UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission file number 0-15327 CYTRX CORPORATION (Exact name of Registrant as specified in its charter) Delaware 58-1642740 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 154 Technology Parkway, Norcross, Georgia 30092 (Address of principal executive offices) (Zip Code) (770) 368-9500 (Registrant's telephone number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_____ Number of shares of CytRx Corporation Common Stock, $.001 par value, issued and outstanding as of September 30, 1996: 7,587,201. CYTRX CORPORATION Form 10-Q Contents Page PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 3 Condensed Consolidated Statements of Operations (unaudited) for the Three Month and Nine Month Periods Ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Month Periods Ended September 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 10 SIGNATURES 11 EXHIBIT 11 -- Computation of Net Loss Per Share 12 2 Part I - FINANCIAL INFORMATION Item 1. - Financial Statements CYTRX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1996 December 31, 1995 ------------- ----------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 962,329 $16,645,570 Short-term investments 18,570,510 8,556,235 Receivables 679,100 91,077 Inventories (Note 2) 6,450 6,318 Other current assets 447,898 267,420 ---------- ----------- Total current assets 20,666,287 25,566,620 Property and equipment, net 5,069,448 5,137,764 Other assets 259,405 255,599 ---------- ---------- Total assets $25,995,140 $30,959,983 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 222,371 $ 266,125 Accrued liabilities 663,838 923,373 ---------- ---------- Total current liabilities 886,209 1,189,498 Commitments Stockholders' equity: Common stock, $.001 par value, 18,750,000 shares authorized; 7,938,051 and 7,915,308 shares issued at September 30, 1996 and December 31, 1995, respectively 7,938 7,915 Additional paid-in capital 62,622,803 62,514,691 Treasury Stock (350,850 and 58,750 shares at September 30, 1996 and December 31, 1995, respectively) (1,434,550) (242,343) Accumulated deficit (36,087,260) (32,509,778) ---------- ---------- Total stockholders' equity 25,108,931 29,770,485 ---------- ---------- Total liabilities and stockholders' equity $25,995,140 $30,959,983 ========== ========== See accompanying notes. 3 CYTRX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Month Period Ended Nine Month Period Ended September 30, September 30, -------------------------- -------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Revenues: Net sales $ 787,389 $ 102,154 $ 1,604,808 $ 353,985 License fees - 25,000 50,000 25,000 Investment income, net (Note 4) 279,585 473,528 900,152 1,424,849 Collaborative, grant and other revenue 51,420 16,507 84,872 52,782 --------- --------- --------- --------- 1,118,394 617,189 2,639,832 1,856,616 Expenses: Cost of sales 699,464 9,931 1,179,816 31,602 Research and development 505,669 1,648,760 2,046,245 5,223,093 Selling, general and administrative 1,033,425 910,706 2,991,253 2,774,145 Realized loss on short-term investments, net - - - 1,102,621 Write-off of patent costs - - - 1,395,476 --------- --------- --------- --------- 2,238,558 2,569,397 6,217,314 10,526,937 --------- --------- --------- --------- Net loss $(1,120,164) $(1,952,208) $(3,577,482) $(8,670,321) ========= ========= ========= ========= Net loss per share $ (0.15) $ (0.25) $ (0.46) $ (1.10) (see Exhibit 11) ========= ========= ========= ========= See accompanying notes. 4 CYTRX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Month Period Ended September 30, --------------------------------- 1996 1995 ---------- ----------- Cash flows from operating activities: Net loss $(3,577,482) $(8,670,321) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 378,546 441,199 Write-off of patent costs - 1,395,476 Net change in assets and liabilities (1,075,728) 623,767 ---------- ---------- Total adjustments (697,182) 2,460,442 ---------- ---------- Net cash used by operating activities (4,274,664) (6,209,879) Cash flows from investing activities: (Increase) decrease in short-term investments (10,014,275) 26,861,659 Capital expenditures, net (310,230) (116,530) ---------- ---------- Net cash provided (used) by investing activities (10,324,505) 26,745,129 Cash flows from financing activities: Net proceeds from issuance of common stock 108,135 100,547 Purchase of treasury stock (1,192,207) - ---------- ---------- Net cash provided by financing activities (1,084,072) 100,547 ---------- ---------- Net increase (decrease) in cash and cash equivalents (15,683,241) 20,635,797 Cash and cash equivalents at beginning of period 16,645,570 3,395,974 ---------- ---------- Cash and cash equivalents at end of period $ 962,329 $24,031,771 ========== ========== See accompanying notes. 5 CYTRX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (Unaudited) 1. Description of Company and Basis of Presentation CytRx Corporation and its subsidiaries are primarily engaged in the development of pharmaceutical products. Reference herein to "the Company" includes CytRx and its wholly-owned subsidiaries -- Vaxcel, Inc., Vetlife, Inc. and Proceutics, Inc. Vaxcel is developing the Optivax vaccine delivery system. Vetlife is developing products to enhance food animal growth. Proceutics provides high quality preclinical development services to the pharmaceutical industry. The accompanying condensed consolidated financial statements at September 30, 1996 and for the three and nine month periods ended September 30, 1996 and 1995 include the accounts of CytRx and its wholly-owned subsidiaries and are unaudited, but include all adjustments, consisting of normal recurring entries, which the Company's management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Company's audited financial statements in its Form 10-K for the year ended December 31, 1995. 2. Inventories Inventories at September 30, 1996 and December 31, 1995 are comprised of the following: September 30, 1996 December 31, 1995 ------------------ ----------------- Finished goods $ 4,744 $ 4,068 Raw materials 1,706 2,250 ------ ------ $ 6,450 $ 6,318 ===== ===== 3. Reverse Stock Split All share and per share information in the accompanying condensed consolidated financial statements and notes thereto has been retroactively adjusted to reflect a one-for-four reverse stock split effective February 6, 1996. 