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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
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 000-14879
Cytogen Corporation
-------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2322400
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
650 College Road East, CN 5308, Suite 3100, Princeton, NJ 08540-5308
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(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 750-8200
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 .
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at May 1, 2003
- ---------------------------- --------------------------
Common Stock, $.01 par value 8,813,832
CYTOGEN CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION............................................... 1
Item 1. Financial Statements................................................ 1
Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002...................................... 1
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 (unaudited).................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 (unaudited).................................... 3
Notes to Consolidated Financial Statements (unaudited).................. 4
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results of Operations................................................... 9
Item 3. Quantitative And Qualitative Disclosures About Market Risk.......... 17
Item 4. Controls and Procedures............................................. 18
Part II. OTHER INFORMATION.................................................. 19
Item 6. Exhibits And Reports On Form 8-K.................................... 19
SIGNATURES................................................................... 20
CERTIFICATIONS............................................................... 21
(i)
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
(Unaudited)
March 31, December 31,
2003 2002
---------- ------------
ASSETS:
Current Assets:
Cash and cash equivalents ...................................... $ 11,131 $ 14,725
Accounts receivable, net ....................................... 1,419 1,778
Inventories .................................................... 1,838 1,262
Other current assets ........................................... 1,104 643
--------- ---------
Total current assets ....................................... 15,492 18,408
Property and Equipment, net ...................................... 917 1,072
Other Assets ..................................................... 1,047 414
--------- ---------
$ 17,456 $ 19,894
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term liabilities ....................... $ 75 $ 80
Accounts payable and accrued liabilities ....................... 4,017 4,427
Deferred revenue ............................................... 354 385
--------- ---------
Total current liabilities .................................. 4,446 4,892
--------- ---------
Long-Term Liabilities ............................................ 2,614 2,614
--------- ---------
Deferred Revenue ................................................. 1,735 1,800
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized -
Series C Junior Participating Preferred Stock, $.01 par value,
200,000 shares authorized, none issued and outstanding ....... - -
Common stock, $.01 par value, 25,000,000 shares authorized,
8,764,074 and 8,758,235 shares issued and outstanding
at March 31, 2003 and December 31, 2002, respectively ........ 88 88
Additional paid-in capital ..................................... 366,906 366,884
Deferred compensation .......................................... (2) (4)
Accumulated deficit ............................................ (358,331) (356,380)
--------- ---------
Total stockholders' equity ................................. 8,661 10,588
--------- ---------
$ 17,456 $ 19,894
========= =========
The accompanying notes are an integral part of these statements.
1
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Revenues:
Product related:
ProstaScint ......................................... $ 1,620 $ 2,076
Others .............................................. 265 506
------- -------
Total product sales ........................ 1,885 2,582
Quadramet royalties ................................. 449 499
------- -------
Total product related ...................... 2,334 3,081
License and contract ................................ 143 215
------- -------
Total revenues ............................. 2,477 3,296
------- -------
Operating Expenses:
Cost of product related revenues ...................... 910 1,054
Research and development .............................. 833 3,799
Equity loss in PSMA LLC ............................... 880 513
Selling and marketing ................................. 1,302 1,453
General and administrative ............................ 1,076 1,510
------- -------
Total operating expenses ................... 5,001 8,329
------- -------
Operating loss ............................. (2,524) (5,033)
Interest income ......................................... 36 77
Interest expense ........................................ (47) (42)
------- -------
Loss before income taxes ................... (2,535) (4,998)
Income tax benefit ...................................... (584) -
------- -------
Net loss ................................................ $(1,951) $(4,998)
======= =======
Basic and diluted net loss per share .................... $ (0.22) $ (0.62)
======= =======
Weighted average common shares outstanding............... 8,763 8,122
======= =======
The accompanying notes are an integral part of these statements.
2
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $ (1,951) $ (4,998)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 163 194
Stock-based compensation expenses ...................... 5 501
Amortization of deferred revenue ....................... (96) (215)
Stock-based milestone payment .......................... - 2,000
Changes in assets and liabilites:
Receivables, net ..................................... 359 961
Inventories .......................................... (576) 200
Other assets ......................................... (1,102) 189
Accounts payable and accrued liabilities ............. (396) (1,380)
Other liabilities .................................... 39 39
-------- --------
Net cash used in operating activities .................. (3,555) (2,509)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of equipment ............................ - 100
Purchases of property and equipment ............................ - (24)
-------- --------
Net cash provided by investing activities .............. - 76
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......................... 5 7,991
Payment of long-term liabilities ............................... (44) (24)
-------- --------
Net cash provided by (used in) financing activities .... (39) 7,967
-------- --------
Net increase (decrease) in cash and cash equivalents ........... (3,594) 5,534
Cash and cash equivalents, beginning of period ................. 14,725 11,309
-------- --------
Cash and cash equivalents, end of period ....................... $ 11,131 $ 16,843
======== ========
The accompanying notes are an integral part of these statements.
