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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, 2005
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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 000-14879
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Cytogen Corporation
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(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, 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
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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 check mark 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 2, 2005
- ---------------------------- --------------------------
Common Stock, $.01 par value 15,521,929
CYTOGEN CORPORATION
TABLE OF CONTENTS
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Page
----
PART I. FINANCIAL INFORMATION.......................................... 1
Item 1. Consolidated Financial Statements (unaudited).............. 1
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004....................................... 2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004.................... 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004.................... 4
Notes to Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.................................................... 23
Item 4. Controls and Procedures.................................... 23
PART II. OTHER INFORMATION.............................................. 24
Item 6. Exhibits................................................... 24
SIGNATURES.............................................................. 25
ProstaScint(R), Quadramet(R) and OncoScint(R) are registered United States
trademarks of Cytogen Corporation. All other trade names, trademarks or
servicemarks appearing in this Quarterly Report on Form 10-Q are the property of
their respective owners, and not the property of Cytogen Corporation or any of
its subsidiaries.
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-1-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
(Unaudited)
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents ........................................... $ 16,653 $ 13,046
Short-term investments .............................................. 9,701 22,779
Accounts receivable, net ............................................ 1,801 1,406
Inventories ......................................................... 4,255 3,623
Prepaid expenses .................................................... 1,027 1,242
Other current assets ................................................ 130 258
--------- ---------
Total current assets .............................................. 33,567 42,354
Property and equipment, net ............................................ 851 787
Quadramet license fee, net ............................................. 6,850 7,024
Other assets ........................................................... 317 248
--------- ---------
$ 41,585 $ 50,413
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term liabilities ............................ 2,296 2,296
Liability related to joint venture .................................. 394 396
Accounts payable and accrued liabilities ............................ 5,159 7,644
--------- ---------
Total current liabilities ......................................... 7,849 10,336
--------- ---------
Long-term liabilities .................................................. 42 47
--------- ---------
Commitments and contingencies
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, 15,521,229 and 15,489,116 shares issued
and outstanding at March 31, 2005 and December
31, 2004, respectively ........................................... 155 155
Additional paid-in capital .......................................... 426,341 426,153
Accumulated other comprehensive income .............................. 69 --
Accumulated deficit ................................................. (392,871) (386,278)
--------- ---------
Total stockholders' equity ........................................ 33,694 40,030
--------- ---------
$ 41,585 $ 50,413
========= =========
The accompany notes are an integral part of these statements.
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CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2005 2004
------------ ------------
REVENUES:
Product revenue:
Quadramet ..................................................... $ 2,054 $ 1,854
ProstaScint ................................................... 1,899 1,727
Other ......................................................... -- 1
-------- --------
Total product revenue ...................................... 3,953 3,582
License and contract revenue .................................... 41 19
-------- --------
Total revenues ............................................. 3,994 3,601
-------- --------
OPERATING EXPENSES:
Cost of product revenue ......................................... 2,427 2,399
Selling, general and administrative ............................. 7,024 3,891
Research and development ........................................ 739 804
Equity in loss of joint venture ................................. 498 809
-------- --------
Total operating expenses ................................... 10,688 7,903
-------- --------
Operating loss ............................................. (6,694) (4,302)
INTEREST INCOME ................................................... 143 64
INTEREST EXPENSE .................................................. (42) (44)
-------- --------
NET LOSS .......................................................... $ (6,593) $ (4,282)
======== ========
BASIC AND DILUTED NET LOSS PER SHARE .............................. $ (0.43) $ (0.33)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ........................ 15,513 12,860
======== ========
The accompany notes are an integral part of these statements.
-3-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (6,593) $ (4,282)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................ 243 265
Stock-based compensation expenses .................... -- 11
Decrease in provision for doubtful accounts .......... (62) --
Amortization of premiums (discounts) on
investments ......................................... 43 (50)
Deferred rent ........................................ 26 3
Loss on disposition of assets ........................ -- 3
Changes in assets and liabilities:
Receivables ......................................... (333) 188
Inventories ......................................... (629) 312
Other assets ........................................ 343 (394)
Liability related to joint venture .................. (2) --
Accounts payable and accrued liabilities ............ (2,511) (1,229)
-------- --------
Net cash used in operating activities .................. (9,475) (5,173)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments ...................... 13,035 --
Purchases of property and equipment ....................... (136) (77)
-------- --------
Net cash provided by (used in) investing activities .... 12,899 (77)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .................... 188 9
Payment of long-term liabilities .......................... (5) (38)
-------- --------
Net cash provided by (used in) financing activities .... 183 (29)
-------- --------
Net increase (decrease) in cash and cash equivalents ...... 3,607 (5,279)
Cash and cash equivalents, beginning of period ............ 13,046 13,630
-------- --------
Cash and cash equivalents, end of period .................. $ 16,653 $ 8,351
======== ========
Supplemental disclosure of non-cash information:
Capital lease of equipment ................................ $ -- $ 74
======== ========
Supplemental disclosure of cash information:
Cash paid for interest .................................... $ 2 $ 5
======== ========
The accompany notes are an integral part of these statements.
