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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 March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15327
CYTRX CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 58-1642740
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
154 Technology Parkway, Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
(770) 368-9500
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(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
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Number of shares of CytRx Corporation Common Stock, $.001 par value, issued and
outstanding as of May 12, 1997: 7,411,120.
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CYTRX CORPORATION
Form 10-Q
Table of Contents
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PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited) for the
Three Month Periods Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Three Month Periods Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
CYTRX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 December 31, 1996
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,040,155 $ 1,604,003
Short-term investments 11,496,765 10,273,108
Accounts receivable, net 2,193,625 643,079
Inventories 11,434 9,508
Other current assets 339,041 532,399
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Total current assets 18,081,020 13,062,097
Property and equipment, net 5,031,368 5,012,809
Other assets:
Long-term investments 0 5,096,353
Note receivable 975,000 975,000
Other 124,207 153,063
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Total other assets 1,099,207 6,224,416
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Total assets $ 24,211,595 $ 24,299,322
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,061,115 $ 586,920
Accrued liabilities 1,618,857 1,123,476
Unearned revenue 1,038 251,192
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Total current liabilities 2,681,010 1,961,588
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 1,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.001 par value, 18,750,000 shares authorized;
7,952,221 and 7,945,203 shares issued at March 31, 1997
and December 31, 1996, respectively 7,952 7,945
Additional paid-in capital 62,683,458 62,653,015
Treasury stock, at cost (552,054 and 507,750 shares held at
March 31, 1997 and December 31, 1996, respectively) (2,186,908) (2,021,669)
Accumulated deficit (38,973,917) (38,301,557)
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Total stockholders' equity 21,530,585 22,337,734
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Total liabilities and stockholders' equity $ 24,211,595 $ 24,299,322
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See accompanying notes.
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CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period Ended March 31,
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1997 1996
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Revenues:
Net sales $ 3,743,080 $ 337,525
Investment income 244,535 303,972
Collaborative and grant income 92,667 0
Other income 25,694 33,768
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4,105,976 675,265
Expenses:
Cost of sales 2,324,645 112,715
Research and development 777,564 987,219
Selling, general and administrative 1,676,127 887,270
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4,778,336 1,987,204
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Net loss $ (672,360) $ (1,311,939)
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Net loss per share -- see Exhibit 11 $ (0.09) $ (0.17)
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See accompanying notes.
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CYTRX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period Ended March 31,
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1997 1996
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Cash flows from operating activities:
Net loss $ (672,360) $ (1,311,939)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 154,908 164,107
Net change in assets and liabilities (610,836) (814,581)
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Total adjustments (455,928) (650,474)
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Net cash used by operating activities (1,128,288) (1,962,413)
Cash flows from investing activities:
Increase in short-term investments (1,223,657) (11,658,456)
Decrease in long-term investments 5,096,353 0
Capital expenditures, net (173,467) (68,065)
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Net cash provided (used) by investing activities 3,699,229 (11,726,521)
Cash flows from financing activities:
Proceeds from issuance of common stock 30,450 25,737
Purchase of treasury stock (165,239) -
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Net cash provided (used) by financing activities (134,789) 25,737
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Net increase (decrease) in cash and cash equivalents 2,436,152 (13,663,197)
Cash and cash equivalents at beginning of period 1,604,003 16,645,570
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Cash and cash equivalents at end of perio $ 4,040,155 $ 2,982,373
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See accompanying notes.
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CYTRX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
1. DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION
CytRx Corporation's business strategy is to build shareholder value
through the development and commercialization of high value human therapeutic
products and the successful development and rollout of its promising subsidiary
companies. CytRx's CRL-5861 is being developed to treat acute sickle cell
crisis and other vascular diseases. Vaxcel, Inc. is developing the Optivax
vaccine delivery system to enhance the effectiveness of vaccines. VetLife,
Inc. markets and distributes products to enhance food animal growth.
Proceutics, Inc. provides high quality preclinical development services to the
pharmaceutical industry. Reference herein to "the Company" includes CytRx and
its subsidiaries.
The accompanying condensed consolidated financial statements at March 31,
1997 and for the three month periods ended March 31, 1997 and 1996 include the
accounts of CytRx together with those of its 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. All significant intercompany transactions have been
eliminated. 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, 1996.
2. INVENTORIES
Inventories at March 31, 1997 and December 31, 1996 are comprised of the
following:
March 31, 1997 December 31, 1996
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Finished goods $8,399 $6,144
Raw materials 3,035 3,364
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$11,434 $9,508
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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
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reverse stock split approved on February 5, 1996 by the Company's stockholders,
effective February 6, 1996.