3
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Cytogen Corporation ("Cytogen" or the "Company") of Princeton, New
Jersey is a product-driven, oncology-focused biopharmaceutical company. Cytogen
markets proprietary and licensed oncology products through its in-house
specialty sales force: ProstaScint(R) (a monoclonal antibody-based imaging agent
used to image the extent and spread of prostate cancer) and NMP22(R)
BladderChek(TM) (a point-of-care, in vitro diagnostic test for bladder cancer).
Cytogen has also developed Quadramet(R), a skeletal targeting therapeutic
radiopharmaceutical for the relief of bone pain in prostate and other types of
cancer, for which the Company receives royalties on product sales through Berlex
Laboratories, the U.S. affiliate of Schering AG Germany, which markets the
product in the United States. Cytogen's pipeline comprises product candidates at
various stages of clinical development, including fully human monoclonal
antibodies and cancer vaccines based on PSMA (prostate specific membrane
antigen) technology, which was exclusively licensed from Memorial
Sloan-Kettering Cancer Center. Cytogen also conducts research in cellular
signaling through its AxCell Biosciences research subsidiary in Newtown, PA.
In August 2000, the Company expanded its product pipeline by entering
into marketing, license and supply agreements with Advanced Magnetics, Inc. for
Combidex(R), which is an investigational magnetic resonance imaging (MRI)
contrast agent that assists in the differentiation of metastatic from
non-metastatic lymph nodes. Cytogen holds exclusive United States marketing
rights to Combidex. Advanced Magnetics is continuing its discussions with the
FDA relating to outstanding issues regarding an approvable letter received from
the FDA dated June 2000, in an effort to bring Combidex to market.
Basis of Consolidation
The consolidated financial statements include the accounts of Cytogen
and its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Basis of Presentation
The consolidated financial statements and notes thereto of Cytogen are
unaudited and include all adjustments, which in the opinion of management, are
necessary to present fairly the financial condition and results of operations
as of and for the periods set forth in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
All such accounting adjustments are of a normal, recurring nature. The
consolidated financial statements do not include all of the information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America and should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
4
10-K, as amended, filed with the Securities and Exchange Commission, which
includes financial statements as of and for the year ended December 31, 2002.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full year.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks and all
highly-liquid investments with a maturity of three months or less at the time of
purchase.
Inventories
The Company's inventories are primarily related to ProstaScint and
NMP22 BladderChek. Inventories are stated at the lower of cost or market using
the first-in, first-out method and consisted of the following:
March 31, December 31,
2003 2002
---------- -----------
Raw materials................. $ 780,000 $ 506,000
Work-in process............... 541,000 39,000
Finished goods................ 517,000 717,000
---------- ----------
$1,838,000 $1,262,000
========== ==========
Net Loss Per Share
Basic net loss per common share is based upon the weighted average
common shares outstanding during each period. Diluted net loss per common share
is the same as basic net loss per share, as the inclusion of common stock
equivalents would be antidilutive due to the Company's losses.
Other Comprehensive Loss
Other comprehensive loss consisted of an unrealized loss on a
marketable security. For the three months ended March 31, 2002, the fair market
value of that security decreased $316,000, and as a result, the comprehensive
loss for the three months ended March 31, 2002 was $5,314,000. There were no
marketable securities outstanding during the first quarter of 2003 and therefore
no other comprehensive gains or losses.
Stock-based Compensation
The Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. The
Company records deferred compensation for option grants to employees for the
amount, if any, by which the market price per share exceeds the exercise price
per share at the measurement date, which is generally the grant date.
5
The Company follows the disclosure provisions of SFAS 123 "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Had compensation cost for
options been recognized in the consolidated statements of operations using the
fair value method of accounting, the Company's net loss and net loss per share
would have been:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net loss, as reported ............................ $(1,951,000) $(4,998,000)
Add: Stock-based employee compensation
expense included in reported net loss ...... 1,000 288,000
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all awards .......... (351,000) (789,000)
----------- -----------
Pro forma net loss ............................... $(2,301,000) $(5,499,000)
=========== ===========
Basic and diluted net loss per share, as reported $ (0.22) $ (0.62)
Pro forma basic and diluted net loss per share ... $ (0.26) $ (0.68)
2. EQUITY LOSS IN PSMA DEVELOPMENT CO. LLC:
In June 1999, Cytogen entered into a joint venture with Progenics
Pharmaceuticals Inc. ("Progenics"), the PSMA Development Company LLC, (the
"Joint Venture"), to develop vaccine and antibody-based immunotherapeutic
products utilizing Cytogen's exclusively licensed PSMA technology. The Joint
Venture is owned equally by Cytogen and Progenics.