-4-
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
BACKGROUND
Founded in 1980, Cytogen Corporation (the "Company" or "Cytogen") of
Princeton, NJ is a product-driven biopharmaceutical company that develops and
commercializes innovative molecules that can be used to build leading
franchises. The Company's marketed products include QUADRAMET(R) (samarium
Sm-153 lexidronam injection) and PROSTASCINT(R) (capromab pendetide) kit for the
preparation of Indium In-111 capromab pendetide in the United States. The
Company has exclusive United States marketing rights to COMBIDEX(R)
(ferumoxtran-10) for all applications, and the exclusive right to market and
sell ferumoxtol (formerly Code 7228) for oncology applications in the United
States. On March 3, 2005, the FDA's Oncologic Drugs Advisory Committee (ODAC)
voted to not recommend approval of the proposed broad indication for COMBIDEX.
On March 24, 2005, Advanced Magnetics, Inc. informed Cytogen that Advanced
Magnetics received an approvable letter from the FDA for Combidex, subject to
certain conditions.
The Company is also developing therapeutics targeting prostate-specific
membrane antigen (PSMA), a protein highly expressed on the surface of prostate
cancer cells and the neovasculature of solid tumors.
Cytogen has had a history of operating losses since its inception. The
Company currently relies on two products, PROSTASCINT and QUADRAMET, for
substantially all of its revenues. In addition, the Company has, from time to
time, stopped selling certain products, such as NMP22 BLADDERCHEK, BRACHYSEED
and ONCOSCINT, that the Company previously believed would generate significant
revenues. The Company's products are subject to significant regulatory review by
the FDA and other federal and state agencies, which requires significant time
and expenditures in seeking, maintaining and expanding product approvals. In
addition, the Company relies on collaborative partners to a significant degree,
among other things, to manufacture its products, to secure raw materials, and to
provide licensing rights to their proprietary technologies for the Company to
sell and market to others. The Company is also subject to credit concentration
risks as a limited number of its customers provide a high percentage of total
revenues and corresponding receivables.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend substantial funds
to implement its planned product development efforts, including acquisition of
products and complementary technologies, research and development, clinical
studies and regulatory activities, and to further the Company's marketing and
sales programs. The Company expects that it will have additional requirements
for debt or equity capital, irrespective of whether or when it reaches
profitability, for further product development costs, product and technology
acquisition costs and working capital.
-5-
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Cytogen and its subsidiaries. All 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 U.S. generally accepted accounting principles and should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, as amended, filed with the
Securities and Exchange Commission, which includes financial statements as of
and for the year ended December 31, 2004. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management 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. Actual results could differ from those estimates.
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.
SHORT-TERM INVESTMENTS
Short-term investments at March 31, 2005 and December 31, 2004 were $9.7
million and $22.8 million, respectively, and consisted of investments in U.S.
government agency notes. The Company has the ability and intent to hold these
investments until maturity and therefore has classified the investments as
held-to-maturity. Held-to-maturity investments are recorded at amortized cost,
adjusted for the accretion of discounts or premiums. Discounts or premiums are
accreted into interest income over the life of the related investment using the
straight-line method, which approximates the effective yield method. Dividend
and interest income are recognized when earned. These investments mature at
various times through June 15, 2005.
At March 31, 2005, the Company's short term investments have unrealized
losses of $10,000 and have been in a continuous loss position for less than
twelve months. Due to the short-term nature of these investments, the unrealized
losses have been deemed temporary and not recognized in the accompanying
consolidated financial statements.
-6-
INVENTORIES
The Company's inventories are primarily related to ProstaScint. Inventories
are stated at the lower of cost or market using the first-in, first-out method
and consisted of the following (all amounts in thousands):
MARCH 31, 2005 DECEMBER 31, 2004
------------------ ---------------------
Raw materials..................... $ 425 $ 427
Work-in-process................... 3,302 2,345
Finished goods.................... 528 851
------------ -------------
$ 4,255 $ 3,623
============ =============
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing the Company's net
loss by the weighted-average common shares outstanding during each period.
Diluted net loss per common share is the same as basic net loss per share for
each of the three month periods ended March 31, 2005 and 2004 because the
inclusion of common stock equivalents, which consist of warrants and options to
purchase shares of the Company's common stock, would be antidilutive due to the
Company's losses.
VARIABLE INTEREST ENTITIES
The Company follows the revised Financial Accounting Standards Board
("FASB") Interpretation No. 46 ("FIN 46R"), "Consolidation of Variable Interest
Entities", which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity.
In June 1999, Cytogen entered into a joint venture with Progenics
Pharmaceuticals, Inc. ("Progenics," and collectively with Cytogen, the
"Members") to form the PSMA Development Company LLC (the "Joint Venture"). The
Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's exclusively licensed
prostate-specific membrane antigen ("PSMA") technology. The Joint Venture is
owned equally by the Members (see Note 2). Cytogen accounts for the Joint
Venture using the equity method of accounting. The Company is not required to
consolidate the Joint Venture under the requirements of FIN 46R.
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.
