp |
47
Summary Compensation Table
The following table presents summary information concerning all compensation paid or accrued
by us for services rendered in all capacities during 2007 and 2006 by Steven A. Kriegsman, Mitchell
K. Fogelman and Matthew Natalizio, who are the only individuals who served as our principal
executive and financial officers during the year ended December 31, 2007, and our three other most
highly compensated executive officers who were serving as executive officers as of December 31,
2007:
Summary Compensation Table
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Option |
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Bonus |
|
Awards |
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All Other |
|
Total |
Name and Position |
|
Year |
|
Salary ($) |
|
($) (1) |
|
($) (2) |
|
Compensation ($) |
|
($) |
Steven A.
Kriegsman
President and Chief Executive Officer |
|
|
2007 |
|
|
|
524,767 |
|
|
|
|
|
|
|
295,534 |
|
|
|
|
|
|
|
820,301 |
|
|
|
|
2006 |
|
|
|
417,175 |
|
|
|
800,000 |
|
|
|
340,426 |
|
|
|
|
|
|
|
1,557,601 |
|
Mitchell K.
Fogelman
Chief Financial Officer and Treasurer (3) |
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2007 |
|
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76,763 |
|
|
|
|
|
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35,665 |
|
|
|
|
|
|
|
112,428 |
|
Matthew
Natalizio
Chief Financial Officer and Treasurer (3) |
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2007 |
|
|
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175,573 |
|
|
|
|
|
|
|
|
|
|
|
5,224 |
(5) |
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|
180,797 |
|
|
|
|
2006 |
|
|
|
204,115 |
|
|
|
83,000 |
|
|
|
78,472 |
|
|
|
|
|
|
|
365,587 |
|
Jack R.
Barber, Ph.D.
Chief Scientific Officer |
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2007 |
|
|
|
327,074 |
|
|
|
|
|
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|
168,876 |
|
|
|
|
|
|
|
495,950 |
|
|
|
|
2006 |
|
|
|
261,750 |
|
|
|
218,750 |
|
|
|
90,544 |
|
|
|
|
|
|
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571,044 |
|
Benjamin S. Levin
General Counsel, Vice President Legal
Affairs and Secretary |
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2007 |
|
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250,000 |
|
|
|
|
|
|
|
84,438 |
|
|
|
|
|
|
|
334,438 |
|
|
|
|
2006 |
|
|
|
208,170 |
|
|
|
219,750 |
|
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120,550 |
|
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|
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548,470 |
|
Tod Woolf,
Ph.D.
President and Chief Executive Officer of
RXi Pharmaceuticals Corporation (4) |
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2007 |
|
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216,347 |
|
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87,500 |
|
|
|
236,433 |
(6) |
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33,302 |
(7) |
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573,582 |
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2006 |
|
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115,830 |
(7) |
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115,830 |
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(1) |
|
Bonuses to the named executive officers reported above relating to 2006 were paid in both
June 2006, in connection with the contractual year end for those officers, and also in April
2007, following our decision to determine and award bonuses in connection with each fiscal
year end. For purposes of this table, the entire amount of the bonus
paid as attributed to 2006 has been presented as a 2006 amount. We plan to determine and award annual bonuses for 2007 at our next regularly
scheduled Compensation Committee meeting, and we will report any bonuses so awarded when made
in a Current Report on Form 8-K. The bonus for Dr. Woolf was paid by RXi on January 10, 2008. |
|
(2) |
|
The values shown in this column represent the dollar amount recognized for financial
statement reporting purposes with respect to the 2006 and 2007 fiscal years for the fair value
of stock options granted in 2006 and 2007 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 12 of the Notes to Consolidated Financial
Statements. |
|
(3) |
|
Mr. Natalizio served as our Chief Financial Officer and Treasurer through September 7, 2007,
and Mr. Fogelman has served in that capacity since September 11, 2007. |
|
(4) |
|
As of March 11, 2008, we no longer owned a majority of the outstanding common stock of RXi,
and thus Mr. Woolf is no longer considered an executive officer of CytRx. Amounts reported
above with respect to Dr. Woolf were paid by RXi unless otherwise noted. |
|
(5) |
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Represents premiums paid for medical, dental and vision insurance for Mr. Natalizio
following his resignation in September 2007. |
|
(6) |
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Represents the fair value of RXi employee stock options issued to Dr. Woolf. |
|
(7) |
|
Consists of $33,000 and $115,830 in consulting fees paid by CytRx Corporation in 2007 and
2006, respectively, and $302 of life insurance premiums paid by RXi in 2007. |
48
2007 Grants of Plan-Based Awards
In 2007, we granted stock options to our named executive officers under our 2000 Long-Term
Incentive Plan as follows:
2007 Grants of Plan-Based Awards
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All Other |
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Grant Date |
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Option Awards |
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Exercise Price of |
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Fair Value of |
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(# of CytRx |
|
Option Awards |
|
Option Awards |
Name |
|
Grant Date |
|
Shares) |
|
($/Sh) |
|
($) |
Steven A. Kriegsman |
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4/18/2007 |
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350,000 |
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$ |
4.51 |
|
|
$ |
1,328,600 |
|
President and Chief Executive Officer |
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Mitchell K. Fogelman |
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9/11/2007 |
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150,000 |
|
|
$ |
3.40 |
|
|
$ |
426,600 |
|
Chief Financial Officer and Treasurer |
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|
|
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|
|
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Matthew Natalizio |
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Chief Financial Officer and Treasurer |
|
|
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Jack R. Barber, Ph.D. |
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4/18/2007 |
|
|
|
200,000 |
|
|
$ |
4.51 |
|
|
$ |
759,200 |
|
Chief Scientific Officer |
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Benjamin S. Levin |
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4/18/2007 |
|
|
|
100,000 |
|
|
$ |
4.51 |
|
|
$ |
379,600 |
|
General Counsel, Vice President Legal Affairs and Secretary |
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Tod Woolf, Ph.D. (1) |
|
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President and Chief Executive Officer of RXi Pharmaceuticals
Corporation |
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(1) |
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No stock options were awarded by CytRx to Dr. Woolf in 2007. On May 23, 2007, RXi granted to
Dr. Woolf ten-year options to purchase 316,994 shares of RXis common stock under the RXi
Pharmaceutical Corporation 2007 Incentive Plan at an exercise price of $5.00 per share. |
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:
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options to purchase shares of common stock, which may be incentive stock options or
non-qualified stock options; |
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stock appreciation rights; |
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restricted stock; |
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performance units; |
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dividend equivalents; and |
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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 March 28, 2008, there were
6,075,300 shares previously issued or
subject to outstanding Plan awards and 2,116,253 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
49
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 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:
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designate participants; |
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determine the types of awards to grant to each participant and the number, terms and
conditions of any award; |
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establish, adopt or revise any rules and regulations as it may deem necessary or
advisable to administer the Plan; and |
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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 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
50
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:
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the achievement by CytRx or a parent or subsidiary of a specific financial target; |
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CytRxs stock price; |
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|
the achievement by an individual or a business unit of CytRx or a subsidiary of a
specific financial target; |
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|
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 participants rights and to receive any
distribution with respect to any award upon the participants 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 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.
51
Holdings of Previously Awarded Equity
Equity awards held as of December 31, 2007 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, 2007:
2007 Outstanding Equity Awards at Fiscal Year-End
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Option Awards |
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Number of |
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Underlying |
|
|
|
|
|
|
Unexercised |
|
Option |
|
|
|
|
Options |
|
Exercise |
|
Option |
|
|
(#) |
|
Price |
|
Expiration |
Name |
|
Exercisable |
|
Unexercisable |
|
($) |
|
Date |
Steven A. Kriegsman |
|
|
77,854 |
|
|
|
(1 |
) |
|
|
272,146 |
|
|
|
4.51 |
|
|
|
4/18/17 |
|
President and Chief Executive Officer |
|
|
100,028 |
|
|
|
(1 |
) |
|
|
99,972 |
|
|
|
1.38 |
|
|
|
6/16/16 |
|
|
|
|
258,307 |
|
|
|
(1 |
) |
|
|
41,693 |
|
|
|
.79 |
|
|
|
5/17/15 |
|
|
|
|
250,000 |
|
|
|
(2 |
) |
|
|
|
|
|
|
2.47 |
|
|
|
6/19/13 |
|
|
|
|
750,000 |
|
|
|
(2 |
) |
|
|
|
|
|
|
2.47 |
|
|
|
6/20/13 |
|
Mitchell K. Fogelman |
|
|
12,539 |
|
|
|
(1 |
) |
|
|
137,461 |
|
|
|
3.40 |
|
|
|
9/11/17 |
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew Natalizio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack R. Barber, Ph.D. |
|
|
44,488 |
|
|
|
(1 |
) |
|
|
155,512 |
|
|
|
4.51 |
|
|
|
4/18/17 |
|
Chief Scientific Officer |
|
|
50,014 |
|
|
|
(1 |
) |
|
|
49,986 |
|
|
|
1.38 |
|
|
|
6/16/16 |
|
|
|
|
129,154 |
|
|
|
(1 |
) |
|
|
20,846 |
|
|
|
.79 |
|
|
|
5/17/15 |
|
|
|
|
100,000 |
|
|
|
(2 |
) |
|
|
|
|
|
|
1.13 |
|
|
|
7/06/14 |
|
Benjamin S. Levin |
|
|
22,244 |
|
|
|
(1 |
) |
|
|
77,756 |
|
|
|
4.51 |
|
|
|
4/18/17 |
|
General Counsel, Vice President Legal |
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|
45,013 |
|
|
|
(1 |
) |
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44,987 |
|
|
|
1.38 |
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6/16/16 |
|
Affairs and Secretary |
|
|
141,652 |
|
|
|
(1 |
) |
|
|
8,348 |
|
|
|
.79 |
|
|
|
5/17/15 |
|
|
|
|
160,000 |
|
|
|
(2 |
) |
|
|
|
|
|
|
1.39 |
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7/15/14 |
|
Tod Woolf, Ph.D. (3) |
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|
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|
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|
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|
President and Chief Executive Officer
of RXi Pharmaceuticals Corporation |
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(1) |
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These options vest in 36 equal monthly installments, subject to the option holders remaining
in our continuous employ through such dates. |
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(2) |
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These options vest in three annual installments, subject to the option holders remaining in
our continuous employ through such dates. |
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(3) |
|
Dr. Woolf has not been issued any equity by CytRx. On May 23, 2007, RXi granted to Dr. Woolf
ten-year options to purchase 316,994 shares of RXis common stock under the RXi Pharmaceutical
Corporation 2007 Incentive Plan at an exercise price of $5.00 per share. As of December 31,
2007, 61,709 of those stock options were exercisable, and the remaining 255,285 options were
not exercisable. |
Option Exercises and Stock Vested
The following table provides information regarding exercises of stock options by each of our
named executive officers during 2007:
2007 Exercises of Plan-Based Awards
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Number of |
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|
|
Shares Acquired |
|
Value Realized |
Name |
|
on Exercise |
|
On Exercise ($)(1) |
Steven A. Kriegsman |
|
|
|
|
|
$ |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Shares Acquired |
|
Value Realized |
Name |
|
on Exercise |
|
On Exercise ($)(1) |
Mitchell K. Fogelman |
|
|
|
|
|
$ |
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
Matthew Natalizio |
|
|
237,496 |
|
|
$ |
582,437 |
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
Jack R. Barber, Ph.D. |
|
|
|
|
|
$ |
|
|
Chief Scientific Officer |
|
|
|
|
|
|
|
|
Benjamin S. Levin |
|
|
|
|
|
$ |
|
|
General Counsel, Vice President Legal Affairs and Secretary |
|
|
|
|
|
|
|
|
Tod Woolf, Ph.D. |
|
|
|
|
|
$ |
|
|
President and Chief Executive Officer of RXi Pharmaceuticals Corporation |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the difference between the exercise price and the fair market value of the common
stock on the date of exercise. |
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 as of May 2007 to continue through December 31, 2009. The
employment agreement will automatically renew in December 2009 for an additional one-year period,
unless either Mr. Kriegsman or we elect not to renew it.