The Company accounts for the Joint Venture using the equity method of
accounting. Through November 2001, Progenics was obligated to fund the initial
$3.0 million of the development costs. Beginning in December 2001, Cytogen began
to recognize 50% of the Joint Venture's operating results in its consolidated
statement of operations. The JV is expected to continue to incur losses in
future years. For the three months ended March 31, 2003 and 2002, Cytogen
recognized $880,000 and $513,000, respectively, of such losses. As of March 31,
2003 and December 31, 2002, the carrying value of the Company's investment in
the Joint Venture was $622,000 and $1,000, respectively, which represents
Cytogen's investment to date in the Joint Venture, less its cumulative share of
losses, which net investment is recorded in other assets. Selected financial
statement information of the Joint Venture is as follows:
6
March 31, December 31,
2003 2002
------------ ------------
Balance Sheet Data:
Cash ................................ $ 1,903,000 $ 290,000
============ ============
Accounts payable .................... $ 676,000 $ 304,000
Capital contributions ............... 14,399,000 11,399,000
Accumulated deficit ................. (13,172,000) (11,413,000)
------------ ------------
$ 1,903,000 $ 290,000
============ ============
For the Period
Three Months Ended From June 15, 1999
---------------------------- (inception) to
2003 2002 March 31, 2003
------------ ------------ ------------------
Interest income............ $ - $ - $ 229,000
Total expenses ............ 1,759,000 1,027,000 13,401,000
------------ ------------ ------------
Net loss .................. $ (1,759,000) $ (1,027,000) $(13,172,000)
============ ============ ============
3. LITIGATION:
On March 17, 2000, Cytogen was served with a complaint filed against
the Company in the U.S. District Court for the District of New Jersey by M.
David Goldenberg ("Goldenberg") and Immunomedics, Inc. (collectively
"Plaintiffs"). The litigation claims that ProstaScint infringes a patent
purportedly owned by Goldenberg and licensed to Immunomedics. The Company
believes that ProstaScint does not infringe this patent, and that the patent is
invalid and unenforceable. The patent sought to be enforced in the litigation
has now expired; as a result, the claim even if successful would not result in
an injunction barring the continued sale of ProstaScint or affect any other of
Cytogen's products or technology. In addition, the Company has certain rights to
indemnification against litigation and litigation expenses from the inventor of
technology used in ProstaScint, which may be offset against royalty payments on
sales of ProstaScint. On December 17, 2001, Cytogen filed a motion for summary
judgment of non-infringement of the asserted claims of the patent-in-suit. The
Plaintiffs opposed that motion and filed their own cross-motion for summary
judgment of infringement. On July 3, 2002, the Court denied both parties'
summary judgment motions, with leave to renew those motions after hearing expert
testimony and legal argument based upon that testimony. On April 29, 2003,
Cytogen's motion for summary judgment of non-infringement of all asserted claims
was granted, plantiff's motion for summary judgement of infringement was denied
and the case was ordered closed. On May 12, 2003, Plaintiffs filed a Notice of
Appeal regarding this decision to the U.S. Court of Appeals for the Federal
Circuit.
7
4. INCOME TAXES
During the first quarter of 2003, the Company sold New Jersey State net
operating loss and research and development credit carryforwards, which resulted
in the recognition of $584,000 of income tax benefit.
8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Quarterly Report on Form 10-Q
regarding our strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. Such
forward-looking statements involve a number of risks and uncertainties and
investors are cautioned not to put any undue reliance on any forward-looking
statement. We cannot guarantee that we will actually achieve the plans,
intentions or expectations disclosed in any such forward-looking statements.
Factors that could cause actual results to differ materially, include, but are
not limited to those identified in the our Annual Report on Form 10-K for the
year ended December 31, 2002, as amended, under the caption "Additional Factors
That May Affect Future Results". Investors are cautioned not to put undue
reliance on any forward looking statement.