The Company follows the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based
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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 as follows (all amounts in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2005 2004
------- -------
Net loss, as reported................................... $ (6,593) $ (4,282)
Add: Stock-based employee compensation expense
included in reported net loss ...................... -- 11
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards...................................... (563) (233)
------------- -------------
Pro forma net loss...................................... $ (7,156) $ (4,504)
============= =============
Basic and diluted net loss per
share, as reported.................................. $ (0.43) $ (0.33)
============= =============
Pro forma basic and diluted net
loss per share...................................... $ (0.46) $ (0.35)
============= =============
OTHER COMPREHENSIVE INCOME
Other comprehensive income consisted of an unrealized holding gain on
marketable securities. For the three months ended March 31, 2005, the fair
market value of those securities increased from $0 to $69,000, and as a result,
the comprehensive loss for the three months ended March 31, 2005 was $6,524,000.
There was no other comprehensive income or loss in the first quarter of 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
Abnormal Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
the Company will adopt SFAS No. 151 in its fiscal year beginning January 1,
2006. The Company is currently in the process of evaluating the impact of
adopting this statement.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which revised SFAS No. 123 and superseded APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123(R) requires that companies recognize
compensation expense associated with grants of stock options and other equity
instruments to employees in the financial statements effective as of the first
interim or annual reporting period that begins after June 15, 2005. In April
2005, the SEC announced the adoption of a new rule allowing companies to
-8-
implement SFAS No. 123(R) at the beginning of their next fiscal year that begins
after June 15, 2005. Compensation cost will be measured based on the fair value
of the instrument on the grant date and will be recognized over the vesting
period. This pronouncement applies to all grants after the effective date and to
the unvested portion of stock options outstanding as of the effective date. SFAS
No. 123(R) eliminates the ability to account for such transactions using the
intrinsic method currently used by the Company. SFAS No. 123(R) also requires
that companies recognize compensation expense associated with purchases of
shares of common stock by employees at a discount to market value under employee
stock purchase plans that meet certain criteria. Accordingly, the Company will
adopt SFAS No. 123(R) in the fiscal year beginning January 1, 2006. Although
management has not yet determined the impact of the adoption of this standard,
it is expected to have a material effect on the Company's consolidated financial
statements.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
2. EQUITY LOSS IN THE PSMA DEVELOPMENT COMPANY LLC
In June 1999, Cytogen entered into a joint venture with Progenics to form
the PSMA Development Company LLC (the "Joint Venture"), a development stage
enterprise. The Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's proprietary PSMA technology. The
Joint Venture is owned equally by Cytogen and Progenics.
Cytogen accounts for the Joint Venture using the equity method of
accounting. Cytogen has recognized 50% of the Joint Venture's operating results
in its consolidated statements of operations for the three months ended March
31, 2005 and 2004. As of May 10, 2005, the Company and Progenics are negotiating
the work plan and annual budget for 2005 for the Joint Venture. In the absence
of an agreement by the Members, funding from the Members could be reduced or
eliminated and the Joint Venture's research and development programs, as well as
all other operations, could be halted. The report of the independent auditors on
the financial statements of the Joint Venture included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 2004 filed with
the Securities and Exchange Commission, contained an explanatory paragraph which
states that the Joint Venture has suffered recurring losses from operations and
has a net capital deficiency that raises substantial doubt about its ability to
continue as a going concern, and that its financial statements do not include
any adjustments that might result from the outcome of that uncertainty. The
Members have not committed to fund the Joint Venture beyond December 31, 2004 at
this time, except for obligations under existing contractual commitments as of
that date. Subsequent to that date, the Members made a commitment and have the
intent and ability to each fund one-half of the shortfall between the Joint
Venture's cash and liabilities of $846,000 as of March 31, 2005. The Joint
Venture may incur losses in future years provided an agreement between the
Members is reached on research program goals and budgets for periods after 2004
and the Joint Venture's operations are funded.
For the three months ended March 31, 2005 and 2004, Cytogen recognized
$498,000 and $809,000, respectively, of the Joint Venture's losses. As of March
31, 2005 and December 31, 2004, Cytogen's cumulative share of losses exceeded
its investment in the Joint Venture
-9-
resulting in a liability to the Joint Venture of $394,000 and $396,000,
respectively, as reported in Liability related to Joint Venture in the
accompanying consolidated balance sheets. In January 2005, the members made a
capital contribution of $500,000 each to the Joint Venture. Selected financial
statement information of the Joint Venture is as follows (all amounts in
thousands):
BALANCE SHEET DATA:
MARCH 31, DECEMBER 31,
2005 2004
---------------- ----------------
ASSETS:
Cash......................................................................... $ 644 $ --
Prepaid expenses............................................................. 40 12
Accounts receivable from Progenics Pharmaceuticals, Inc.,
a related party.......................................................... -- --
---------------- ----------------
$ 684 $ 12
================ ================
LIABILITIES AND MEMBERS' DEFICIT:
Accounts payable to Cytogen Corporation, a related party..................... $ 53 $ 4
Accounts payable to Progenics Pharmaceuticals, Inc.,
a related party.......................................................... 744 189
Accounts payable and accrued expenses........................................ 693 629
---------------- ----------------
Total liabilities................................................... 1,490 822
---------------- ----------------
Capital contributions........................................................ 24,298 23,298
Deficit accumulated during the development stage............................. (25,104) (24,108)
---------------- ----------------
Total members' deficit.............................................. (806) (810)
---------------- ----------------
Total liabilities and members' deficit.............................. $ 684 $ 12
================ ================
INCOME STATEMENT DATA:
THREE
MONTHS ENDED FOR THE PERIOD
MARCH 31, FROM JUNE 15, 1999
----------------------- (INCEPTION) TO
2005 2004 MARCH 31, 2005
-------- ---------- --------------------
Interest income.............. $ 1 $ 3 $ 242
Total expenses............... 997 1,621 25,346
-------- --------- -----------
Net loss..................... $ (996) $ (1,618) $ (25,104)