4. NET LOSS PER COMMON SHARE
Net loss per common share is calculated in accordance with Accounting
Principles Board Opinion No. 15, Earnings per Share, and is based on the
weighted average number of common shares and common share equivalents
outstanding during each period. Stock options and warrants outstanding are
excluded from the computation of net loss per share since the effect is
antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The adoption of
Statement No. 128 will not impact the Company's calculation of net loss per
share for the three month periods ended March 31, 1997 and 1996.
5. POTENTIAL MERGER OF VAXCEL
In December 1996 CytRx, Vaxcel and Zynaxis, Inc. ("Zynaxis") signed an
agreement whereby Zynaxis will be merged with a wholly-owned subsidiary of
Vaxcel. Zynaxis is a publicly-held biotechnology company engaged in the
development of certain vaccine technologies. Under the terms of the agreement,
all of the outstanding shares of Zynaxis will be converted into shares of
Vaxcel based upon certain exchange ratios defined in the agreement. After
closing, it is anticipated that CytRx will own approximately 87.5% of the
outstanding common shares of Vaxcel, with the remaining 12.5% held by the
former stockholders of Zynaxis. The merger will be treated as a purchase by
Vaxcel and is expected to constitute a tax-free reorganization for Zynaxis
stockholders.
Pursuant to the agreement, CytRx will provide up to $2 million to Zynaxis
under a secured credit facility bearing interest at prime plus 2% during the
period prior to the closing of the merger, at which time the outstanding
principal and interest will be contributed to the capital of Vaxcel, together
with additional equity in the amount of $4 million less the outstanding
principal and interest of the secured note. At March 31, 1997 the outstanding
principal balance under this credit facility was $975,000 and during April 1997
CytRx advanced an additional $450,000 to Zynaxis.
The proposed transaction is subject to the approval of the Zynaxis
stockholders at a meeting to be held May 21, 1997.
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6. ADOPTION OF SHAREHOLDER PROTECTION RIGHTS PLAN
Effective April 16, 1997, the Company's Board of Directors declared a
distribution of one Right for each outstanding share of the Company's Common
Stock to stockholders of record at the close of business on May 15, 1997 and
for each share of Common Stock issued by the Company thereafter and prior to a
Flip-in Date (as defined below). Each Right entitles the registered holder to
purchase from the Company one ten-thousandth (1/10,000th) of a share of Series
A Junior Participating Preferred Stock, at an exercise price of $30. The
Rights are generally not exercisable until 10 business days after an
announcement by the Company that a person or group of affiliated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or more of the
Company's then outstanding shares of Common Stock (a "Flip-in Date").
In the event the Rights become exercisable as a result of the acquisition
of shares, each Right will enable the owner, other than the Acquiring Person,
to purchase at the Right's then current exercise price a number of shares of
Common Stock with a market value equal to twice the exercise price. In
addition, unless the Acquiring Person owns more than 50% of the outstanding
shares of Common Stock, the Board of Directors may elect to exchange all
outstanding Rights (other than those owned by such acquiring person) at an
exchange ratio of one share of Common Stock per Right. All Rights that are
owned by any person on or after the date such person becomes an Acquiring
Person will be null and void.
The Rights have been distributed to protect the Company's stockholders
from coercive or abusive takeover tactics and to give the Board of Directors
more negotiating leverage in dealing with prospective acquirors.
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Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
At March 31, 1997 the Company had cash and investments of $15.5 million
and net assets of $21.5 million, compared to $17 million and $22.3 million,
respectively, at December 31, 1996. Working capital totaled $15.4 million at
March 31, 1997, compared to $11.1 million at December 31, 1996. Working
capital at December 31, 1996 excludes $5.1 million of investments classified as
non-current assets which mature in early 1998 that are included in working
capital at March 31, 1997.
Management believes that cash and investments on hand, combined with
interest income and operating revenues, will be sufficient to satisfy the
Company's liquidity and working capital needs for the next several years, but
it is possible that additional funding may be required to accomplish the
necessary testing and data collection procedures prescribed by the U.S. Food
and Drug Administration for the commercialization of any products for human
use. Definitive statements as to the time required and costs involved in
reaching certain objectives for the Company's products are difficult to project
due to the uncertainties of the medical research field. Requirements could
vary depending upon the results of research, competitive and technological
developments, and the time and expense required for governmental approval of
products, some of which factors are beyond management's control.
During 1996 the Company received federal government funding for certain
research and development activities via several Small Business Innovative
Research (SBIR) grants. The Company will continue to seek government
assistance for its product development efforts as appropriate and available.
Additional funding for research and development expenditures is expected to be
obtained through joint ventures and product licensing arrangements with other
companies. CytRx also anticipates that it may raise funds through equity
financings of one or more of its subsidiaries, either directly by the
subsidiary through issuance of the subsidiary's stock, or through sale by CytRx
of a portion of its ownership in a subsidiary. These statements regarding the
Company's plans for future financing are forward-looking statements that are
subject to a number of risks and uncertainties. The Company's ability to
obtain future financings through joint ventures, product licensing
arrangements, equity financings or otherwise is subject to market conditions
and the Company's ability to identify parties that are willing and able to
enter into such arrangements on terms that are satisfactory to the Company.
