UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K
(Mark One) [X]FOR ANNUAL
REPORTAND TRANSITION REPORTS PURSUANT TOSECTION
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934[FEE REQUIRED]. For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File No. 0-15327 CYTRX CORPORATION (Exact name of Registrant as specified in its charter) Delaware 58-1642740 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 154 Technology Parkway Norcross, Georgia 30092 30092 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 368-9500 __________________________ Securities registered pursuant to Section l2(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share
(Mark One) | ||||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the fiscal year ended December 31, 2002 | ||||
OR | ||||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACTOF 1934 | |||
Commission File No. 0-15327 | ||||
CYTRX CORPORATION | ||||
(Exact name of Registrant as specified in its charter) | ||||
Delaware | 58-1642740 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
11726 San Vicente Blvd Suite 650 Los Angeles, California | 90049 | |||
(Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (310) 826-5648 | ||||
Securities registered pursuant to Section l2(b) of the Act: None | ||||
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share | ||||
Indicate by check mark 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 [X] NO [ ]
YES x | NO o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
On March 19, 1996,10-K o
Indicate by check mark with the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
YES o | NO x |
The aggregate market value of the Registrant'sRegistrant’s common stock held by non-affiliates on March 25, 2003 was approximately $27,453,000.$8,445,000. On March 19, 1996,25, 2003, there were 7,860,80321,510,111 shares of the Registrant'sRegistrant’s common stock outstanding, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
None.
“SAFE HABOR” STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the CytRx CorporationSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E or the Securities Exchange Act of 1934, as amended (the “Securities and Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Annual Report to Stockholderson Form 10-K (the “Annual Report”), as well as those made in other filings with the SEC.
All statements in this Annual Report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, other than statements of historical fact are forward-looking statements for purposes of these provisions, including any projections of financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or “could” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein and in documents incorporated by reference into Parts I, II, III and IV. Portionsthis Annual Report are reasonable, there can be no assurance that such expectations or any of the CytRx
Corporation Proxy Statementforward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth in the “Risk Factors” and for the 1996reasons described elsewhere in this Annual MeetingReport. All forward looking statements and reasons why results may differ included in this Annual Report are made as of Stockholders are
incorporated by reference into Part III.
We do not have, and expressly disclaim, any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward looking statement is based.
1
PART I
Item 1. Business
Overview
CytRx Corporation
General
We are a Delaware corporation that was foundedincorporated in 1985 and is engaged in the development and commercialization of pharmaceutical relatedproducts. Our current products are FLOCOR, an intravenous agent for treatment of sickle cell disease (an inherited disease caused by a genetic mutation of hemoglobin in the blood) and services including
human therapeutics focused on high-value critical-care therapies. In additionother acute vaso-occlusive disorders (a blockage of blood flow caused by deformed or “sickled” red blood cells which can cause intense pain in sickle cell disease patients), and TranzFect, a delivery technology for DNA and conventional-based vaccines. We are currently seeking strategic partners or licensees to its development work in human therapeutics, CytRx has also created three
wholly-owned subsidiaries to broadencomplete the development of FLOCOR, and TranzFect is currently being developed by our two licensees for this technology. We are seeking to license our TranzFect technology to a strategic partner or licensee for development as a potential DNA-based prostate cancer adjuvant (an agent added to a vaccine to increase its effectiveness) and may also seek to license this technology as a potential conventional adjuvant for hepatitis B and C, flu, malaria and other viral diseases. Our technologies without
losing focus on its core critical-care strategy. Vaxcel, Inc. is developing its
Optivaxalso have potential applications in the areas of spinal cord injury, vaccine delivery systemand gene therapy. In addition, we own minority interests in two development stage genomics companies, which are described under "Recent Developments."
Certain financial information concerning the industry segments in which we operate can be found in Note 17 to enhance the effectiveness of vaccines. Vetlife, Inc.
is developing products to enhance food animal growth. Proceutics, Inc. provides
preclinical development services to the pharmaceutical industry. Reference
herein to "the Company" includes CytRx and its wholly-owned subsidiaries.
The Company presently has no product that is approved by a regulatory agency for
commercial use in human or veterinary applications.
our Consolidated Financial Statements.
Product Development
CytRx's human therapeutics product
Therapeutic Copolymer Programs
General. The primary focus of our internal development efforts are focusedactivities has been on critical-
care products providing target opportunitiesCRL-5861 (purified poloxamer 188), which we also call FLOCOR for high-value breakthrough
productspurposes of our potential sickle cell disease product. CRL-5861 is a novel, intra-vascular agent with pharmacological properties that can be characterized as rheologic (related to address unmet medical needs. Projects include RheothRx whichblood flow), cytoprotective (protects certain cells during chemotherapy) and anti-adhesive / anti-thrombotic (prevents blood clot formation). CRL-5861 is an intravenous solution that has the unique property of improving micro-vascular blood flow. Extensive preclinical and clinical studies suggest CRL-5861 may be of significant benefit in acute ischemic vascular disorders (a decrease in the blood supply to a bodily organ, tissue or part caused by constriction or obstruction of the blood vessels) such as stroke, heart attack, or vaso-occlusive disorder crisis. CRL-5861 may also provide benefit in cancer when used in combination with radiation or cytotoxic drugs (drugs that can produce a toxic effect in cells). Through its effect on increasing blood flow, CRL-5861 is thought to (1) increase delivery of cytotoxic drugs to ischemic portions of tumors, and (2) increase oxygen delivery, thus increasing the sensitivity of tumor cells to drug and radiation therapy.
We believe CRL-5861 may have significant potential in treating a variety of vascular-occlusive diseases, including sickle cell disease, spinal cord compression injury, muscular dystrophy and delivery of anti-cancer agents. The safety profile of CRL-5861 is well established. It has been investigated in over 17 clinical studies representing administration to alleviateapproximately 4,000 patients and healthy volunteers.
Sickle Cell Disease. Sickle cell disease is a devastating disorder originating from an inherited abnormality of hemoglobin, the oxygen-carrying molecule in red blood cells, which is typically seen in African-Americans and others of African descent. Approximately 72,000 individuals suffer from this disease in the United States. Under conditions of low blood oxygen, which is generally caused by dehydration or stress, the sickle cell victim’s hemoglobin becomes rigid, causing red blood cells to become rough, sticky and irregularly shaped, often looking like sickles, which gives the disease its name.
The most common problem sickle cell patients face is episodic pain (also referred to as vaso-occlusive crisis, or VOC). These episodes can last anywhere from days to weeks, and can vary significantly in their severity. Aside from causing considerable pain and suffering, associated withthese crisis episodes slowly destroy vital organs as they are deprived of oxygen. As a result, the life expectancy of sickle cell victims is about twenty years shorter than those without the disease. Patients suffering from sickle cell disease may experience several crisis episodes each year. Hospitalization is required when pain becomes too much to bear. Currently, there is no disease modifying treatment for acute crisis of sickle cell disease and treatment is limited to narcotics, fluids and bed rest.
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In sickle cell disease, the application of FLOCOR can best be described as an intravenous blood “lubricant”. FLOCOR’s unique surface-active properties decrease blood viscosity and enable the rigid sickled cells to become more flexible, thus allowing easier passage of blood cells through narrow blood vessels. We believe FLOCOR can provide limited periods of relief from pain by shortening the episodes of vaso-occlusive crises and, most importantly, preserve organ function.
In December 1999, we reported results from a Phase III clinical study of FLOCOR for treatment of acute sickle cell crisis. Although the study did not demonstrate statistical significance in the primary endpoint (objective of the study), which was duration of the vaso-occlusive crisis, statistically significant and clinically important benefits associated with FLOCOR were observed in certain subgroups, principally the subgroup of 15 years of age and under. In 1995, results fromorder to assess when patients were achieving crisis resolution, the data on achievement of crisis resolution were distributed by time. For patients 15 years of age and younger, a 2,900 patient RheothRx trial indicated unacceptable side
effectsstatistically significant number of patients achieving resolution of crisis was higher for FLOCOR-treated patients at dosesall time periods than for placebo-treated patients. The Phase III study also demonstrated that provided therapeutic benefitFLOCOR is well tolerated.
Following completion of this Phase III study, our Data and Safety Monitoring Board (composed of five independent scientists and two statisticians that we had retained to heart attack victims. Asevaluate the overall safety issues associated with this study) and a result, CytRx's licensee, Glaxo Wellcome PLC, returned rights to the Company.
CytRx believesgroup of six well recognized hematologists associated with leading medical centers who we retained as consultants recommended that RheothRx still offers opportunity in treating sickle cell
disease. RheothRx has shown promise in reducing crisis duration, pain and
lengthwe continue with clinical development of hospitalization in patients suffering acute crisis. Scientists are
currently exploring the feasibility of continuing development in this area.
In June 1989, the FDA informed CytRx of its decision to grant RheothRx "Orphan
Drug" designationFLOCOR for the treatment of sickle cell crisis. In March 1990,
RheothRx also received Orphandisease. Based on our conversations with the United States Food and Drug Administration (FDA), we believe it is likely that either two small additional pivotal trials or one large trial will be required for FLOCOR’s approval, along with one to two additional safety studies. We expect total costs for these additional studies to be in the range of $10,000,000-$12,000,000, although the actual costs could vary substantially, depending on the nature and number of trials that the FDA ultimately would require.
Because of the substantial expenditures that will be required to conduct the required additional clinical testing of FLOCOR, we are not at this time continuing our internal efforts to develop FLOCOR but are, consistent with our new business strategy, seeking a strategic alliance or license arrangement with a larger company to complete the development of FLOCOR and market this product. See “Recent Developments.”
FLOCOR has been granted “Orphan Drug” designation by the FDA for the treatment of severe
burns.sickle cell crises. The Orphan Drug Act of 1983, as amended, provides incentive to drug manufacturers to develop drugs for the treatment of rare diseases (e.g.(for example, diseases that affect less than 200,000 individuals in the United States, or diseases thatRheothRxFLOCOR as an Orphan Drug, if the Company iswe are the first manufacturersponsor to obtain FDA approval to market RheothRxFLOCOR for treatment of sickle cell crisis or severe burns, the Companycrises, we will obtain a seven-year period of marketing exclusivity beginning from the date of itsFLOCOR’s approval. During this period, the FDA cannotmay not approve the same drug for the same use from another sponsor. There
Spinal Cord Injury. Traumatic spinal cord damage is one of the most devastating injuries imaginable and, unfortunately, occurs primarily in young people, often resulting in complete paralysis. Researchers believe that a significant portion of spinal cord damage results from a secondary progression of damage after the initial injury. This secondary injury results from membrane injury to nerve cells, causing them to lose function over time.
Scientists associated with a major university medical center are currently testing compounds related to CRL-5861 for their ability to interact with damaged nerve membranes in such a way as to “seal” the damage and restore membrane integrity. If successful, this treatment could limit the progression of secondary, post-injury damage, thereby maintaining or restoring spinal cord function. Assuming the successful outcome of these preliminary studies in animals, which would need to be confirmed in clinical trials, we believe it could be possible for any strategic partner or licensee that we might be able to secure to be able to proceed very quickly with the clinical development of this agent since the program could benefit from the existing safety data and manufacturing capabilities already in place from our FLOCOR program. To proceed with this development, we or our potential strategic partner or licensee would need to enter into a license or other arrangement with the medical center.
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Vaccine Enhancement and Gene Therapy
DNA Vaccines & Gene Therapy.
Gene therapy and gene based vaccines are mediated through the delivery of DNA containing selected genes into cells by a process known as transfection. We refer to our gene delivery technology as TranzFect. A common class of materials used to enhance the transfection process are known as cationic lipids (a fatty molecule that can bind with cell membranes). This type of lipid can associate with and alter the integrity of a cell membrane, thus increasing the uptake of the complexed DNA. Unfortunately, cationic lipids are toxic to cells and are readily metabolized. Thus, the effect of these agents in transfection protocols is not readily reproducible when used in vivo.
We have identified a series of non-ionic block copolymers known as poloxamers that share several physico-chemical traits with the cationic lipids in that they associate with DNA and cell membranes. (Block copolymers are composed of short segments of two different kinds of polymer, while non-ionic block copolymers do not have any cations (e.g. Na+ or Ca++) attached to them.) However, the block copolymers are significantly less toxic than the cationic lipids and are not metabolized in vivo. In addition, the poloxamer family of non-ionic block copolymers have a significant history of being safely used in a wide variety of oral, injectable, and topical pharmaceutical products. Importantly, a poloxamer known as CRL-1005, which is among the most active in transfection protocols and is adjuvant active, has been studied in a Phase I clinical trial that we sponsored. In that trial, CRL-1005 was well tolerated at doses significantly higher than those anticipated to be useful in gene therapy or DNA vaccine studies.
In addition to the ability of poloxamers to enhance transfection, these compounds have significant immuno-adjuvant (an immunological agent added to a vaccine to increase its antigenic response) activity. Accordingly, we believe that an optimal application for this technology may be in the field of DNA vaccines. We believe that in this application, the activity of poloxamers will be two-fold. First, the poloxamers will act as delivery/transfection agents to facilitate the intracellular delivery and protection of the DNA from enzymatic digestion. Second, the poloxamer will act as an immuno-adjuvant. Since the poloxamer is not metabolized and has surface active properties, it is likely to remain on the surface of the transfected cell awaiting expression of the gene. When the gene product is excreted from the cell, the poloxamer is likely to associate with the antigen (a substance that when introduced into the body, stimulates the production of an antibody) and exert immuno-adjuvant actions. Numerous preclinical have demonstrated that conventional vaccines adjuvanted with poloxamers are well tolerated and result in significantly enhanced antibody and cellular immune responses.
License fees paid to us with respect to our TranzFect technology have represented 78%, 85% and 60% of our total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
Merck License.
In November 2000, we entered into an exclusive, worldwide license agreement with Merck & Co., Inc. whereby we granted Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. To date, Merck has focused its efforts on the HIV application, which is still at an early stage of clinical development.
In November 2000, Merck paid us an upfront payment of $2,000,000 and in February 2002, Merck paid us an additional $1,000,000 milestone fee related to the commencement by Merck of the first FDA Phase I Study for the first product incorporating TranzFect designed for the prevention and treatment of HIV. Merck will also pay us up to $3,000,000 in $1,000,000 increments within 30 days of the occurrence of each of the following: (1) the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study for such HIV product; (2) the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below for such HIV product; and (3) notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom or Japan that all approvals for the marketing of such HIV product, including pricing approvals, have been granted. Merck will also pay us an annual fee of $50,000 the first year, $75,000 the second year, and $100,000 the third year and each additional year thereafter until Merck receives notification from a regulatory authority as mentioned above. These annual payments by Merck may be used by Merck to offset future royalty payments that they may owe us.
For the products incorporating TranzFect targeting the other diseases, Merck will pay us milestone payments of up to $2,850,000 in the following increments: (1) $100,000 for the commencement by Merck of the first FDA Phase I Study; (2) $250,000 for the commencement by Merck of the earlier of the first FDA Phase IIb Study or Phase III Study; (3) $500,000
4
for the filing by Merck of the first U.S. Public Health Service Act Product License Application in one of the countries mentioned below; and (4) $2,000,000 for notification from a regulatory authority in the United States, Canada, France, Germany, Italy, Spain, the United Kingdom or Japan that all approvals for the marketing of such product, including pricing approvals, have been granted.
Merck also will pay to us royalties of between 2% and 4%, on a country-by-country basis, based on net sales. Merck will pay an additional 1% royalty on net sales if certain conditions are met regarding patent protection and Merck’s competitive position. The royalty payments are subject to certain reductions.
The receipt of the additional milestone and royalty payments is dependent upon the activities of Merck, and therefore we cannot predict the amount or likelihood of these payments that we will receive.