======== ========= ===========
3. BRISTOL-MYERS SQUIBB MEDICAL IMAGING, INC.
Effective January 1, 2004, the Company entered into a new manufacturing and
supply agreement with Bristol-Myers Squibb Medical Imaging, Inc. ("BMSMI"),
whereby BMSMI will manufacture, distribute and provide order processing and
customer service for Cytogen relating to Quadramet. Under the terms of the
agreement, Cytogen is obligated to pay at least $4.2 million annually, subject
to future annual price adjustment, through 2008, unless terminated by BMSMI or
Cytogen on two years prior written notice. This agreement will automatically
renew
-10-
for five successive one-year periods unless terminated by BMSMI or Cytogen on
two years prior written notice. During each of the three months ended March 31,
2005 and 2004, Cytogen incurred $1.1 million of manufacturing costs for
Quadramet, all of which is included in cost of product revenue. The Company also
pays BMSMI a variable amount per month for each Quadramet order placed to cover
the costs of customer service which is included in selling, general and
administrative expenses.
The two primary components of Quadramet, particularly Samarium-153 and
EDTMP, are provided to BMSMI by outside suppliers. BMSMI obtains its supply of
Samarium-153 from a sole supplier, and EDTMP from another sole supplier.
Alternative sources for these components may not be readily available, and any
alternate suppliers would have to be identified and qualified, subject to all
applicable regulatory guidelines. If BMSMI cannot obtain sufficient quantities
of these components on commercially reasonable terms, or in a timely manner, it
would be unable to manufacture Quadramet on a timely and cost-effective basis.
4. LAUREATE PHARMA, L.P.
In September 2004, the Company entered into a non-exclusive manufacturing
agreement with Laureate Pharma, L.P. pursuant to which Laureate shall
manufacture ProstaScint and its primary raw materials for Cytogen in Laureate's
Princeton, New Jersey facility. Laureate is the sole manufacturer of ProstaScint
and its antibodies. The agreement will terminate, unless terminated earlier
pursuant to its terms, upon Laureate's completion of the specified production
campaign for ProstaScint and shipment of the resulting products from Laureate's
facility. Under the terms of the agreement, the Company is obligated to pay at
least an aggregate of $5.1 million through 2006. Approximately $3.0 million has
been incurred under this agreement through March 31, 2005, and is recorded as
inventory in the accompanying balance sheet as of March 31, 2005. Of this
amount, approximately $700,000 was recorded during the first quarter of 2005.
5. LITIGATION
The Company is, from time to time, subject to claims and suits arising in
the ordinary course of business. In the opinion of management, the ultimate
resolution of any such current matters would not have a material effect on the
Company's financial condition, results of operations or liquidity.
-11-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q 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. These
forward-looking statements regarding future events and our future results are
based on current expectations, estimates, forecasts, and projections and the
beliefs and assumptions of our management including, without limitation, our
expectations regarding results of operations, selling, general and
administrative expenses, research and development expenses and the sufficiency
of our cash for future operations. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," "continue," or similar terms, variations of such terms
or the negative of those terms. These forward-looking statements include
statements regarding our intent to hold our investments until maturity, the
impact of SFAS No. 123(R), additional funding and development of the PSMA
technologies, growth and market penetration for Quadramet and ProstaScint,
revenues, if any, from our joint venture with Progenics Pharmaceuticals, Inc.,
increased expenses resulting from our sales force and marketing expansion,
including sales and marketing expenses for ProstaScint and Quadramet, the
sufficiency of our capital resources and supply of products for sale, the
continued cooperation of our contractual and collaborative partners, our need
for additional capital and other statements included in this Quarterly Report on
Form 10-Q that are not historical facts. 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, market acceptance of our products, the results of
our clinical trials, our ability to hire and retain employees, economic and
market conditions generally, our receipt of requisite regulatory approvals for
our products and product candidates, the continued cooperation of our marketing
and other collaborative and strategic partners, our ability to protect our
intellectual property, and the other risks identified under the caption
"Additional Factors That May Affect Future Results" in our Annual Report on Form
10-K for the year ended December 31, 2004, as amended, and those under the
caption "Risk Factors," as included in certain of our other filings, from time
to time, with the Securities and Exchange Commission.
Any forward-looking statements made by us do not reflect the potential
impact of any 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 consolidated financial statements and related notes thereto contained
elsewhere herein, as well as in our Annual Report on Form 10-K for the year
ended December 31, 2004, as amended, and from time to time in our other filings
with the Securities and Exchange Commission.