Under his employment agreement as amended, Mr. Kriegsman is entitled to receive an annual base
salary of $500,000. Our board of directors (or its Compensation Committee) will review the base
salary annually and may increase (but not decrease) it in its sole discretion. In addition to his
annual salary, Mr. Kriegsman is eligible to receive an annual bonus as determined by our board of
directors (or its Compensation Committee) in its sole discretion, but not to be less than $150,000.
Pursuant to his employment agreement with us, we have agreed that he shall serve on a full-time
basis as our Chief Executive Officer and 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. Kriegsmans 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. Kriegsmans 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. Kriegsmans 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. Kriegsmans 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
53
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.
Potential Payment upon Termination or Change in Control for Steven A. Kriegsman
Mr. Kriegsmans 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. Kriegsmans 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 Mitchell K. Fogelman
Mitchell K. Fogelman is employed as our Chief Financial Officer and Treasurer pursuant to an
employment agreement dated as of September 11, 2007 that expires on December 31, 2008. Mr. Fogelman
is entitled under his employment agreement to receive an annual base salary of $250,000 and is
eligible to receive an annual bonus as determined by our board of directors (or its Compensation
Committee) in its sole discretion. As an incentive to enter into his employment agreement, Mr.
Fogelman was granted as of September 11, 2007, a ten-year, nonqualified option under our 2000
Long-Term Incentive Plan to purchase 150,000 shares of our common stock at a price of $3.40 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. Fogelman remains in our continuous employ.
In the event we terminate Mr. Fogelmans 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
six 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 on a month-to-month basis
following the expiration of an employment agreement that is in the process of being renegotiated
after expiring on December 31, 2007. Dr. Barber is paid an annual base salary of $325,000 and is
eligible to receive an annual bonus as determined by our board of directors (or its Compensation
Committee) in its sole discretion.
In the event we terminate Dr. Barbers 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 base salary.
Employment Agreement with Benjamin S. Levin
Benjamin S. Levin is employed as our Vice President Legal Affairs, General Counsel and
Secretary on a month-to-month basis following the expiration of an employment agreement that is in
the process of being renegotiated after expiring on December 31, 2007. Mr. Levin 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.
In the event we terminate Mr. Levins 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 six
months base salary.
Employment Agreement with Tod Woolf, Ph.D.
CytRx and RXi 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 RXis 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 has been granted by RXi a ten-year option to
purchase 316,994 shares of RXi common stock at an exercise price of $5.00 per share. This option
will vest in equal monthly installments over three years, subject to accelerated vesting in certain
events.
54
In the event Dr. Woolfs 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 $125,000.
Quantification of Termination Payments and Benefits
The table below reflects the amount of compensation to each of our named executive officers in
the event of termination of such executives employment by his voluntary resignation or
termination, by a termination of the executives employment without cause or his resignation for
good reason, termination following a change in control and in the event of the executives
permanent disability or death of the executive is shown below. The amounts assume that such
termination was effective as of December 31, 2007, and thus includes amounts earned through such
time and are estimates of the amounts which would be paid out to the executives upon their
termination. The actual amounts to be paid out can only be determined at the time of such
executives separation.
Termination Payments and Benefits
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|
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|
|
|
|
|
|
|
|
|
|
Termination w/o Cause or |
|
|
|
|
|
|
|
|
|
|
|
|
for Good Reason |
|
|
|
|
|
|
|
|
|
|
|
|
Before Change in |
|
After Change in |
|
|
|
|
|
Disability |
|
Change in |
Name |
|
Benefit |
|
Control ($) |
|
Control ($) |
|
Death ($) |
|
$ |
|
Control ($) |
Steven A. Kriegsman |
|
Severance Payment |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
|
|
President and Chief Executive |
|
Stock Options (1) |
|
|
231,430 |
|
|
|
|
|
|
|
231,430 |
|
|
|
231,430 |
|
|
|
231,430 |
|
Officer |
|
Health Insurance (2) |
|
|
45,704 |
|
|
|
45,704 |
|
|
|
45,704 |
|
|
|
45,704 |
|
|
|
|
|
|
|
Life Insurance |
|
|
11,350 |
|
|
|
11,350 |
|
|
|
|
|
|
|
11,350 |
|
|
|
|
|
|
|
Bonus |
|
|
300,000 |
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
|
|
|
|
Tax Gross Up (3) |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mitchell K. Fogelman |
|
Severance Payment |
|
|
125,000 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
Stock Options (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack R. Barber, Ph.D. |
|
Severance Payment |
|
|
68,750 |
|
|
|
68,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Scientific Officer |
|
Stock Options (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,714 |
|
Benjamin S. Levin |
|
Severance Payment |
|
|
125,000 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General Counsel, Vice President Legal Affairs and Secretary |
|
Stock Options (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,793 |
|
Tod Woolf, Ph.D.(4) |
|
Severance Payment |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief Executive |
|
Stock Options (1) |
|
|
449,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
978,098 |
|
Officer of RXi |
|
Benefits |
|
|
14,500 |
|
|
|
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2007,
determined by the aggregate difference between the stock price as of December 31, 2007 and the
exercise prices of the underlying options. |
|
(2) |
|
Represents the cost as of December 31, 2007 for the family health benefits provided to Mr.
Kriegsman for a period of two years. |
|
(3) |
|
Mr. Kriegsmans 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.
Kriegsmans 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. Kriegsmans
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. |
|
(4) |
|
As of March 11, 2008, we no longer owned a majority of the outstanding common stock of RXi
Pharmaceuticals Corporation, and thus Mr. Woolf is no longer considered an executive officer
of CytRx. Amounts reported above with respect to Dr. Woolf would be payable by RXi. Stock
option amounts for Dr. Woolf relate to options to purchase RXi common stock granted pursuant
to the RXi Pharmaceutical Corporation 2007 Incentive Plan. |
55
In connection with Mr. Natalizios resignation as our Chief Financial Officer in September
2007, we paid approximately $5,000 of premiums for continuing medical, dental and vision insurance.
Compensation of Directors
The following table sets forth the compensation paid to our directors other than our Chief
Executive Officer for 2007:
Director Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
Option |
|
|
|
|
Paid in Cash |
|
Awards |
|
Total |
Name (1) |
|
($) (2) |
|
($) (3) |
|
($) |
Max Link, Ph.D. |
|
|
108,173 |
|
|
|
70,000 |
|
|
|
178,173 |
|
Chairman |
|
|
|
|
|
|
|
|
|
|
|
|
Marvin R. Selter |
|
|
169,834 |
|
|
|
70,000 |
|
|
|
239,834 |
|
Vice Chairman |
|
|
|
|
|
|
|
|
|
|
|
|
Louis Ignarro, Ph.D. |
|
|
26,750 |
|
|
|
70,000 |
|
|
|
96,750 |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Rubinfeld, Ph.D. |
|
|
80,066 |
|
|
|
70,000 |
|
|
|
150,066 |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
Richard Wennekamp |
|
|
76,990 |
|
|
|
70,000 |
|
|
|
146,990 |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Steven A. Kriegsman does not receive additional compensation for his role as a Director. For
information relating to Mr. Kriegsmans 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 2007, 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, which had a grant date fair value of $2.80 calculated 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 12 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 May 2007. 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 $3,000 ($9,500 for the Chairman of
the Board and $8,000 for the Chairman of the Audit Committee), a fee of $3,000 for each board
meeting attended ($2,000 for meetings attended by teleconference and $750 for board actions taken
by unanimous written consent), $2,000 for each meeting of the audit committee attended, and $1,000
for each other committee meeting attended. Non-employee directors who serve as the chairman of a
board committee receive an additional $2,000 for each meeting of the nomination and governance
committee or the compensation committee attended and an additional $2,500 for each meeting attended
of the audit committee. In July 2007, 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.
56
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 20, 2008 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 20, 2008 (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 90,743,553 shares of our common stock outstanding as of March 20, 2008.
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%.
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
Common Stock |
Name of Beneficial Owner |
|
Number |
|
Percent |
Louis Ignarro, Ph.D.(1)
|
|
|
538,916 |
|
|
|
* |
|
Steven A. Kriegsman(2)
|
|
|
5,575,274 |
|
|
|
6.0 |
% |
Max Link(3)
|
|
|
159,519 |
|
|
|
* |
|
Joseph Rubinfeld(4)
|
|
|
97,000 |
|
|
|
* |
|
Marvin R. Selter(5)
|
|
|
442,451 |
|
|
|
* |
|
Richard L. Wennekamp(6)
|
|
|
90,000 |
|
|
|
* |
|
Mitchell K. Fogelman(7)
|
|
|
33,336 |
|
|
|
* |
|
Jack R. Barber(8)
|
|
|
404,161 |
|
|
|
* |
|
Shi Chung Ng (9)
|
|
|
50,004 |
|
|
|
* |
|
Benjamin S. Levin(10)
|
|
|
403,614 |
|
|
|
* |
|
All executive officers and directors as a group (ten persons)(11)
|
|
|
7,794,275 |
|
|
|
8.3 |
% |
|
|
|
(1) |
|
Includes 447,000 shares subject to options or warrants. |
|
(2) |
|
Includes 1,554,174 shares subject to options or warrants. Mr. Kriegsmans address is c/o
CytRx Corporation, 11726 San Vicente Boulevard, Suite 650, Los Angeles, CA 90049. |
|
(3) |
|
Includes 104,543 shares subject to options or warrants. |
|
(4) |
|
Includes 97,000 shares subject to options or warrants. |
|
(5) |
|
The shares shown are owned, of record, by the Selter Family Trust or Selter IRA Rollover.