6 4. Net Loss Per Common Share Net loss per common share is computed based on the weighted average number of common shares outstanding during each period. Stock options and warrants outstanding are excluded from the computation of net loss per share since their effect is antidilutive. 5. Marketing and Distribution Agreements In January 1996 Vetlife signed an agreement with Ivy Laboratories, Inc. to market and distribute Ivy's line of FDA approved cattle growth products and devices in the United States. The newly created Vetlife Cattle Marketing Group will begin marketing products by January 1997. In connection with the agreement, Vetlife arranged for a letter of credit in the amount of $5 million in favor of Ivy Laboratories. The letter of credit is collateralized by approximately $6 million of short-term investments. In September 1996, Vetlife signed an agreement with Elanco Animal Health, a division of Eli Lilly and Company, whereby Vetlife became the exclusive U.S. supplier of Elanco's Compudose cattle growth promotant products, effective October 1, 1996. 7 Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition and Liquidity At September 30, 1996 the Company had cash and short-term investments of $19.5 million and net assets of $25.1 million, compared to $25.2 million and $29.8 million, respectively, at December 31, 1995. Working capital totaled $19.8 million at September 30, 1996, compared to $24.4 million at December 31, 1995. The Company has no material capital commitments. During 1995 the Company formed a new subsidiary, Proceutics, Inc., to provide preclinical development services to the pharmaceutical industry. CytRx contributed existing property and staff resources to the venture which commenced formal operations in January 1996. Although Proceutics continues to provide services to its affiliates, revenues derived from third parties are contributing to the Company's consolidated liquidity and capital resources. In January 1996 Vetlife signed an agreement with Ivy Laboratories, Inc. to market and distribute Ivy's line of FDA approved cattle growth products and devices in North America. Marketing and selling activities are not expected to begin until January 1997, unless Ivy receives FDA approval in 1996 to market certain additional products currently pending agency review. In September 1996 Vetlife signed an agreement with Elanco Animal Health, a division of Eli Lilly and Company, whereby Vetlife became the exclusive U.S. supplier of Elanco's Compudose cattle growth promotant products, effective October 1, 1996. Management expects that revenue generated from these arrangements will support Vetlife's other development programs. Given its current operating plans, management believes that cash and short-term investments on hand, combined with investment income, revenues generated by Proceutics and Vetlife, and sales of Titermax, the Company's research adjuvant, will be sufficient to satisfy the Company's working capital needs for the next several years. The Company's future cash requirements are dependent upon a number of factors, including the progress of the Company's product development activities, the expense of obtaining regulatory approvals, the determination of the commercial potential of the Company's products under development and the status of competitive products. The Company will consider additional sources of funding as appropriate and available. Results of Operations The following table presents the breakdown of consolidated results of operations by operating unit for the three month and nine month periods ended September 30, 1996 and 1995. Although the subsequent discussion addresses the consolidated results of operations for CytRx and its subsidiaries, management believes this presentation of net results by operating unit is important to an understanding of the consolidated financial statements taken as a whole. 8 Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (in thousands) 1996 1995 1996 1995 ---- ---- ---- ---- CytRx $(420) $(1,566) $(1,475) $(6,955) Proceutics (166) - (725) - Vaxcel (264) (246) (777) (1,138) Vetlife (270) (140) (600) (577) ----- ----- ----- ----- Consolidated Net Loss $(1,120) $(1,952) $(3,577) $(8,670) ===== ===== ===== ===== Net sales were $787,000 during the three months ended September 30, 1996 compared to $102,000 in 1995 and $1,605,000 during the nine months ended September 30, 1996 compared to $354,000 in 1995. Cost of sales during the nine month period ended September 30, 1996 were $1,180,000 (74% of net sales) as compared to $32,000 (9% of net sales) in 1995. These increases from 1995 are primarily attributable to the activities of Proceutics, which commenced formal operations in January. Net sales during 1995 consist solely of sales of Titermax. Investment income was $280,000 and $900,000 during the three months and nine months ended September 30, 1996, as compared to $474,000 and $1,425,000 for the same periods in 1995. The decrease from 1995 is primarily due to lower cash and invesment balances. At December 31, 1994 the Company had $2.5 million in unrealized losses as a result of 1994's dramatic increase in interest rates. By taking advantage of strength in the bond market during the second quarter of 1995, CytRx reduced its unrealized losses by $1.4 million, recording a non-cash charge of $1.1 million during the nine months ended September 30, 1995 which is shown as a separate line item on the Condensed Consolidated Statements of Operations. Research and development expenditures in 1996 decreased by $1,143,000, or 69%, from 1995 for the three months ended September 30, and by $3,177,000, or 61%, for the nine months ended September 30. This decrease is due to a reduction in the scope of the Company's preclinical development activities combined with a shift of certain personnel and capital resources to Proceutics. Selling, general and administrative expenses in 1996 increased by $123,000, or 13%, from 1995 for the three months ended September 30, and by $217,000 or 8%, for the nine months ended September 30. This increase is due to higher administrative expenses associated with Proceutics and Vetlife's Cattle Marketing Group, partially offset by cost reduction measures taken by CytRx. 9 Part II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 -- Statement re: computation of net loss per share (attached hereto). (b) Reports on Form 8-K: None. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CYTRX CORPORATION (Registrant) Date: November 4, 1996 By:/s/ Mark W. Reynolds Mark W. Reynolds Controller (Chief Financial Officer) 11