-12-
OVERVIEW
Founded in 1980, Cytogen Corporation of Princeton, NJ is a product-driven
biopharmaceutical company that develops and commercializes innovative molecules
that can be used to build leading franchises. Our marketed products include
Quadramet(R) (samarium Sm-153 lexidronam injection) and ProstaScint(R) (capromab
pendetide) kit for the preparation of Indium In-111 capromab pendetide in the
United States. We have exclusive United States marketing rights to Combidex(R)
(ferumoxtran-10) for all applications, and the exclusive right to market and
sell ferumoxytol (formerly Code 7228) for oncology applications in the United
States. We are also developing therapeutics targeting prostate-specific membrane
antigen (PSMA), a protein highly expressed on the surface of prostate cancer
cells and the neovasculature of solid tumors. Full prescribing information for
our products is available at www.cytogen.com or by calling 1-800-833-3533.
SIGNIFICANT EVENTS IN 2005
FDA Committee Votes Not to Recommend Approval of Proposed Broad Indication for
Combidex
On March 3, 2005, the FDA's Oncologic Drugs Advisory Committee voted to not
recommend approval of the proposed broad indication for Combidex.
Advanced Magnetics Receives Approvable Letter for Combidex
On March 24, 2005, we announced that Advanced Magnetics, Inc., the
developer of Combidex(R) which is exclusively licensed to Cytogen for marketing
in the United States, had informed Cytogen that Advanced Magnetics received an
approvable letter from the FDA for Combidex, subject to certain conditions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
REVENUES
INCREASE/(DECREASE)
-------------------
2005 2004 $ %
---- ---- ------- ---------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Quadramet............................................ $ 2,054 $ 1,854 $ 200 11%
ProstaScint.......................................... 1,899 1,727 172 10%
NMP22 BladderChek
(ceased December 2004)............................ -- 1 (1) (100)%
License and Contract................................. 41 19 22 116%
-------- ---------- -------
$ 3,994 $ 3,601 $ 393 11%
======== ========== =======
Total revenues for the first quarter of 2005 were $4.0 million compared to
$3.6 million for the same period in 2004. Product revenues accounted for 99% of
total revenues for the first
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quarters of each of 2005 and 2004. License and contract revenues accounted for
the remainder of revenues.
QUADRAMET. Quadramet sales were $2.1 million for the first quarter of 2005,
compared to $1.9 million in the first quarter of 2004. Quadramet sales accounted
for 52% of product revenues for the first quarters of each of 2005 and 2004. We
believe such increase was due, in part, to increased demand associated with our
focused marketing programs. Currently, we market Quadramet only in the United
States and have no rights to market Quadramet in Europe. We believe that the
future growth and market penetration of Quadramet is dependent upon, among other
things: (i) new clinical data supporting the expanded and earlier use of
Quadramet in various cancers; (ii) novel research supporting combination uses
with other therapies, such as chemotherapeutics and bisphosphonates; and (iii)
establishing the use of Quadramet at higher doses to target and treat primary
bone cancers. We cannot provide any assurance that we will be able to
successfully market Quadramet or that Quadramet will achieve greater market
penetration on a timely basis or result in significant revenues for us.
PROSTASCINT. ProstaScint sales were $1.9 million for the first quarter of
2005, compared to $1.7 million in the first quarter of 2004. ProstaScint sales
accounted for 48% of product revenues for the first quarters of each of 2005 and
2004. We believe that such increase in ProstaScint sales is due to the
implementation of a price increase for ProstaScint in late June 2004, increased
demand associated with our focused marketing programs and our continued
identification of new distribution channels to better accommodate customer
needs. We believe that future growth and market penetration of ProstaScint is
dependent upon, among other things, the implementation and continued research
relating to advances in imaging technology, new product applications and the
validation of PSMA as an independent prognostic indicator. We cannot provide any
assurance that we will be able to successfully market ProstaScint, or that
ProstaScint will achieve greater market penetration on a timely basis or result
in significant revenues for us.
NMP22 BLADDERCHEK. There were no sales of NMP22 BladderChek during the
first quarter of 2005 compared to $1,000 in the first quarter of 2004. Effective
December 31, 2004, we stopped promoting NMP22 BladderChek.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $41,000
and $19,000 for the first quarters of 2005 and 2004, respectively. During the
first quarter of 2005, we recognized $41,000 of contract revenues compared to
$12,000 in the first quarter of 2004 for limited research and development
services provided by us to the PSMA Development Company LLC, our joint venture
with Progenics Pharmaceuticals, Inc. The level of future revenues for the
remainder of 2005, if any, for contract services provided to the joint venture
may vary and will depend upon the extent of research and development services
required by the joint venture.
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OPERATING EXPENSES
INCREASE/(DECREASE)
---------------------------
2005 2004 $ %
---- ---- ----------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenue...................... $ 2,427 $ 2,399 $ 28 1%
Selling, general and administrative.......... 7,024 3,891 3,133 81%
Research and development..................... 739 804 (65) (8)%
Equity in loss of joint venture.............. 498 809 (311) (38)%
-------- -------- --------- 35%
$ 10,688 $ 7,903 $ 2,785
======== ======== =========
Total operating expenses for the first quarter of 2005 were $10.7 million
compared to $7.9 million in the same quarter of 2004.