Includes 85,000 shares subject to options or warrants owned by Mr. Selter. |
|
(6) |
|
Includes 85,000 shares subject to options or warrants. |
|
(7) |
|
Includes 33,336 shares subject to options or warrants. |
|
(8) |
|
Includes 404,161 shares subject to options or warrants. |
|
(9) |
|
Includes 50,004 shares subject to options or warrants. |
|
(10) |
|
Includes 403,614 shares subject to options or warrants. |
|
(11) |
|
Includes 3,263,832 shares subject to options or warrants. |
57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Director Independence
Our board of directors has determined that Messrs. Link, Rubinfeld, Selter, Ignarro 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.
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 2007, and there are no transactions currently proposed
for 2008.
Transactions between us 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 persons 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 director, the Audit Committee also is to consider whether the
transaction will compromise the directors status as an independent director as prescribed in the
NASDAQ Marketplace Rules.
All of our related person transactions will be disclosed in our filings with the SEC in
accordance with SEC rules.
58
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 Committees review:
|
|
|
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. |
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, 2007, 2006 and 2005.
Audit Fees
The fees for 2007 and 2006 billed to us by BDO for professional services rendered for the
audit of our annual consolidated financial statements and internal controls over financial reporting and for the
2006 audit of managements assessment of internal controls over
financial reporting were $656,000
and $815,000, respectively. In 2005, the fees for the audit of our annual financial statements
were $170,000.
Audit Related Fees
BDO rendered $804,000 of other audit-related
services related to the RXi registration statement in
2007 and $113,000 of audit-related services in 2006. There were 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 were $43,000 for 2007 and $25,000 for 2006. We did not engage BDO to perform any
tax-related services for 2005.
All Other Fees
No other services were rendered by BDO for 2007, 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 to us by BDO for 2007 and 2006.
59
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this 10-K:
(1) Financial Statements
Our consolidated financial statements and the related report of the independent registered
public accounting firm thereon are set forth on pages F-1 to F-25 of this Annual Report.
These consolidated financial statements are as follows:
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2007, 2006
and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
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, 2007, 2006
and 2005
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 61 of this Annual Report, which is incorporated herein by reference.
60
CytRx Corporation
Form 10-K Exhibit Index
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Footnote |
3.1
|
|
Amended and Restated Certificate of Incorporation, as amended |
|
|
|
|
|
|
|
3.2
|
|
Restated By-Laws, as amended |
|
|
|
|
|
|
|
4.1
|
|
Shareholder Protection Rights Agreement dated April 16, 1997 between CytRx Corporation and
American Stock Transfer &Trust Company as Rights Agent
|
|
(a) |
|
|
|
|
|
4.2
|
|
Amendment No. 1 to Shareholder Protection Rights Agreement
|
|
(e) |
|
|
|
|
|
4.3
|
|
Amendment No. 2 to Shareholder Protection Rights Agreement
|
|
(s) |
|
|
|
|
|
4.4
|
|
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
May 29, 2003 private placement
|
|
(i) |
|
|
|
|
|
4.5
|
|
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
September 16, 2003 private placement
|
|
(j) |
|
|
|
|
|
4.6
|
|
Warrant issued on May 10, 2004 to MBN Consulting, LLC
|
|
(k) |
|
|
|
|
|
4.7
|
|
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
October 4, 2004 private placement
|
|
(l) |
|
|
|
|
|
4.8
|
|
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
January 2005 private placement
|
|
(m) |
|
|
|
|
|
4.9
|
|
Form of Common Stock Purchase Warrant between CytRx Corporation and each of the investors in the
March 2006 private placement
|
|
(p) |
|
|
|
|
|
10.1*
|
|
1994 Stock Option Plan, as amended and restated
|
|
(b) |
|
|
|
|
|
10.2*
|
|
1995 Stock Option Plan
|
|
(r) |
|
|
|
|
|
10.3*
|
|
1998 Long-Term Incentive Plan
|
|
(d) |
|
|
|
|
|
10.4*
|
|
2000 Long-Term Incentive Plan
|
|
(e) |
|
|
|
|
|
10.5*
|
|
Amendment No. 1 to 2000 Long-Term Incentive Plan
|
|
(g) |
|
|
|
|
|
10.6*
|
|
Amendment No. 2 to 2000 Long-Term Incentive Plan
|
|
(g) |
|
|
|
|
|
10.7*
|
|
Amendment No. 3 to 2000 Long-Term Incentive Plan
|
|
(j) |
|
|
|
|
|
10.8*
|
|
Amendment No. 4 to 2000 Long-Term Incentive Plan
|
|
(j) |
|
|
|
|
|
10.9
|
|
License Agreement dated December 7, 2001 by and between CytRx Corporation and Vical Incorporated
|
|
(f) |
|
|
|
|
|
10.10
|
|
Agreement between CytRx Corporation and Dr. Robert Hunter regarding SynthRx, Inc dated October
20, 2003
|
|
(j) |
|
|
|
|
|
10.11
|
|
Office Lease between The Kriegsman Group and Douglas Emmett, dated April 13, 2000
|
|
(j) |
|
|
|
|
|
10.12
|
|
Assignment to CytRx Corporation effective July 1, 2003 of Office Lease between The Kriegsman
Group and Douglas Emmett, dated April 13, 2000
|
|
(j) |
|
|
|
|
|
10.13
|
|
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
|
|
(l) |
|
|
|
|
|
10.14*
|
|
Amended and Restated Employment Agreement dated May 17, 2005 between CytRx Corporation and
Steven A. Kriegsman
|
|
(n) |
|
|
|
|
|
10.15
|
|
First Amendment to Office Lease dated October 14, 2005, by and between CytRx Corporation and
Douglas Emmett 1993, LLC
|
|
(o) |
|
|
|
|
|
10.16*
|
|
Second Amended and Restated Employment Agreement dated June 16, 2006 between CytRx Corporation
and Dr. Jack Barber
|
|
(q) |
10.17*
|
|
Second Amended and Restated Employment Agreement dated June 16, 2006 between CytRx Corporation
and Benjamin S. Levin
|
|
(q) |
61
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Footnote |
10.18
|
|
Royalty Agreement dated August 28, 2006 between CytRx Corporation and Kenneth Council, as
Trustee of the ALS Charitable Remainder Trust
|
|
(r) |
|
|
|
|
|
10.19
|
|
Contribution Agreement, dated as of January 8, 2007, between CytRx Corporation and RXi
Pharmaceuticals Corporation
|
|
(t) |
|
|
|
|
|
10.20
|
|
Reimbursement Agreement, dated January 8, 2007, between CytRx Corporation and RXi
Pharmaceuticals Corporation
|
|
(t) |
|
|
|
|
|
10.21
|
|
Voting agreement, dated as of January 10, 2007, between CytRx Corporation and the University of
Massachusetts
|
|
(t) |
|
|
|
|
|
10.22
|
|
Master Agreement for Clinical Trials Management Services, dated February 5, 2007, between CytRx
Corporation and Pharmaceutical Research Associates
|
|
(t) |
|
|
|
|
|
10.23
|
|
Stockholders agreement, dated February 23, 2007, among CytRx Corporation, RXi Pharmaceuticals
Corporation, Craig C. Mello, Ph.D., Tariq Rana, Ph.D., Gregory J. Hannon, Ph.D., and Michael P.
Czech, Ph.D
|
|
(t) |
|
|
|
|
|
10.24
|
|
Form of Purchase Agreement, dated as of April 17, 2007, by and between CytRx Corporation and
each of the selling stockholders named therein
|
|
(u) |
|
|
|
|
|
10.25
|
|
Contribution Agreement, dated as of April 30, 2007, between CytRx Corporation and RXi
Pharmaceuticals Corporation
|
|
(t) |
|
|
|
|
|
10.26*
|
|
Employment Agreement dated April 30, 2007, between CytRx Corporation and Shi Chung Ng
|
|
(v) |
|
|
|
|
|
10.27*
|
|
Lease dated July 20, 2007, between CytRx Corporation and BMR-3030 Bunker Hill Street LLC
|
|
(v) |
|
|
|
|
|
10.28*
|
|
Employment Agreement dated September 11, 2007, between CytRx Corporation and Mitchell K. Fogelman
|
|
(w) |
|
|
|
|
|
10.29*
|
|
Employment Letter dated October 26, 2007, between CytRx Corporation and John Y. Caloz
|
|
(w) |
|
|
|
|
|
21.1
|
|
Subsidiaries |
|
|
|
|
|
|
|
23.1
|
|
Consent of BDO Seidman, LLP |
|
|
|
|
|
|
|
31.1
|
|
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 |
|
|
|
|
|
|
|
31.2
|
|
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 |
|
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
* |
|
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 Registrants Current Report on Form 8-K filed on April 17,
1997 |
|
(b) |
|
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q filed on November
13, 1997 |
|
(c) |
|
Incorporated by reference to the Registrants Registration Statement on Form S-8 (File No.