This agreement remains effective unless terminated according to its terms by either party or until the expiration of all royalty obligations thereunder. Merck’s obligation to pay royalties to us pursuant to the license agreement extends for a minimum of five years from the date of first commercial sale of the product in the applicable country or until the expiration of the last applicable patent in the country in which sales are made, whichever is longer. Merck may terminate this agreement at any time in its sole discretion by giving 90 days written notice. Upon termination by Merck, the rights and obligations under the agreement, including any licenses and payment obligations not yet due, also terminate. The agreement may also be terminated for cause by either party. All amounts previously paid to us through the date of termination are non-refundable upon termination of the agreement and require no assuranceadditional efforts on our part.
Vical License.
In December 2001, we entered into a license agreement with Vical Incorporated granting Vical exclusive, worldwide rights to use or sublicense our TranzFect poloxamer technology to enhance viral or non-viral delivery of polynucleotides (such as DNA and RNA) in all preventive and therapeutic human and animal health applications, except for (1) four infectious disease vaccine targets previously licensed by us to Merck, and (2) DNA vaccines or therapeutics based on prostate-specific membrane antigen (PSMA). In addition, the Vical license permits Vical to use TranzFect poloxamer technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. Vical has not yet commenced any clinical development work with our TranzFect technology.
Under the Vical license, we received a nonrefundable up-front payment of $3,750,000, and we have the potential to receive total aggregate additional milestone payments of up to $3,600,000, plus royalty payments in the future based on criteria described in the agreement. The receipt of the additional milestone payments is dependent upon the activities of Vical, and therefore, we cannot predict the amount or likelihood of these payments that we will receive.
This agreement remains effective unless terminated according to its terms by either party or until the expiration of all royalty obligations under this agreement. Vical’s obligation to pay royalties to CytRx pursuant to the license agreement extends for a minimum of five years from the date of first commercial sale of the product or until the expiration of the last applicable patent in the country in which sales are made. Vical may terminate this agreement at any time in its sole discretion by giving 90 days written notice. Upon termination by Vical, the rights and obligations under the agreement, including any licenses and payment obligations not yet due, also terminate. The agreement may also be terminated for cause by either party. All amounts previously paid to us through the date of termination are nonrefundable upon termination of the agreement and require no additional efforts on our part.
PSMA Development Company Option Agreement.
In December 2002, we granted an option to PSMA Development Company (“PDC”) to license TranzFect, our vaccine adjuvant technology. PDC would utilize TranzFect in this strategic alliance in a prostate cancer vaccine being developed by PDC. Under the terms of the option agreement, PDC has a 24 month right of first refusal to enter into a license agreement for TranzFect under pre-negotiated terms.
Conventional Vaccines.
As part of our TranzFect program, we have developed a library of compounds, many of which have been shown to enhance the activity of conventional vaccines. We refer to this program as Optivax. We are seeking other potential licensees for Optivax applications. We may, under certain circumstances, be required to pay a royalty fee to Emory University if we utilize certain intellectual property of that university in connection with our Optivax program. The royalty, if applicable, would be equal to 4% of the first $1,000,000 and 2.5% of any additional revenues that we receive on our sales of Optivax products or on royalties that we receive from any licensees of our Optivax technology.
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Other Product Development Efforts.
Food Animal Growth Promotant. The FDA has expressed a growing concern about the use of low level antibiotics in animal feed and the possibility of resultant antibiotic resistance in human pathogens. Pending regulations at the FDA could suspend farmers’ use of any antibiotics found to promote the spread of resistant human pathogens. In experimental studies, our compound, CRL-8761, has been shown to have a consistent effect to improve the rate of weight gain and feed efficiency in well-controlled studies in poultry and swine. CRL-8761 as a feed additive consistently provides the same growth performance benefits as antibiotics but, since it has no antibiotic activity, it is free from human health concerns over the use of antibiotics.
Ivy Animal Health License.
In February 2001, we entered into a license agreement with Ivy Animal Health, Inc. under which we granted Ivy a worldwide exclusive license to CRL-8761. As part of the license, we received a nominal up-front payment, and will receive a milestone fee of $100,000 upon regulatory approval in the United States and a future royalty equal to market RheothRx5% of net sales.
Recent Developments
On July 19, 2002, we completed the acquisition of Global Genomics Capital, Inc. The acquisition of Global Genomics was accomplished through a merger of our wholly owned subsidiary, GGC Merger Corporation, with and into Global Genomics. Global Genomics was the surviving corporation in the merger with GGC Merger Corporation and is now our wholly-owned subsidiary. We have changed Global Genomics’ name to GGC Pharmaceuticals, Inc., but for purposes of this Annual Report, we will continue to refer to the company as Global Genomics. For accounting purposes, we were deemed the acquiror of Global Genomics.
In the Global Genomics merger, each outstanding share of common stock of Global Genomics was converted into 0.765967 shares of our common stock. Accordingly, a total of 8,948,204 shares of our common stock, or approximately 41.7% of our common stock outstanding immediately after the merger, were issued to the common stockholders of Global Genomics, and an additional 1,014,677 shares of our common stock were reserved for issuance upon the exercise of the outstanding Global Genomics warrants that we assumed in the merger. Other than the foregoing stock, we paid no other consideration to the Global Genomics shareholders.
Global Genomics is a development stage company that has been engaged principally in investing in or acquiring companies that develop and commercialize healthcare products driven by genomics technologies. Global Genomics’ primary assets are a 40% equity interest in Blizzard Genomics, Inc. and a 5% equity interest in Psynomics, Inc. ("Psynomics").
Blizzard Genomics is developing instrumentation, software and consumable supplies for the treatmentgrowing genomics industry. Blizzard Genomics is the exclusive sublicensee of sickle cell crisis or severe burns.
CytRxa technology that it believes allows for cheaper, faster and more portable analysis of DNA, through the use of its own readers and DNA chips, as compared to other currently available technology. Subject to having sufficient financial resources, Blizzard Genomics has plans to commercially launch its first product, a chip reader, during 2003. Blizzard Genomics’ I-Scan Imager™ chip reader acquires the image of labeled DNA attached to a DNA chip. It is also developing Protox as a treatment for tuberculosis as well asportable, flexible, easy-to-use instrument with DNA detection and analysis capabilities that Blizzard Genomics believes are comparable to those of DNA chip readers that are more expensive. Blizzard Genomics’ T-Chip™ thermal hybridization station produces a stable, reproducible temperature gradient across the surface of Blizzard Genomics’ T-Chip™ DNA chip. This innovation enables researchers and clinicians to use straightforward temperature versus position analyses to detect the smallest changes in a DNA strand. Most importantly, Blizzard Genomics’ thermal gradient technology can distinguish previously undetectable genetic variants in disease and pathogenic agents. Pending receipt of additional funding to complete the development of the T-Chip™ thermal hybridization station and T-Chip™ DNA chip, Blizzard Genomics anticipates commercial sales of these products commencing in 2004. Since Blizzard Genomics’ currently planned products are primarily for use in combinationresearch laboratories, they will not need to be approved by the FDA before they can be marketed.
Psynomics is an early stage psychiatric genomics company. Psynomics is currently operating, as a “virtual company” out of the University of California, San Diego and has had an ongoing research collaboration with certain antibioticits founders at that university. Psynomics’ short-term goal is to identify the genes that cause common neuropsychiatric diseases, such as bipolar disorder, schizophrenia and anti-viral compoundsdepression and to enhance
their uptakedevelop diagnostic tests for these diseases. Initial research by the founders of Psynomics has resulted in patent applications being filed for discoveries in the bipolar disorder area. Psynomics’ long-term
6
goal is to provide the tools to the pharmaceutical industry to develop novel drug and resulting effectiveness.
VAXCEL'S Optivax System representsgene therapy products for neuropsychiatric diseases, but Psynomics has not yet commenced any work in this area. We do not currently intend to allocate additional capital to Global Genomics for it to make further investments in its two existing portfolio companies or in new companies.
At the time of the Global Genomics merger, there were no material relationships between Global Genomics or any of its shareholders or affiliates and us, except that on July 16, 2002, Global Genomics’ three designees to our Board of Directors, Steven A. Kriegsman, Louis J. Ignarro, Ph.D. and Joseph Rubinfeld, Ph.D., were elected directors and Steven A. Kriegsman became our Chief Executive Officer. Mr. Kriegsman was Global Genomics’ Chairman and Dr. Ignarro was a novel approachdirector of Global Genomics at that time. On the date of the merger, the controlling shareholder of Global Genomics was Steven A. Kriegsman, who beneficially owned, on a fully diluted basis, approximately 41.3% of Global Genomics’ equity interest.
The shares of our common stock that we issued in the merger with Global Genomics or that we will issue upon exercise of warrants issued by Global Genomics that we assumed in the merger were not registered under the Securities Act. As a result, resale of these shares is restricted under the Securities Act. However, pursuant to improvinga registration rights agreement that we signed with the effectivenessformer shareholders of vaccines includingGlobal Genomics, we recently filed a registration statement with the SEC to register these shares.
Subsequent to our merger with Global Genomics, we modified our corporate business strategy by discontinuing any additional internal research and development efforts for any of our existing products or technologies. We have,instead, more recently focused our efforts on obtaining strategic alliances, license partners or other collaborative arrangements with larger pharmaceutical companies for FLOCOR and TranzFect. Our spending for each of these technologies now will primarily relate to maintaining patents and other agreements as required under our existing license agreements and to support our additional licensing efforts. We may also pursue product acquisition opportunities. These product acquisition activities could include our acquisition through a merger of one or more privately held companies possessing existing or potential products or technologies that we consider to enable single-dose
formulations for vaccines that currently require multiple injections. Phase I
human clinical trials were initiated in January 1996 to study the Optivax System
in combination with a cancer vaccine. Vaxcel is focusing on building corporate
partnerships with vaccine producers. The company recentlybe attractive, although we have not entered into option
agreementsany commitments to merge with Connaught Laboratoriesor acquire any other company.
Research and Medeva PLCDevelopment Expenditures
Expenditures for research and development activities related to combinecontinuing operations were $767,000, $1,844,000 and $1,962,000 during the Optivax
System with high priority vaccine development projects at these firms. years ended December 31, 2002, 2001 and 2000, respectively.
Manufacturing
The Optivax System is being made available to other vaccine companies on an antigen
by antigen basis.
VETLIFE is engaged inmanufacture of CRL-5861 requires the development, licensingfollowing:
• | a supply of the raw drug substance | |
• | a supply of the purified drug which is refined from the raw drug substance | |
• | formulation and sterile filling of the purified drug substance into the finished drug product |
A number of suppliers and marketing of technologies
to improvemanufacturers can provide the value of food animal productsraw drug substance and the finished drug product. Prior to the cattle, poultry, swine and
dairy industries. In January 1996, Vetlifechange in our business strategy to now seek a strategic partner or licensee for CRL-5861 (who we anticipate would be responsible for the manufacture of CRL-5861), we entered into an agreement with Organichem Corp. to market
and distribute a lineprovide us with commercial supplies of FDA-approved cattle growth products in North America.
The Vetlife Cattle Marketing Group projects sales, profits and positive cash
flow beginning in 1997. Vetlife products under development are targeted at
improving product benefits or reducing cost without compromising safety or
quality. Projects include a non-antibiotic growth promoter for poultry and
swine, adjuvants to enhance animal vaccines and antibiotic potentiators to
overcome antibiotic resistance or reduce required doses.
Regulations imposedthe purified drug substance. However, this agreement will expire by the United States government and other countries require
a demonstrationend of the safety and efficacy2003, which will be well before any potential strategic partner or licensee that we secure will need commercial supplies of new therapeutic agents through
studies in animals and controlled clinical testing in human beings prior to
marketing. See "Government Regulation."this substance. There can be no assurance that any particular development program ofstrategic partner or licensee that we secure will either have the Company will leadspecific equipment expertise to purify the development of a
marketable productCRL-5861 drug substance or that any such product will be profitable.
Consolidated expenditures for researchable to enter into an agreement with Organichem or another supplier on acceptable terms. An inability to obtain purified drug substance in sufficient amounts and development activities were $7.1
million, $6.8 million and $4.7 million duringat acceptable prices could have a material adverse effect on our ability to secure a strategic partner or licensee or on the years ended December 31, 1995,
1994 and 1993, respectively.
Other Products and Services
PROCEUTICS was formed in 1995 and commenced formal operations in January 1996.
Proceutics is targeting a growing need within biopharmaceutical companies by
providing high-value, high-quality pharmaceutical development servicesability of that partner or licensee to supplement pre-IND activities. Proceutics services include analytical methods
development and testing, formulations, clinical supply manufacturing,
pharmacokinetic studies, protocol preparation and other services tocommercialize CRL-5861.
If we or our strategic partner or licensee modify the
preclinical development of new drug candidates.
CytRx also manufactures, markets and distributes TiterMax, an adjuvant used to
produce cell mediated and humoral responses in research animals. The keys to
the potency of TiterMax lie in its immunostimulatory activity and the formation
of stable water-in-oil emulsions. TiterMax aids in the antigen's effective
presentation to the immune system without the toxic effects of other research
adjuvants.
Manufacturing
The Company has converted a portion of its Norcross, Georgia headquarters into a
pilot manufacturing facility in order to produce the bulk clinical supply
ingredients for its product development programs. See "Product Development."
Production of the final dosage form of materials for use in clinical trials will
be performed by third party manufacturers. The Company's pilot facility is
intended for manufacture of investigational supplies of certain of the Company's
products under development and is generally not large enough to produce
quantities of product adequate for commercial purposes. The process used in the
pilot facility also may require modification to achieve commercial scale. If
the Company modifies its manufacturing process or changeschange the source or location of product supply for any of our products, regulatory authorities will require the Companyus or our strategic partner or licensee to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the Company's clinical trials.
Further,trials for that product. Moreover, any manufacturing facility and the quality control and manufacturing procedures used by the Companyus or our strategic
7
partner or licensee for the commercial supply of a product must comply with applicable OSHA, EPA,Occupational Safety and Health Administration, Environmental Protection Agency, and FDA standards, including Good Manufacturing Practice regulations.
Patents and Proprietary Technology
CytRx considers the protection of its discoveries and inventions important to
its business. The Company seeks
We actively seek patent protection for its technology when
deemedour technologies, processes, uses, and ongoing improvements and consider our patents and other intellectual property to be critical to our business.
We continually evaluate the patentability of new inventions and improvements developed by us or our collaborators. Whenever appropriate, we will endeavor to file United States and has filedinternational patent applications to protect these new inventions and improvements. However, there can be no assurance that any of the current pending patent applications or any new patent applications that may be filed will ever be issued in the United States or any other country.
We also attempt to protect our proprietary products, processes and other information by relying on trade secrets and non-disclosure agreements with our employees, consultants and certain other persons who have access to such products, processes and information. Under the agreements, all inventions conceived by employees are our exclusive property. Nevertheless, there can be no assurance that these agreements will afford significant protection against misappropriation or unauthorized disclosure of our trade secrets and confidential information.
We believe we have significant intellectual property in the United States and selected foreign countriesthe other commercially significant territories covering several general productthe use of poloxamers in a number of therapeutic areas. We have patents claiming broad areas of the use of these compounds currently pending or issued in Canada, Japan, South Korea, the European Patent Office and the United States. On November 23, 1999, the U.S. Patent Office issued patent No. 5,990,241 “Polyoxypropylene/Polyoxyethylene Copolymers With Improved Biological Activity” to us. We believe the issue of this patent provides important exclusivity since it contains composition of matter claims for purified poloxamers used in our products and technologies, including technology licensed from Emory University (see below) and others.