Cautionary Statement
Our actual results may differ materially from our historical results of
operations and those discussed in the forward-looking statements for various
reasons, including, but not limited to, our ability to: (i) access the capital
markets in the near term and in the future for continued funding of our
operations including existing and new projects and to maintain the listing of
our common stock on the Nasdaq National Market; (ii) attract and retain
personnel needed for business operations and strategic plans; (iii) carry out
our business and financial plans; (iv) attract, and the ultimate success of,
strategic partnering arrangements, collaborations, and acquisition candidates;
(v) successfully develop and commercialize in-licensed products such as NMP22(R)
BladderChek(TM), including programs designed to facilitate the use of our
products, such as the Partners in Excellence or PIE Program; (vi) establish and
successfully complete clinical trials where required for product approval; (vii)
obtain foreign regulatory approvals for products and to establish marketing
arrangements in countries where approval is obtained; (viii) demonstrate, over
time, the efficacy and safety of our products; (ix) determine and implement the
appropriate strategic initiative for our AxCell Biosciences subsidiary; and (x)
fund development necessary for existing products and for the pursuit of new
product opportunities. Additional risks that we face include, but are not
limited to: (i) the risk of whether marketable and valuable products result from
our development activities; (ii) the possibility that we may not be able to
adequately protect our intellectual property portfolio; (iii) the degree of
competition we may face from existing or new products; (iv) the risks associated
with obtaining the necessary regulatory approvals; (v) the ability of Advanced
Magnetics to satisfy the conditions specified by the FDA regarding approval to
market Combidex(R) in the United States; (vi) shifts in the regulatory
environment affecting sale of our products such as third-party payor
reimbursement issues and dependence on our partners for development of certain
projects; (vii) competitive products and technologies; (viii) price pressure;
and (ix) other factors discussed in our press releases and from time-to-time in
our other filings with the Securities and Exchange Commission. Any
forward-looking statements made by us do not reflect the potential impact of any
9
future acquisitions, mergers, dispositions, joint ventures or investments we may
make. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statements, and these statements represent our current outlook
only as of the date given.
The following discussion and analysis should be read in conjunction
with the Financial Statements and related notes thereto contained elsewhere
herein, as well as our Annual Report on Form 10-K for the year ended December
31, 2002, as amended, and from time to time in our other filings with the
Securities and Exchange Commission.
Significant Events in 2003
In January 2003, we provided Draximage Inc. with notice of termination
for each of our License and Distribution Agreement and Product Manufacturing and
Supply Agreement with respect to both of Draximage's BrachySeed I-125 and
BrachySeed Pd-103 products. Effective January 24, 2003, we no longer accept or
fill new orders for the BrachySeed products. In April 2003, we entered into an
agreement with Draximage formally terminating each of these agreements.
In April 2003, NMP22 BladderChek was awarded clearance from the FDA for
use in screening patients for bladder cancer, in addition to approval gained
previously for the indication of monitoring patients who have a prior diagnosis
of bladder cancer. In October 2002, we entered into a five-year agreement with
Matritech Inc. to be the sole distributor for Matritech's NMP22 BladderChek test
to urologists and oncologists in the United States. Retention of exclusivity
rights depends upon meeting certain minimum annual purchases. NMP22 Bladderchek
is an in-vitro point of care diagnostic test for bladder cancer that requires
only a few drops of a patient's urine. NMP22 BladderChek returns results in
thirty minutes and provides urologists with a new tool to improve detection and
early diagnosis when used in combination with cytoscopy, a clinical procedure
for the visual identification of tumors in the bladder. We are in the
early-phase of launching NMP22 BladderChek and are promoting the product to
urologists in the U.S. using our in-house sales force.
Results of Operations
Three Months Ended March 31, 2003 and 2002
Revenues. Total revenues for the first quarter of 2003 were $2.5
million compared to $3.3 million for the same period in 2002. The decrease from
the prior year period is due primarily to lower product related revenues
resulting from lower ProstaScint sales and from the discontinuation of selling
and marketing the brachytherapy products as of January 24, 2003 and OncoScint as
of December 31, 2002. Product related revenues, which included product sales and
royalties, accounted for 94% and 93% of total revenues for the first quarters of
2003 and 2002, respectively. License and contract revenues accounted for the
remainder of revenues.