33-93818) filed on June 22, 1995 |
|
(d) |
|
Incorporated by reference to the Registrants Proxy Statement filed on April 30, 1998 |
62
|
|
|
(e) |
|
Incorporated by reference to the Registrants Annual Report on Form 10-K filed on March 27,
2001 |
|
(f) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on December
21, 2001 |
|
(g) |
|
Incorporated by reference to the Registrants Proxy Statement filed June 10, 2002 |
|
(h) |
|
Incorporated by reference to the Registrants 10-Q filed on May 15, 2003 |
|
(i) |
|
Incorporated by reference to the Registrants 8-K filed on May 30, 2003 |
|
(j) |
|
Incorporated by reference to the Registrants 10-K filed on May 14, 2004 |
|
(k) |
|
Incorporated by reference to the Registrants 10-Q filed on August 16, 2004 |
|
(l) |
|
Incorporated by reference to the Registrants 8-K filed on October 5, 2004 |
|
(m) |
|
Incorporated by reference to the Registrants 8-K filed on January 21, 2005 |
|
(n) |
|
Incorporated by reference to the Registrants 10-Q filed on August 15, 2005 |
|
(o) |
|
Incorporated by reference to the Registrants 8-K filed on October 20, 2005 |
|
(p) |
|
Incorporated by reference to the Registrants 8-K filed on March 3, 2006 |
|
(q) |
|
Incorporated by reference to the Registrants 10-Q filed on August 3, 2006 |
|
(r) |
|
Incorporated by reference to the Registrants 10-Q filed on November 13, 2006 |
|
(s) |
|
Incorporated by reference to the Registrants 10-K filed on April 2, 2007 |
|
(t) |
|
Incorporated by reference to the Registrants 10-Q filed on May 10, 2007 |
|
(u) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on April 18,
2007 |
|
(v) |
|
Incorporated by reference to the Registrants 10-Q filed on August 9, 2007 |
|
(w) |
|
Incorporated by reference to the Registrants 10-Q filed on November 14, 2007 |
63
SIGNATURES
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.
|
|
|
|
|
Date: April 1, 2008 |
CYTRX CORPORATION
|
|
|
By: |
/s/ STEVEN A. KRIEGSMAN
|
|
|
|
Steven A. Kriegsman |
|
|
|
President and Chief Executive Officer |
|
|
64
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
|
|
|
CytRx Corporation |
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-22 |
|
|
F-25 |
F-1
CYTRX CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
50,498,261 |
|
|
$ |
30,381,393 |
|
Short-term investments, at amortized cost |
|
|
9,951,548 |
|
|
|
|
|
Accounts receivable |
|
|
101,217 |
|
|
|
105,930 |
|
Prepaid expenses and other current assets |
|
|
930,596 |
|
|
|
233,323 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
61,481,622 |
|
|
|
30,720,646 |
|
Equipment and furnishings, net |
|
|
1,573,290 |
|
|
|
252,719 |
|
Molecular library, net |
|
|
193,946 |
|
|
|
283,460 |
|
Goodwill |
|
|
183,780 |
|
|
|
183,780 |
|
Other assets |
|
|
713,398 |
|
|
|
195,835 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
64,146,036 |
|
|
$ |
31,636,440 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,946,215 |
|
|
$ |
955,156 |
|
Accrued expenses and other current liabilities |
|
|
3,700,866 |
|
|
|
2,722,478 |
|
Deferred revenue, current portion |
|
|
8,399,167 |
|
|
|
6,733,350 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
14,046,248 |
|
|
|
10,410,984 |
|
Deferred revenue, non-current portion |
|
|
7,167,381 |
|
|
|
16,075,117 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
21,213,629 |
|
|
|
26,486,101 |
|
|
|
|
|
|
|
|
Minority interest |
|
|
2,708,368 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitment and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred Stock, $.01 par value, 5,000,000 shares authorized, including 5,000 shares of
Series A Junior Participating Preferred Stock; no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 150,000,000 shares authorized; 90,397,867 and 70,788,586
shares issued and outstanding at December 31, 2007 and 2006, respectively |
|
|
90,398 |
|
|
|
70,789 |
|
Additional paid-in capital |
|
|
203,905,691 |
|
|
|
146,961,657 |
|
Treasury stock, at cost (633,816 shares held, at December 31, 2007 and 2006, respectively) |
|
|
(2,279,238 |
) |
|
|
(2,279,238 |
) |
Accumulated deficit |
|
|
(161,492,812 |
) |
|
|
(139,602,869 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
40,224,039 |
|
|
|
5,150,339 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
64,146,036 |
|
|
$ |
31,636,440 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue |
|
$ |
7,241,920 |
|
|
$ |
1,858,772 |
|
|
$ |
82,860 |
|
Licensing revenue |
|
|
101,000 |
|
|
|
101,000 |
|
|
|
101,500 |
|
Grant revenue |
|
|
116,118 |
|
|
|
105,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,459,038 |
|
|
|
2,065,702 |
|
|
|
184,360 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (includes an aggregate
of 462,112 shares of RXi common stock valued at
$2,310,560 issued in exchange for licensing
rights in the second quarter of 2007) |
|
|
18,823,802 |
|
|
|
9,781,007 |
|
|
|
9,087,270 |
|
General and administrative |
|
|
14,822,142 |
|
|
|
9,657,257 |
|
|
|
6,424,106 |
|
Depreciation and amortization |
|
|
272,229 |
|
|
|
227,704 |
|
|
|
217,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,918,173 |
|
|
|
19,665,968 |
|
|
|
15,728,471 |
|
|
|
|
|
|
|
|
|
|
|
Loss before other income |
|
|
(26,459,135 |
) |
|
|
(17,600,266 |
) |
|
|
(15,544,111 |
) |
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
2,663,542 |
|
|
|
996,647 |
|
|
|
206,195 |
|
Gain on lease termination |
|
|
|
|
|
|
|
|
|
|
163,604 |
|
Other income (expense), net |
|
|
1,496,979 |
|
|
|
(3,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,298,614 |
) |
|
|
(16,606,824 |
) |
|
|
(15,174,312 |
) |
Minority interest in losses of subsidiary |
|
|
448,671 |
|
|
|
|
|
|
|
81,452 |
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes |
|
|
(21,849,943 |
) |
|
|
(16,606,824 |
) |
|
|
(15,092,860 |
) |
Provision for income taxes |
|
|
(40,000 |
) |
|
|
(145,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(21,889,943 |
) |
|
|
(16,751,824 |
) |
|
|
(15,092,860 |
) |
Deemed dividend for anti-dilution adjustments made
to outstanding common stock warrants |
|
|
|
|
|
|
(488,429 |
) |
|
|
(1,075,568 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(21,889,943 |
) |
|
$ |
(17,240,253 |
) |
|
$ |
(16,168,428 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.26 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding |
|
|
84,006,728 |
|
|
|
68,105,626 |
|
|
|
56,852,402 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Treasury |
|
|
|
|
|
|
Shares Issued |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Total |
|
Balance at December 31, 2004 |
|
|
40,189,688 |
|
|
$ |
40,190 |
|
|
$ |
110,028,327 |
|
|
$ |
(106,194,187 |
) |
|
$ |
(2,279,238 |
) |
|
$ |
1,595,092 |
|
Common stock and warrants issued
in connection with private
placements |
|
|
18,084,494 |
|
|
|
18,084 |
|
|
|
19,572,362 |
|
|
|
|
|
|
|
|
|
|
|
19,590,446 |
|
Issuance of stock options/warrants: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For services and licenses |
|
|
|
|
|
|
|
|
|
|
586,471 |
|
|
|
|
|
|
|
|
|
|
|
586,471 |
|
For minority interest |
|
|
|
|
|
|
|
|
|
|
273,000 |
|
|
|
|
|
|
|
|
|
|
|
273,000 |
|
Options and warrants exercised |
|
|
1,009,778 |
|
|
|
1,010 |
|
|
|
255,203 |
|
|
|
|
|
|
|
|
|
|
|
256,213 |
|
Deemed dividend |
|
|
|
|
|
|
|
|
|
|
1,075,569 |
|
|
|
(1,075,569 |
) |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,092,860 |
) |
|
|
|
|
|
|
(15,092,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
59,283,960 |
|
|
|
59,284 |
|
|
|
131,790,932 |
|
|
|
(122,362,616 |
) |
|
|
(2,279,238 |
) |
|
|
7,208,362 |
|
Common stock and warrants issued
in connection with private
placements |
|
|
10,650,795 |
|
|
|
10,651 |
|
|
|
12,393,709 |
|
|
|
|
|
|
|
|
|
|
|
12,404,360 |
|
Issuance of stock options/warrants
for services and licenses |
|
|
149,928 |
|
|
|
150 |
|
|
|
1,930,098 |
|
|
|
|
|
|
|
|
|
|
|
1,930,248 |
|
Options and warrants exercised |
|
|
703,903 |
|
|
|
704 |
|
|
|
358,489 |
|
|
|
|
|
|
|
|
|
|
|
359,193 |
|
Deemed dividend |
|
|
|
|
|
|
|
|
|
|
488,429 |
|
|
|
(488,429 |
) |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,751,824 |
) |
|
|
|
|
|
|
(16,751,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
70,788,586 |
|
|
|
70,789 |
|
|
|
146,961,657 |
|
|
|
(139,602,869 |
) |
|
|
(2,279,238 |
) |
|
|
5,150,339 |
|
Common stock and warrants issued
in connection with private
placements |
|
|
8,615,000 |
|
|
|
8,615 |
|
|
|
34,239,442 |
|
|
|
|
|
|
|
|
|
|
|
34,248,057 |
|
Issuance of stock options/warrants
for services and licenses |
|
|
|
|
|
|
|
|
|
|
2,402,035 |
|
|
|
|
|
|
|
|
|
|
|
2,402,035 |
|
Options and warrants exercised |
|
|
10,994,281 |
|
|
|
10,994 |
|
|
|
18,778,180 |
|
|
|
|
|
|
|
|
|
|
|
18,789,174 |
|
Issuance of stock options by subsidiary |
|
|
|
|
|
|
|
|
|
|
1,524,377 |
|
|
|
|
|
|
|
|
|
|
|
1,524,377 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,889,943 |
) |
|
|
|
|
|
|
(21,889,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
90,397,867 |
|
|
$ |
90,398 |
|
|
$ |
203,905,691 |
|
|
$ |
(161,492,812 |
) |
|
$ |
(2,279,238 |
) |
|
$ |
40,224,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CYTRX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(21,889,943 |
) |
|
$ |
(16,751,824 |
) |
|
$ |
(15,092,860 |
) |
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
272,229 |
|
|
|
227,704 |
|
|
|
217,095 |
|
Non-cash earned on short-term investments |
|
|
(172,055 |
) |
|
|
|
|
|
|
|
|
Loss on retirement of equipment |
|
|
|
|
|
|
2,864 |
|
|
|
|
|
Minority interest in losses of subsidiary |
|
|
(448,671 |
) |
|
|
|
|
|
|
(81,452 |
) |
Gain on lease termination |
|
|
|
|
|
|
|
|
|
|
(163,604 |
) |
Stock option and warrant expense |
|
|
3,511,541 |
|
|
|
1,284,032 |
|
|
|
366,753 |
|
Common stock issued for services |
|
|
3,089,639 |
|
|
|
262,500 |
|
|
|
|
|
Non-cash stock compensation related to research and development |
|
|
|
|
|
|
411,530 |
|
|
|
219,718 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
4,713 |
|
|
|
66,930 |
|
|
|
(172,860 |
) |
Prepaid expenses and other current assets |
|
|
(1,214,836 |
) |
|
|
100,295 |
|
|
|
596,935 |
|
Accounts payable |
|
|
757,086 |
|
|
|
139,530 |
|
|
|
(845,477 |
) |
Deferred revenue |
|
|
(7,241,919 |
) |
|
|
22,533,467 |
|
|
|
|
|
Accrued expenses and other current liabilities |
|
|
978,388 |
|
|
|
1,082,557 |
|
|
|
456,637 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(463,885 |
) |
|
|
26,111,409 |
|
|
|
593,745 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(22,353,828 |
) |
|
|
9,359,585 |
|
|
|
(14,499,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(9,779,493 |
) |
|
|
|
|
|
|
|
|
Redemption of short-term investments |
|
|
|
|
|
|
|
|
|
|
1,011,814 |
|
Purchases of equipment and furnishings |
|
|
(1,269,313 |
) |
|
|
(41,133 |
) |
|
|
(47,563 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(11,048,806 |
) |
|
|
(41,133 |
) |
|
|
964,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of stock options and warrants |
|
|
18,789,173 |
|
|
|
359,191 |
|
|
|
256,213 |
|
Net proceeds from issuances of common stock |
|
|
34,248,058 |
|
|
|
12,404,360 |
|
|
|
19,590,446 |
|
Capital contributions from minority interest |
|
|
482,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
53,519,502 |
|
|
|
12,763,551 |
|
|
|
19,846,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
20,116,868 |
|
|
|
22,082,003 |
|
|
|
6,311,795 |
|
Cash and cash equivalents at beginning of year |
|
|
30,381,393 |
|
|
|
8,299,390 |
|
|
|
1,987,595 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
50,498,261 |
|
|
$ |
30,381,393 |
|
|
$ |
8,299,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
received during the years for interest received |
|
$ |
2,491,487 |
|
|
$ |
996,647 |
|
|
$ |
206,195 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid
during the years for income taxes |
|
$ |
183,461 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value of options and warrants provided for goods and services |
|
$ |
|
|
|
$ |
705,794 |
|
|
$ |
586,471 |
|
|
|
|
|
|
|
|
|
|
|
Fair market value of common stock exchanged for minority interest in
subsidiary |
|
$ |
|
|
|
$ |
|
|
|
$ |
273,000 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment through accrued liabilities |
|
$ |
233,974 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
During
2007, the Company allocated $289,254 of additional paid in capital
arising from subsidiary common stock options issued to minority
interest.