There can be no assurancepurified poloxamer 188, the active ingredient in CRL-5861. This patent will expire in 2017. We also own a comprehensive group of patents that patent applications which have been or will inbroadly claim the future be filed by the Company will result in the issuanceuse of any patents,
or, if issued,poloxamers as vaccine adjuvants that such patents will provide sufficient protection or be of
commercial benefit to CytRxadditional coverage for DNA vaccines. Additional United States patents that cover the vaccine area are No. 6,086,899, “Novel Vaccine Adjuvant and its licensees.
Pursuant to an agreement with Emory University ("Emory") whereby certain basic
research was performed by the Company utilizing the research facilitiesVaccine”, which expires in 2015; No. 5,696,298, “Polyoxypropylene/Polyoxyethylene Copolymers With Improved Biological Activity”, which expires in 2017; No. 5,567,859, “Polyoxypropylene/Polyoxyethylene Copolymers With Improved Biological Activity”, which expires in 2014; and support staff at Emory, Emory will be assigned the rights to all patents
acquired as a result of discovery activities conducted at Emory on behalf of
CytRx. Emory has granted CytRx exclusive worldwide licenses to these patents.
Emory is entitled to receive royalty payments on sales made by CytRx of products
covered by the licensed patents,No. 5,554,372, “Methods and on payments received by CytRx as a result
of sales of such products made by a third party. In the event that patents are
not issued with respect to a particular class of products, the Company's license
with respect to that class of products will terminate.
Vaccines Comprising Surface-Active Copolymers”, which expires in 2016.
Competition
Many companies, including large pharmaceutical, chemical and biotechnology firms with financial resources, research and development staffs, and facilities that aremay, in certain cases, be substantially greater than those of the Company,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, underwe will be competing with numerous other companies, many of which will have substantially greater financial resources, large acquisition and research and development staffs that may give those companies a competitive advantage over us in identifying and evaluating these drug acquisition opportunities. Any products that we acquire will be competing with products marketed by the Company.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/orand such products may be more effective than those currently under development by the
Company or its licensees and corporate partners. The Company competes in this
research and development environment by attempting to develop its products and
technologies in an innovative and timely fashion that would provide the Company
with an advantagemay be developed in the licensing and/future by our strategic partners or licensees. Competitive products may include in addition to those products currently under development that we are not aware of or products that may be developed in the future.
Although we do not expect FLOCOR to have direct competition from other products currently available or that we are aware of that are being developed related to FLOCOR’s ability to reduce blood viscosity in the cardiovascular area, there are a number of anticoagulant products that FLOCOR would have to compete against, such as tissue plasminogen activator (t-PA) and streptokinase (blood clot dissolving enzymes) as well as blood thinners such as heparin and coumatin, even though FLOCOR acts by a different mechanism to prevent damage due to blood coagulation. In the sickle cell disease area, we would compete against companies that are developing or marketing other products to treat sickle cell disease, such as Droxia (hydroxyurea) marketed by Bristol-Myers Squibb Co. and Decitabine, which is being developed by SuperGen, Inc.
8
Our TranzFect technology will compete against a number of itscompanies that have developed adjuvant products, such as the adjuvant QS-21 marketed by Aquila Biopharmaceuticals, Inc. and technologies.
adjuvants marketed by Corixa. Blizzard Genomics’ products will compete with a number of currently marketed products, including those offered by Axon Instruments, Affymetrix, Applied Precision, Perkin Elmer and Agilent Technologies.
Government Regulation
The marketing of pharmaceutical products requires the approval of the FDA and comparable regulatory authorities in foreign countries. The FDA has established guidelines and safety standards which apply to the pre-clinical evaluation, clinical testing, manufacture and marketing of pharmaceutical products. The therapeuticdrug product (drug) generally takes several years and involves the expenditure of substantial resources. The steps required before such a product can be produced and marketed for human use in the United States include preclinical studies in animal models, the filing of an Investigational New Drug ("IND"(“IND”) application, human clinical trials and the submission and approval of a New Drug Application ("NDA"(“NDA”). The NDA involves considerable data collection, verification and analysis, as well as the preparation of summaries of the manufacturing and testing processes, preclinical studies, and clinical trials. The FDA must approve the NDA before the drug may be marketed. There can be no assurance that the Companywe or our strategic alliance partners or licensees will be able to obtain the required FDA approvals for any of itsour products.
The manufacturing facilities and processprocesses for the Company'sour products, whetherwhich we anticipate will be manufactured directly by the Companyour strategic partners or by alicensees or other third party,parties, will be subject to rigorous regulation, including the need to comply with Federal Good Manufacturing Practice regulations. The Company isOur 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.
Environmental Protection
The Company's pharmaceutical development center is exempt from the CFR (40-Part
370) hazardous chemical reporting. The facility is classified as a small
quantity generator of hazardous waste, which includes radio-isotopes, biological
and chemical hazards. Such waste is removed by a qualified waste hauler. The
Company has established a Corporate Safety Committee to oversee its Health and
Safety Policy which defines procedures for identification of risks posed to
employees from hazardous material and training of employees in the proper
handling and disposal of such materials.
During 1993 and 1994 the Company incurred approximately $2.6 million to expand
and renovate its pharmaceutical development facility. These expenditures
included amounts related to the installation of a single pass air handling
system with HEPA filters for the exhaust air from Biosafety Level III and
radiological hoods. Also included were the installation of backflow prevention
devices and acid dilution basins to neutralize waste water leaving the facility.
During 1995 compliance with federal, state and local regulations pertaining to
environmental standards did not have a material effect upon the capital
expenditures or earnings of the Company.
Number of
Employees
As of December 31, 1995, the Company2002, we had 59three full-time employees who are each employed in our management and 1 part-time employees.
administrative operations.
Item 2. Properties
The Company's executive offices and operational facilities, consisting of an
aggregate of approximately 30,700 square feet, are located on property owned by
the Company
We currently lease administrative office space at 150 and 154 Technology Parkway, Norcross, Georgia.11726 San Vicente Blvd, Los Angeles, California. These
facilities include approximately 20,000 square feet of laboratories, pilot
manufacturing, and associated space.
The above-mentioned facilities are in satisfactory condition and suitable for the particularour purposes for which they were acquired or constructed and are
adequate for present operations.
Item 3. Legal Proceedings
None.
We are not a party to any material litigation. We are occasionally involved in other claims arising out of our operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse affect on us.
Item 4. Submission of Matters to a Vote of Security Holders
On December 22, 1995, the Registrant mailed a Proxy Statement to its
stockholders of record as of December 7, 1995 pertaining to a Special Meeting of
Stockholders held on February 5, 1996. The only item of business acted upon at
the Special Meeting was a proposal to amend the Registrant's Certificate of
Incorporation to effect a recapitalization through a one-for-four reverse stock
split. At the meeting approximately 26.6 million votes were cast (either by
person or by proxy) in favor of the proposal, 1.6 million against the proposal,
with 128,000 abstentions. There were 3.1 million nonvoted shares. Accordingly,
the reverse stock split was effected February 6, 1996.
None.
9
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity and Related Stockholder Matters
The Company's
Our Common Stock is traded on the The Nasdaq StockSmallCap Market under the symbol CYTR.“CYTR”. The following table sets forth the high and low closingsale prices for theour Common Stock for the periods indicated as reported by Nasdaq.NASDAQ Such prices represent prices between dealers without adjustment for retail mark-ups, mark-
downs,mark-downs, or commissions and may not necessarily represent actual transactions.
Such prices have been adjusted to reflect the one-for-four reverse stock split
effected February 6, 1996.
High Low
COMMON STOCK:
1996
January 1 to March 19 6 3 11/16
1995
Fourth quarter 12 5/8 3 1/2
Third quarter 13 1/2 6 1/2
Second quarter 10 3/4 5 3/4
First quarter 10 3/8 5 1/4
1994
Fourth quarter 10 3/4 5
Third quarter 18 1/2 8 1/2
Second quarter 26 1/2 16
First quarter 33 22 1/2
|
| High |
| Low |
| ||||
|
| ||||||||
COMMON STOCK: |
|
|
|
|
|
| |||
2003 |
|
|
|
|
|
|
| ||
January 1 to March 12 |
|
| .56 |
|
| .21 |
| ||
2002 |
|
|
|
|
|
|
| ||
Fourth Quarter |
|
| .41 |
|
| .21 |
| ||
Third Quarter |
|
| .75 |
|
| .34 |
| ||
Second Quarter |
|
| 1.05 |
|
| .52 |
| ||
First Quarter |
|
| 1.00 |
|
| .57 |
| ||
2001 |
|
|
|
|
|
|
| ||
Fourth Quarter |
|
| .94 |
|
| .45 |
| ||
Third Quarter |
|
| 1.12 |
|
| .61 |
| ||
Second Quarter |
|
| 1.35 |
|
| .79 |
| ||
First Quarter |
|
| 1.22 |
|
| .75 |
| ||
On March 19, 1996,25, 2003, the closing price of theour Common Stock as reported on The NasdaqNASDAQ Stock Market, was $4.00. As of December 31, 1995$0.48 and there were approximately 1,5001,120 holders of record of the Company'sour Company’s Common Stock. The number of record holders does not reflect the number of beneficial owners of the
Company'sour Common Stock for whom shares are held by Cede & Co., certain brokerage firms and other institutions. The Company hasWe have not paid any dividends since itsour inception and doesdo not contemplate payment of dividends in the foreseeable future.
Item 6. Selected Financial Data
|
| 2002 |
| 2001 |
| 2000 |
| 1999 |
| 1998 |
| ||||||
|
|
|
|
| |||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Service revenues |
| $ | 22,453 |
| $ | 101,463 |
| $ | 451,031 |
| $ | 322,536 |
| $ | 350,789 |
| |
License fees |
|
| 1,051,000 |
|
| 3,751,000 |
|
| 2,000,000 |
|
| — |
|
| — |
| |
Interest and other income |
|
| 268,456 |
|
| 546,947 |
|
| 876,827 |
|
| 1,068,924 |
|
| 1,762,747 |
| |
|
|
|
|
| |||||||||||||
Total revenues |
| 1,341,909 |
|
| 4,399,410 |
|
| 3,327,858 |
|
| 1,391,460 |
|
| 2,113,536 |
| ||
|
|
|
|
| |||||||||||||
Loss from continuing operations |
| (6,175,636 | ) |
| (931,341 | ) |
| (1,147,457 | ) |
| (15,269,918 | ) |
| (7,737,296 | ) | ||
Income from discontinued operations |
| — |
|
| — |
|
| 799,355 |
|
| 240,627 |
|
| 2,943,937 |
| ||
Extraordinary item |
| — |
|
| — |
|
| — |
|
| — |
|
| (325,120 | ) | ||
|
|
|
|
| |||||||||||||
Net loss | $ | (6,175,636 | ) | $ | (931,341 | ) | $ | (348,102 | ) | $ | (15,029,291 | ) | $ | (5,118,479 | ) | ||
|
|
|
|
| |||||||||||||
Basic and diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Loss from continuing operations |
| $ | (0.39 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (1.99 | ) | $ | (1.01 | ) | |
Income from discontinued operations |
|
| — |
|
| — |
|
| 0.08 |
|
| 0.03 |
|
| 0.38 |
| |
Extraordinary item |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (0.04 | ) | |
|
|
|
|
| |||||||||||||
Net loss |
| $ | (0.39 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (1.96 | ) | $ | (0.67 | ) | |
|
|
|
|
| |||||||||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total assets | $ | 9,283,584 |
| $ | 7,610,596 |
| $ | 6,859,238 |
| $ | 6,128,063 |
| $ | 16,641,568 |
| ||
Long-term debt |
| — |
|
| — |
|
| — |
|
| 650,000 |
|
| — |
| ||
Other long-term liabilities |
| — |
|
| — |
|
| — |
|
| 1,693,638 |
|
| — |
| ||
Total stockholders’ equity |
| 7,959,347 |
|
| 6,582,751 |
|
| 5,618,814 |
|
| 1,032,688 |
|
| 14,688,548 |
|
10
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with our Selected Financial Data and our audited consolidated financial statements included in this Annual Report.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, bad debts, impairment of long-lived assets, including finite lived intangible assets, accrued liabilities and certain expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are summarized in Note 2 to our financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Service revenues are recognized at the time services are rendered because we have performed by that time all obligations necessary to recognize those revenues. We do not require collateral or other securities for sales made on credit. Revenues from collaborative research arrangements and grants are generally recorded as the related costs are incurred. The costs incurred under such arrangements are recorded as research and development expense and approximated the revenues reported in the accompanying statements of operations. Non-refundable license fee revenue is recognized upon receipt when no continuing involvement on our part is required and payment of the license fee represents the culmination of the earnings process. Nonrefundable license fees received subject to future performance by us or that are credited against future payments due to us are deferred until services are performed, future payments are received or termination of the agreement, whichever is earliest.
Stock-based Compensation
We grant stock options and warrants for a fixed number of shares to key employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. We account for stock option grants and warrants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, and, accordingly, recognize no compensation expense for the stock option grants and warrants for which the terms are fixed. For stock option grants and warrants which vest based on certain corporate performance criteria, compensation expense is recognized to the extent that the quoted market price per share exceeds the exercise price on the date such criteria are achieved or are probable. At each reporting period end, we must estimate the probability of the criteria specified in the stock based awards being met. Different assumptions in assessing this probability could result in additional compensation expense being recognized. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation, (“SFAS 123”) which provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. SFAS 123 was amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock Based Compensation - Transition and Disclosure (“SFAS 148”). However, we have continued to account for stock-based compensation in accordance with APB 25 (See Note 12 to financial statements). We have also granted stock options and warrants to certain consultants and other third parties. Stock options and warrants granted to consultants and other third parties are accounted for in accordance with Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued for Sales of Goods and Services to Other Than Employees, and are valued at the fair market value of the options and warrants granted (valued as of the date of grant) or the services received, whichever is more reliably measurable. Expense is recognized in the period in which a performance commitment exists or the period in which the services are received, whichever is earlier.
11
Impairment of Long-Lived Assets
We review long-lived assets, including finite lived intangible assets, for impairment on an annual basis or on an interim basis if an event occurs that might reduce the fair value of such assets below their carrying value. 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.
Specifically, in the current year, we recorded an impairment charge of $921,000 related to certain equipment and leasehold improvements based on our evaluation of the recoverability of the carrying amount of these assets in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). This impairment charge represented the total net book value of these assets. See Note 4 to our financial statements.
Additionally, we have recorded an investment in Blizzard Genomics – acquired developed technology of $6,644,000 as of December 31, 2002, which represents the allocated fair value of our 40% investment in Blizzard Genomics of $7,309,000 upon purchase, less accumulated amortization of $335,000 and our 40% of the net losses of Blizzard Genomics since the date of acquisition of $330,000. Based upon our analysis, we have determined there has been no impairment to this asset as of December 31, 2002 in accordance with SFAS 144.
Although we currently believe that the estimates used in the evaluation of long-lived assets, including finite lived intangible assets, are reasonable, differences between actual and expected revenue, operating results, and cash flows could cause these assets to be deemed impaired. If this were to occur, we would be required to charge to operations the write-down in value of such assets, which could have a material adverse effect on our results of operations and financial position.
Estimated facility abandonment accrual
During 2002, we recorded a loss of $478,000 associated with the closure of our Atlanta headquarters and relocation to Los Angeles subsequent to our merger with Global Genomics. This loss represents the total remaining lease obligations and estimated operating costs through the remainder of the lease term, less estimated sublease income. To the extent that we are able to negotiate a termination of the Atlanta headquarters lease, our operating costs are different or our estimates related to sublease income are different, the total loss ultimately recognized may be different than the amount recorded as of December 31, 2002 and such difference may be material.