Product related revenues for the first quarter of 2003 were $2.3
million compared to $3.1 million for the same period in 2002. Sales of
ProstaScint accounted for 69% and 67% of product related revenues in the first
quarters of 2003 and 2002, respectively, while Quadramet royalties accounted for
19% and 16% of product related revenues for such quarters, respectively. Sales
of ProstaScint were $1.6 million for the first quarter of 2003, a decrease of
$456,000 from $2.1 million in the first quarter of 2002. We believe that the
10
year-over-year decline in first quarter ProstaScint sales was largely due to
changes in radiopharmacy wholesaler buying patterns. Year-over-year declines in
first quarter ProstaScint sales also occurred during 2001 and 2002, while annual
product sales increased during these periods, although historical performance
may not be indicative of future results. We also believe future growth for
ProstaScint is dependent upon, among other things, the implementation and
continued research of the following:
- Advances in imaging technology
- Fusion imaging - an image processing technique that combines
functional information from a ProstaScint scan with anatomic
images provided by CT (computed tomography) or MR (magnetic
resonance) scans in a digital overlay to provide information that
cannot be achieved with separate imaging modalities alone, which
may improve diagnostic interpretation; and
- Image enhancements - improving the quality of ProstaScint images
through reconstruction and attenuation-correction methods to
address inherent limitations of single photon emission computed
tomography (SPECT) imaging by correcting for the effects of
radiation scatter and/or inherent collimator/detector blur.
- New product applications
- Utilization of ProstaScint scans to guide therapy ("image-guided
therapy"), to enhance therapy targeting for treatments such as
brachytherapy, cryotherapy and external beam radiation, such as
intensity modulated radiation therapy (IMRT); and
- Utilization of ProstaScint scans to guide biopsy ("image-guided
biopsy"), which could be facilitated by future advances in image
acquisition technology.
There can be no assurance, however, that the achievement of any of the above
will significantly increase the sales of ProstaScint.
Other product sales include sales from NMP22 BladderChek, BrachySeed
(ended January 2003) and OncoScint (ended December 2002). Sales of NMP22
BladderChek during the first quarter 2003 were $25,000. NMP22 BladderChek is one
of only two immunoassay fluid tests approved by the FDA for screening patients
for cancer; the other is the prostate specific antigen (PSA) test for prostate
cancer. We began promoting NMP22 BladderChek to urologists in the United States
in November 2002 using our in-house sales force. The NMP22 BladderChek test is
currently approved for use in two clinical settings:
- Monitoring - In July 2002, Matritech, Inc. received FDA approval to
market the NMP22 BladderChek test for monitoring patients previously
diagnosed with bladder cancer; and
- Screening - In April 2003, Matritech received FDA approval to market
the NMP22 BladderChek test to aid in the diagnosis of patients with
bladder cancer.
There can be no assurance however, as to the market acceptance of NMP22
BladderChek or whether the sale of NMP22 Bladderchek will significantly increase
our revenues.
11
Sales of BrachySeed during the first quarter of 2003 were $240,000 and
accounted for 10% of product related revenues, compared to $452,000, or 15% of
product related revenues, in the first quarter of 2002. As described above,
effective January 24, 2003, we no longer accept or fill new orders for the
BrachySeed I-125 and BrachySeed Pd-103 products. In April 2003, we entered into
an agreement with Draximage to formally terminate our agreements with Draximage
with respect to these products.
We discontinued selling OncoScint CR/OV(R) in December 2002 in order to
focus on our other oncology products, since the market for OncoScint CR/OV for
colorectal cancer diagnosis has been negatively affected by positron emission
tomography or "PET" scans which have shown the same or higher sensitivity than
OncoScint CR/OV. Sales of OncoScint CR/OV during the first quarter of 2002 were
$54,000.
Quadramet royalties for the first quarter of 2003 were $449,000, a
decrease of $50,000 from $499,000 in the first quarter of 2002. Quadramet is
currently marketed in the U.S. by the Company's marketing partner, Berlex
Laboratories. We believe that the future growth and market penetration of
Quadramet is dependent upon, among other things:
- New clinical data supporting the expanded and earlier use of Quadramet
in various cancers;
- Novel research supporting combination uses with other therapies, such
as chemotherapy and bisphophonates;
- Establishing the use of Quadramet at higher doses to target and treat
primary bone cancers; and
- Increased marketing and sales penetration to physicians.
There can be no assurance that Quadramet will achieve greater market penetration
on a timely basis or result in significant revenues for Cytogen.
License and contract revenues for the first quarter of 2003 were
$143,000 compared to $215,000 for the same period of 2002. As a result of our
adoption of Securities and Exchange Commission's Staff Accounting Bulletin
No.101 ("SAB 101") in 2000, license revenues from certain up-front,
non-refundable license fees previously recognized in prior years were deferred
and are being amortized over the estimated performance period. In the first
quarter of 2003, we recognized $96,000 of deferred license revenue compared to
$215,000 for the same period in 2002. In the first quarter of 2003, we performed
limited research and development services for the PSMA Development Company LLC,
our joint venture with Progenics Pharmaceuticals Inc. resulting in $47,000 of
contract revenue. The level of future revenues from the joint venture will be
dependent upon the extent of the research and development services required by
the joint venture.