In connection with the Companys 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
CYTRX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
CytRx Corporation (CytRx or the Company) is clinical-stage biopharmaceutical company
engaged in developing human therapeutic products based primarily upon our small-molecule molecular
chaperone amplification technology. Molecular chaperone proteins occur normally in human cells and
are key components of the bodys defenses against potentially toxic mis-folded cellular proteins.
Since damaged toxic proteins called aggregates are thought to play a role in many diseases, the
Company believes that amplification of molecular chaperone proteins could have therapeutic efficacy
for a broad range of indications. Currently, the Company is using its chaperone amplification
technology to develop treatments for neurodegenerative disorders and diabetic complications. CytRx
currently owns approximately 49% of RXi Pharmaceuticals Corporation, or RXi, which was founded in
April 2006 by the Company and four researchers in the field of RNAi, including Dr. Craig Mello,
recipient of the 2006 Nobel Prize for Medicine for his co-discovery of RNAi. At December 31, 2007,
CytRx owned approximately 85% of RXi, and on March 11, 2007, CytRx paid approximately 36% of its
shares of RXi common stock as a dividend to CytRx stockholders. RNAi is a naturally occurring
mechanism for the regulation of gene expression that has the potential to selectively inhibit the
activity of any human gene. RXi is focused 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.
At December 31, 2007, the Company had cash, cash equivalents and short-term investments of
$60.4 million, including $11.7 million held by RXi. Management believes that CytRxs current
resources will be sufficient to support its currently planned level of operations into the second
half of 2009. This estimate is based, in part, upon the Companys currently projected expenditures
for 2008 of approximately $29.2 million, including approximately $5.1 million for its clinical
program for arimoclomol for ALS and related studies, approximately $6.4 million for its planned
Phase II clinical trial of arimoclomol in stroke patients and Phase II clinical trial of
iroxanadine for diabetic ulcers, approximately $9.2 million for equipping and operating its
research laboratory in San Diego, California, and approximately $8.5 million for other general and
administrative expenses. Management believes that RXis current resources will be sufficient to
support its currently planned level of operations into the second quarter of 2009. Projected
expenditures for CytRx and RXi are based upon numerous assumptions and subject to many
uncertainties, and the Companys actual expenditures may be significantly different from these
projections. 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 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 through
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. RXi began its operations in
2007, and had no operations during 2006.
Revenue Recognition Biopharmaceutical revenues consist of license fees from strategic
alliances with pharmaceutical companies as well as service and grant 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 we have no other performance obligations related to the milestone and
collectability 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
F-6
related receivable is reasonably assured. Once all conditions of the grant are met and no
contingencies remain outstanding, the revenue is recognized as grant fee revenue and an earned but
unbilled revenue receivable is recorded.
In August 2006, the Company received approximately $24.3 million in proceeds 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 ALSCRT has no obligation to provide any further
funding to the Company. The Company has concluded that due to the research and development
components of the transaction that it is properly accounted for under Statement of Financial
Accounting Standards 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 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 of expense incurred for this research and development on a
quarterly basis. For the years ended December 31, 2007 and 2006, the Company recognized
approximately $7.2 and $1.8 million, respectively, of service revenue related to this transaction.
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.
The amount of deferred revenue, current portion is the amount of deferred revenue that is
expected to be recognized in the next twelve months and is subject to fluctuation based upon
managements estimates. Managements estimates include an evaluation of what pre-clinical and
clinical trials are necessary, the timing of when trials will be performed and the estimated
clinical trial expenses. These estimates are subject to changes and could have a significant effect
on the amount and timing of when the deferred revenues are recognized.
Other Income In June 2007, the Company recognized $1.5 million of income arising from a fee
received pursuant to a change-in-control provision included in the purchase agreement for its 1998
sale of its animal pharmaceutical unit. Management concluded that the fee did not represent revenue
generated from the Companys normal course of its business, and accordingly the Company recorded this fee as
other income.
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.
Short-term Investments RXi has purchased zero coupon U.S Treasury Bills at a discount.
These securities mature within the next twelve months. They are classified as held-to-maturity and
under Statement of Financial Accounting Standards No. 115, Investments in Debt Securities, are
measure at amortized cost since RXi has the intent and ability to hold these securities to
maturity. The interest income has been amortized at the effective interest rate.
Equipment and Furnishings Equipment and Furnishings 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 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 LibraryThe 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 Companys 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
F-7
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 17.1 million shares, 30.2 million
shares and 24.7 million shares at December 31, 2007, 2006 and 2005, respectively. In connection
with the Companys 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 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, 2007, the Company has reserved
approximately 2.2 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.
Stock-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 Companys share-based employee compensation plans are described in Note 12. 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 made to employees, non-employee directors, and consultants, including
employee stock options. SFAS 123(R) supersedes the Companys 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
Companys fiscal year 2006. 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 Companys stock option plans for the year ending December 31,
2005. 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.
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
Net loss applicable to common stockholders |
|
$ |
(16,168 |
) |
Total stock-based employee compensation expense
determined under fair-value based method for
all awards |
|
|
(1,388 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(17,556 |
) |
|
|
|
|
Loss per share, as reported (basic and diluted) |
|
$ |
(0.28 |
) |
Loss per share, pro forma (basic and diluted) |
|
$ |
(0.31 |
) |
The Companys Statement of Operations as of and for the years ended December 31, 2006 and 2007
reflects the impact of SFAS 123(R). In accordance with the modified prospective transition method,
the Companys 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 years ended December 31, 2007 and 2006 was $2.7 million and $1.2 million,
respectively. As of December 31, 2007, there was $3.4 million of unrecognized compensation cost
related to unvested employee stock options that is expected to be
F-8
recognized as a component of the Companys 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. 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 Companys
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 $1.5 million of stock
based compensation expense related to non-employee stock options in 2007.
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, including licenses, that are utilized in research and development and that
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.
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 Companys 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, cash equivalents and
short-term investments. The Company maintains cash and cash equivalents in large well-capitalized
financial institutions and the Companys 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 equivalent or its short-term investments.
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 revenue and the estimate of expense arising from the
common stock options granted to employees and non-employees. Actual results could materially differ
from those estimates.
Reclassifications Certain prior year balances have been reclassified to conform with the
2007 presentation, with no change in net loss for prior periods presented.
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
In July 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
F-9
fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 as of January
1, 2007, as required. The adoption of FIN No. 48 did not have an impact on the Companys financial
position and results of operations.
In September 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. In February 2008, the FASB issued Staff Position No. FAS 157-1,
which amended SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and other accounting
pronouncements that address fair value measurements for purposes of lease classification or
measurement under Statement 13. However, this scope exception does not apply to assets acquired
and liabilities assumed in a business combination. Also in February 2008, the FASB issued Staff
Position No. FAS 157-2, which delayed the effective date of SFAS No. 157 for non-financial assets
and liabilities, except those items recognized at fair value on an annual or more frequently
recurring basis to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The Company does not expect SFAS No. 157 will have a significant impact on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company does not expect SFAS No. 159 will
have a significant impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends
or dividend equivalents that are charged to retained earnings and paid to employees for non-vested
equity-classified employee share-based payment awards as an increase to additional paid-in capital.
EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The adoption is not
expected to have a significant impact on the Companys consolidated financial statements.
In June 2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3), which requires that nonrefundable advance payments for goods
or services that will be used or rendered for future research and development activities be
deferred and amortized over the period that the goods are delivered or the related services are
performed, subject to an assessment of recoverability. EITF 07-3 will be effective for fiscal years
beginning after December 15, 2007. The Company does not expect that the adoption of EITF 07-3 will
have an impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160) and a revision to SFAS No. 141, Business Combinations (SFAS
No. 141R). SFAS No. 160 modifies the accounting for noncontrolling interest in a subsidiary and
the deconsolidation of a subsidiary. SFAS No. 141R establishes the measurements in a business
combination of the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree. Both of these related statements are effective for fiscal years
beginning after December 15, 2008. The Company has not determined the impact that the adoption of
these two statements will have on the consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin 110 (SAB 110), which expresses
the views of the Staff regarding use of a simplified method, as discussed in SAB 107, in
developing an estimate of expected term of plain vanilla share options in accordance with
Statement of Financial Accounting Standards No. 123. SAB 110 will allow, under certain
circumstances, the use of the simplified method beyond December 31, 2007 when a Company is unable
to rely on the historical exercise data. The Company does not anticipate the adoption of SAB 110 having a material impact on our financial statements.
4. Accounts Receivable
At December 31, 2007 and 2006, the accounts receivable balance of $101,217 and $105,930,
respectively, primarily related annual licensing fees due to the Company. Due to the certainty of
the collectability of the account receivable, no allowance was recorded.
F-10
5. Other Assets
At December 31, 2007 and 2006, the Company had approximately $713,000 and $196,000,
respectively, of non-current other assets, which consist primarily of security deposits on
contracts for research and development and leases for its facilities.