Quarterly Financial Data
The following table sets forth unaudited statement of operations data for our most recent two completed fiscal years. This quarterly information has been derived from our unaudited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods covered. The quarterly financial data should be read in conjunction with our financial statements and related notes. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
|
| Quarter Ended |
| |||||||||||
|
|
| ||||||||||||
|
| March 31 |
| June 30 |
| September 30 |
| December 31 |
| |||||
|
|
|
|
|
| |||||||||
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales | $ | 22 |
| $ | — |
| $ | — |
| $ | — |
| ||
Gross profit |
| 11 |
|
| — |
|
| — |
|
| — |
| ||
Net loss |
| (179 | ) |
| (931 | ) |
| (2,547 | ) |
| (2,519 | ) | ||
Basic and diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Net loss |
|
| (0.02 | ) |
| (0.08 | ) |
| (0.13 | ) |
| (0.12 | ) | |
2001 |
|
|
|
|
|
|
|
|
|
|
|
| ||
Net sales | $ | 26 |
| $ | 10 |
| $ | 28 |
| $ | 37 |
| ||
Gross profit |
| 13 |
|
| 3 |
|
| 7 |
|
| 7 |
| ||
Net income (loss) |
| (1,157 | ) |
| (1,220 | ) |
| (1,002 | ) |
| 2,448 |
| ||
Basic and diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income (loss) |
|
| (0.11 | ) |
| (0.12 | ) |
| (0.10 | ) |
| 0.23 |
|
12
Liquidity and Capital Resources
At December 31, 2002, we had cash, cash equivalents and short-term investments of $1,789,000 and net assets of $7,959,000, compared to $5,273,000 and $6,583,000, respectively, at December 31, 2001. Working capital totaled $1,638,000 at December 31, 2002, compared to $4,693,000 at December 31, 2001.
Change in Business Strategy
Subsequent to our merger with Global Genomics, we have modified our corporate business strategy by discontinuing any additional internal research and development efforts for any of our existing products or technologies. We have, instead, more recently focused our efforts on obtaining strategic alliances, license partners or other collaborative arrangements with larger pharmaceutical companies for FLOCOR and additional strategic partners or licensees for TranzFect. Our spending for each of these technologies now will primarily relate to maintaining patents and other agreements as required under our existing license agreements and to support our additional licensing efforts. We may also pursue product acquisition opportunities. Given this change in business strategy, we believe that we will have adequate working capital to allow us to operate at least through the end of 2003, although we may require additional working capital before this in order to fund any product acquisitions that we consummate. Any additional capital requirements may be provided by potential milestone payments pursuant to the Merck and Vical licenses or by potential payments from future strategic alliance partners or licensees of FLOCOR or our other existing technologies. We may also pursue other sources of capital, although we do not currently have commitments from any third parties to provide us with capital. The results of our technology licensing efforts and the actual proceeds of any fund-raising activities will determine our ongoing ability to operate as a going concern. These efforts are subject to market conditions and our ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. There is no assurance that such funding will be available to finance our operations on acceptable terms, if at all.
License Agreements
We currently have three license agreements for our technologies, as described below. From the dates that we entered into these agreements through December 31, 2002, we have received $7,077,000 in upfront fees, milestone payments and annual maintenance fees pursuant to these agreements, and have the potential to receive in excess of $17,000,000 in additional milestone and maintenance fees, plus additional royalties on eventual sales of approved products of from 1% to 5% of net sales by the licensees.
In December 2001, we entered into a license agreement with Vical granting Vical exclusive, worldwide rights to use or sublicense our TranzFect poloxamer technology to enhance viral or non-viral delivery of polynucleotides (such as DNA and RNA) in all preventive and therapeutic human and animal health applications, except for (1) four infectious disease vaccine targets previously licensed by us to Merck and (2) DNA vaccines or therapeutics based on prostate-specific membrane antigen (PSMA). In addition, the Vical license permits Vical to use TranzFect poloxamer technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. Under the Vical license, we received an up-front payment of $3,750,000 and have the potential to receive additional aggregate milestone payments of up to $3,600,000 and royalty payments in the future based on criteria described in the agreement. (Restrictions in the Vical license prevent us from disclosing certain of its terms, including some of the specific terms of the potential milestone and royalty payments.) Vical will also pay us an annual maintenance payment of between $50,000 and $100,000 until the first product approval. Maintenance payments are creditable against future royalties. Vical may terminate the license at any time upon 90 days written notice. All amounts paid to us through the date of termination are non-refundable upon termination and require no additional efforts on our part.
In November 2000, we entered into an exclusive, worldwide license agreement with Merck whereby we granted to Merck the right to use our TranzFect technology in DNA-based vaccines targeted to four infectious diseases, one of which is HIV. For the license to the TranzFect technology to treat the first disease target, Merck paid us a signature payment of $2,000,000. In addition, in February 2002, Merck paid us a $1,000,000 milestone fee related to the commencement by Merck of the first FDA Phase I Study for the first product incorporating TranzFect designed for the prevention and treatment of HIV. Merck may pay us additional milestone and product approval payments in the future of up to $3,000,000 as they develop the product. Additionally, if certain conditions are met regarding patent protection and Merck’s competitive position, Merck may pay a royalty to us of 1% on net sales of products incorporating TranzFect for the first disease target. If Merck chooses to pursue development of the TranzFect technology to treat the three additional disease targets, Merck will make a series of milestone and product approval payments to us totaling up to $2,850,000 for each target. If and when sales
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of products incorporating TranzFect for the three additional disease targets commence, we will receive royalties of between 2% and 4% of the net sales from such products. Additionally, if certain conditions are met regarding patent protection and Merck’s competitive position, Merck may pay us an additional royalty of 1% on net sales of products incorporating TranzFect for these additional disease targets. Merck will also pay us an annual fee of between $50,000 and $100,000 until the first product approval for one of the three additional disease targets. Merck may terminate the license at any time upon 90 days written notice. All amounts paid to us through the date of termination are non-refundable upon termination and require no additional efforts on our part.
In February 2001, we entered into an exclusive, worldwide license agreement with Ivy Animal Health, Inc. under which we licensed our compound, CRL-8761, to Ivy. We received a nominal up-front payment from Ivy and will receive a $100,000 milestone payment upon regulatory approval in the United States and future royalties based on sales.
Government Support of FLOCOR
Based on the encouraging results we observed in children in the previous Phase III clinical study of FLOCOR, we collaborated with a consortium of pediatric hematology centers led by Johns Hopkins University School of Medicine to design a follow-up Phase III trial to further investigate FLOCOR in children with sickle cell crisis. In October 2001, Johns Hopkins University School of Medicine, in cooperation with the Maryland Medical Research Institute, submitted grant applications to the NIH for financial support of the trial. On June 3, 2002, we were informed that the grant to fund a portion of the anticipated costs of the Phase III trial to further investigate FLOCOR was not approved.
Based on our conversations with the FDA, we believe it is likely that either two small additional pivotal trials or one large trial will be required for FLOCOR’s approval, along with one to two additional safety studies. We expect total costs for these additional studies to be in the range of $10,000,000 – $12,000,000, although the actual costs could vary substantially, depending upon the nature and number of trials that the FDA ultimately would require. Because of the substantial expenditures that will be required to conduct the required additional clinical testing of FLOCOR, we are not at this time continuing our internal efforts to develop FLOCOR but are, consistent with our new business strategy, seeking a strategic alliance or license arrangement with a larger company to complete the development of FLOCOR and market this product. There can be no assurance that we will be able to identify parties that are willing and able to enter into such collaborative arrangements on terms that are satisfactory to us. Any potential strategic partner or licensee for the sickle cell indication may consider a possible resubmission of the grant application for consideration by the NIH during its next grant review cycle. There is, however, no guarantee that such a submission will occur. Further, even if the grant application is resubmitted, there can be no assurance that the NIH will award any grant, or that, if awarded, our licensees would have adequate funding to complete the required testing and development.
Net Operating Loss Carryforward
At December 31, 2002, we had consolidated net operating loss carryforwards for income tax purposes of approximately $58,100,000, which will expire in 2003 through 2022 if not utilized. We also have research and development tax credits and orphan drug tax credits available to reduce income taxes, if any, of approximately $6,600,000, which will expire in 2003 through 2020 if not utilized. Based on an assessment of all available evidence including, but not limited to, our limited operating history and lack of profitability, uncertainties of the commercial viability of our technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, we have concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a 100% deferred tax valuation allowance has been recorded against these assets.
The above statements regarding our plans and expectations for future financing are forward-looking statements that are subject to a number of risks and uncertainties. Our ability to obtain future financings through joint ventures, product licensing arrangements, equity financings or otherwise is subject to market conditions and our ability to identify parties that are willing and able to enter into such arrangements on terms that are satisfactory to us. There can be no assurance that we will be able to obtain future financing from these sources. Additionally, depending upon the outcome of our fund raising efforts, the accompanying financial information may not necessarily be indicative of future operating results or future financial condition.
Merger with Global Genomics Capital
On February 11, 2002, we entered into an agreement whereby we agreed to acquire Global Genomics, a privately-held genomics holding company, through a merger of GGC Merger, Inc., our wholly-owned subsidiary, into Global Genomics. Global Genomics is a genomics holding company that currently has a 40% ownership interest in Blizzard Genomics and a
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5% ownership interest in Psynomics. Our primary reasons for the acquisition were to (a) expand our business into the genomics field to diversify our product and technology base, and (b) gain the management and directors of Global Genomics, who may assist us in developing corporate partnerships and acquisition, investment and financing opportunities not previously available to us.
Blizzard Genomics is developing instrumentation, software and consumable supplies for the growing genomics industry. Blizzard Genomics is the exclusive sublicensee of a technology that it believes allows for cheaper, faster and more portable analysis of DNA, through the use of its own readers and DNA chips, as compared to other currently available technology. Subject to having sufficient financial resources, Blizzard Genomics has plans to commercially launch its first product, a chip reader, during 2003. Blizzard Genomics’ I-Scan Imager™ chip reader acquires the image of labeled DNA attached to a DNA chip. It is a portable, flexible, easy-to-use instrument with DNA detection and analysis capabilities that Blizzard Genomics believes are comparable to those of DNA chip readers that are more expensive. Blizzard Genomics’ T-Chip™ thermal hybridization station produces a stable, reproducible temperature gradient across the surface of Blizzard Genomics’ T-Chip™ DNA chip. This innovation enables researchers and clinicians to use straightforward temperature versus position analyses to detect the smallest changes in a DNA strand. Most importantly, Blizzard Genomics’ thermal gradient technology can distinguish previously undetectable genetic variants in disease and pathogenic agents. Pending receipt of additional funding to complete the development of the T-Chip™ thermal hybridization station and T-Chip™ DNA chip, Blizzard Genomics anticipates commercial sales of these products commencing in 2004. Since Blizzard Genomics’ currently planned products are primarily for use in research laboratories, they will not need to be approved by the FDA before they can be marketed.
Psynomics is an early stage psychiatric genomics company. Psynomics is currently operating, as a “virtual company” out of the University of California, San Diego and has had an ongoing research collaboration with its founders at that university. Psynomics’ short-term goal is to identify the genes that cause common neuropsychiatric diseases, such as bipolar disorder, schizophrenia and depression and to develop diagnostic tests for these diseases. Initial research by the founders of Psynomics has resulted in patent applications being filed for discoveries in the bipolar disorder area. Psynomics’ long-term goal is to provide the tools to the pharmaceutical industry to develop novel drug and gene therapy products for neuropsychiatric diseases, but Psynomics has not yet commenced any work in this area. We do not currently intend to allocate additional capital to Global Genomics for it to make further investments in its two existing portfolio companies or in new companies.
The merger was accounted for as a purchase by us of a group of assets of Global Genomics in a transaction other than a business combination and was not considered to be a reverse acquisition for accounting purposes. We considered the provisions of Statement of Financial Accounting Standards No. 141 – Business Combinations (“SFAS 141”) and determined that we were the acquirer for accounting purposes. Because the current activities of Global Genomics are focused on the development of a business rather that the operation of a business and planned principal operations of Global Genomics have not yet commenced, Global Genomics is considered a development-stage company. Therefore, in accordance with the guidance in Emerging Issues Task Force Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, Global Genomics does not constitute a business as defined in SFAS 141. Accordingly, we allocated the purchase price in accordance with the provisions of Statement of Financial Accounting Standards No. 142 – Goodwill and Other Intangible Assets (“SFAS 142”) related to the purchase of a group of assets. SFAS 142 provides that the cost of a group of assets acquired in a transaction other than a business combination shall be allocated to the individual assets acquired based on their relative fair values and shall not give rise to goodwill.
The purchase price was determined in accordance with SFAS 141 and SFAS 142. A summary of the determination of the purchase price is as follows:
Issuance of 8,948,204 shares of CytRx common stock at $0.6475 per share | $ | 5,793,962 |
| |
Fair value of 1,014,677 vested warrants issued to purchase CytRx common stock |
| 598,659 |
| |
Transaction costs |
| 971,869 |
| |
| ||||
Total purchase price | $ | 7,364,490 |
|
Since Global Genomics was a development stage company and no goodwill can arise from the purchase of a development stage company, in accordance with the provisions of SFAS 141 and SFAS 142, all identifiable assets acquired, including identifiable intangible assets, were assigned a portion of the purchase price on the basis of their relative fair values. To this end, an independent appraisal of Global Genomic’s assets was used as an aid in determining the fair value of the identifiable assets,
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including identified intangible assets, in allocating the purchase price among the acquired assets of Blizzard Genomics and Psynomics underlying Global Genomics’ investment in each company. Global Genomics’ primary assets were its investment in Blizzard Genomics and Psynomics and thus, the fair value of each of these entities was determined. The discounted cash flow approach was used to determine the estimated fair value of the acquired intangible assets. Cash flows were projected for a period of 10 years and were discounted to net present value using discount factors of from 46% to 60%. Material cash inflows from product sales were projected to begin in 2003 for Blizzard Genomics.
A summary of the purchase price allocation is as follows:
Current assets | $ | 33,129 |
| |
Investment in Blizzard Genomics – Acquired developed technology |
| 7,309,250 |
| |
In-process research and development (recognized as an expense) |
| 78,394 |
| |
Less: Liabilities assumed |
| (56,283 | ) | |
| ||||
Total purchase price |
| 7,364,490 |
| |
|
The in-process research and development was recorded as a charge for acquired incomplete research and development in the accompanying consolidated statement of operations and relates primarily to Global Genomics’ investment in Psynomics. The acquired developed technology primarily represents values assigned to Global Genomics’ investment in Blizzard Genomics’ I-Scan Imager™ chip reader, thermal hybridization station and T-Chip™ DNA chip. The acquired technology is being amortized over a period of ten years. The ten-year amortization period was determined through consideration of relevant patent terms (legal life), estimated technological life and economic life, and the range of useful lives observed in public filings of other companies involved in similar DNA technologies. As of December 31, 2002, accumulated amortization related to the acquired developed technology was $335,049 and total amortization expense recorded for 2002 was $335,049. Annual amortization expense over each of the next five years is expected to be $730,925.
Impairment Test of Intangible Assets.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we reviewed the net values on our balance sheet as of December 31, 2002 assigned to Investment in Blizzard - Acquired Developed Technology resulting from our acquisition of Global Genomics. SFAS 144 requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. During 2002, Blizzard Genomics was unsuccessful in its attempts to raise the funding necessary for it to pursue its commercialization strategy for its products. Although Blizzard Genomics is continuing these efforts, the difficulty it has encountered has prompted us to evaluate the carrying values of its assets related to Blizzard Genomics.