Operating Expenses. Total operating expenses for the first quarter of
2003 were $5.0 million compared to $8.3 million in the same quarter of 2002. The
decrease from the prior year period is attributable primarily to a non-cash
milestone payment of $2.0 million in 2002 related to the progress of dendritic
cell prostate cancer clinical trials at Northwest Biotherapeutics, Inc. and
cost-saving measures implemented in September 2002 as a result of the
restructuring at our subsidiary AxCell Biosciences.
12
Cost of product related revenues for the first quarter of 2003 were
$910,000 compared to $1.1 million in the same period of 2002. The decrease from
the prior year period is primarily due to the lower product sales and to a
reversal of $133,000 related to lower royalty expenses on the 2002 BrachySeed
sales as a result of a termination agreement entered into with Draximage with
respect to the BrachySeed products.
Research and development expenses for the first quarter of 2003 were
$833,000 compared to $3.8 million in the same period of 2002. The decrease from
the prior year period is attributable primarily to a non-cash milestone payment
of $2.0 million in 2002 related to the progress of dendritic cell prostate
cancer clinical trials at Northwest Biotherapeutics, Inc., and cost-saving
measures implemented in September 2002 as a result of the restructuring at our
subsidiary AxCell Biosciences. During the first quarters of 2003 and 2002, we
invested $450,000 and $1.3 million, respectively, in AxCell's signal
transduction research activities.
Our share in the equity loss in the PSMA Development LLC ("Joint
Venture") was $880,000 during the first quarter of 2003 compared to $513,000 in
the same quarter of 2002 and represented 50% of the Joint Venture's operating
results. The Joint Venture is equally owned by Cytogen and Progenics. We account
for the Joint Venture using the equity method of accounting. We and Progenics
share equally the costs of the Joint Venture. We expect to incur significant and
increasing costs in the future to fund our share of the development costs from
the Joint Venture. As of May 2003, we and Progenics are in the process of
negotiating the 2003 annual budget for the joint venture and have agreed that
the operating budget for 2003 will be no less than the 2002 operating expenses
for the Joint Venture.
Selling and marketing expenses for the first quarter of 2003 were $1.3
million compared to $1.5 million in the same period of 2002. The decrease from
the prior year is primarily due to the discontinuation of the selling and
marketing activities related to the brachytherapy products effective January
2003.
General and administrative expenses for the first quarter of 2003 were
$1.1 million compared to $1.5 million in the same period of 2002. The decrease
from the prior year period is due primarily to a reduction in personnel at the
end of 2002 and a non-cash charge in 2002 for stock-based compensation for a key
employee.
Interest Income/Expense. Interest income for the first quarter of 2003
was $36,000 compared to $77,000 in the same period of 2002. The decrease from
the prior year period is due to a lower average yield on investments and lower
average cash balances in 2003. Interest expense for the first quarter of 2003
was $47,000 compared to $42,000 in the same period of 2002. Interest expense
includes interest on outstanding debt and finance charges related to various
equipment leases.
Income tax benefit. During the first quarter of 2003, we sold New
Jersey State net operating loss and research and development credit
carryforwards, which resulted in the recognition of $584,000 income tax benefit.
Assuming the State of New Jersey continues to fund this program, which is
uncertain, the future amount of net operating losses and tax credits which we
may sell will also depend upon the allocation among qualifying companies of an
annual pool established by the State of New Jersey. We did not recognize any
such benefits during the first quarter of 2002.
13
Net Loss. Net loss for the first quarter of 2003 was $2.0 million
compared to $5.0 million reported in the first quarter of 2002. The net loss per
share for the first quarter of 2003 was $0.22 based on weighted average common
shares outstanding of 8.8 million, compared to a net loss per share of $0.62
based on the weighted average common shares outstanding of 8.1 million for the
same period in 2002.
Liquidity and Capital Resources
Our cash and cash equivalents were $11.1 million as of March 31, 2003,
compared to $14.7 million as of December 31, 2002. Cash used for operating
activities for the three months ended March 31, 2003 was $3.6 million compared
to $2.5 million in the same period of 2002. The increase from the prior year
period is due primarily to our build-up of ProstaScint inventory in the first
quarter of 2003 and to our first quarter 2003 capital contribution of $1.5
million to the PSMA Development Company LLC, our joint venture with Progenics
Pharmaceuticals, Inc.
Historically, our primary sources of cash have been proceeds from the
issuance and sale of our stock through public offerings and private placements,
product related revenues, revenues from contract research services, fees paid
under license agreements and interest earned on cash and short-term investments.