6. Equipment, Furnishings and Molecular Library, net
Equipment, furnishings and molecular library, net, at December 31, 2007 and 2006 consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Equipment and furnishings |
|
$ |
1,965 |
|
|
$ |
502 |
|
Less accumulated depreciation |
|
|
(392 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
1,573 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular library |
|
$ |
447 |
|
|
$ |
447 |
|
Less accumulated amortization |
|
|
(253 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
|
Molecular library, net |
|
$ |
194 |
|
|
$ |
283 |
|
|
|
|
|
|
|
|
The molecular library was purchased in 2004 and placed in service by the Company in March
2005. The molecular library is being amortized over 60 months, which is less than the estimated
effective life of the patents. The Company will incur related amortization of approximately $89,000
in 2008, $89,000 in 2009 and $16,000 in 2010.
Depreciation and amortization expense for the years ended December 31, 2007, 2006 and 2005
were $272,000, $228,000, and $217,000, respectively.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities at December 31, 2007 and 2006 are summarized
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Professional fees |
|
$ |
907 |
|
|
$ |
900 |
|
Research and development costs |
|
|
873 |
|
|
|
1,013 |
|
Wages, bonuses and employee benefits |
|
|
1,255 |
|
|
|
404 |
|
Income taxes |
|
|
30 |
|
|
|
145 |
|
Other |
|
|
636 |
|
|
|
260 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,701 |
|
|
$ |
2,722 |
|
|
|
|
|
|
|
|
8. Termination of the Atlanta Facility Lease
Subsequent to the Companys merger with Global Genomics in 2002, it recorded a loss of
$563,000 associated with the closure of the Atlanta headquarters and its relocation to Los Angeles.
This loss represented the total remaining lease obligations and estimated operating costs through
the remainder of the lease term, less estimated sublease rental income and deferred rent at the
time. In August 2005, the Company entered into a lease termination agreement pursuant to which it
was released from all future obligations on the lease in exchange for a one-time $110,000 payment
and the forfeiture of a $49,000 security deposit. As a result of this agreement the Company
realized $164,000 in other income 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,
F-11
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.
As a result of RXis separation from CytRx in March 2008 (see discussion in the Our
Separation from RXi Pharmaceuticals Corporation section on page 8), each of CytRx and RXi will be
responsible for their respective future contractual obligations, therefore, they are shown
separately below.
CytRxs current contractual obligations that will require future cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable |
|
|
Cancelable |
|
|
|
|
|
|
|
Operating |
|
|
Employment |
|
|
|
|
|
|
Research and |
|
|
License |
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
Agreements |
|
|
Subtotal |
|
|
Development |
|
|
Agreements |
|
|
Subtotal |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
(1) |
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
Total |
|
2008 |
|
$ |
446 |
|
|
$ |
900 |
|
|
$ |
1,346 |
|
|
$ |
4,035 |
|
|
$ |
|
|
|
$ |
4,035 |
|
|
$ |
5,381 |
|
2009 |
|
|
236 |
|
|
|
650 |
|
|
|
886 |
|
|
|
3,279 |
|
|
|
|
|
|
|
3,279 |
|
|
|
4,165 |
|
2010 |
|
|
145 |
|
|
|
|
|
|
|
145 |
|
|
|
3,045 |
|
|
|
|
|
|
|
3,045 |
|
|
|
3,190 |
|
2011 |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
2,188 |
|
|
|
|
|
|
|
2,188 |
|
|
|
2,199 |
|
2012 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
|
|
|
|
681 |
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
838 |
|
|
$ |
1,550 |
|
|
$ |
2,388 |
|
|
$ |
13,228 |
|
|
$ |
|
|
|
$ |
13,228 |
|
|
$ |
15,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RXis current contractual obligations that will require future cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cancelable |
|
|
Cancelable |
|
|
|
|
|
|
|
Operating |
|
|
Employment |
|
|
|
|
|
|
Research and |
|
|
License |
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
Agreements |
|
|
Subtotal |
|
|
Development |
|
|
Agreements |
|
|
Subtotal |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
(1) |
|
|
(2) |
|
|
|
|
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
Total |
|
2008 |
|
$ |
180 |
|
|
$ |
942 |
|
|
$ |
1,122 |
|
|
$ |
|
|
|
$ |
716 |
|
|
$ |
716 |
|
|
$ |
1,838 |
|
2009 |
|
|
105 |
|
|
|
448 |
|
|
|
553 |
|
|
|
|
|
|
|
666 |
|
|
|
666 |
|
|
|
1,219 |
|
2010 |
|
|
|
|
|
|
290 |
|
|
|
290 |
|
|
|
|
|
|
|
616 |
|
|
|
616 |
|
|
|
906 |
|
2011 |
|
|
|
|
|
|
105 |
|
|
|
105 |
|
|
|
|
|
|
|
816 |
|
|
|
816 |
|
|
|
921 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
1,126 |
|
|
|
1,126 |
|
2013 and thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,325 |
|
|
|
10,325 |
|
|
|
10,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
285 |
|
|
$ |
1,785 |
|
|
$ |
2,070 |
|
|
$ |
|
|
|
$ |
14,265 |
|
|
$ |
14,265 |
|
|
$ |
16,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Certain agreements, which have been revised from time to
time, provide for minimum salary levels, adjusted annually at the discretion of the Companys
Compensation Committee, as well as for minimum bonuses that are payable. |
|
(3) |
|
Research and development obligations relate primarily to clinical trials. Most of these
purchase obligations are cancelable. |
|
(4) |
|
License agreements generally relate to RXis obligations with UMMS associated with RNAi and,
for future periods, represent minimum annual royalty payment obligations. Not included in the
table are milestone payment amounts that may be required under RXis license agreements, due
to their contingent nature. RXi has determined that a hypothetical product candidate attaining
all possible product milestones would have aggregate potential milestone payments of $36
million. This hypothetical product analysis was undertaken since RXi has not yet named a lead
product candidate. RXi determined what would be a like product candidate based on its current
research and ran an analysis of the milestone payments due under its current licenses for this
hypothetical product. As a part of this analysis, due to the fact that certain of its licenses
are for technologies that are mutually exclusive, if any two licenses are mutually exclusive
and only one would be applicable to any single product, RXi selected the milestone payments
that would result in higher fees to include in its analysis. |
The Company applies the disclosure provisions of FASB Interpretation No. (FIN) 45,
Guarantors 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
F-12
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; further, the Company maintains insurance to cover
certain losses arising from these indemnifications. Accordingly, the Company has not accrued any
liabilities in its consolidated financial statements related to these indemnifications or
guarantees.
10. Private Placements of Common Stock
On April 19, 2007, the Company completed a $37.0 million private equity financing in which we
issued 8.6 million shares of its common stock at $4.30 per share. Net of investment banking
commissions, legal, accounting and other expenses related to the transaction, the Company received
approximately $34.2 million of proceeds.
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 Companys 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 Companys
common stock and warrants to purchase an additional 8,667,247 shares of the Companys 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 Companys 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 managements 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 Companys 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 Companys 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.
F-13
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. Czechs 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. Czechs 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 option shares 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. Stock Options and Warrants
CytRx Options
As of December 31, 2007, an aggregate of 10,000,000 shares of common stock were reserved for
issuance under the Companys 2000 Stock Option Incentive Plan, as amended, including 5,999,300
shares subject to outstanding stock options and 2,192,000 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 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. 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.
The Company adopted the provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)),
which requires the measurement and recognition of compensation expense for all stock-based awards
made to employees and non-employee directors.
The fair value of stock options at the date of grant was estimated based on the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
Weighted average risk free interest rate |
|
|
4.41 |
% |
|
|
4.91 |
% |
|
|
4.10 |
% |
Dividend yields |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Weighted average volatility |
|
|
108 |
% |
|
|
112 |
% |
|
|
109 |
% |
Expected lives (years) |
|
|
6 |
|
|
|
6 |
|
|
|
8 |
|
The Companys computation of expected volatility is based on the historical daily volatility
of its publicly traded stock. For option grants issued during the year ended December 31, 2007 and
2006, the Company used a calculated volatility for each grant. The Companys computation of
expected life were estimated using the simplified method provided for under Staff Accounting
Bulletin 107 (SAB 107), which averages the contractual term of the Companys options of ten years
with the average vesting term of three years for an average of six years. In December 2007, Staff
Accounting Bulletin 110 (SAB 110) was released which permits the continued use of the simplified
method when a Company is unable to relay on the historical exercise data. Since the Company is
still in its relatively early stages, it will continue with the simplified method. 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 the years ended December 31, 2007 and
2006, the Company has estimated an annualized forfeiture rate of 10% and 10%, respectively, for
options granted to its employees and 1% for each period for options granted to senior management
and directors. Compensation costs will be adjusted for future changes in estimated forfeitures. 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. No
amounts relating to employee stock-based compensation have been capitalized. Under provisions of
SFAS 123(R), the Company recorded $1.7 million and $1.2 million of employee stock-based
compensation for the years ended December 31, 2007 and 2006, respectively.