COST OF PRODUCT REVENUE. Cost of product revenue for each of the first
quarters of 2005 and 2004 was $2.4 million and primarily reflects manufacturing
costs for ProstaScint and Quadramet, royalties on our sales of products and
amortization of the up-front payment to Berlex Laboratories to reacquire the
marketing rights to Quadramet in 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first quarter of 2005 were $7.0 million compared to $3.9
million in the same period of 2004. The increase from the prior year period is
due primarily to the expansion of our sales force and the implementation of
other marketing initiatives for our existing products, certain pre-launch costs
associated with Combidex, and increased professional fees relating to the audit
of management's assessment of and the effective operation of internal controls
over financial reporting. As of March 31, 2005, we employed 59 persons in sales
and marketing. The employees in sales and marketing included 9 Clinical Oncology
Specialists and 42 Regional Managers, Professional Oncology Representatives,
Senior Professional Oncology Representatives and Senior and Corporate Account
Managers. In comparison, 36 persons were employed in sales and marketing as of
March 1, 2004.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
quarter of 2005 were $739,000 compared to $804,000 in the same period of 2004.
The current year expenses reflect costs associated with our product development
efforts in support of new and expanded uses for Quadramet and ProstaScint and
savings from the closure of our AxCell Biosciences facility in the fourth
quarter of 2004. During the first quarter of 2005, we incurred $6,000 in
expenses relating to AxCell's operations compared to $251,000 in the same period
of 2004. Research projects through academic, governmental and corporate
collaborators to be supported and additional applications for the intellectual
property and technology at AxCell are being pursued.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics Pharmaceuticals, Inc.,
was $498,000 and $809,000 during the first quarters of 2005 and 2004,
respectively. Such amounts represented 50% of the joint venture's operating
losses. We equally share ownership and costs of the joint venture with Progenics
and account for the joint venture using the equity method of accounting. As of
May 10, 2005, we and Progenics are in the process of negotiating the work plan
and annual budget for 2005 for the joint venture. We cannot give any assurances
that agreement will be
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reached on such matters in the near future, if at all. In the absence of an
agreement by the Progenics and us, funding from the members of the joint venture
could be reduced or eliminated and the joint venture's research and development
programs, as well as all other operations, could be halted. In 2004, $8.0
million of grants were awarded over four years from the National Institutes of
Health that will be used to develop novel immunotherapies for prostate cancer
based upon PSMA. The failure of Cytogen and Progenics to reach agreement on the
2005 annual work plan and budget for the joint venture could adversely affect
the joint venture's ability to access the NIH grants. We and Progenics have not
committed to fund the Joint Venture beyond December 31, 2004 at this time,
except for obligations under existing contractual commitments as of that date.
Subsequent to that date, we and Progenics made a commitment and have the intent
and ability to each fund one-half of the joint venture's shortfall between cash
and liabilities of $846,000 as of March 31, 2005. We may incur significant and
increasing costs in the future to fund our share of the development costs of the
joint venture, although we cannot provide any assurance that any further
agreements between us and Progenics will be reached regarding the joint venture.
INTEREST INCOME/EXPENSE. Interest income for the first quarter of 2005 was
$143,000 compared to $64,000 in the same period of 2004. The increase in 2005
from the prior year period was due to a higher average yield on investments and
higher average cash balances in 2005. Interest expense for the first quarter of
2005 was $42,000 compared to $44,000 in the same period in 2004. Interest
expense includes interest on outstanding debt and finance charges related to
various equipment leases that are accounted for as capital leases.
NET LOSS. Net loss for the first quarter of 2005 was $6.6 million compared
to $4.3 million reported in the first quarter of 2004. The basic and diluted net
loss per share for the first quarter of 2005 was $0.43 based on 15.5 million
weighted average common shares outstanding, compared to a basic and diluted net
loss per share of $0.33 based on 12.9 million weighted average common shares
outstanding for the same period in 2004.
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COMMITMENTS
We have entered into various contractual and commercial commitments. The
following table summarizes our obligations with respect to theses commitments as
of March 31, 2005:
LESS
THAN 1 TO 3 4 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
-------- -------- --------- ----------- -----------
(ALL AMOUNTS IN THOUSANDS)
Long-term debt(1) ................................. $ 2,380 $ -- $ -- $ -- $ 2,380
Capital lease obligations.......................... 16 42 -- -- 58
Facility leases.................................... 338 535 -- -- 873
Research and development and
other obligations............................... 342 164 151 607 1,264
Manufacturing contracts(2) ........................ 5,493 5,473 -- -- 10,966
Capital contribution to joint venture(3)........... 423 -- -- -- 423
Minimum royalty payments(4)........................ 1,000 2,000 2,000 3,583 8,583
------- -------- ------- --------- --------
Total........................................ $ 9,992 $ 8,214 $ 2,151 $ 4,190 $ 24,547
======= ======== ======= ========= ========
(1) In August 1998, we received $2.0 million from Elan Corporation, plc in
exchange for a convertible promissory note. The note is convertible
into shares of our common stock at $28 per share, subject to
adjustments, and matures in August 2005. The note bears annual
interest of 7%, compounded semiannually, however, such interest was
not payable in cash but was added to the principal of the note through
August 2000. For subsequent periods, interest is payable in cash. The
note contains certain non-financial covenants, with which we were in
compliance as of March 31, 2005.