There can be no assurance that the Company will be able to obtain future
financing from these sources.
In December 1996 CytRx, Vaxcel and Zynaxis, Inc. signed an agreement to
merge Zynaxis with a wholly-owned subsidiary of Vaxcel (see Note 5 to Financial
Statements). The merger is subject to approval by the Zynaxis shareholders at
a meeting to be held on May 21, 1997. Pursuant to the agreement, CytRx has
committed to provide $4 million in equity funding to Vaxcel, less the
outstanding principal and interest drawn on a $2 million secured credit
facility by Zynaxis during the period prior to closing of the merger.
Subsequent to the merger, CytRx
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will own approximately 87.5% of Vaxcel, with the remaining 12.5% held by the
former Zynaxis shareholders. It is expected that the Vaxcel common stock will
be publicly traded subsequent to the merger.
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 party sources
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 beginning January 1, 1997. 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 offset
VetLife's product development efforts and will contribute to the Company's
consolidated liquidity and capital resources.
At December 31, 1996 the Company has net operating loss carryforwards for
income tax purposes of approximately $37 million, which will expire at various
dates through 2011 if not utilized. The Company also has research and
development credits available to reduce income taxes, if any, of approximately
$1.1 million. Based on an assessment of all available evidence including, but
not limited to, the Company's limited operating history and lack of
profitability, uncertainties of the commercial viability of the Company's
technology, the impact of government regulation and healthcare reform
initiatives, and other risks normally associated with biotechnology companies,
the Company has concluded that it is more likely than not that these net
operating loss carryforwards and credits will not be realized and, as a result,
a 100% deferred tax valuation allowance has been recorded against these assets.
Such valuation allowance had no impact on reported net losses.
Results of Operations
The following table presents the breakdown of consolidated results of
operations by operating unit for the three month periods ended March 31, 1997
and 1996. Although the subsequent discussion addresses the consolidated
results of operations for CytRx together with 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.
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Three Month Period Ended March 31,
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1997 1996
(in thousands) ----------------- -----------------
CytRx $(616) $(361)
Proceutics (87) (409)
Vaxcel (343) (296)
VetLife 374 (246)
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Consolidated $(672) $(1,312)
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Consolidated net sales for the three months ended March 31, 1997 were
$3,743,000, as compared to $338,000 in 1996. The significant components of net
sales are shown below.
Three Month Period Ended March 31,
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1997 1996
(in thousands) ----------------- -----------------
Product Sales (VetLife) $3,080 $ -
Product Sales (CytRx) 128 123
Service Revenues (Proceutics) 436 155
Service Revenues (CytRx) 99 60
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Consolidated $3,743 $338
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Cost of sales were $2,325,000 (62% of net sales) during the first quarter
of 1997 as compared to $113,000 (33% of net sales) in 1996. This increase is
directly attributable to the sales activities of VetLife, which initiated sales
and marketing activities during the fourth quarter of 1996, as well as an
increased level of activity for Proceutics.
Investment income was $244,000 during the first quarter of 1997 as
compared to $304,000 for the same period in 1996, corresponding to reductions
in cash and investment balances.
Research and development expenditures were $778,000 during the first
quarter of 1997 as compared to $987,000 for the same period in 1996. This
decrease is due in part to staff reductions and other scale-backs in research
and development activities by VetLife during 1996 as it shifted its primary
focus to the start-up and pre-marketing activities of its Cattle Business Unit.
Also contributing to the decrease is the broader base of selling and
administrative activities in Proceutics and VetLife to which overall facilities
costs and shared services are allocated, thereby reducing such allocations to
research and development.
Selling, general and administrative expenses during the first quarter of
1997 were $1,676,000 as compared to $887,000 in 1996. This increase is
attributable to the initiation of selling activities for VetLife, together with
the resulting increased allocation of overhead expenses as discussed above.
Management believes that inflation had no material impact on the Company's
operations during the three year period ended December 31, 1996.
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Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
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3(ii) Bylaws of the Company
4.1 Shareholder Protection Rights Agreement, dated as of
April 16, 1997, between CytRx Corporation and American
Stock Transfer & Trust Company, as Rights Agent *
4.2 Certificate of Designation, Preferences and Rights of the
Series A Junior Participating Preferred Stock of CytRx
Corporation
11 Statement re: computation of net loss per share
27 Financial Data Schedule (for SEC use only).
* Incorporated by reference from the Company's report on Form 8-K
filed April 16, 1997
(b) Reports on Form 8-K: None.
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SIGNATURES
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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: May 14, 1997 By: /s/ Mark W. Reynolds
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Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer)
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