F-14
At December 31, 2007, there remained approximately $3.4 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 Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Stock Options |
|
|
Exercise Price |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Outstanding beginning of year |
|
|
4,500,208 |
|
|
|
4,097,542 |
|
|
|
3,026,042 |
|
|
$ |
1.66 |
|
|
$ |
1.70 |
|
|
$ |
2.02 |
|
Granted |
|
|
1,685,500 |
|
|
|
783,500 |
|
|
|
1,124,500 |
|
|
|
4.02 |
|
|
|
1.36 |
|
|
|
.83 |
|
Exercised |
|
|
(1,030,933 |
) |
|
|
(82,500 |
) |
|
|
(15,000 |
) |
|
|
1.76 |
|
|
|
.97 |
|
|
|
1.00 |
|
Forfeited |
|
|
(222,503 |
) |
|
|
(296,667 |
) |
|
|
(38,000 |
) |
|
|
1.24 |
|
|
|
1.59 |
|
|
|
1.52 |
|
Expired |
|
|
|
|
|
|
(1,667 |
) |
|
|
|
|
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
4,932,273 |
|
|
|
4,500,208 |
|
|
|
4,097,542 |
|
|
|
2.46 |
|
|
|
1.66 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
3,210,320 |
|
|
|
3,316,994 |
|
|
|
2,360,989 |
|
|
$ |
1.93 |
|
|
$ |
1.84 |
|
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
stock options granted during
the year: |
|
$ |
3.34 |
|
|
$ |
1.16 |
|
|
$ |
.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity for unvested employee stock options as of December 31, and changes
during the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Stock Options |
|
|
Value per Share |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Nonvested at January 1, |
|
|
1,183,214 |
|
|
|
1,736,553 |
|
|
|
1,574,162 |
|
|
$ |
.99 |
|
|
$ |
1.16 |
|
|
$ |
1.77 |
|
Granted |
|
|
1,685,500 |
|
|
|
783,500 |
|
|
|
1,124,500 |
|
|
|
3.34 |
|
|
|
1.16 |
|
|
|
0.72 |
|
Vested |
|
|
(924,259 |
) |
|
|
(1,040,172 |
) |
|
|
(924,109 |
) |
|
|
1.67 |
|
|
|
1.29 |
|
|
|
1.65 |
|
Pre-vested forfeitures |
|
|
(222,503 |
) |
|
|
(296,667 |
) |
|
|
(38,000 |
) |
|
|
1.06 |
|
|
|
1.39 |
|
|
|
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, |
|
|
1,721,952 |
|
|
|
1,183,214 |
|
|
|
1,736,553 |
|
|
$ |
2.92 |
|
|
$ |
.99 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes significant ranges of outstanding stock options under the three
plans at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Number of |
|
|
|
|
Range of |
|
|
|
|
|
Contractual Life |
|
Weighted Average |
|
Options |
|
Weighted Average |
|
Weighted Average |
Exercise Prices |
|
Number of Options |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Contractual Life |
|
Exercise Price |
$0.25 1.00 |
|
|
814,774 |
|
|
|
6.76 |
|
|
$ |
0.81 |
|
|
|
699,440 |
|
|
|
6.76 |
|
|
$ |
0.81 |
|
$1.01 2.00 |
|
|
1,269,500 |
|
|
|
7.16 |
|
|
|
1.48 |
|
|
|
1,041,222 |
|
|
|
7.16 |
|
|
|
1.49 |
|
$2.01 3.00 |
|
|
1,162,499 |
|
|
|
5.51 |
|
|
|
2.45 |
|
|
|
1,162,499 |
|
|
|
5.51 |
|
|
|
2.45 |
|
$3.01 4.00 |
|
|
700,500 |
|
|
|
9.74 |
|
|
|
3.45 |
|
|
|
137,539 |
|
|
|
9.74 |
|
|
|
3.34 |
|
$4.01 4.65 |
|
|
985,000 |
|
|
|
9.35 |
|
|
|
4.42 |
|
|
|
169,621 |
|
|
|
9.35 |
|
|
|
4.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,932,273 |
|
|
|
7.51 |
|
|
$ |
2.46 |
|
|
|
3,210,321 |
|
|
|
7.51 |
|
|
$ |
1.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding options as of December 31, 2007, was $3,836,556
of which $3,273,003 is related to exercisable options. The aggregate intrinsic value was calculated
based on the positive difference between the closing fair market value of the Companys common
stock on December 31, 2007 ($2.84) and the exercise price of the underlying options.
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), Emerging
Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF
00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees, as amended.
Non-employee option grants that do not vest immediately upon grant are recorded as an expense
over the performance period. At the end of each financial reporting period prior to performance,
the value of these options, as calculated using the Black-Scholes option pricing model, will be
determined, and compensation expense 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 common stock
options are fully vested.
F-15
The Company recorded approximately $0.4 million, $1.3 million and $0.6 million of non-cash
charges related to the issuance of stock options to certain consultants in exchange for services
during 2007, 2006 and 2005, respectively. In January 2007, the Companys RNAi operations (RXi
Pharmaceuticals Corporation) began operating on a stand-alone basis (see Our Separation from RXi
Pharmaceuticals Corporation on page 8 for further details). Except for approximately $0.2 million
in 2006, the non-cash charges for services incurred during 2006 and 2005 relate primarily to the
RXi operations and are discussed more fully in the RXi Options section that follows on page F-17.
At December 31, 2007, there was no change in the number of non-employee options outstanding
from the prior year. There remained 1,067,000 options granted.
The fair value of stock options at the date of grant was estimated based on the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Weighted average risk free interest rate |
|
|
|
|
|
|
4.31 |
% |
Dividend yields |
|
|
|
|
|
|
0 |
% |
Weighted average volatility |
|
|
|
|
|
|
108 |
% |
Expected lives (years) |
|
|
|
|
|
|
6 |
|
A summary of the activity for nonvested stock options as of December 31, and changes during
the years are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant Date |
|
|
|
Stock Options |
|
|
Fair Value per Share |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Nonvested at January 1, |
|
|
916,663 |
|
|
|
1,030,831 |
|
|
$ |
1.44 |
|
|
$ |
1.53 |
|
Granted |
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
.95 |
|
Vested |
|
|
(104,163 |
) |
|
|
(364,168 |
) |
|
|
1.63 |
|
|
|
1.35 |
|
Pre-vested forfeitures |
|
|
(562,500 |
) |
|
|
|
|
|
|
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, |
|
|
250,000 |
|
|
|
916,663 |
|
|
$ |
1.00 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CytRx Warrants
A summary of the Companys warrant activity and related information for the years ended
December 31 are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Warrants |
|
|
Exercise Price |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Outstanding beginning of year |
|
|
23,360,165 |
|
|
|
18,508,949 |
|
|
|
9,735,416 |
|
|
$ |
1.83 |
|
|
$ |
1.94 |
|
|
$ |
1.64 |
|
Granted |
|
|
|
|
|
|
6,112,870 |
|
|
|
10,267,887 |
|
|
|
|
|
|
|
1.54 |
|
|
|
1.96 |
|
Exercised |
|
|
(10,233,650 |
) |
|
|
(1,261,654 |
) |
|
|
(1,294,354 |
) |
|
|
1.77 |
|
|
|
1.16 |
|
|
|
0.55 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(95,000 |
) |
|
|
|
|
|
|
(200,000 |
) |
|
|
2.25 |
|
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
13,031,515 |
|
|
|
23,360,165 |
|
|
|
18,508,949 |
|
|
|
1.87 |
|
|
|
1.83 |
|
|
|
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
13,031,515 |
|
|
|
23,360,165 |
|
|
|
18,508,949 |
|
|
$ |
1.87 |
|
|
$ |
1.83 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
warrants granted during the
year: |
|
$ |
|
|
|
$ |
1.54 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes additional information concerning warrants outstanding and
exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
Number of |
|
Exercisable |
|
|
Number of |
|
Contractual Life |
|
Average |
|
Shares |
|
Weighted Average |
Range of Exercise Prices |
|
Shares |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Exercise Price |
$0.20 1.26 |
|
|
482,001 |
|
|
|
1.68 |
|
|
$ |
.20 |
|
|
|
482,001 |
|
|
$ |
.20 |
|
$1.54 1.84 |
|
|
4,183,844 |
|
|
|
5.35 |
|
|
|
1.59 |
|
|
|
4,183,844 |
|
|
|
1.59 |
|
$1.85 2.36 |
|
|
7,056,917 |
|
|
|
4.98 |
|
|
|
2.00 |
|
|
|
7,056,917 |
|
|
|
2.00 |
|
$2.37 2.67 |
|
|
1,308,753 |
|
|
|
5.04 |
|
|
|
2.67 |
|
|
|
1,308,753 |
|
|
|
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,031,515 |
|
|
|
4.98 |
|
|
$ |
1.87 |
|
|
|
13,031,515 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
RXi Options
As of December 31, 2007, an aggregate of 2.75 million shares of common stock were reserved for
issuance under the RXi Pharmaceuticals Corporation 2007 Incentive Plan, including approximately
1,340,000 shares subject to outstanding common stock options granted under this plan and
approximately 1,410,000 shares available for future grants. The administrator of the plan
determines the times which an option may become exercisable. Vesting periods of options granted to
date include vesting upon grant to vesting at the end of a five year period. The options will
expire, unless previously exercised, not later than ten years from the grant date.
RXi issued options to purchase approximately 1,340,000 shares of its common stock during 2007.
The fair value of the common stock options granted in the year listed in the table below was
estimated using the Black-Scholes option-pricing model, based on the following assumptions:
|
|
|
|
|
|
|
2007 |
Weighted average risk free interest rate |
|
|
4.50 |
% |
Weighted average volatility |
|
|
108.7 |
% |
Expected lives (years) |
|
|
6 |
|
Expected dividend yield |
|
|
0 |
% |
The fair value of RXis common stock and RXis expected common stock price volatility
assumption is based upon a valuation conducted by Sanli Pastore & Hill, an independent third party
valuation firm engaged by the RXis Board of Directors, which determined the RXi corporate
valuation and analyzed the volatility of a basket of comparable companies. The expected life
assumptions were based upon the simplified method provided for under SAB 107, which averages the
contractual term of RXis options of ten years with the average vesting term of three years for an
average of six years. The dividend yield assumption of zero is based upon the fact that RXi has
never paid cash dividends and presently has no intention of paying cash dividends. The risk-free
interest rate used for each grant was also based upon prevailing short-term interest rates. Based
on CytRxs historical experience, RXi has estimated an annualized forfeiture rate of 4.0% for
options granted to its employees, 2.1% for options granted senior management and no forfeiture rate
for the directors. RXi 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. Under provisions of SFAS 123(R), RXi recorded $1.0 million of employee stock-based
compensation for the year ended December 31, 2007. No amounts relating to employee stock-based
compensation have been capitalized. As of December 31, 2007, there was $2.1 million of unrecognized
compensation cost related to outstanding options that is expected to be recognized as a component
of RXis operating expenses through 2011. Compensation costs will be adjusted for future changes
in estimated forfeitures.
At December 31, 2007, the unrecognized compensation expense related to unvested common stock
options granted to employees and non-employee directors is expected to be recognized as expense
over a weighted-average period of 1.8 years. Presented below is RXis common stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Stock Options |
|
Exercise Price |
|
|
2007 |
|
2007 |
Outstanding beginning of year |
|
|
|
|
|
$ |
|
|
Granted |
|
|
1,139,375 |
|
|
|
5.00 |
|
Exercised |
|
|
(66,044 |
) |
|
|
5.00 |
|
Forfeited |
|
|
(92,465 |
) |
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
980,866 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
274,129 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
A summary of the activity for nonvested stock options as of December 31, and changes during
the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Stock Options |
|
|
Value per Share |
|
|
|
2007 |
|
|
2007 |
|
Nonvested at January 1, |
|
|
|
|
|
$ |
|
|
Granted |
|
|
1,139,375 |
|
|
|
3.51 |
|
Vested |
|
|
(274,129 |
) |
|
|
3.45 |
|
Pre-vested forfeitures |
|
|
(92,465 |
) |
|
|
3.57 |
|
|
|
|
|
|
|
|
Nonvested at December 31, |
|
|
772,781 |
|
|
$ |
3.51 |
|
|
|
|
|
|
|
|
|
F-17
The following table summarizes significant ranges of outstanding stock options at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
Number of |
|
|
|
|
Range of |
|
|
|
Contractual Life |
|
Weighted Average |
|
Options |
|
Weighted Average |
|
Weighted Average |
Exercise Prices |
|
Number of Options |
|
(years) |
|
Exercise Price |
|
Exercisable |
|
Contractual Life |
|
Exercise Price |
$5.00
|
|
980,866
|
|
9.46
|
|
$5.00
|
|
274,129
|
|
9.46
|
|
$5.00 |
The aggregate intrinsic value of outstanding options as of December 31, 2007 is negligible.