(2) Effective January 1, 2004, we entered into a new manufacturing and
supply agreement with BMSMI for QUADRAMET whereby BMSMI manufactures,
distributes and provides order processing and customer services for us
relating to QUADRAMET. Under the terms of our agreement, we are
obligated to pay at least $4.2 million annually, subject to future
annual price adjustment, through 2008, unless terminated by BMSMI or
us on a two year prior written notice. This agreement will
automatically renew for five successive one-year periods unless
terminated by BMSMI or us on a two-year prior written notice.
Accordingly, we have not included commitments beyond March 31, 2007.
Additionally, in September 2004, we entered into a non-exclusive
manufacturing agreement with Laureate Pharma, L.P. pursuant to which
Laureate shall manufacture ProstaScint for us in its Princeton, New
Jersey facility. The agreement will terminate, unless earlier
terminated pursuant to its terms, upon Laureate's completion of the
production campaign for PROSTASCINT and shipment of the resulting
products from Laureate's facility. Under the terms of the agreement,
we are obligated to pay at least an aggregate of $5.1 million through
2006, of which approximately $3.0 million was incurred through March
31, 2005. We intend that the agreement will provide us with a
sufficient supply of ProstaScint to satisfy our commercial
requirements for approximately the next four years, based upon current
sales levels.
(3) As of May 10, 2005, we and Progenics are in the process of negotiating
the work plan and annual budget for 2005 for the joint venture. We
cannot give any assurances that agreement will be reached on such
matters in the near future, if at all. Cytogen and Progenics made a
commitment and have the intent and ability to each fund one-half of
the shortfall between the joint venture's cash and liabilities of
$846,000 as of March 31, 2005. We may incur significant and increasing
costs in the future to fund our share of the development costs from
the joint venture, although we cannot be sure that any further
agreements between us and Progenics will be reached regarding the
joint venture. In the event we reach agreement with Progenics on the
work plan and annual budget for 2005 for the joint venture, we would
expect to incur additional commitments for capital contributions to
the joint venture in 2005. If no agreement is reached
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with Progenics, we also may have commitments for certain wind down
costs under third party agreements with the joint venture.
(4) We acquired an exclusive license from The Dow Chemical Company for
QUADRAMET for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of QUADRAMET, or a guaranteed contractual
minimum payment, whichever is greater, and future payments upon
achievement of certain milestones. Future annual minimum royalties due
to Dow are $1.0 million per year in 2005 through 2012 and $833,000 in
2013.
In addition to the above, we are obligated to make certain royalty payments
based on sales of the related product and certain milestone payments if our
collaborative partners achieve specific development milestones or commercial
milestones.
LIQUIDITY AND CAPITAL RESOURCES
CONDENSED STATEMENT OF CASH FLOWS:
2005
--------------------------
(ALL AMOUNTS IN THOUSANDS)
Net loss................................................ $ (6,593)
Adjustments to reconcile net loss to net cash
used in operating activities.......................... (2,882)
----------
Net cash used in operating activities................... (9,475)
Net cash provided by investing activities............... 12,899
Net cash provided by financing activities............... 183
----------
Net increase in cash and cash equivalents............... $ 3,607
==========
OVERVIEW
Our cash and cash equivalents were $16.7 million as of March 31, 2005,
compared to $13.0 million as of December 31, 2004. As of March 31, 2005, our
total cash, cash equivalents and short-term investments was $26.4 million
compared to $35.8 million as of December 31, 2004. The decrease in cash, cash
equivalents and short term investments from the December 31, 2004 balance was
primarily due to the build-up of ProstaScint inventory and to increased
operating expenditures in 2005, including costs to promote and support our
oncology products and to expand our internal sales force. During the three
months ended March 31, 2005 and 2004, net cash used for operating activities was
$9.5 million and $5.2 million, respectively. In 2005, we expect operating
expenditures to increase over 2004 levels.
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.
Our financial objectives are to meet our capital and operating requirements
through revenues from existing products and licensing arrangements. To achieve
these 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
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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, debt or other securities
as market conditions permit or enter into credit facilities.
OTHER LIQUIDITY EVENTS
In September 2004, we entered into a non-exclusive manufacturing agreement
with Laureate Pharma, L.P. pursuant to which Laureate is manufacturing
ProstaScint for us in its Princeton, New Jersey facility. Our agreement will
terminate, unless terminated earlier pursuant to its terms, upon Laureate's
completion of the production campaign and shipment of the resulting products
from Laureate's facility. Under the terms of the agreement, we are obligated to
pay at least an aggregate of $5.1 million through 2006. Approximately $3.0
million has been incurred under this agreement through March 31, 2005, and is
recorded as inventory in the accompanying balance sheet as of March 31, 2005. Of
this amount, approximately $700,000 was recorded during the first quarter of
2005. We intend that the agreement will provide us with a sufficient supply of
ProstaScint to satisfy our commercial requirements for approximately the next
four years, based upon current sales levels. In October 2004, Laureate was
acquired by Safeguard Scientifics, Inc. Laureate has continued to operate as a
full service contract manufacturing organization and we have not experienced any
disruption in Laureate's performance of its obligations to produce ProstaScint.