As of December 31, 2002, the following assets related to Blizzard Genomics are reflected on our balance sheet:
Investment in Blizzard - Acquired Developed Technology | $ | 7,309,250 |
| |
Less: Accumulated Amortization |
| (335,049 | ) | |
Less: Equity Method Losses to Date |
| (329,709 | ) | |
| ||||
$ | 6,644,492 |
|
Blizzard Genomics’ recurring losses and net capital deficiency raise substantial doubt about its ability to continue as a going concern unless it raises significant amounts of capital in the near future. Blizzard Genomics management currently has plans to raise approximately $2 million during 2003 through strategic alliances, distributor agreements and/or the outright sale or sublicense of its sublicensed rights to its current developed technology and has hired a local investment banking group to assist in its fund raising efforts. Although Blizzard Genomics has thus far been unable to raise the financing necessary to continue to execute its business plan, and continued uncertainties exist, it is our opinion that these difficulties are indicative primarily of the overall financial market conditions and not of commercial infeasibility or other problems associated specifically with Blizzard Genomics’ technology and products. Our analysis consisted of our internal review of current financial projections internally prepared by Blizzard Genomics, application of a discounted cash flow valuation model of Blizzard Genomics’ projected cash flows, and consideration of other qualitative factors. Our management determined that the estimated fair values of our investment in Blizzard Genomics exceeded the carrying values reflected on our balance sheet at December 31, 2002 related to Blizzard Genomics, that such values were fairly stated and that no impairment charge was necessary.
Blizzard Genomics may experience delays in completing the development or commercially launching its products. Additionally, these products are likely to face intense market competition from existing products or technologies and products or technologies that are developed in the future. Blizzard Genomics currently has no working capital and is currently seeking to raise up to $2,000,000 in capital to fund the commercial launch of the I-Scan Imager™ chip reader, completion of development of its T-Chip technology and for its working capital needs. Should Blizzard raise at least $750,000 in capital, it believes that it would have sufficient funding to commence commercial marketing of the I-Scan Imager™ chip reader, but would require additional capital to complete development of its T-Chip technology on a timely
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basis and might need additional capital to support its operations. Any significant delay in the commercialization of Blizzard Genomics’ products or the cessation of its operations would adversely affect the carrying value of our assets related to Blizzard Genomics and would have a materially adverse effect on our stockholders’ equity.
Results of Operations
We recorded a net loss of $6,176,000 for the year ended December 31, 2002 as compared to net losses of $931,000 for 2001 and $348,000 for 2000. Loss from continuing operations was $6,176,000 , $931,000 and $1,147,000 in 2002, 2001 and 2000, respectively.
From 1996 to 2002 we marketed the services of a small group of human resources professionals under the name of Spectrum Recruitment Research as a way of offsetting our cost of maintaining this function. In February 2002 the operations of Spectrum were terminated and the rights to use the Spectrum tradenames were transferred to Albert, Isaac & Alexander, Inc., a consulting firm comprised of former Spectrum employees. Service revenues related to Spectrum were $22,000 in 2002, $101,000 in 2001 and $451,000 in 2000. Cost of service revenues was $11,000 in 2002, $71,000 in 2001 and $268,000 in 2000, or 50%, 70% and 59% of service revenues, respectively.
License fee income was $1,051,000 in 2002, $3,751,000 in 2001 and $2,000,000 in 2000 and relates primarily to our licenses of TranzFect to Vical and Merck, respectively (see Note 15 to financial statements). License fees for 2002 include a $1,000,000 milestone payment received from Merck during the first quarter related to the commencement by Merck of a Phase I human clinical trial incorporating our TranzFect technology.
Interest income was $96,000 in 2002 as compared to $162,000 in 2001 and $170,000 in 2000. The variance between years is attributable primarily to fluctuating cash balances. Grant income was $46,000 in 2002 versus $157,000 in 2001 and $349,000 in 2000. Grant income primarily relates to several small SBIR (Small Business Innovative Research) grants we received from the NIH in support of our FLOCOR studies. Since our new business strategy (see Liquidity and Capital Resources) does not contemplate further spending by us on research activities, we do not expect to record additional grant revenue in the foreseeable future.
Other income was $127,000, $228,000 and $358,000 in 2002, 2001 and 2000, respectively. Other income for 2000 includes $225,000 in fees paid to us by Merck pursuant to an evaluation agreement for our TranzFect technology and pursuant to a fee for service agreement whereby we provided certain chemistry services to Merck. The remainder primarily relates to sublease revenues for our leased facility in Atlanta.
Research and development expenditures during 2002 were $767,000 versus $1,844,000 in 2001 and $1,962,000 in 2000. Research and development expenditures for all periods primarily relate to our development activities for FLOCOR. The expense for 2002 includes $78,000 allocated from our purchase price of Global Genomics as “in-process research and development.” The reduction in research and development expense during 2002 primarily results from the modification of our corporate business strategy subsequent to our merger with Global Genomics, such that we do not presently intend to pursue additional internal research and development efforts for any of our existing products or technologies, rather than through partnering or out-licensing to outside parties this research and development work.
Selling, general and administrative expenses during 2002 were $2,060,000 as compared to $2,830,000 in 2001 and $1,927,000 in 2000. We recorded non-cash charges of $230,000, $1,441,000 and $365,000 during 2002, 2001 and 2000, respectively, related to the issuance of stock warrants to certain consultants and certain vesting events for management stock options. Excluding these charges, selling, general and administrative expenses were $1,830,000, $1,389,000 and $1,562,000 during 2002, 2001 and 2000, respectively. The increase from 2001 to 2002 is due in part to our recording patent costs as an administrative expense subsequent to our merger with Global Genomics, which is consistent with our modified business strategy. Prior to the merger, these costs were treated as research and development expense. Also contributing to the increase for 2002 is a greater percentage allocation of facilities costs to administrative expense versus research and development expense, and higher legal and accounting costs subsequent to the merger, which we expect to be transitory.
Pursuant to his employment agreement, our former President and CEO, Jack Luchese, was entitled to a payment of $435,000 upon the execution of the merger agreement between Global Genomics and us and an additional $435,000 upon the closing of the merger. In order to reduce the amount of cash that we had to pay to Mr. Luchese, Mr. Luchese and we agreed that approximately $325,200 of the first $435,000 payment would be satisfied by CytRx granting a stock award to
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Mr. Luchese under our 2000 Long-Term Incentive Plan under which we issued Mr. Luchese 558,060 shares of our common stock. Those shares of stock were issued at a value equal to 85% of the volume weighted average price of our common stock for the 20 trading days ended on February 8, 2002. The cash payment and fair value of the shares issued were recognized as expense (total of $428,000) during the first quarter of 2002.
The terms of our merger with Global Genomics contemplated that their management team would replace ours subsequent to the closing of the merger. On July 16, 2002, we terminated the employment of all of our then current officers, resulting in total obligations for severance, stay bonuses, accrued vacation and other contractual payments of $1,394,000 (including the final $435,000 owed to Mr. Luchese as discussed above). Prior to the merger closing date, we advanced part of these amounts to three of our officers (through salary continuance), such that the total remaining obligation at the closing date was $1,179,000. Four of our officers agreed to accept an aggregate total of $177,000 of this amount in the form of our Common Stock in lieu of cash, resulting in the issuance of 248,799 shares. Thus, the net cash payout in satisfaction of these obligations was $1,002,000, before taxes. The severance payments and fair value of the shares issued (total expense of $1,394,000) was recognized as expense during the third quarter of 2002 and is reported as a separate line item on the accompanying consolidated statement of operations, together with the payment to Mr. Luchese discussed above.
Depreciation and amortization expense was $1,129,000, $586,000 and $318,000 in 2002, 2001 and 2000, respectively. As discussed above under “Merger with Global Genomics, Capital”, we recorded $335,000 of amortization expense related to intangibles during 2002, which is included in the $1,129,000 total depreciation and amortization expense for the year.
During the fourth quarter of 2002, we recognized an asset impairment charge of approximately $921,000 related to our equipment and facility used for FLOCOR production. In May 2002, Organichem, Corp., which is to provide us with commercial supplies of FLOCOR purified drug substance, advised us that it does not intend to renew the agreement when it expires in December 2003. We are continuing to seek a strategic partner for the development of FLOCOR. However, during the fourth quarter, we recorded an impairment loss equal to the net book value of the equipment and related leasehold improvements. In light of the relatively short remaining term of the Organichem contract, the significant costs that would be associated with relocating our equipment and our lack of success to date in finding a strategic partner for the development of FLOCOR This charge is reflected as a separate line item in the accompanying consolidated statement of operations. Due to the recognition of this impairment charge, our property balances have been reduced to a nominal amount as of December 31, 2002, and therefore, our depreciation expense will be nominal for the foreseeable future. We expect amortization expense related to intangible assets to be approximately $731,000 annually.
During the fourth quarter of 2002, we recognized a loss of $478,000 associated with the closure of our Atlanta headquarters and relocation to Los Angeles subsequent to our merger with Global Genomics. This loss represents the difference between the total remaining lease obligations and estimated operating costs through the remainder of the lease term, less estimated sublease income and other offsets.
Equity in Losses of Blizzard Genomics.
We record our portion of the net loss of Blizzard Genomics in accordance with the equity method of accounting. For the period July 19, 2002 (date of acquisition of Global Genomics) to December 31, 2002, we recorded $330,000 as our share in the net loss of Blizzard Genomics. This amount is reported as a separate line item in the accompanying consolidated statement of operations.
Discontinued Operations –
From 1987 to 2000, we manufactured, marketed and distributed Titermax, an adjuvant used to produce immune responses in research animals. Effective June 15, 2000, we entered into a Purchase Agreement with Titermax USA, Inc. (an unaffiliated company) whereby Titermax USA purchased the worldwide rights to market and distribute Titermax, including all accounts receivable, inventory and other assets used in the Titermax business. The gross purchase price was $750,000, consisting of $100,000 in cash and a $650,000 five-year secured promissory note bearing interest of 10% annually. Net income associated with the Titermax activities included in income from discontinued operations was approximately $119,000 for 2000. A gain related to the sale of $680,000 was recorded in 2000 and is also classified as discontinued operations.
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Related Party Transactions
In July 2002, we entered into a services and facilities agreement with Kriegsman Capital Group, whereby Kriegsman Capital agreed to provide us with office space and certain administrative services. Kriegsman Capital is owned by Steven A. Kriegsman, our President and CEO. From July 2002 to December 2002, we paid a total of $59,000 to Kriegsman Capital under this agreement. The charges are determined based upon actual space used and estimated percentages of employee time used. We believe that such charges approximate the fair value of the space and services provided.
Effective January 1, 2001, we entered into an agreement with Cappello Capital Corp. in which Cappello Capital served as our exclusive financial advisor. The initial term of such agreement was for a period of twelve months, but at the closing of the merger between Global Genomics and us, this agreement was extended until December 31, 2002. Under the agreement, Cappello Capital assisted us with analysis of potential transactions and strategic alternatives. The types of transactions that Cappello Capital might assist us with included private placement of equity, debt or convertible securities, strategic alliances, sale of all or a portion of our company, recapitalization or strategic acquisitions. As compensation for its services, we granted Cappello Capital a ten-year warrant to purchase 1,272,492 shares of our Common Stock (subject to downward adjustment under certain conditions) with an exercise price of $1.00 per share, which were fully vested at December 31, 2002. We valued these warrants for operating expense purposes at $1,063,000. Additionally, if we proceed with any of the transactions described in the agreement, we pay Cappello Capital a fee of between 3% and 7.5%, depending upon the nature of the transaction and the dollar amount involved. For the period January 2002 to June 2002 we paid Cappello Capital a monthly retainer of $10,000, or a total of $60,000. The monthly retainer and the fair value of the warrant issued were recognized as selling, general, and administrative expenses in our statement of operations. Expense for the fair value of the warrant was recognized based on the vesting terms of the warrant. The fee paid to Cappello Capital upon the closing of the merger with Global Genomics was 448,330 shares of our common stock, or 4.5% of the shares issuable in the merger. The value of these shares at the date of their issuance was $247,000. The fair value of these shares was considered as a transaction cost of the merger and was included in the purchase price of Global Genomics. Alexander L. Cappello, one of our directors, is Chairman and Chief Executive Officer of Cappello Group, Inc., an affiliate of Cappello Capital.
RISK FACTORS
You should carefully consider the following risks before deciding to purchase shares of our common stock. If any of the following risks actually occur, our business or prospects could be materially adversely affected and the trading price of our common stock could be negatively impacted, and investors in our securities could lose all or part of their investment. You should also refer to the other information in this Annual Report, including our financial statements and the related notes.
We Have Operated at a Loss and Will Likely Continue to Operate at a Loss For the Foreseeable Future
We have incurred significant losses over the past five years, including net losses of approximately $6,176,000, $931,000 and $348,000 for 2002, 2001 and 2000, respectively, and we had an accumulated deficit of $71,957,000 as of December 31, 2002. Our operating losses have been due primarily to our expenditures for research and development on our products and for general and administrative expenses and our lack of significant revenues. We are likely to continue to incur operating losses until such time, if ever, that we generate significant recurring revenues. Unless we are able to acquire products from third parties that are already being marketed and that can be profitably marketed by us, it will take an extended period of time for us to generate recurring revenues. We anticipate that it will take at least several years before the development of any of our licensed or other current potential products is completed, FDA marketing approvals are obtained and commercial sales of any of these products can begin.
We Have No Source of Significant Recurring Revenues, Which May Make Us Dependent on Financing to Sustain Our Operations
Although we generated $1,051,000 in revenues from milestone payments and license fees from our licensees during 2002, we do not have any significant sources of recurring operating revenues. We will not have significant recurring operating revenues until at least one of the following occurs:
one or more of our currently licensed products is commercialized by our licensees that generates royalty income for us
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• | we are able to enter into license or other arrangements with third parties who are then able to complete the development and commercialize one or more of our other products that are currently under development | |
• | we are able to acquire products from third parties that are already being marketed or are approved for marketing |
We are likely to incur negative cash from operations until such time, if ever, as we can generate significant recurring revenues. Should we be unable to generate these recurring revenues by early 2004, it is likely that we will become dependent on obtaining financing from third parties to maintain our operations. We have no commitments from third parties to provide us with any debt or equity financing. Accordingly, financing may be unavailable to us or only available on terms that substantially dilute our existing shareholders. A lack of needed financing could force us to reduce the scope of or terminate our operations or to seek a merger with or be acquired by another company. There can be no assurance that we would be able to identify an appropriate company to merge with or be acquired by or that we could consummate such a transaction on terms that would be attractive to our shareholders or at all.
We Have Changed Our Business Strategy, Which Will Require Us to Find and Rely Upon Third Parties for the Development of Our Products and to Provide Us With Products
We have modified our prior business strategy of internally developing FLOCOR and our other potential products not yet licensed to third parties. We will now seek to enter into strategic alliances, license agreements or other collaborative arrangements with larger pharmaceutical companies that will provide for those companies to be responsible for the development and marketing of our products. There can be no assurance that our products will have sufficient potential commercial value to enable us to secure these arrangements with suitable companies on attractive terms or at all. If we enter into these 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 requirements, the timing of receipt or amount of revenues from these arrangements may be materially and adversely affected. By entering into these arrangements rather than completing the development and then marketing these products on our own, we may suffer a reduction in the ultimate overall profitability for us of these products. If we are unable to enter into these arrangements for a particular product, we may be required to either sell the product to a third party or abandon it unless we are able to raise sufficient capital to fund the substantial expenditures necessary for development and marketing of the product.
We will also seek to acquire products from third parties that already are being marketed or have previously been marketed. We have not yet identified any of these products. It may be difficult for us to acquire these types of products with our limited financial resources, and we may incur substantial shareholder dilution if we acquire these products with our securities. We do not have any prior experience in acquiring or marketing products and may need to find third parties to market these products for us. We may also seek to acquire products through a merger with one or more privately held companies that own such products. Although we anticipate that we would be the surviving company in any such merger, the owners of the private company could be issued a substantial or even controlling amount of stock in our company.