The aggregate intrinsic value is calculated based on the positive difference between the closing
fair market value of RXis common stock on December 31, 2007 and the exercise price of the
underlying options.
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. 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 RXis common stock 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 will include fair value re-measurements until the stock options are
fully vested. RXi used an independent third-party valuation firm to estimate the fair
market value of RXis common stock and used the common stock fair market value as an input into the
calculation of fair value of the common stock options granted using the Black-Scholes
option-pricing model. Under provisions of SFAS 123(R), EITF 96-18, RXi recorded
approximately $1.0 million of stock based compensation expense related to non-employee stock
options for the year ended December 31, 2007 in respect of RXi.
The fair value of non-employee stock options at the date of grant was estimated based on the
following assumptions:
|
|
|
|
|
|
|
2007 |
Weighted average risk free interest rate |
|
|
4.39 |
% |
Dividend yields |
|
|
0 |
% |
Weighted average volatility |
|
|
109.4 |
% |
Expected lives (years) |
|
|
6 |
|
The fair value of RXis common stock and RXis expected common stock price volatility
assumption is based upon Sanli Pastore & Hill, Inc.s valuation that determined the RXi corporate
valuation and analyzed the volatility of a basket of comparable companies. The expected life
assumptions were based upon the simplified method provided for under SAB 107, which averages the
contractual term of RXis options of ten years with the average vesting term for an average of six
years. The dividend yield assumption of zero is based upon the fact that RXi has never paid cash
dividends and presently has no intention of paying cash dividends. The risk-free interest rate
used for each grant was also based upon prevailing short-term interest rates.
At December 31, 2007, there remained approximately $489,000 of unrecognized compensation
expense related to unvested common stock options granted to non-employees is expected to be
recognized as expense over a weighted-average period of 1.8 years. Presented below is RXis common
stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Stock Options |
|
Exercise Price |
|
|
2007 |
|
2007 |
Outstanding beginning of year |
|
|
|
|
|
$ |
|
|
Granted |
|
|
357,318 |
|
|
|
5.00 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
357,318 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
221,883 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
F-18
13. Stockholder Protection Rights Plan
Effective April 16, 1997, the Companys board of directors declared a distribution of one
right (Rights) for each outstanding share of the Companys 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
Companys 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 Rights
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 Companys 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.
14. Income Taxes
At December 31, 2007, the Company had United States federal and state net operating loss
carryforwards of $109 million and $52 million, respectively, available to offset against future
taxable income, which expire in 2010 through 2027. As a result of a change in-control that occurred
in the CytRx shareholder base in July 2002, approximately $45 million in federal net operating loss
carryforwards became limited in their availability to $0.7 million annually. Management currently believes that the remaining $64
million in federal net operating loss carryforwards, and the $52 million in state net operating
loss carryforwards, are unrestricted. However, management is reviewing its recent equity transactions to determine if they may have resulted in any further restrictions on the Companys
net operating loss carryforwards. 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, 2007, CytRx also had research and development and orphan drug
credits for federal and state purposes of approximately $3 million and $2 million, respectively,
available for offset against future income taxes, which expire in 2008 through 2027. Based on an
assessment of all available evidence including, but not limited to, the Companys 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 Companys deferred tax assets and liabilities, all of which are
long-term, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
39,919 |
|
|
$ |
30,892 |
|
Tax credit carryforwards |
|
|
3,114 |
|
|
|
2,391 |
|
Equipment, furnishings and other |
|
|
4,124 |
|
|
|
1,547 |
|
Deferred revenue |
|
|
6,200 |
|
|
|
9,085 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
53,357 |
|
|
|
43,915 |
|
Deferred tax liabilities |
|
|
(111 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
53,246 |
|
|
|
43,830 |
|
Valuation allowance |
|
|
(53,246 |
) |
|
|
(43,830 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
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, 2007 and 2006 were increases
of $9,416,000 and $34,000, respectively.
F-19
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Federal benefit at statutory rate |
|
$ |
(7,781 |
) |
|
$ |
(5,646 |
) |
|
$ |
(5,128 |
) |
State income taxes, net of Federal taxes |
|
|
(908 |
) |
|
|
(968 |
) |
|
|
(603 |
) |
Permanent differences |
|
|
65 |
|
|
|
143 |
|
|
|
736 |
|
Provision related to change in valuation allowance |
|
|
9,416 |
|
|
|
34 |
|
|
|
5,308 |
|
Net change in research and development tax credits |
|
|
(1,125 |
) |
|
|
5,059 |
|
|
|
|
|
Change in state tax rates |
|
|
|
|
|
|
2,160 |
|
|
|
|
|
Other, net |
|
|
373 |
|
|
|
(637 |
) |
|
|
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40 |
|
|
$ |
145 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
15. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 2007 and 2006 is as follows (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
|
(In thousands, except per share data) |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,563 |
|
|
$ |
2,371 |
|
|
$ |
2,046 |
|
|
$ |
1,479 |
|
Net loss |
|
|
(4,546 |
) |
|
|
(6,285 |
) |
|
|
(4,597 |
) |
|
|
(6,462 |
) |
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(4,546 |
) |
|
$ |
(6,285 |
) |
|
$ |
(4,597 |
) |
|
$ |
(6,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common stock |
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
61 |
|
|
$ |
|
|
|
$ |
776 |
|
|
$ |
1,229 |
|
Net loss |
|
|
(4,166 |
) |
|
|
(5,465 |
) |
|
|
(2,972 |
) |
|
|
(4,148 |
) |
Deemed dividend for anti-dilution adjustments made to
outstanding common stock warrants |
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(4,654 |
) |
|
$ |
(5,465 |
) |
|
$ |
(2,972 |
) |
|
$ |
(4,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common stock |
|
$ |
(0.07 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.04 |
) |
|
$ |
(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 Statements of Operations as of and for the years ended December 31, 2007 and 2006 reflect
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 years ended December
31, 2007 and 2006 were $2.7 and $1.2 million, respectively.
In connection with the Companys 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 to arrive at net
loss applicable to common stockholders on the consolidated statements of operations and for purposes
of calculating basic and diluted earnings per shares.
Fourth Quarter Adjustment
During the fourth quarter of 2007, the Company recorded adjustments for: (i) additional
compensation expense of $236,000 related to previously granted non-employee stock options, (ii) additional
compensation expense of $350,000 related to stock options previously granted to Directors and (iii) additional
general and administrative expense of $192,000 related to legal fees rendered during the third quarter. Management concluded
the effect of these adjustments was not material to any previously reported quarterly period.
16. Subsequent Events
F-20
On February 14, 2008, the Companys board of directors declared a dividend, payable to its
stockholders as of March 6, 2008, the record date, of one share of the common stock of RXi
Pharmaceuticals Corporation for each approximately 20.05 shares of our common stock held by such
stockholders. The dividend was paid on March 11, 2008. The RXi shares distributed by the Company
to its stockholders constituted approximately 36% of the currently outstanding RXi shares, and as a
result, the Company currently owns approximately 49% of the outstanding shares of RXi common stock.
As a result, the Companys financial statements will no longer consolidate the financial condition
and results of operation of RXi, but instead will account for its ongoing investment in RXi based
on the equity method of accounting.
As of March 25, 2007, the Company has received approximately $1.0 million in connection with
the exercise of warrants and options since December 31, 2007. The exercise price of the warrants
and options ranged from $.20 to $2.00.
F-21
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 (the
Company) as of December 31, 2007 and 2006 and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended December 31,
2007. We have also audited the schedule listed in the accompanying index under Item 15a(2). These financial
statements and schedule are the responsibility of the Companys 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, 2007 and 2006, and
the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2007, 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 2 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123 (revised
2004), Share-based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of
December 31, 2007, 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 1, 2008, expressed an adverse opinion on the effectiveness of the Companys internal control
over financial reporting due to material weaknesses.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
April 1, 2008
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
CytRx Corporation
Los Angeles, California
We have audited CytRx Corporations (the Company) internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
CytRx Corporations management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying, Item 9A, Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys 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, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys 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 in the
United States of America. A companys 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 being 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 companys 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 deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the companys annual or interim financial statements will not be prevented or detected on a timely
basis. The following material weaknesses have been identified and included in managements
assessment. As of December 31, 2007, the Company did not maintain effective controls over its
annual financial reporting process. We noted during our substantive audit procedures that certain
schedules provided by management contained errors indicating that the schedules had not been
reviewed, or reviewed in sufficient detail, to identify and correct the errors prior to the
schedules being provided for audit. We noted errors in schedules relating to accrued liabilities,
stock compensation, research and development expenses and related revenue recognition. In
addition, we noted that there were lapses in the maintenance of the Companys books and records.
Material weaknesses in financial reporting impacts the Companys ability to report financial
information in conformity with generally accepted accounting principles in the United States of
America, which could affect all significant financial statement accounts. These material
weaknesses were considered in determining the nature, timing and extent of audit tests applied in
our audit of the 2007 consolidated financial statements, and this report does not affect our report
dated April 1, 2008 on those consolidated financial statements.
In our opinion, CytRx Corporation did not maintain, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the COSO criteria. We do not
express an opinion or any other form of assurance on managements statements referring to any
corrective actions taken by the Company after the date of managements assessment.
F-23
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of CytRx Corporation as of December 31, 2007
and 2006, and the related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2007 and our report dated April 1, 2008 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
April 1, 2008
F-24
CYTRX CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
Other |
|
|
|
|
|
Balance at |
Description |
|
Year |
|
Expenses |
|
Accounts |
|
Deductions |
|
End of Year |
Reserve Deducted in the Balance
Sheet from the Asset to Which it
Applies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Deferred Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
43,830,000 |
|
|
$ |
|
|
|
$ |
9,416,000 |
|
|
$ |
|
|
|
$ |
53,246,000 |
|
Year ended December 31, 2006 |
|
|
43,796,000 |
|
|
|
|
|
|
|
34,000 |
|
|
|
|
|
|
|
43,830,000 |
|
Year ended December 31, 2005 |
|
|
38,488,000 |
|
|
|
|
|
|
|
5,308,000 |
|
|
|
|
|
|
|
43,796,000 |
|
F-25