Effective January 1, 2004, we entered into a new manufacturing and supply
agreement with BMSMI whereby BMSMI manufactures, distributes and provides order
processing and customer services for us relating to Quadramet. Under the terms
of the new agreement, we are obligated to pay at least $4.2 million annually,
subject to future annual price adjustment, through 2008, unless terminated by
BMSMI or us on two years prior written notice. During the three months ended
March 31, 2005, we incurred $1.1 million of manufacturing costs for Quadramet.
This agreement will automatically renew for five successive one-year periods
unless terminated by BMSMI or us on a two year prior written notice. We also pay
BMSMI a variable amount per month for each Quadramet order placed to cover the
costs of customer service. In addition, we expect our Quadramet sales and
marketing expenses to increase in 2005.
Beginning in December 2001, we began to equally share the costs of the
joint venture with Progenics. As of May 10, 2005, we and Progenics are in the
process of negotiating the work plan and annual budget for 2005 for the joint
venture. We cannot give any assurances that agreement will be reached on such
matters in the near future, if at all. Cytogen and Progenics each made a capital
contribution of $500,000 to the joint venture in January 2005, for 2004
expenditures. We and Progenics have not committed to fund the Joint Venture
beyond December 31, 2004 at this time, except for obligations under existing
contractual commitments as of that date. Subsequent to that date, we and
Progenics made a commitment and have the intent and ability to each fund
one-half of the shortfall between the joint venture's cash and liabilities of
$846,000 as of March 31, 2005. We may incur significant and increasing costs in
the future to fund our share of the development costs from the joint venture
although we cannot provide any assurance that any further agreements between us
and Progenics will be reached regarding the joint venture. Any funding amount in
subsequent periods may vary dependent upon, among other things, the results of
the clinical trials and research and development
-19-
activities, competitive and technological developments, and market
opportunities. If no agreement is reached with Progenics, we also may have
commitments for certain wind down costs under third party agreements with the
joint venture.
We acquired an exclusive license from The Dow Chemical Company for
Quadramet for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of Quadramet, or a guaranteed contractual minimum
payment, whichever is greater, and future payments upon achievement of certain
milestones. Future annual minimum royalties due to Dow are $1.0 million per year
in 2005 through 2012 and $833,000 in 2013.
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 at least into early
2006. 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,
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 our
Annual Report on Form 10-K for the year ended December 31, 2004, as amended,
includes a summary of our significant accounting policies and
-20-
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
Product revenues include product sales by us to our customers. Product
sales are recognized when the customer takes ownership of the products and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an agreement exists and the sales price is fixed and
determinable. Product returns are accepted under limited circumstances and are
estimated based upon historical experience. We may provide rebates and volume
discounts to our customers from time to time. Such rebates and discounts are
recorded as a reduction of product sales when earned by the customer.
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from research services,
and revenues from other miscellaneous sources.
In 2003, Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB
104") replaced Staff Accounting Bulletin No. 101, "Revenue Recognition In
Financial Statements" ("SAB 101"), which the Company adopted in 2000. The
provisions related to non-refundable, up-front license fees were unchanged in
SAB 104 compared to SAB 101. 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.
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
-21-
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Abnormal Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
we will adopt SFAS No. 151 in our fiscal year beginning January 1, 2006. We are
currently in the process of evaluating the impact of adopting this statement.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which revised SFAS No. 123 and superseded APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123(R) requires that companies recognize
compensation expense associated with grants of stock options and other equity
instruments to employees in the financial statements effective as of the first
interim or annual reporting period that begins after June 15, 2005. In April
2005, the SEC announced the adoption of a new rule allowing companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year that begins
after June 15, 2005. Compensation cost will be measured based on the fair value
of the instrument on the grant date and will be recognized over the vesting
period. This pronouncement applies to all grants after the effective date and to
the unvested portion of stock options outstanding as of the effective date. SFAS
No. 123(R) eliminates the ability to account for such transactions using the
intrinsic method currently used by us. SFAS No. 123(R) also requires that
companies recognize compensation expense associated with purchases of shares of
common stock by employees at a discount to market value under employee stock
purchase plans that meet certain criteria. Accordingly, we will adopt SFAS No.
123(R) in the fiscal year beginning January 1, 2006.
-22-
Although management has not yet determined the impact of the adoption of this
standard, it is expected to have a material effect on our consolidated financial
statements.
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.
Our exposure to market risk is principally confined to interest rate
sensitivity. Our cash equivalents and short-term investments are conservative in
nature, with a focus on preservation of capital. Due to the short-term nature of
our investments and our investment policies and procedures, we have determined
that the risks associated with interest rate fluctuations related to these
financial instruments are not material to our business. As of March 31, 2005, 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. However, downward changes in
interest rates could expose us to market risk associated with any fixed interest
rate debt.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of March 31, 2005. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of March 31, 2005, our disclosure controls and
procedures were effective.
(2) Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended as of March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
31.1 Certification of President and Chief Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2 Certification of Senior Vice President and Chief Financial
Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
32.1 Certification of President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
32.2 Certification of Senior Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
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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 10, 2005 By: /s/ Michael D. Becker
--------------------------------------------
Michael D. Becker
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2005 By: /s/ Christopher P. Schnittker
--------------------------------------------
Christopher P. Schnittker
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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