Our Limited Financial Resources May Adversely Impact Our Ability to Execute Certain Strategic Initiatives
On December 31, 2002 we had $1,789,000 in cash, cash equivalents and short-term investments and $1,638,000 in working capital. Our recently modified product development strategy calls for seeking strategic alliances, licensing agreements or other collaborative arrangements with larger pharmaceutical companies to complete the development of FLOCOR and our other potential products, and we will not continue any further FLOCOR development work on our own in the meantime. Although we are not doing any further development work on TranzFect, our two licensees for this technology (Merck and Vical) are continuing to do development work on product applications for this technology that could entitle us to future milestone payments should they continue with this work and it successfully meets the defined milestones, as well as future royalty payments should either of these licensees commercialize products based on our technology. We also will seek to acquire products from third parties that already are being or have previously been marketed or are approved for marketing. Although we believe this strategy will enhance our ability to achieve profitability, our lack of substantial available funds may make it difficult for us to acquire new products or to adopt other strategic initiatives in the future, such as acquiring or developing a marketing organization for our products or resuming internal development work on our products.
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Our Recent Acquisition of Global Genomics May Place Additional Financial and Operational Burdens on Us
In July 2002, we acquired Global Genomics through a merger. Global Genomics is a development stage company that, to date, has not generated any operating revenue, does not expect to generate any revenues in the foreseeable future and has operated at a loss since its organization in May 2000. Global Genomics incurred losses of $302,866 and $1,563,000 for the years ended December 31, 2002 and 2001, respectively. We have moved our headquarters in connection with the merger to Los Angeles, California while we continue to incur a substantial lease expense (approximately $14,000 per month, less offsetting sublease income of currently $3,000 per month) for our prior headquarters in Norcross, Georgia. We may be unable to substantially mitigate the future rental expense for our prior headquarters by subleasing this space.
Although a majority of the members of our board of directors were directors prior to our merger with Global Genomics, all of our then current operating officers were terminated as a part of the merger. This change in personnel may place additional administrative burdens on our management in conducting our operations.
If Our Products Are Not Successfully Developed and Approved by the FDA, We May Be Forced to Reduce or Terminate Our Operations
Each of our products is in the development stage and must be approved by the FDA or similar foreign governmental agencies before they can be marketed. The process for obtaining FDA approval is both time-consuming and costly, with no certainty of a successful outcome. This process typically includes the conduct of extensive pre-clinical and clinical testing, which may take longer or cost more than we or our licensees currently anticipate due to numerous factors such as:
• | difficulty in securing centers to conduct trials | |
• | difficulty in enrolling patients in conformity with required protocols or projected timelines | |
• | unexpected adverse reactions by patients in trials | |
• | difficulty in obtaining clinical supplies of the product | |
• | changes in the FDA s requirements for our testing during the course of that testing | |
• | inability to generate statistically significant data confirming the efficacy of the product being tested |
Our TranzFect technology is currently in Phase I clinical trials that are being conducted by our licensee, Merck & Co., as a component of a vaccine to prevent AIDS. Since TranzFect is to be used as a component in vaccines, we do not need to seek FDA approval, but the vaccine manufacturer will need to seek FDA approval for the final vaccine formulation containing TranzFect.
We May Be Unable to Establish a Viable Medical Indication for FLOCOR or Find a Partner to Fund the Necessary Research for FLOCOR
In December 1999, we reported results from our Phase III clinical trial of FLOCOR for treatment of sickle cell disease patients experiencing an acute vaso-occlusive crisis (a blockage of blood flow caused by deformed or sickled red blood cells). Overall, the study did not achieve the statistical target for its primary objective, which was to decrease the length of vaso-occlusive crisis for the study population as a whole. The results of this study showed substantial departures from the assumptions used in designating length of crisis as the primary objective, but this experience could be helpful in the design of future clinical trials. For patients 15 years of age or younger, the number of patients achieving resolution of crisis was higher for FLOCOR-treated patients at all time periods than for placebo-treated patients, which may indicate that future clinical trials should focus on pediatric patients.
To generate sufficient data to seek FDA approval for FLOCOR will require additional clinical studies, which will entail substantial time and expense. We currently estimate the cost of these clinical trials to be in the range of $10,000,000 - $12,000,000, although the actual costs could vary substantially, depending on the nature and number of trials that the FDA ultimately would require. We do not intend to conduct or fund these tests ourselves but will seek a strategic alliance partner or licensee for this purpose. The failure of our prior Phase III trial to generate sufficient data could make it more difficult for us to secure a strategic alliance partner or licensee for this product. In June 2002, the NIH turned down a grant application
21
by Johns Hopkins University School of Medicine to provide financial support for a potential new Phase III trial for FLOCOR. Since this grant application was submitted at the NIH’s suggestion, we believed that there was a reasonable possibility of obtaining government funding for a portion of the cost of a new FLOCOR trial. However, based on the NIH’s rejection of the Johns Hopkins application, we may encounter difficulty in obtaining future governmental financial support for FLOCOR development work should we or any strategic alliance partner or licensee seek such support in the future.
If Blizzard Genomics Fails to Successfully Commercialize Its Products, the Value of Our Assets Will Be Adversely Impacted
Blizzard Genomics, which is Global Genomics’ principal portfolio company, has not yet commercialized any of its products. Although Blizzard Genomics plans to introduce its first product, the I-Scan Imager™ chip reader , a low cost DNA chip reader, during 2003 and its T-Chip technology, in 2004, it may experience delays in completing the development of or commercially launching these products, which will be used in research laboratories and will not require FDA approval prior to their being marketed. These products are likely to face intense market competition from existing products or technologies and products or technologies that are developed in the future. Blizzard Genomics is the licensee of several U.S. patents, and is seeking additional patent protection for its products and technologies. There can be no assurance, however, that the company will be able to secure sufficient patent coverage for its products and technologies. The failure of Blizzard Genomics to successfully commercialize its products would require us to write down or write off on our balance sheet the substantial carrying value of Global Genomics’ investment in that company as part of our assets, which would have a materially adverse effect on our stockholders’ equity.
Blizzard Genomics May Be Unable to Raise Sufficient Funding to Commercialize Its Products, Which Would Adversely Impact the Value of Our Assets
Blizzard Genomics has no working capital and is currently seeking to raise up to $2,000,000 in capital to fund the commercial launch of the I-Scan Imager™ chip reader, completion of development of its T-Chip™ technology and for its working capital needs. Blizzard Genomics has encountered difficulty to date in obtaining this capital. Failure to raise at least a portion of this capital could delay Blizzard Genomics’ commercialization of its products and might force it to suspend its operations. Should Blizzard Genomics raise at least $750,000 in capital, it believes that it would have sufficient funding to begin commercial marketing of the I-Scan Imager™ chip reader but would require additional capital to complete development of its T-Chip technology on a timely basis and might need additional capital to support its operations. Any significant delay in the commercialization of Blizzard Genomics’ products or the cessation of its operations would adversely affect the carrying value of Global Genomics’ investment in that company as part of our assets, which would have a materially adverse effect on our stockholders’ equity.
We Are Dependent Upon a Limited Operational Management Team and Need to Recruit a Chief Financial Officer and Perhaps Other Personnel to Effectively Operate
Our current management team is limited to Steven A. Kriegsman, our Chief Executive Officer and interim Chief Financial Officer, and Kathryn H. Hernandez, our Corporate Secretary. We are, therefore, very dependent on the availability and quality of the efforts of Mr. Kriegsman in managing our company. We will need to recruit a permanent Chief Financial Officer and may need to recruit other personnel in order to effectively operate the company and carry out our business plan. As provided by the terms of our merger with Global Genomics, we will seek to hire a full-time Chief Executive Officer to replace Mr. Kriegsman, whose employment agreement expires in July 2003. There can be no assurance that Mr. Kriegsman will be willing to continue to serve as our Chief Executive Officer if we have not found his replacement before expiration of his current employment agreement.
We Are Subject to Intense Competition That Could Materially Impact Our Operating Results
We and our strategic partners or licensees may be unable to compete successfully against our current or future competitors. The pharmaceutical, biopharmaceutical and biotechnology industry is characterized by intense competition and rapid and significant technological advancements. Many companies, research institutions and universities are working in a number of areas similar to our primary fields of interest to develop new products. There also is intense competition among companies seeking to acquire products that already are being marketed. Many of the companies developing or marketing products with which our products and technologies will compete have or are likely to have substantially greater research and product
22
development capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other resources than at least some of our present or future strategic partners or licensees.
As a result, these competitors may:
• | Succeed in developing competitive products earlier than we or our strategic partners or licensees | |
• | Obtain approvals for such products from the FDA or other regulatory agencies more rapidly than we or our strategic partners or licensees do | |
• | Obtain patents that block or otherwise inhibit the development and commercialization of our product candidates | |
• | Develop treatments or cures that are safer or more effective than those we propose for our products | |
• | Devote greater resources to marketing or selling their products | |
• | Introduce or adapt more quickly to new technologies or scientific advances | |
• | Introduce products that make the continued development of our product candidates uneconomical | |
• | Withstand price competition more successfully than our strategic partners or licensees can | |
• | More effectively negotiate third-party strategic alliances or licensing arrangements | |
• | Take advantage of product acquisition or other opportunities more readily than we can |
Although we do not expect FLOCOR to have direct competition from other products currently available or that we are aware of that are being developed related to FLOCOR’s ability to reduce blood viscosity in the cardiovascular area, there are a number of anticoagulant products that FLOCOR would have to compete against, such as tissue plasminogen activator (t-PA) and streptokinase (blood clot dissolving enzymes) as well as blood thinners such as heparin and coumatin, even though FLOCOR acts by a different mechanism to prevent damage due to blood coagulation. In the sickle cell disease area, we would compete against companies that are developing or marketing other products to treat sickle cell disease, such as Droxia (hydroxyurea) marketed by Bristol-Myers Squibb Co. and Decitabine, which is being developed by SuperGen, Inc. Our TranzFect technology will compete against a number of companies that have developed adjuvant products, such as the adjuvant QS-21 marketed by Aquila Biopharmaceuticals, Inc. and adjuvants marketed by Corixa. Blizzard Genomics’ products will compete with a number of currently marketed products, including those offered by Axon Instruments, Affymetrix, Applied Precision, Perkin Elmer and Agilent Technologies.
The Manufacturing Requirements for FLOCOR May Make It More Difficult for Us to License FLOCOR or for Our Licensee to Develop FLOCOR
The manufacture of CRL-5861 requires the following:
• | a supply of the raw drug substance | |
• | a supply of the purified drug which is refined from the raw drug substance | |
• | formulation and sterile filling of the purified drug substance into the finished drug product |
A number of suppliers and manufacturers can provided the raw drug substance and the finished drug product. Prior to the change in our business strategy to now seek a strategic partner or licensee for FLOCOR (who we anticipate would be responsible for the manufacture of FLOCOR), we entered into an agreement with Organichem Corp. to provide us with commercial supplies of the purified drug substance. However, this agreement will expire before the end of 2003, which will be well before any potential strategic parties or licensee that we secure will need commercial supplies of this substance. There can be no assurance that any strategic partner or licensee that we secure will either have the specific equipment expertise to purify the FLOCOR drug substance or will be able to enter into an agreement with Organichem or another supplier on acceptable terms. An inability to obtain purified drug substance in sufficient amounts and at acceptable prices
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could have a material adverse effect on our ability to secure a strategic partner or licensee or on the ability of that partner or licensee to commercialize FLOCOR.
We May Be Unable to Protect Our Intellectual Property Rights, Which Could Adversely Affect the Value of Our Assets
Obtaining and maintaining patent and other intellectual property rights for our technologies and potential products is critical to establishing and maintaining the value of our assets and our business. Although we believe that we have significant patent coverage for our FLOCOR and TranzFect technologies, there can be no assurance that this coverage will be broad enough to prevent third parties from developing or commercializing similar or identical technologies, that the validity of our patents will be upheld if challenged by third parties or that our technologies will not be deemed to infringe the intellectual property rights of third parties. Any litigation brought by us to protect our intellectual property rights or by third parties asserting intellectual property rights against us could be costly and have a material adverse effect on our operating results or financial condition and 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 May Incur Substantial Costs from Future Clinical Testing or Product Liability Claims
If any of our products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of our products or by patients using our commercially marketed products. Even if the commercialization of one or more of our products is approved by the FDA, users may claim that such products caused unintended adverse effects. We currently do not carry product liability insurance covering the use of our products in human clinical trials or the commercial marketing of these products but anticipate that our licensees who are developing our products will carry liability insurance covering the clinical testing and marketing of those products. However, if someone asserts a claim against us and the insurance coverage of our licensees or their other financial resources are inadequate to cover a successful claim, such successful claim may exceed our financial resources and cause us to discontinue operations. Even if claims asserted against us are unsuccessful, they may divert management’s attention from our operations and we may have to incur substantial costs to defend such claims.
Our Common Stock May Be Delisted From Nasdaq, Which Could Adversely Affect the Trading Market For and Value of Our Common Stock
Our ability to continue to have our common stock listed on the Nasdaq SmallCap Market depends on our satisfying applicable Nasdaq listing criteria. We have been unable to maintain compliance with Nasdaq’s $1 minimum closing bid requirement and failed to come back into compliance with this requirement by Nasdaq’s original deadline, which was then extended by Nasdaq pursuant to Nasdaq’s rule affording additional time to comply for those companies who otherwise satisfy Nasdaq’s core initial listing requirements (including shareholders’ equity of at least $5,000,000). There can be no assurance that we will be able to continue to satisfy Nasdaq’s core initial listing requirements or that we will be able to satisfy the minimum bid price requirement by Nasdaq’s deadline date, which would make our common stock subject to delisting from the Nasdaq Small Cap Market. If our common stock is delisted from the Nasdaq Small Cap Market, an active trading market for our common stock may cease to exist and the delisting could materially and adversely impact the market value of our common stock.
It Will Be Difficult For Us To Manage Our Operations If We Are Regulated As An Investment Company In The Future
The Investment Company Act of 1940 regulates certain companies that own investment securities with a value greater than 40% of the total assets of that company. In the Global Geonomics merger, we acquired a 40% equity interest in Blizzard Genomics, which investment represents a material amount of our total assets. If our ownership interest in Blizzard Genomics significantly decreases or we otherwise no longer remain the largest shareholder of Blizzard Genomics, the value of our investment in Blizzard Genomics could cause us to become subject to the provisions of the Investment Company Act. Should we become subject to the Investment Company Act, we would essentially have to operate as a mutual fund and would be subject to all of the substantive regulations imposed on such companies, including the restrictions on the securities we can issue, the rules specifying the composition and structure of our management, the additional reporting requirements, and other limitations on our ability to conduct our operations in the manner currently conducted. Our Board of Directors
24
has determined that, should we become subject to these provisions, we will either (i) seek an order from the SEC exempting us from these provisions, or (ii) attempt to restructure our business in a manner that would relieve us from these provisions. The regulatory requirements for investment companies are extremely restrictive and would materially and adversely affect our ability to manage and operate our business and could materially and adversely affect our financial condition. Although it is our intention to remain an operating company that is not subject to the Investment Company Act, no assurance can be given that we will not become subject to the provisions of that act.
Our Anti-Takeover Provisions May Make It More Difficult to Change Our Management or May Discourage Others From Acquiring Us and Thereby Adversely Affect Shareholder Value
We have a shareholder rights plan and provisions in our bylaws that may discourage or prevent a person or group from acquiring us without our board of directors approval. The intent of the shareholder rights plan and our bylaw provisions is to protect our shareholders’ interests by encouraging anyone seeking control of our company to negotiate with our board of directors.
We have a classified board of directors, which requires that at least two stockholder meetings, instead of one, will be required to effect a change in the majority control of our board of directors. This provision applies to every election of directors, not just an election occurring after a change in control. The classification of our board increases the amount of time it takes to change majority control of our board of directors and may cause our potential purchasers to lose interest in the potential purchase of us, regardless of whether our purchase would be beneficial to us or our stockholders. The additional time and cost to change a majority of the members of our board of directors makes it more difficult and may discourage our existing shareholders from seeking to change our existing management in order to change the strategic direction or operational performance of our company.