In January 2003, we received $584,000 relating to a sale of New Jersey
State net operating losses and research and development credits. Assuming the
State of New Jersey continues to fund this program, which is uncertain, the
future amount of net operating losses and tax credits which we may sell will
also depend upon the allocation among qualifying companies of an annual pool
established by the State of New Jersey.
Because the market value of our common stock held by non-affiliates of
the Company is less than $75 million, we are ineligible to utilize a
registration statement on Form S-3 for primary offerings in which our common
stock is offered for cash on our behalf. We cannot guarantee you that the market
value of our common stock held by non-affiliates will ever increase above $75
million, and as a result, that we will thereby regain eligibility to utilize a
Form S-3 registration statement for such primary offerings.
We have historically relied upon revenues from sales of the BrachySeed
products to partially fund ongoing operations. For the three months ended March
31, 2003 and 2002, revenue from the sale of BrachySeed products was $240,000 and
$452,000, respectively. In December 2002, we served notice of termination of our
agreements with Draximage, and in April 2003, entered into an agreement with
Draximage to formally terminate each of our License and Distribution Agreement
and Product Manufacturing and Supply Agreement with respect to both the
BrachySeed I-125 and BrachySeed Pd-103 products. As of January 24, 2003, we no
longer accept or fill new orders for the BrachySeed products.
14
Beginning in December 2001, we began to equally share the costs of the
PSMA Development Company LLC, with Progenics. We expect our share of losses and
funding in the joint venture to continue at an even higher level in the
subsequent periods. The joint venture is funded by equal capital contributions
from each of Progenics and Cytogen in accordance with an annual budget approved
by the joint venture's management committee. As of May 2003, we and Progenics
are in the process of negotiating the 2003 annual budget for the joint venture
and have agreed that the operating budget for 2003 will be no less than the 2002
operating expenses for the joint venture.
Our capital and operating requirements may change depending upon
various factors, including: (i) whether we and our strategic partners achieve
success in manufacturing, marketing and commercialization of our products; (ii)
the amount of resources which we devote to clinical evaluations and the
expansion of marketing and sales capabilities; (iii) results of clinical trials
and research and development activities; and (iv) competitive and technological
developments, in particular, we expect to incur significant costs for the
development of our PSMA technologies.
Our financial objectives are to meet our capital and operating
requirements through revenues from existing products and licensing arrangements.
To achieve our strategic objectives, we may enter into research and development
partnerships and acquire, in-license and develop other technologies, products or
services. Certain of these strategies may require payments by us in either cash
or stock in addition to the costs associated with developing and marketing a
product or technology. However, we believe that, if successful, such strategies
may increase long-term revenues. There can be no assurance as to the success of
such strategies or that resulting funds will be sufficient to meet cash
requirements until product revenues are sufficient to cover operating expenses,
if ever. To fund these strategic and operating activities, we may sell equity or
debt securities as market conditions permit or enter into credit facilities.
We have incurred negative cash flows from operations since our
inception, and have expended, and expect to continue to expend in the future,
substantial funds to implement our planned product development efforts,
including acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further our
marketing and sales programs. We expect that our existing capital resources
should be adequate to fund our operations and commitments into the first quarter
of 2004. We cannot assure you that our business or operations will not change in
a manner that would consume available resources more rapidly than anticipated.
We expect that we will have additional requirements for debt or equity capital,
irrespective of whether and when we reach profitability, for further product
development costs, product and technology acquisition costs, and working
capital.
Our future capital requirements and the adequacy of available funds
will depend on numerous factors, including: (i) the successful commercialization
of our products; (ii) the costs associated with the acquisition of complementary
products and technologies; (iii) progress in our product development efforts and
the magnitude and scope of such efforts; (iv) progress with clinical trials; (v)
progress with regulatory affairs activities; (vi) the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; (vii) competing technological and market developments; and
(viii) the expansion of strategic alliances for the sales, marketing,
15
manufacturing and distribution of our products. To the extent that the currently
available funds and revenues are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. There can be no assurance that the financial
sources described above will be available when needed or at terms commercially
acceptable to us. If adequate funds are not available, we may be required to
delay, further scale back or eliminate certain aspects of our operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies,
product candidates, products or potential markets. If adequate funds are not
available, our business, financial condition and results of operations will be
materially and adversely affected.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our Consolidated Financial Statements in this
Quarterly Report on Form 10-Q and Note 1 to our Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended December 31,
2002, as amended, include a summary of our significant accounting policies and
methods used in the preparation of our Consolidated Financial Statements. The
following is a brief discussion of the more significant accounting policies and
methods used by us. The preparation of our Consolidated Financial Statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our actual results could differ materially
from those estimates.
Revenue Recognition
We recognize revenue from the sale of our products upon shipment. We do
not grant price protection to customers. Quadramet royalties are recognized when
earned. The Securities and Exchange Commission has issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition", which provides guidance on the
recognition of up-front, non-refundable license fees. Accordingly, we defer
up-front license fees and recognize them over the estimated performance period
of the related agreement, when we have continuing involvement. Since the term of
the performance periods is subject to management's estimates, future revenues to
be recognized could be affected by changes in such estimates.
Accounts Receivable
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continuously monitor collections and payments from
our customers and maintain an allowance for uncollectible accounts based upon
our historical experience and any specific customer collection issues that we
have identified. While we believe our reserve estimate to be appropriate, we may
find it necessary to adjust our allowance for uncollectible accounts if the
future bad debt expense exceeds our estimated reserve. We are subject to
concentration risks as a limited number of our customers provide a high percent
of total revenues, and corresponding receivables.
16
Inventories
Inventories are stated at the lower of cost or market, as determined
using the first-in, first-out method, which most closely reflects the physical
flow of our inventories. Our products and raw materials are subject to
expiration dating. We regularly review quantities on hand to determine the need
for reserves for excess and obsolete inventories based primarily on our
estimated forecast of product sales. Our estimate of future product demand may
prove to be inaccurate, in which case we may have understated or overstated our
reserve for excess and obsolete inventories.
Carrying Value of Fixed and Intangible Assets
Our fixed assets and certain of our acquired rights to market our
products have been recorded at cost and are being amortized on a straight-line
basis over the estimated useful life of those assets. If indicators of
impairment exist, we assess the recoverability of the affected long-lived assets
by determining whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment is indicated, we
measure the amount of such impairment by comparing the carrying value of the
assets to the present value of the expected future cash flows associated with
the use of the asset. Adverse changes regarding future cash flows to be received
from long-lived assets could indicate that an impairment exists, and would
require the write down of the carrying value of the impaired asset at that time.
In October 2002, we entered into a five-year agreement with Matritech
Inc. to be the sole distributor for Matritech's NMP22 BladderChek point-of-care
test to urologists and oncologists in the United States. Retention of
exclusivity rights depends upon meeting certain minimum annual purchases. We
paid Matritech $150,000 upon the execution of the agreement, which was recorded
as other assets in the accompanying consolidated balance sheet for the
respective period and is being amortized over the five year estimated
performance period of the agreement. We determined that we did not have any
impairment regarding Matritech's license fee at March 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. As of March 31, 2003, we had $2.3 million of debt
outstanding with a fixed interest rate of 7%. We do not have exposure to market
risks associated with changes in interest rates, as we have no variable interest
rate debt outstanding. Changes in interest rates could expose us to market risk
associated with a fixed interest rate debt. We do not believe that this note
will have material exposure to market risks associated with interest rates.
17
Item 4 - Controls and Procedures
a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
the Company's Chief Executive Officer and the Company's Vice President, Finance
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and are operating in an effective manner.
b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
18
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 - By-Laws of Cytogen Corporation, as amended. Filed herewith.
99.1 - Certification pursuant to 18 U.S.C. Section 1350. Filed
herewith.
(b) Reports on Form 8-K
During the three months ended March 31, 2003, the Company filed two
Current Reports on Form 8-K with the Securities and Exchange
Commission. On January 17, 2003, the Company filed a Current Report on
Form 8-K, under "Item 5. Other Events", on which the Company reported
that the production and sale of the Palladium version of BrachySeed
had been halted for an unspecified period of time. On January 24,
2003, the Company filed a Current Report on Form 8-K, under "Item 5.
Other Events", on which the Company announced that it provided
Draximage with notice of termination of each of its License and
Distribution Agreement and Product Manufacturing and Supply Agreement
with respect to both of Draximage's BrachySeed I-125 and BrachySeed
PD-103 products.
19
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.
CYTOGEN CORPORATION
Date May 14, 2003 By: /s/ Michael D. Becker
------------------ -----------------------------------------
Michael D. Becker
President and Chief Executive Officer
Date May 14, 2003 By /s/ Thu A. Dang
----------------- -----------------------------------------
Thu A. Dang
Vice President, Finance
(Principal Financial and Accounting Officer)
20
Certification
I, Michael D. Becker, President and Chief Executive Officer of Cytogen
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytogen
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
21
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Michael D. Becker
-------------------------- -----------------------------------
Michael D. Becker
President and Chief Executive Officer
22
Certification
I, Thu A. Dang, Vice President, Finance of Cytogen Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytogen
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
23
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Thu A. Dang
-------------------------- --------------------------
Thu A. Dang
Vice President, Finance
24