Our bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of our capital stock then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause. Our bylaws also provide that a stockholder must give us at least 120 days notice of a proposal or director nomination that such stockholder desires to present at any annual meeting or special meeting of stockholders. Such provision prevents a stockholder from making a proposal or director nomination at a stockholder meeting without us having advance notice of that proposal or director nomination. This could make a change in control more difficult by providing our directors with more time to prepare an opposition to a proposed change in control. By making it more difficult to remove or install new directors, the foregoing bylaw provisions may also make our existing management less responsive to the views of our shareholders with respect to our operations and other issues such as management selection and management compensation.
Our Outstanding Options and Warrants and the Registration of Our Shares Issued in the Global Genomics Merger May Adversely Affect the Trading Price of Our Common Stock
As of March 25, 2003, there were outstanding stock options and warrants to purchase 6,906,826 shares of our common stock at exercise prices ranging from $0.01 to $7.75 per share. Our outstanding options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of options and warrants can be expected to exercise them at a time when we may be able to obtain additional capital through a new offering of securities on terms more favorable to us than the terms of outstanding options and warrants. For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. To the extent the trading price of our common stock at the time of exercise of any such options or warrants exceeds the exercise price, such exercise will also have a dilutive effect to our stockholders.
We May Experience Volatility in Our Stock Price, Which May Adversely Affect the Trading Price of Our Common Stock
The market price of our common stock has experienced significant volatility in the past and may continue to experience significant volatility from time to time. Our stock price has ranged from $0.21 to $6.44 over the past three years. Factors such as the following may affect such volatility:
• | our quarterly operating results | |
• | announcements of regulatory developments or technological innovations by us or our competitors |
25
• | government regulation of drug pricing | |
• | developments in patent or other technology ownership rights | |
• | public concern regarding the safety of our products |
Other factors which may affect our stock price are general changes in the economy, financial markets or the pharmaceutical or biotechnology industries.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Our financial instruments that are sensitive to changes in interest rates are our investments. As of December 31, 2002, we held no investments other than amounts invested in money market accounts and U.S. Government obligations. We are not subject to any other material market risks.
Item 8. Financial Statements and Supplementary Data
The information required by Items 6-8 is incorporated by reference to
Our consolidated financial statements and supplemental schedule and the applicable portions from the Company's 1995 Annual Report to Stockholders. See
Part IV, Item 14notes thereto as of December 31, 2002 and 2001, and for an indexeach of the three years ended December 31, 2002, 2001 and 2000, together with the independent auditors’ report thereon, are set forth on pages F-1 to F-20 of this Annual Report.
Blizzard Genomics’ financial statements and supplemental schedule and the notes thereto as of December 31, 2002 and schedules.
2001, and for each of the three years ended December 31, 2002, 2001 and 2000, together with the independent auditors’ reports thereon, are set forth on pages F-21 to F-43 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table provides information concerning our directors and executive officers:
Name | Age | Class of Directors (1) | Position | ||||||||
Steven A. Kriegsman | 61 | II | Director, Chief Executive Officer | ||||||||
Alexander L. Cappello | 47 | III | Director | ||||||||
Raymond C. Carnahan, Jr. | 77 | II | Director | ||||||||
Louis Ignarro, Ph.D. | 61 | I | Director | ||||||||
Max Link | 63 | III | Director, Chairman | ||||||||
Herbert H. McDade, Jr. | 75 | II | Director | ||||||||
Joseph Rubinfeld, Ph.D. | 70 | I | Director | ||||||||
Kathryn Hernandez | 46 | Corporate Secretary | |||||||||
(1) | Class I directors serve on the Board of Directors until the 2004 meeting of stockholders, Class II directors serve on the Board of Directors until the 2005 meeting of stockholders and Class III directors serve on the Board of Directors until the 2003 meeting of stockholders. | ||||||||||
Steven A. Kriegsman has been a director and our Chief Executive Officer since July 2002. He previously served as a director and the Chairman of Global Genomics since June 2000. Mr. Kriegsman is President and founder of Kriegsman Capital Group LLC, a financial advisory firm specializing in the development of alternative sources of equity capital for emerging growth companies. Mr. Kriegsman has advised such companies as Closure Medical Corporation, Novoste Corporation, Advanced Tissue Sciences, Inc., Miravant Medical Technologies and Maxim Pharmaceuticals. Mr. Kriegsman has a B.S. degree from New York University in accounting and completed the Executive Program in Mergers and
26
Acquisitions at New York University, The Management Institute. Mr. Kriegsman serves as a director of AuthentiDate Holdings Corp.
Alexander L. Cappello has been a director since January 2001. Since 1981, Mr. Cappello has served as Chairman of Cappello Group, Inc. Mr. Cappello has been active in the investment banking, merchant banking, project finance and venture capital arena since 1975. Prior to his current role with Cappello Group Inc., he was the founder of both Swiss American Financial and Euro American Financial Corp., two merchant and investment banking firms that progressively expanded operations throughout North America and Europe. Mr. Cappello’s early career experience was in sales with IBM and corporate finance with Union Bank of California. Mr. Cappello also serves as a director of Advanced Biotherapy, Inc.
Raymond C. Carnahan, Jr. has been a director since 1991. Mr. Carnahan has over 39 years of experience in cost controls and operational systems in a variety of industries. Prior to his retirement in 1991, Mr. Carnahan served as Manager, International Cost Analysis planning for Johnson & Johnson International from 1974 to 1991. Mr. Carnahan has provided consulting services to Waterford-Wedgewood Corporation in England and to Torf Pharmaceutical Corporation in Poland and serves as President for the Morristown Memorial Hospital Chaplaincy Service in Morristown, New Jersey.
Louis Ignarro, Ph.D. has been a director since July 2002. He previously served as a director of Global Genomics since November 20, 2000. Dr. Ignarro serves as the Jerome J. Bezler, M.D. Distinguished Professor of Pharmacology in the Department of Molecular and Medical Pharmacology at the UCLA School of Medicine. Dr. Ignarro has been at the UCLA School of Medicine since 1985 as a professor, acting chairman and assistant dean. Dr. Ignarro received the Nobel Prize for Medicine in 1998. Dr. Ignarro received a B.S. in pharmacy from Columbia University and his Ph.D. in Pharmacology from the University of Minnesota.
Max Link has been a director since 1996. Dr. Link has been retired from business since 1994. From May 1993 to June 1994, Dr. Link served as the Chief Executive Officer of Corange U.S. Holdings, Inc. (the holding company for Boehringer Mannheim Therapeutics, Boehringer Mannheim Diagnostics and DePuy International). From 1992 to 1993, Dr. Link was Chairman of Sandoz Pharma. From 1987 to 1992, Dr. Link was the Chief Executive Officer of Sandoz Pharma, Ltd. and a member of the Executive Board of Sandoz, Ltd., Basel. Prior to 1987, Dr. Link served in various capacities with the United States operations of Sandoz, including President and Chief Executive Officer. Dr. Link also serves as a director of Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Cell Therapeutics, Inc., Celsion Corporation, Columbia Laboratories, Inc., Discovery Laboratories, Inc., Human Genome Sciences, Inc. and Protein Design Laboratories, Inc
Herbert H. McDade, Jr. has been a director since 1990. Mr. McDade has been retired from business since 1996. From 1989 to 1996, Mr. McDade served as Chairman, President and Chief Executive Officer of Chemex Pharmaceuticals, Inc. (now Access Pharmaceuticals, Inc.). From 1986 to 1989 he was Chairman and President of Armour Pharmaceutical Corporation, a wholly owned subsidiary of Rorer Group, Inc. (now Rhone-Poulenc Rorer). Prior to 1986, Mr. McDade served as Vice President of the Revlon Corporation. Mr. McDade serves as a director of Access Pharmaceuticals, Inc. and Discovery Laboratories, Inc.
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. Dr. Rubinfeld was also Chief Scientific Officer of SuperGen from 1991 until September 1997. 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 is a member of the board of directors of AVI BioPharma, Inc. and NeoTherapeutics, Inc. Dr. Rubinfeld received a BS degree in chemistry from C.C.N.Y. and a M.A. and Ph.D. in chemistry from Columbia University.
Kathryn R. Hernandez joined CytRx in 2002 as Corporate Secretary. Prior to joining CytRx, Ms. Hernandez was employed as Executive Assistant to Mr. Kriegsman at The Kriegsman Group, an Institutional Division of Financial West Group.
The Board of Directors has determined that Raymond C. Carnahan, Jr. is an independent director serving on the Audit Committee who is an audit committee financial expert as defined by the SEC’s rules.
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Section 16(a) Beneficial Ownership Reporting Compliance
Our executive officers and directors and any person who owns more than 10% of our outstanding shares of common stock are required by Section 16(a) of the Securities Exchange Act to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and to furnish us with copies of those reports. Based solely on our review of copies of reports we have received and written representations from certain reporting persons, we believe that all Section 16(a) filing requirements applicable to our directors and executive officers and greater than 10% shareholders for 2002 were complied with, except as follows:
William Fleck and Jack L. Luchese, former executive officers or directors, each did not timely report their acquisition of shares of our common stock in January 2002. Raymond C. Carnahan, Jr. and Herbert H. McDade, who are directors, each did not timely report our grant to them of stock options in July 2002. Form 4’s reporting each of these transactions were subsequently filed by the individuals.
Item 11. Executive Compensation
Summary Compensation Table
The following table presents summary information concerning compensation paid or accrued by us for services rendered in all capacities during the fiscal years ended December 31, 2000, 2001 and 2002 for (i) our President and Chief Executive Officer; (ii) our former President and Chief Executive Officer and (iii) two additional individuals whose total salary and bonus exceeded $100,000 but who were not serving as executive officers as of December 31, 2002.
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Name and Principal Position | Year |
| Salary ($) |
| Bonus ($) |
| Securities |
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| All Other |
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Steven A. Kriegsman |
| 2002 |
| $ | 110,000 |
| $ | — |
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| — |
| $ | — |
| |
President & Chief Executive Officer |
| 2001 |
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| — |
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| — |
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| — |
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| — |
| |
| 2000 |
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| — |
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| — |
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| — |
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| — |
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Jack J. Luchese |
| 2002 |
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| 191,391 |
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| 435,150 |
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| — |
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| 566,469 | (1) | |
Former President and Chief Executive Officer |
| 2001 |
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| 360,150 |
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| 55,250 |
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| 550,000 |
|
| — | — | |
| 2000 |
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| 350,000 |
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| 17,500 |
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| 100,000 |
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| — | — | ||
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R. Martin Emanuele |
| 2002 |
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| 103,647 |
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| — |
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| — |
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| 161,617 | (2) | |
Former VP, Research & Business Development |
| 2001 |
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| 185,500 |
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| 30,250 |
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| 32,500 |
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| — | — | |
| 2000 |
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| 181,000 |
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| 7,500 |
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| 111,250 |
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| — | — | ||
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J. Michael Grindel |
| 2002 |
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| 113,630 |
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| — |
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| — |
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| 177,153 | (3) | |
Former VP. Drug Development |
| 2001 |
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| 208,300 |
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| 17,750 |
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| 20,000 |
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| — | — | |
| 2000 |
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| 203,300 |
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| 5,000 |
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| — |
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| — | — | ||
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Mark W. Reynolds |
| 2002 |
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| 79,657 |
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| — |
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| — |
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| 178,180 | (4) | |
Former VP, Finance and Secretary |
| 2001 |
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| 136,250 |
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| 17,750 |
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| 32,500 |
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| — | — | |
| 2000 |
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| 125,000 |
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| 12,500 |
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| 105,250 |
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| — | — |
(1) Consists of $435,150 of contractual “change of control” payment, $60,025 stay bonus, $46,871 prepaid insurance benefits and $18,453 accrued vacation payout. Also includes $6,000 of matching contributions by us under our 401(k) profit sharing plan.
(2) Consists of $156,117 in severance payment, stay bonus and accrued vacation payout associated with executive’s termination of employment in connection with our merger with Global Genomics, and $5,500 of matching contributions by us under our 401(k) profit sharing plan.
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(3) Consists of $171,153 in severance payment, stay bonus and accrued vacation payout associated with executive’s termination of employment in connection with our merger with Global Genomics, and $6,000 of matching contributions by us under our 401(k) profit sharing plan.
(4) Consists of $172,680 in severance payment, stay bonus and accrued vacation payout associated with executive’s termination of employment in connection with our merger with Global Genomics, and $5,500 of matching contributions by us under our 401(k) profit sharing plan.
Option Grants in Last Fiscal Year
There were no option grants to any of the named executive officers listed in the Summary Compensation Table above.
Option Values at December 31, 2002
The following table sets forth the number of options and total value of unexercised in-the-money options and warrants at December 31, 2002 for each of our executive officers named in the Summary Compensation Table above, using the price per share of our common stock of $0.25 on December 31, 2002. No stock options were exercised during 2002 by any of the named executive officers listed in the Summary Compensation Table above. The following table includes warrants issued to Steven A. Kriegsman by Global Genomics prior to our merger with that company that have been assumed by us covering 459,352 shares of our common stock..
Number of Securities Underlying |
| Value of Unexercised |
| ||||||||||
| |||||||||||||
Name | Exercisable |
| Unexercisable |
| Exercisable |
| Unexercisable |
| |||||
|
|
|
| ||||||||||
Steven A. Kriegsman |
| 459,352 |
|
| — |
| $ | 110,244 |
| $ | — |
| |
Jack J. Luchese |
| 1,857,427 |
|
| — |
|
| — |
|
| — |
| |
R. Martin Emanuele |
| 284,933 |
|
| — |
|
| — |
|
| — |
| |
J. Michael Grindel |
| 193,000 |
|
| — |
|
| — |
|
| — |
| |
Mark W. Reynolds |
| 250,252 |
|
| — |
|
| — |
|
| — |
|
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2002 regarding securities authorized for issuance under our equity compensation plans. This table excludes warrants previously issued to Steven A. Kriegsman by Global Genomics that we assumed in connection with that merger.
| Number of Securities |
| Weighted-Average |
| Number of Securities |
| |||||
|
|
|
| ||||||||
Equity Compensation Plans |
|
|
|
|
|
|
|
|
|
| |
Approved by Security Holders: |
|
|
|
|
|
|
|
|
| ||
1986 Stock Option Plan |
|
| 51,263 |
| $ | 1.00 |
|
| — |
| |
1994 Stock Option Plan |
|
| 245,823 |
| $ | 1.14 |
|
| 60,850 |
| |
1995 Stock Option Plan |
|
| 25,000 |
| $ | 1.00 |
|
| 22,107 |
| |
1998 Long-Term Incentive Plan |
|
| 419,035 |
| $ | 0.99 |
|
| 29,517 |
| |
2000 Long-Term Incentive Plan |
|
| 452,917 |
| $ | 0.96 |
|
| 1,683,702 |
| |
Equity Compensation Plans Not Approved by Security Holders Other Plans (1) |
| 1,707,427 |
| $ | 0.98 |
|
| — |
| ||
|
|
| |||||||||
Total |
| 2,901,465 |
| $ | 0.99 |
|
| 1,796,176 |
|
29
(1) Our former President and Chief Executive Officer holds warrants to purchase an aggregate of 1,707,427 shares at a weighted average exercise price of $0.98 per share.
Employment Agreements
Employment Agreement with Steven A. Kriegsman.
Steven A. Kriegsman became our Chief Executive Officer on July 16, 2002 pursuant to our employment agreement with him. Mr. Kriegsman’s employment agreement will automatically renew in July 2003 for an additional one-year period, unless either Mr. Kriegsman or we elect not to renew the employment agreement.
Under the employment agreement, Mr. Kriegsman is paid an annual base salary, which currently is $240,000. Our board of directors (or its compensation committee) will review the base salary if the employment agreement is renewed in July 2003. In addition to his annual base salary, Mr. Kriegsman is eligible to receive bonus compensation upon achieving goals and objectives set by our board of directors (or its compensation committee). Mr. Kriegsman is also 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. Mr. Kriegsman has not yet been granted any cash, option or other equity bonus compensation under his employment agreement.
In the event we terminate Mr. Kriegsman’s employment without cause (including if we secure a replacement Chief Executive Officer), we have agreed to pay Mr. Kriegsman his salary through the balance of the initial one-year term of his employment agreement plus an additional six months. If we so terminate Mr. Kriegsman after the initial term, we will pay him an additional six months of salary after his termination date.
Under our employment agreement with Mr. Kriegsman, he is to provide us during the term of his employment and his receipt of any severance payments with the first opportunity to conduct or take action with respect to any acquisition opportunity or any other potential transaction identified by Mr. Kriegsman within the biotech, pharmaceutical or health care industries and that is within the scope of the business plan adopted by our board of directors. Mr. Kriegsman’s employment agreement with us also contains confidentiality provisions relating to our trade secrets and any other proprietary or confidential information, which provisions shall remain in effect for five years after the expiration of the employment agreement with respect to proprietary or confidential information and for so long as trade secrets remain trade secrets.
Employment Agreement with Jack J. Luchese.
Jack J. Luchese was named our President and Chief Executive Officer in March 1989. His employment agreement with us was amended and restated as of September 1, 1999 and was further amended as of January 1, 2002. Mr. Luchese’s employment agreement was to expire on December 31, 2002 but was terminated on July 16, 2002 in connection with our merger with Global Genomics. Under the agreement, Mr. Luchese was paid an annual base salary, which was to be $360,150 for 2002. The base salary was to be reviewed no less than once each 18 months and adjusted from time to time consistent with average overall merit increases for all other employees. In addition to his annual base salary, Mr. Luchese was eligible to receive cash bonuses with respect to each calendar year during the term of the agreement as determined from time to time by the compensation committee of our board of directors, in its sole discretion. The employment agreement provided that Mr. Luchese was entitled to a success bonus of $435,150 if, during the term of the agreement, we executed a definitive agreement for a transaction that would constitute a change in control or if we executed a FLOCOR license agreement. In connection with the execution of the merger agreement on February 11, 2002, we became obligated to pay Mr. Luchese the success bonus. The agreement also provided that Mr. Luchese was entitled to a change in control payment if, during the term of the agreement, our stockholders approved a transaction that would constitute a change in control or if a change in control otherwise occurred. The amount of the change in control payment was to be (1) the higher of $870,300 or an amount equal to two times his then-current salary and highest annual bonus for the last three years, minus (2) the amount of the success bonus, if any, previously paid to him. The agreement also contained confidentiality and non-competition provisions. Mr. Luchese would be required to forfeit the success bonus and change in control payment if he violated the confidentiality and non-competition provisions in the employment agreement.
Pursuant to the employment agreement, Mr. Luchese was granted options and warrants to purchase an aggregate of 1,857,427 shares of common stock. Warrants to purchase 1,257,427 shares have an exercise price of $1.00, warrants as to 500,000 shares have an exercise price of $0.93 and options as to 100,000 shares have an exercise price of $1.03125. The vesting criteria of such options and warrants included a combination of tenure and achievement of defined corporate
30
objectives. The shares of stock that may be acquired upon exercise of warrants and options held by Mr. Luchese have been or were to be registered by us under the Securities Act of 1933. The warrants and options contained certain anti-dilution provisions and provide for accelerated vesting in the event that Mr. Luchese’s employment is terminated by the board of directors without cause, in the event of his death or disability or in the event of a change of control.
Change in Control Agreementwith Jack J. Luchese.
In April 1997, we entered into a separate change in control agreement with Mr. Luchese, which was amended and restated in September 1999 and further amended as of January 1, 2002. The change in control agreement had a renewing three-year term, but was terminated in connection with our merger with Global Genomics. If a change in control occurred during the term of the change in control agreement, or if Mr. Luchese’s employment was terminated in connection with or in anticipation of a change of control, the change in control agreement would become a new two-year employment agreement that automatically replaced and superceded Mr. Luchese’s pre-change in control employment agreement, described above.
Mr. Luchese was entitled under the change of control agreement to continued employee welfare benefits for two years after the date of termination. In lieu of receiving the employee welfare benefits, upon the closing of the merger with Global Genomics and Mr. Luchese’s termination, we agreed to pay Mr. Luchese a cash payment of approximately $45,000, which is approximately equal to the value of such benefits.
If the total payments to Mr. Luchese under the employment agreement or change in control agreement and from any other source would result in the imposition of an excise tax under Section 4999 of the Internal Revenue Code, the payments would be reduced to the extent necessary to avoid the imposition of such excise tax, but only if such reduction would result in a net after-tax benefit to Mr. Luchese. The change in control agreement further provided that Mr. Luchese had no obligation to mitigate severance payments, that we would reimburse Mr. Luchese for all legal fees incurred in enforcing or contesting the change in control agreement, and that Mr. Luchese will hold for the benefit of us all confidential information concerning us obtained over the course of this employment.
Executive Involuntary Termination Agreements.
Each of our other named executive officers prior to our merger with Global Genomics, other than Jack J. Luchese, entered into executive involuntary termination agreements with us. Under these agreements, if within 24 months after a change in control of our company an executive officer was terminated or was required to relocate greater than 35 miles from our then current headquarters in Norcross, Georgia, such executive officer would receive a severance payment equal to one year of that officer’s current salary. If an executive officer was terminated without cause and not within 24 months after a change in control of our company, such officer would receive six months base salary. If an executive officer was terminated for cause, that officer would receive an amount of severance determined by our Chief Executive Officer that would be no greater than three months of pay at the officer’s salary as in effect on the termination date. In exchange for entering into these agreements, the executive officers agreed to release us from all claims that such officer might have had against us as of the date such officer executed the agreement. These agreements were terminated in connection with our merger with Global Genomics.
Compensation of Directors
Periodically, our board of directors reviews the then-current director compensation policies and from time to time makes changes to such policies based on various criteria the board deems relevant. Directors who are employees of our company receive no compensation for their service as directors or as members of committees.
For the period January 1, 2002 to June 30, 2002, non-employee directors received a fee of $2,000 for each board meeting attended ($750 for meetings attended by teleconference) and $500 for each committee meeting attended. Non-employee directors who chaired the board or a board committee received an additional $250 for each committee meeting attended. Each non-employee director received an initial stock option grant to purchase 5,000 shares upon the date he or she first becomes a member of the board. Options to purchase 5,000 shares of common stock were granted to each non-employee director annually. Stock option grants to directors pursuant to the plans discussed above contain the same terms and provisions as stock option grants to employees, except that options granted to directors are considered non-qualified stock options for income tax reporting purposes.
31
Effective July 1, 2002, the director compensation package was revised as follows. Non-employee directors receive a quarterly retainer of $1,500 and a fee of $1,500 for each board meeting attended ($750 for meetings attended by teleconference and for board actions taken by unanimous written consent) and $750 for each committee meeting attended. Non-employee directors who chair the board or a board committee receive an additional $250 for each committee meeting attended. During 2002, Raymond C. Carnahan, Jr., the Chairman of our Audit Committee, also received $5,000 in connection with internal auditing services that he provided to that committee. Options to purchase 10,000 shares of common stock are granted to each non-employee director annually. Stock option grants to directors pursuant to the plans discussed above contain the same terms and provisions as stock option grants to employees, except that options granted to directors are considered non-qualified stock options for income tax reporting purposes.
In connection with our merger with Global Genomics, we agreed to accelerate the vesting of all of the options and warrants held by our directors upon the closing of the merger and to provide for these options and warrants to thereafter be exercisable throughout their terms, notwithstanding the holder of such option or warrant ceasing to serve as a director following the merger.
Compensation Committee Interlocks and Insider Participation
There are no “interlocks,” as defined by the SEC, with respect to any member of the compensation committee. Raymond C. Carnahan, Jr., Max Link, Herbert H. McDade, Jr. and Joseph Rubinfeld, Ph.D. are the current members of the compensation committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The
Based solely upon information requiredmade available to us, the following table sets forth information with respect to the beneficial ownership of our common stock as of March 25, 2003 by Items 10-12(1) each person who is incorporatedknown by reference from the
Company's definitive proxy statement for the Company's 1996 Annual Meeting of
Stockholders, which is expectedus to be filed pursuant to Regulation 14A within
120 days after the endbeneficially own more than five percent of the Company's 1995 fiscal year.
|
| Shares of Common Stock |
| ||||
|
|
| |||||
Name of Beneficial Owner | Number |
| Percentage |
| |||
|
|
|
|
| |||
Alexander L. Cappello (1) |
| 598,264 |
|
| 2.7 | % | |
Raymond C. Carnahan, Jr (2). |
| 30,182 |
|
| * |
| |
Louis Ignarro, Ph.D. |
| 91,916 |
|
| — |
| |
Steven A. Kriegsman (3) |
| 4,113,016 |
|
| 18.7 |
| |
c/o CytRx Corporation 11726 San Vicente Boulevard, Suite 650 Los Angeles, CA 90049 |
|
|
|
|
|
| |
Max Link (4) | 38,750 | * | |||||
Jack J. Luchese (5) |
| 2,454,628 |
|
| 10.5 |
| |
116 Tranquility Lane Destin, FL 32541 | |||||||
Herbert H. McDade, Jr. (6) |
| 38,551 |
|
| * |
| |
Joseph Rubinfeld |
| — |
|
| — |
| |
All executive officers and directors as a group (8 persons) (7) |
| 4,910,679 |
|
| 21.8 | % |
* | Less than 1% |
(1) | Includes 445,002 shares subject to options or warrants exercisable within 60 days. Shares of our common stock and options to purchase shares of our common stock beneficially owned by Mr. Cappello are held through the Alexander L. and Linda Cappello 2001 Family Trust. |
(2) | Includes 29,932 shares subject to options or warrants exercisable within 60 days. |
(3) | Includes 459,352 shares subject to options or warrants exercisable within 60 days. |
(4) | Includes 21,209 shares subject to options or warrants exercisable within 60 days. |
(5) | Includes 1,775,000 shares subject to options or warrants exercisable within 60 days. |
(6) | Includes 37,551 shares subject to options or warrants exercisable within 60 days. |
(7) | Includes 993,046 shares subject to options or warrants exercisable within 60 days. |
32
Item 13. Certain Relationships and Related Transactions
None.
Effective January 1, 2001, we entered into an agreement with Cappello Capital Corp. in which Cappello Capital served as our exclusive financial advisor. The initial term of such agreement was for a period of twelve months and was subsequently extended for an additional twelve month period, expiring on December 31, 2002. Under the agreement, Cappello Capital assisted us with analysis of potential transactions and strategic alternatives. The types of transactions that Cappello Capital may assist us with include private placements of equity, debt or convertible securities, strategic alliances, sale of all or a portion of CytRx, recapitalization or strategic acquisitions. As compensation for its services, we granted Cappello Capital a ten-year warrant to purchase 1,272,492 shares of our common stock (subject to downward adjustment under certain conditions) with an exercise price of $1.00 per share. We valued these warrants for operating expense purposes at $1,063,000. Additionally, if we proceeded with any of the transactions described in the agreement, we were to pay Cappello Capital a fee of between 3% and 7.5%, depending upon the nature of the transaction and the dollar amount involved. The fee we paid to Cappello Capital upon the closing of the merger with GGC was 448,330 shares of CytRx common stock, or 4.5% of the shares issuable in the merger. The value of these shares at the date of issuance was $247,000. Under the terms of the extension, CytRx paid Cappello Capital a monthly retainer fee of $10,000 for the six-month period ending on June 30, 2002. Alexander L. Cappello, one of our directors, is Chairman and Chief Executive Officer of Cappello Group, Inc., an affiliate of Cappello Capital. Mr. Capello is a related party, and we believe that the terms under which we engaged Cappello Capital were at least as favorable to us as could have been obtained from an unrelated third party
Pursuant to his employment agreement, Jack J. Luchese, our former President and CEO, was entitled to a payment of $435,150 upon the execution of the merger agreement by CytRx and Global Genomics Capital and an additional $435,150 upon the closing of the merger. In order to reduce the amount of cash that CytRx had to pay to Mr. Luchese, CytRx and Mr. Luchese agreed that approximately $325,200 of the first $435,150 payment would be satisfied by CytRx granting a stock award to Mr. Luchese under the CytRx Corporation 2000 Long-Term Incentive Plan under which CytRx would issue Mr. Luchese 558,060 shares of CytRx common stock. As an inducement for Mr. Luchese to accept shares of stock in lieu of cash, those shares were issued at a value equal to 85% of the volume weighted average price of CytRx common stock for the 20 trading days ended on February 8, 2002. At the date of issuance, the shares had a market value of $424,126. The remainder of the first $435,150 payment was paid in cash. Upon the closing of the merger, Mr. Luchese the second payment of $435,150 and also received a cash payout of approximately $45,000, which is approximately equal to the value of, and was paid to Mr. Luchese in lieu of, medical and other similar benefits to which Mr. Luchese was entitled after his termination under the terms of his employment agreement.
Under agreements between each of our executive officers prior to our merger with Global Genomics, other than Jack J. Luchese, and us, each of those executive officers was entitled to a cash payment upon his termination subsequent to the closing of the merger for severance pay, stay bonuses and accrued vacation. In order to reduce the amount of cash that we had to pay to these executive officers, they were offered, subject to certain stockholder approval, stock awards in lieu of cash for all or any portion of the amounts to which they were entitled. In addition, as an additional inducement for an executive officer to accept, in full or in part, this offer, we agreed to amend all outstanding options held by such officer to allow those options to be exercised for the entire remainder of their original terms. A summary of the cash payments and stock awards made to these officers is as follows:
|
| Net Cash Payment |
| Stock Award |
| |||||
|
|
|
| |||||||
Name |
|
| Number of Shares |
| Value |
| ||||
|
|
|
| |||||||
R. Martin Emanuele | $ | 116,117 |
|
| 68,634 |
| $ | 48,703 |
| |
William B. Fleck |
| 61,661 |
|
| 42,896 |
|
| 30,439 |
| |
J. Michael Grindel |
| 126,153 |
|
| 77,213 |
|
| 54,790 |
| |
Mark W. Reynolds |
| 137,680 |
|
| 60,055 |
|
| 42,615 |
|
Since July 16, 2002, Steven A. Kriegsman has been our Chief Executive Officer and one of our directors. In July 2002, we entered into an agreement with the Kriegsman Capital Group (“KCG”), an affiliate of Mr. Kriegsman, whereby KCG agreed to provide us with office space and certain administrative services. From July 2002 to December 2002, we paid a total of approximately $59,000 to KCG under this agreement. The charges are determined based upon actual space used and estimated percentages of employee time used. Mr. Kriegsman is a related party, and we believe that the terms under which we have employed Mr. Kriegsman as our Chief Executive Officer and have been paying KCG for this rent and other expenses are at least as favorable to us as could have been obtained from an unrelated third party.
33
Item 14. Controls and Procedures
Our Chief Executive Officer and interim Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this Annual Report, has concluded that the Company’s disclosure controls and procedures are adequate and effective to ensure that material information relating to us can be gathered, analyzed and disclosed on a timely basis in the reports that we file under the Securities Exchange Act. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation.
PART IV
Item 14.15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this 10-K:
1. The consolidated financial statements listed below are
incorporated by reference from the Company's 1995 Annual
Report to Stockholders: