SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 2002
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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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
650 College Road East, CN 5308, 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at November 1, 2002
---------------------------- -------------------------------
Common Stock, $.01 par value 8,806,999*
* Such amount reflects the number of shares of common stock outstanding after
the Company's one-for-ten reverse stock split which became effective on October
25, 2002.
CYTOGEN CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION............................................... 3
Item 1. Financial Statements................................................ 3
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001......................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 (unaudited)...................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited)................................... 5
Notes to Consolidated Financial Statements (unaudited).................... 6
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results of Operations................................................. 11
Item 3. Quantitative And Qualitative Disclosures About Market Risk.......... 22
Item 4. Controls and Procedures............................................. 22
Part II. OTHER INFORMATION.................................................. 23
Item 2. Changes in Securities............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................. 24
Item 6. Exhibits And Reports On Form 8-K.................................... 24
2
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)
September 30, December 31,
2002 2001
------------- ------------
ASSETS:
Current Assets:
Cash and cash equivalents ...................................... $ 16,246 $ 11,309
Marketable securities .......................................... - 1,376
Receivable on income tax benefit sold .......................... - 1,103
Accounts receivable, net ....................................... 1,765 1,621
Inventories .................................................... 1,178 1,889
Other current assets ........................................... 834 508
--------- ---------
Total current assets ......................................... 20,023 17,806
Property and Equipment, net ...................................... 1,184 1,831
Other Assets ..................................................... 2,325 1,855
--------- ---------
$ 23,532 $ 21,492
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt .............................. $ 89 $ 77
Accounts payable and accrued liabilities ....................... 4,280 5,315
Deferred revenue ............................................... 354 534
--------- ---------
Total current liabilities .................................... 4,723 5,926
--------- ---------
Long-Term Liabilities ............................................ 2,687 2,291
--------- ---------
Deferred Revenue ................................................. 1,897 2,061
--------- ---------
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,
8,756,147 and 7,893,734 shares issued and outstanding
at September 30, 2002 and December 31, 2001, respectively .... 88 79
Additional paid-in capital ..................................... 367,226 351,577
Deferred compensation .......................................... (232) (621)
Accumulated other comprehensive income ......................... - 860
Accumulated deficit ............................................ (352,857) (340,681)
--------- ---------
Total stockholders' equity ................................... 14,225 11,214
--------- ---------
$ 23,532 $ 21,492
========= =========
The accompanying notes are an integral part of these statements.
3
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Product related:
ProstaScint .......................... $ 1,914 $ 1,697 $ 5,961 $ 5,730
BrachySeed ........................... 698 246 1,715 350
OncoScint ............................ 48 74 158 299
-------- -------- -------- --------
Total product sales ........... 2,660 2,017 7,834 6,379
Quadramet royalties .................. 376 579 1,385 1,615
-------- -------- -------- --------
Total product related ......... 3,036 2,596 9,219 7,994
License and contract revenues .......... 65 225 345 697
-------- -------- -------- --------
Total revenues ................ 3,101 2,821 9,564 8,691
-------- -------- -------- --------
Operating Expenses:
Cost of product sales .................. 1,154 1,421 3,449 3,240
Research and development ............... 1,331 2,661 6,876 6,882
Equity loss in PSMA LLC ................ 1,006 - 2,114 -
Selling and marketing .................. 1,433 1,489 4,508 4,820
General and administrative ............. 1,664 1,147 4,374 3,670
-------- -------- -------- --------
Total operating expenses ...... 6,588 6,718 21,321 18,612
-------- -------- -------- --------
Operating loss ................ (3,487) (3,897) (11,757) (9,921)
Loss on investment ....................... (516) - (516) -
Interest income .......................... 75 162 224 538
Interest expense ......................... (43) (44) (127) (136)
-------- -------- -------- --------
Net loss ................................. $ (3,971) $ (3,779) $(12,176) $ (9,519)
======== ======== ======== ========
Basic and diluted net loss per share ..... $ (0.46) $ (0.48) $ (1.46) $ (1.23)
======== ======== ======== ========
Weighted average common shares outstanding 8,660 7,887 8,353 7,745
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(12,176) $ (9,519)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................... 560 885
Imputed interest ................................. - (32)
Stock-based compensation expenses ................ 781 480
Amortization of deferred revenue ................. (345) (645)
Stock-based milestone payments ................... 2,033 -
Asset impairment ................................. 396 -
Loss on investment ............................... 516 -
Changes in assets and liabilites:
Receivables, net ............................... 959 1,300
Inventories .................................... 711 (829)
Other assets ................................... 85 (49)
Accounts payable and accrued liabilities ....... (848) (2,138)
Other liabilities .............................. 390 -
-------- --------
Net cash used in operating activities ............ (6,938) (10,547)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of product rights ............................... (1,000) (500)
Net proceeds from sale of equipment ...................... 100 -
Purchases of property and equipment ...................... (103) (486)
-------- --------
Net cash used in investing activities ............ (1,003) (986)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 12,962 14,188
Payment of long-term debt ................................ (84) (100)
-------- --------
Net cash provided by financing activities ........ 12,878 14,088
-------- --------
Net increase in cash and cash equivalents ................ 4,937 2,555
Cash and cash equivalents, beginning of period ........... 11,309 11,993
-------- --------
Cash and cash equivalents, end of period ................. $ 16,246 $ 14,548
======== ========
The accompanying notes are an integral part of these statements.
5
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") is a product-driven,
oncology-focused biopharmaceutical company. Cytogen markets several products
through its in-house oncology sales force: ProstaScint(R) (a monoclonal
antibody-based imaging agent used to image the extent and spread of prostate
cancer); BrachySeed(TM) I-125 and BrachySeed(TM) Pd-103 (two uniquely designed,
next-generation radioactive seed implants for the treatment of localized
prostate cancer) licensed by the Company from Draximage, Inc.; and beginning in
November 2002, NMP22(R) BladderChek(TM) (a convenient antibody based
point-of-care diagnostic test for bladder cancer) licensed by the Company from
Matritech, Inc. Cytogen developed Quadramet(R) as a skeletal targeting
therapeutic radiopharmaceutical for the relief of bone pain in prostate and
other types of cancer and 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 cell signaling
through its AxCell Biosciences subsidiary ("AxCell").
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
10-K filed with the Securities and Exchange Commission, which includes financial
statements as of and for the year ended December 31, 2001. 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.
6
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.
Marketable Securities
In connection with the acquisition of Prostagen Inc. in June 1999, the
Company received 275,350 shares of Northwest Biotherapeutics, Inc. ("Northwest")
common stock. The Company had classified this investment as available-for-sale
marketable securities. The fair value of Northwest stock, based on the quoted
market prices, has significantly decreased from the Company's original carrying
value of this investment of $516,000. Based on an evaluation of the financial
condition of Northwest and the current stock price, management concluded that
the carrying amount of this investment will not be recoverable. Accordingly, the
Company has recorded a non-cash charge of $516,000 related to the other than
temporary decline in the value of this investment during the three months ended
September 30, 2002.
Inventories
The Company's inventories are primarily comprised of ProstaScint and
OncoScint CR/OV. Inventories are stated at the lower of cost or market using the
first-in, first-out method and consisted of the following:
September 30, December 31,
2002 2001
-------------- --------------
Raw materials................. $ 506,000 $ 506,000
Work-in process............... 24,000 1,371,000
Finished goods................ 648,000 12,000
---------- ----------
$1,178,000 $1,889,000
========== ==========
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components which,
for the Company, include net loss and unrealized gains or losses on
available-for-sale marketable securities. In accordance with SFAS 130, the
accumulated balance of other comprehensive income or loss is displayed as a
separate component of stockholders' equity. The following table reconciles net
loss to comprehensive loss for the three and nine months ended September 30,
2002.
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------- -------------------
Net loss................................ $(3,971,000) $(12,176,000)
Other comprehensive loss:
Unrealized holding losses
arising during the period ........... (837,000) (1,376,000)
Less: reclasification
adjustment for losses included
in net loss ......................... 516,000 516,000
------------ -------------
Comprehensive loss...................... $(4,292,000) $(13,036,000)
============ =============
7
During the three and nine months ended September 30, 2001, the Company
had no unrealized gains or losses on available-for-sale marketable securities.
Net Loss Per Share
Basic net loss per share is based upon the weighted average common
shares outstanding during each period. Diluted net loss per share is the same as
basic net loss per share, as the inclusion of common stock equivalents would be
antidilutive.
Reclassifications
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.
2. REVERSE STOCK SPLIT:
On October 25, 2002, upon the receipt of approval of the Company's
stockholders at a duly called and held Special Meeting of Stockholders of the
Company, the Company's Board of Directors authorized and implemented a reverse
stock split (the "Reverse Split") of Cytogen's issued, outstanding and
authorized shares of common stock at a ratio of one-for-ten. As a result of the
Reverse Split, one new share of common stock will be issued for every ten shares
of common stock held by stockholders of record as of the close of business on
October 25, 2002. All references in the accompanying financial statements to the
number of shares and per share amounts have been retroactively restated to
reflect the Reverse Split.
3. RESTRUCTURING OF AXCELL BIOSCIENCES INC:
In an effort to reduce expenses and position Cytogen for stronger
long-term growth in oncology, the Company restructured AxCell in September 2002
by reducing 75% of AxCell's workforce. As a result, during the third quarter of
2002, the Company recorded a charge of $830,000 related to employee severance
costs, the impairment of property and equipment and future rental payments on
leased facilities that will not be used in operations, which is included in
general and administrative expense in the accompanying consolidated statement of
operation. As of September 30, 2002, $439,000 of the restructuring charge was
accrued, and will be paid through 2006.
4. EQUITY LOSS IN PSMA DEVELOPMENT CO. LLC:
In June 1999, Cytogen entered into a joint venture called the PSMA
Development Co. LLC (the "Joint Venture"), with Progenics Pharmaceuticals Inc.
("Progenics"), 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. Progenics was obligated to fund
the initial $3.0 million of development costs of the Joint Venture. Beginning in
December 2001, the Company and Progenics began to equally share the costs of the
8
Joint Venture. Since December 2001, Cytogen has recognized 50% of the Joint
Venture's operating results in its consolidated results of operations. Selected
financial statement information of the Joint Venture is as follows:
Statement of Operations Data:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ---------- ----------- ------------
Interest income............... $ - $ 10,000 $ 4,000 $ 36,000
Total expenses................ 2,012,000 853,000 4,232,000 1,888,000
----------- --------- ------------ -----------
Net loss.................... $(2,012,000) $(843,000) $(4,228,000) $(1,852,000)
=========== ========= =========== ============
5. SALES OF CYTOGEN COMMON STOCK:
In January 2002, the Company sold 297,067 shares of Cytogen common
stock to the State of Wisconsin Investment Board ("SWIB"), for an aggregate
purchase price of $8.0 million, pursuant to a January 2002 Share Purchase
Agreement between SWIB and the Company. In June 2002, the Company sold an
additional 416,670 shares of Cytogen common stock to SWIB for an aggregate
purchase price of $5.0 million. Pursuant to its agreements with SWIB, in January
2002 the Company agreed not to enter into equity line arrangements in the
future, issue certain securities at less than fair market value or undertake
certain other securities issuances without requisite stockholder approval.
6. AMENDMENT OF AGREEMENT AND MILESTONE PAYMENTS:
Pursuant to a Stock Exchange Agreement ("Prostagen Agreement") related
to the Company's acquisition of Prostagen Inc. ("Prostagen") in June 1999, the
Company agreed to issue up to an additional $4.0 million worth of Cytogen common
stock to the shareholders and debtholders of Prostagen (the "Prostagen
Partners"), if certain milestones are achieved in the dendritic cell therapy and
PSMA development programs. During the first quarter of 2002, the Company and the
Prostagen Partners agreed that a milestone was achieved based on the progress of
the dendritic cell prostate cancer clinical trials at Northwest Biotherapeutics,
Inc. As a result, the Company accrued a $2.0 million stock liability with a
corresponding charge recorded as research and development expense in the first
quarter of 2002. In May 2002, the Company entered into an addendum to the
Prostagen Agreement, as amended in August 2002 (the "Addendum") which clarifies
the milestone payments to be made under the Prostagen Agreement, as well as the
timing of such payments. Accordingly, Cytogen issued and registered with the
Securities and Exchange Commission (the "SEC") $2.0 million worth of Cytogen
common stock, or 122,699 shares, in satisfaction of the stock liability. In
addition, the Company may be obligated to pay two additional milestone payments
of $1.0 million each, upon the earlier of certain clinical achievements
regarding the PSMA development programs or January 2003 and July 2003,
respectively, provided that the payments shall be due on these dates only if
safety has been established in a completed Phase I clinical trial and the
research program on immunotherapy for prostate cancer is continuing on such
dates. Any future milestone payments are payable in shares of Cytogen common
stock which will be registered with the SEC after issuance.
9
Under the terms of a Product, Manufacturing and Supply Agreement (the
"Supply Agreement") entered in December 2000 between Cytogen and Draximage Inc.,
Draximage will supply radioactive iodine and palladium seeds to Cytogen in
exchange for product transfer payments, royalties on sales and certain milestone
payments. Pursuant to the Supply Agreement, Cytogen paid Draximage $1.0 million
related to the first sale of BrachySeed Pd-103, which occurred in May 2002. The
Company has recorded the $1.0 million milestone in other assets in the
accompanying consolidated balance sheet and will amortize such amount over the
approximately eight year remaining term of the Draximage agreement.
7. LITIGATION:
On March 17, 2000, the Company was served with a complaint filed
against Cytogen in the United States Federal Court for the District of New
Jersey by M. David Goldenberg ("Goldenberg") and Immunomedics, Inc.
(collectively "Plaintiffs"). The litigation claims that the Company's
ProstaScint product 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. 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. In
addition, 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 the Company's
products or technology. Discovery proceedings have advanced in a United States
District Court with expert testimony being scheduled during the fourth quarter
of 2002. However, given the uncertainty associated with litigation, there can
be no assurance that the litigation could not result in a material expenditure
to the Company.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains historical information as well as
forward looking statements that involve a number of risks and uncertainties.
Statements contained or incorporated by reference in this Quarterly Report on
Form 10-Q that are not based on historical facts are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Generally, forward looking statements can be identified by the
use of phrases like "believe", "expect", "anticipate", "plan", "may", "will",
"could", "estimate", "potential", "opportunity" and "project" and similar terms.
The Company's actual results could differ materially from the Company's
historical results of operations and those discussed in the forward looking
statements. Factors that could cause actual results to differ materially,
include, but are not limited to those identified in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 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
In addition to the risks discussed under the caption referred to above,
among other factors that could cause actual results to differ materially from
expected results are the following: (i) the Company's ability to access the
capital markets in the near term and in the future for continued funding of its
operations including existing projects and in the pursuit of future projects;
(ii) the ability to attract and retain personnel needed for business operations
and strategic plans; (iii) the timing and results of clinical studies, and
regulatory approvals; (iv) market acceptance of the Company's products,
including programs designed to facilitate use of the products, such as the
Partners in Excellence or PIE Program; (v) demonstration over time of the
efficacy and safety of the Company's products; (vi) the degree of competition
from existing or new products; (vii) the decision by the majority of public and
private insurance carriers on whether to reimburse patients for the Company's
products; (viii) the ability of the Company and its partners to comply with
applicable governmental regulations and changes thereto; (ix) the profitability
of the Company's products; (x) the ability to attract, and the ultimate success
of, strategic partnering arrangements, collaborations, and acquisition
candidates; (xi) the ability of the Company and its partners to identify new
products as a result of those collaborations that are capable of achieving FDA
approval, that are cost-effective alternatives to existing products and that are
ultimately accepted by the key users of the product; (xii) the ability to
integrate the in-licensed products such as NMP22(R) BladderChek(TM) and
BrachySeed; (xiii) the success of the Company in obtaining marketing approvals
for its products in Canada and Europe; (xiv) the ability of the Company to
protect its proprietary technology, trade secrets or know-how under the patent
and other intellectual property laws of the United States and other countries;
and (xv) the ability of Advanced Magnetics Inc. to satisfy the conditions
specified by the FDA regarding approval to market Combidex in the United States.
11
The following discussion and analysis should be read in conjunction
with the Financial Statements and related notes thereto contained elsewhere
herein, as well as the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 and from time to time the Company's other filings with the
Securities and Exchange Commission.
Significant Events in 2002
During May 2002, the Company launched the palladium version of
BrachySeed(TM) (Pd-103), a uniquely designed next generation radioactive seed
implant for the treatment of localized prostate cancer. The Company introduced
the iodine version of BrachySeed (I-125) in 2001, and since then has increased
its penetration of the brachytherapy iodine market, resulting in consistent
quarter-over-quarter growth in BrachySeed sales. Despite such historical
quarter-over-quarter sales increases, the radioactive seed implant market is
very competitive and there can be no assurance that such increases will continue
in the future. The Company is utilizing its existing oncology sales force to
market both BrachySeed products.
In October 2002, the Company entered into a five-year agreement with
Matritech Inc. ("Matritech") to be the sole distributor for Matritech's NMP22
BladderChek test. NMP22 Bladderchek is a convenient antibody-based point-of-care
diagnostic test for bladder cancer that requires only a few drops of a patient's
urine. BladderChek returns results in thirty minutes and provides urologists
with an adjunct technology to cytoscopy, a clinical procedure for the visual
identification of tumors in the bladder, for improved detection and early
diagnosis. During November 2002, the Company began promoting BladderChek to
physicians throughout the U.S. using its in-house urologic-oncology sales force.
Also in 2002, the Company received regulatory approval in Canada for
ProstaScint(R), the Company's radio-labeled monoclonal antibody prostate cancer
imaging agent. ProstaScint was approved for marketing in the United States in
1996. In both Canada and the United States, ProstaScint is indicated for use in
staging high risk patients newly diagnosed with prostate cancer who are at risk
for lymph node metastases and for patients with recurrent prostate cancer
following a radical prostatectomy who are suspected of having occult metastatic
disease. In Canada, ProstaScint is also indicated for use in identifying those
patients with recurrent prostate cancer who are likely to benefit from receiving
local salvage radiation therapy. The Company is reviewing various options to
introduce both ProstaScint and Quadramet in Canada, either independently or with
a partner. Quadramet, which was approved for marketing in Canada in 1998, is a
therapeutic agent marketed in the U.S. for the relief of bone pain in prostate
and other types of cancer. There can be no assurance, however, regarding the
timing of launch for ProstaScint and Quadramet in Canada, the market acceptance
of the newly launched products including BrachySeed I-125, BrachySeed Pd-103 and
BladderChek and whether these products will significantly increase the revenues
of the Company.
In an effort to reduce expenses and position Cytogen for stronger
long-term growth in oncology, the Company restructured its AxCell Biosciences
subsidiary in September 2002. Management intends that the plan, which included a
75% reduction of AxCell's workforce, will allow continued research related to
the role of novel proteins and signal transduction pathways in disease
progression through both external collaborations and internal data mining. While
AxCell continues to pursue opportunities in the area of signal transduction
research, the restructuring reinforces Cytogen's corporate objectives of
developing and marketing oncology products.
12
On October 25, 2002, upon the receipt of approval of the Company's
stockholders at a duly called and held Special Meeting of Stockholders of the
Company, the Company's Board of Directors authorized and implemented a reverse
stock split (the "Reverse Split") of Cytogen's issued, outstanding and
authorized shares of common stock at a ratio of one-for-ten. As a result of the
Reverse Split, one new share of common stock will be issued for every ten shares
of common stock held by stockholders of record as of the close of business on
October 25, 2002. After giving effect to the Reverse Split, the number of shares
of authorized common stock is 25,000,000, and the number of shares of common
stock issued and outstanding at September 30, 2002 was 8,756,147 (pending
adjustment for the disposition of fractional shares, which will be paid in cash
based on $0.395 per share). The Reverse Split is intended in part to help
increase the market price of Cytogen's common stock above the minimum $1.00 per
share as required by the Nasdaq National Market's ("NNM's") maintenance listing
standards. On November 11, 2002, the Company announced that it had received
notification from the Nasdaq Stock Market, Inc. that the Company had regained
compliance with the NNM's listing standards regarding minimum bid price.
Results of Operations
Three Months Ended September 30, 2002 and 2001
Revenues. Total revenues for the third quarter of 2002 were $3.1
million compared to $2.8 million for the same period in 2001. The increase from
the prior year period is due to higher product related revenues, partially
offset by lower license and contract revenues. Product related revenues, which
included product sales and royalties, accounted for 98% and 92% of total
revenues for the third quarters of 2002 and 2001, respectively. License and
contract revenues accounted for the remainder of revenues.
Product related revenues for the third quarter of 2002 were $3.0
million compared to $2.6 million for the same period in 2001. Sales of
ProstaScint accounted for 63% and 65% of product related revenues in the third
quarters of 2002 and 2001, respectively, while Quadramet royalties accounted for
12% and 22% of product related revenues for such quarters, respectively. Sales
of ProstaScint were $1.9 million for the third quarter of 2002, $217,000 higher
than the $1.7 million recorded in the third quarter of 2001. Cytogen believes
that future growth of ProstaScint is dependent upon, among other things, the
successful entry into additional markets and the implementation and continued
research of new product applications such as: (i) combining or fusing
ProstaScint with CT or MRI scans in a digital overlay; (ii) using ProstaScint
scans to guide therapy, like the placement of brachytherapy seeds and/or
external beam radiation; (iii) using ProstaScint to guide biopsy; or (iv)
competitive re-imbursement by federal and private agencies. There can be no
assurance, however, that such initiatives will significantly increase the sales
of ProstaScint.
Sales of BrachySeed during the third quarter of 2002 were $698,000 and
accounted for 23% of product related revenues, compared to $246,000, or 9% of
product related revenues, recorded in the same period of 2001. Since the market
introduction of BrachySeed I-125 in February 2001, the Company has increased its
penetration of the brachytherapy iodine market resulting in consistent
quarter-over-quarter growth. BrachySeed sales in 2002 also include the initial
sales of BrachySeed Pd-103, which was launched in May 2002. There can be no
assurance, however, as to the continued market penetration of the BrachySeed
I-125 and market acceptance of BrachySeed Pd-103 radioactive seed implants or
whether the sale of these products will significantly increase the revenues of
the Company in future periods.
13
Sales of OncoScint CR/OV during the third quarter of 2002 were $48,000
compared to $74,000 in the same period of 2001. 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. Accordingly, the Company will discontinue
selling OncoScint CR/OV at the end of 2002 in order to focus on its other
oncology products.
Quadramet royalties for the third quarter of 2002 were $376,000,
$203,000 less than the $579,000 reported in the same period of 2001. The
decrease was partially due to a temporary and infrequent disruption in the
supply of Quadramet from the manufacturer of the product during the third
quarter of 2002, which has been resolved. Quadramet is currently marketed in the
U.S. by the Company's marketing partner, Berlex Laboratories ("Berlex"). Cytogen
believes that future growth and market penetration of Quadramet is largely
dependent upon, among other things: (i) new clinical data supporting the
expanded and earlier use of Quadramet in various cancers and in combination with
other therapies, such as chemotherarpy and bisphophonates; (ii) establishing the
use of Quadramet at higher doses to target and treat primary bone cancers; and
(iii) increased marketing and sales penetration to radiation and medical
oncologists. Although Cytogen believes that Berlex is a capable partner, 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 third quarter of 2002 were
$65,000 compared to $225,000 for the same period of 2001. As a result of the
Company's adoption of Securities and Exchange Commission's Staff Accounting
Bulletin No.101 ("SAB 101") in 2000, license revenues include the recognition of
deferred revenues from certain up-front, non-refundable license fees previously
recognized in prior years.
Operating Expenses. Total operating expenses for the third quarter of
2002 were essentially flat at $6.6 million compared to $6.7 million recorded in
the same quarter of 2001, despite a charge of $830,000 related to the
restructuring of AxCell recorded in September 2002, which is reflected in
general and administrative expenses. Excluding the restructuring charge related
to AxCell, the third quarter of 2002 operating expenses reflect a decrease in
cost of product sales and research and development expenses and an increase in
development cost associated with PSMA Development Company LLC, a joint venture
between Cytogen and Progenics Pharmaceuticals, Inc. ("Progenics") for the
development of in vivo immunotherapies, utilizing prostate specific membrane
antigen or PSMA.
Cost of product sales for the third quarter of 2002 were $1.2 million
compared to $1.4 million recorded in the same period of 2001. The decrease from
the prior year period is primarily due to the lower manufacturing costs for
ProstaScint, partially offset by an increase in sales from our BrachySeed
products.
Research and development expenses for the third quarter of 2002 were
$1.3 million compared to $2.7 million recorded in the same period of 2001. The
decrease from the prior year period is attributable primarily to reduced
expenses associated with AxCell's signal transduction inhibitors research
programs and the development of a new manufacturing and purification process for
ProstaScint. During the third quarters of 2002 and 2001, the Company invested
$956,000 and $1.2 million, respectively, in AxCell's signal transduction
14
research activities, and $0 and $943,000 respectively, in the development of a
new manufacturing process for ProstaScint. In connection with the restructuring
plan for AxCell in September 2002, cost-saving measures at AxCell are expected
to lower Cytogen's annual operating expenses by approximately $2.2 million
beginning in the fourth quarter of 2002. Funding for the development of a new
manufacturing process for ProstaScint has been put on hold pending further
evaluation of the development results.
The Company's share in the equity loss in the PSMA Development LLC was
$1.0 million during the third quarter of 2002 and represented 50% of the Joint
Venture's operating results. The Joint Venture is equally owned by Cytogen and
Progenics. The Company accounts for the Joint Venture using the equity method of
accounting. Progenics was obligated to fund the initial $3.0 million of
development costs of the Joint Venture. Beginning in December 2001, the Company
and Progenics began to equally share the costs of the Joint Venture. The Company
expects to incur significant costs in the future to fund its share of the
development costs from the Joint Venture.
Selling and marketing expenses for the third quarter of 2002 were
essentially flat at $1.4 million compared to $1.5 million in the same period of
2001. These expenses included costs associated with the product launches of
BrachySeed I-125 in 2001 and BrachySeed Pd-103 in 2002.
General and administrative expenses for the third quarter of 2002 were
$1.7 million compared to $1.1 million in the same period of 2001. The increase
from the prior year period is due primarily to a charge of $830,000 related to
the restructuring of AxCell in September 2002, partially offset by decreased
spending in legal and professional fees.
Loss on Investment. The Company recorded a non-cash charge of $516,000
during the third quarter of 2002 for an impairment in the carrying value of an
investment in shares of Northwest Biotherapeutics, Inc. ("Northwest") common
stock, which the Company had received as part of the acquisition of Prostagen in
1999. The fair value of such investment, based on the quoted market prices, has
significantly decreased from its original carrying value of $516,000. Based on
an evaluation of the financial condition of Northwest and the current stock
price, management concluded that the decline was other than temporary and that
the carrying amount of this investment would not be recoverable.
Interest Income/Expense. Interest income for the third quarter of 2002
was $75,000 compared to $162,000 recorded in the same period of 2001. The
decrease from the prior year period is due to a lower average yield on
investments during 2002. Interest expense for the third quarter of 2002 was
$43,000 compared to $44,000 recorded in the same period of 2001. Interest
expense includes finance charges related to various equipment leases.
Net Loss. Net loss for the third quarter of 2002 was $4.0 million
compared to $3.8 million reported in the third quarter of 2001. After giving
effect to the Reverse Split, the net loss per share for the third quarter of
2002 was $0.46 based on weighted average common shares outstanding of 8.7
million, compared to a net loss per share of $0.48 based on the weighted average
common shares outstanding of 7.9 million for the same period in 2001.
15
Nine months ended September 30, 2002 and 2001
Revenues. Total revenues for the nine months ended September 30, 2002
and 2001 were $9.6 million and $8.7 million, respectively. The increase from the
prior year period is due to higher product related revenues, partially offset by
lower license and contract revenues. Product related revenues, which included
product sales and royalties, accounted for 96% of total revenues in 2002
compared to 92% from the comparable period of 2001. License and contract
revenues accounted for the remainder of revenues. For the fiscal year 2002, the
Company projects total revenues to be in the range of $12.5 million to $14.5
million.
Product related revenues for the nine months ended September 30, 2002
and 2001 were $9.2 million and $8.0 million, respectively. Sales of ProstaScint
accounted for 65% and 72% of product related revenues in the nine months ended
September 30, 2002 and 2001, respectively, while Quadramet royalties accounted
for 15% and 20% of product related revenues for such periods, respectively.
Sales of ProstaScint were $6.0 million for nine months ended September 30, 2002
compared to $5.7 million in the comparable period of 2001. Cytogen believes that
future growth of ProstaScint is dependent upon, among other things, the
successful entry into additional markets and the implementation and continued
research of new product applications as described above. There can be no
assurance, however, that such initiatives will significantly increase the sales
of ProstaScint.
Royalties from Quadramet for the nine months ended September 30, 2002 were
$1.4 million compared to $1.6 million in the same period of 2001. The decrease
was partially due to a temporary and infrequent disruption in the supply of
Quadramet from the manufacturer of the product during the third quarter of 2002,
which has been resolved. Quadramet is currently marketed in the U.S. by the
Company's marketing partner, Berlex Laboratories ("Berlex"). Cytogen believes
that future growth and market penetration of Quadramet is largely dependent
upon, among other things: (i) new clinical data supporting the expanded and
earlier use of Quadramet in various cancers and in combination with other
therapies, such as chemotherarpy and bisphophonates; (ii) establishing the use
of Quadramet at higher doses to target and treat primary bone cancers; and (iii)
increased marketing and sales penetration to radiation and medical oncologists.
Although Cytogen believes that Berlex is a capable partner, there can be no
assurance that Quadramet will achieve greater market penetration on a timely
basis or result in significant revenues for Cytogen.
Sales of BrachySeed for the nine months ended September 30, 2002 were
$1.7 million and accounted for 19% of product related revenues, compared to
$350,000 or approximately 4% of product related revenues recorded in the same
period of 2001. The increase from the prior year period is due to increased
market penetration of BrachySeed I-125 since its market introduction in February
2001, and to the initial sales of BrachySeed Pd-103, which was launched in May
2002. Sales of BrachySeed Pd-103 have not been substantial to date, since the
product is still in the initial launch phase. There can be no assurance,
however, as to the continued market penetration of BrachySeed I-125 and market
acceptance of BrachySeed Pd-103 or whether the sale of these products will
significantly increase the revenues of the Company in future periods.
16
Sales of OncoScint CR/OV were $158,000 in 2002 compared to $299,000 in
the same period of 2001. 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.
Accordingly, the Company will discontinue selling OncoScint CR/OV at the end of
2002 in order to focus on its other oncology products.
License and contract revenues for the nine months ended September 30,
2002 and 2001 were $345,000 and $697,000, respectively. As a result of the
Company's adoption of SAB 101 in 2000, license revenues for both 2002 and 2001
include the recognition of deferred revenues from certain up-front
non-refundable license fees previously recognized in prior years.
Operating Expenses. Total operating expenses for the nine months ended
September 30, 2002 were $21.3 million, and included a one-time, non-cash
milestone payment of $2.0 million related to the progress of the dendritic cell
prostate cancer clinical trials at Northwest and a charge of $830,000 for the
restructuring of AxCell recorded in September 2002. Excluding these charges,
operating expenses for the nine months of 2002 would have been flat at $18.5
million compared to $18.6 million recorded in the same period of 2001. The
current year expenditures reflect an increase in development costs associated
with the PSMA Development Company LLC and decreased expenses in the new
manufacturing process for ProstaScint and AxCell's signal transduction research
programs. For fiscal year 2002, the Company projects total operating expenses,
excluding cost of sales and one-time non-cash charges, to be in the range of
$20.0 million to $22.0 million.
Cost of product sales for the nine months ended September 30, 2002 were
$3.4 million compared to $3.2 million in the same period of 2001. The increase
from the prior year period is due primarily to increases in sales of our
products and to a $157,000 charge to reserve for excess inventory for OncoScint
and ProstaScint, partially offset by lower facility related costs associated
with the manufacturing of ProstaScint.
Research and development expenses for the nine months ended September
30, 2002 were $6.9 million and were flat compared to the $6.9 million reported
in the same period of 2001, despite a one-time, non-cash milestone payment of
$2.0 million related to the progress of dendritic cell prostate cancer clinical
trials at Northwest in 2002. Excluding this one-time charge, the 2002 research
and development expenses decreased from the prior year expenditures, as a result
of reduced costs associated with AxCell's signal transduction inhibitors
research programs and the development of a new manufacturing and purification
process for ProstaScint. During the nine months ended September 30, 2002 and
2001, the Company invested $3.3 million and $3.6 million, respectively, in
AxCell's signal transduction research activities, and $551,000 and $1.8 million
respectively, in the development of a new manufacturing process for ProstaScint.
In connection with the AxCell restructuring plan in September 2002, cost-saving
measures at AxCell are expected to lower Cytogen's annual operating expenses by
approximately $2.2 million beginning in the fourth quarter of 2002. Funding for
the development of a new purification and manufacturing process for ProstaScint
has been put on hold pending further evaluation of the development results.
The Company's share in the equity loss in the PSMA Development LLC, our
joint venture with Progenics was $2.1 million during the nine months ended
September 30, 2002 and represented 50% of the Joint Venture's operating results.
The Joint Venture is equally owned by Cytogen and Progenics. The Company
accounts for the Joint Venture using the equity method of accounting. Progenics
was obligated to fund the initial $3.0 million of development costs of the Joint
17
Venture. Beginning in December 2001, the Company and Progenics began to equally
share the costs of the Joint Venture. The Company expects to incur significant
costs in the future to fund its share of the development costs from the Joint
Venture.
Selling and marketing expenses were $4.5 million for the nine months
ended September 30, 2002 compared to $4.8 million in the same period of 2001.
The decrease from the prior year period is due primarily to costs associated
with the 2001 launch of BrachSeed I-125.
General and administrative expenses for the nine months ended September
30, 2002 were $4.4 million compared to $3.7 million in the same period in 2001.
The increase from the prior year period is due to a charge of $830,000 related
to restructuring of AxCell in September 2002, and a stock based compensation
charge for a key employee. The increase is partially reduced by decreased
spending in legal and professional fees.
Loss on Investment. The Company recorded a non-cash charge of $516,000
during the third quarter of 2002 for an impairment in the carrying value of an
investment in shares of Northwest common stock, which the Company had received
as part of the acquisition of Prostagen in 1999. The fair value of such
investment, based on the quoted market prices, has dramatically decreased from
its original carrying value of $516,000. Based on an evaluation of the financial
condition of Northwest and the current stock price, management concluded that
the decline was other than temporary and that the carrying amount of this
investment would not be recoverable.
Interest Income/Expense. Interest income for the nine months ended
September 30, 2002 was $224,000 compared to $538,000 recorded in the same period
of 2001. The decrease from the prior year period is due a lower average yield on
investments in 2002. Interest expense for the nine months ended September 30,
2002 was $127,000 compared to $136,000 recorded in the same period of 2001.
Interest expense includes finance charges related to various equipment leases.
Net Loss. Net loss for the nine months ended September 30, 2002 was
$12.2 million compared to $9.5 million recorded in the same period of 2001.
Giving effect to the Reverse Split, the net loss per share for the nine months
ended September 30, 2002 was $1.46 based on weighted average common shares
outstanding of 8.4 million compared to a net loss per share of $1.23 based on
the weighted average common shares outstanding of 7.7 million for the same
period in 2001. As mentioned above, the 2002 net loss included a one-time,
non-cash milestone of $2.0 million related to the progress of dendritic cell
prostate cancer clinical trials at Northwest and a charge of $830,000 for the
restructuring of AxCell in September 2002.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $16.2 million as of
September 30, 2002, compared to $11.3 million as of December 31, 2001. The cash
used for operating activities for the nine months ended September 30, 2002 was
$6.9 million compared to $10.5 million in the same period of 2001. The decrease
from the prior year period is due primarily to improved working capital
management which included a build-up of ProstaScint inventory in 2001 compared
with a reduction in 2002 as the Company is in the process of seeking a new
manufacturer of ProstaScint. For the fiscal year 2002, the Company projects that
cash used in operations will be in the range of $9.5 million to $10.5 million.
18
Historically, the Company's primary sources of cash have been
proceeds from the issuance and sale of its stock through public offerings and
private placements, product related revenues, revenues from contract
manufacturing and research services, fees paid under license agreements and
interest earned on cash and short-term investments.
The Company filed a shelf Registration Statement on Form S-3 to
register 1,000,000 shares of its common stock in October 2001. Such Registration
Statement was declared effective by the Securities and Exchange Commission in
November 2001. The Company may issue such registered shares of common stock from
time to time and may use the proceeds thereof for general corporate purposes,
including, but not limited to, continued development and commercialization of
its proteomics technologies, research and development of additional products and
expansion of its sales and marketing capabilities. As of September 30, 2002 the
Company has registered 713,737 shares of common stock under such shelf
registration statement and a total of 286,263 shares of the Company's common
stock remain available to be registered.
In January 2002, the Company sold 297,067 shares of Cytogen common
stock to the State of Wisconsin Investment Board ("SWIB") for an aggregate
purchase price of $8.0 million. In June 2002, the Company sold an additional
416,670 shares of Cytogen common stock for an aggregate purchase price of $5.0
million. Pursuant to its agreement with SWIB, in January 2002 the Company agreed
not to enter into equity line arrangements in the future, issue certain
securities at less than fair market value or undertake certain other securities
issuances without requisite stockholder approval.
In January 2002, the Company received cash of $1.1 million relating to
the December 2001 sale of New Jersey State net operating losses and research and
development credits. Under the current legislation, the Company may be able to
sell a minimum $634,000 of its remaining approved $2.4 million of tax benefits
in 2002 assuming the State of New Jersey continues to fund this program. The
actual amount of net operating losses and tax credits the Company may sell will
also depend upon the allocation among qualifying companies of an annual pool
established by the State of New Jersey.
Beginning in December 2001, Cytogen and Progenics began to equally
share the costs of the Joint Venture. Since that date, Cytogen has recognized
50% of the Joint Venture's operating results, which, during the nine months
ended September 30, 2002 was a loss of $2.1 million. The Company expects its
share of losses in the PSMA Development Co. LLC to continue at even higher
levels in subsequent periods.
The Company's capital and operating requirements may change depending
upon various factors, including: (i) whether the Company and its strategic
partners achieve success in manufacturing, marketing and commercialization of
its products; (ii) the amount of resources which the Company devotes 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, the Company expects to incur
significant costs for the development of its PSMA technologies.
19
The Company's financial objectives are to meet its capital and
operating requirements through revenues from existing products and licensing
arrangements. To achieve its strategic objectives, the Company 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 the Company in either cash or stock in addition to the costs
associated with developing and marketing a product or technology. There can be
no assurance as to the success of such strategies or that resulting funds will
be sufficient to meet cash requirements until such time as product revenues are
sufficient to cover operating expenses, if ever. To fund these strategic and
operating activities, the Company may sell assets, equity or debt securities as
market conditions permit or enter into credit facilities.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
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 its
marketing and sales programs. The Company expects that its existing capital
resources should be adequate to fund the Company's operations during 2003. The
Company cannot assure you that its business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. The
Company expects that it will have additional requirements for capital from the
issuance of debt or equity securities, irrespective of whether and when it
reaches profitability, for further product development costs, product and
technology acquisition costs, and working capital.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including the successful
commercialization of its products, the costs associated with the acquisition of
complementary products and technologies, progress in its product development
efforts, the magnitude and scope of such efforts, progress with clinical trials,
progress with regulatory affairs activities, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the expansion of strategic
alliances for the sales, marketing, manufacturing and distribution of its
products. To the extent that the currently available funds and revenues are
insufficient to meet current or planned operating requirements, the Company will
be required to obtain additional funds through asset sales, 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 the
Company. If adequate funds are not available, the Company may be required to
delay, further scale back or eliminate certain aspects of its operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. If adequate
funds are not available, the Company's business, financial condition and results
of operations will be materially and adversely affected.
20
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, 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 the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, 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 the Company. The preparation of the Company's Consolidated
Financial Statements requires the Company 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. The
Company's actual results could differ materially from those estimates.
Revenue Recognition
The Company recognizes revenue from the sale of its products upon
shipment. The Company does 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, the Company defers up-front license fees and recognizes 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
The Company's accounts receivable balances are net of an estimated
allowance for uncollectible accounts. The Company 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 the Company has identified. While the Company
believes its reserve estimate to be appropriate, the Company may find it
necessary to adjust its allowance for uncollectible accounts if its future bad
debt expense exceeds our estimated reserve. The Company is subject to
concentration risks as a limited number of its 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 the Company's inventories. The Company's products and raw materials are
subject to expiration dating. The Company regularly reviews quantities on hand
to determine the need for reserves for excess and obsolete inventories based
primarily on its estimated forecast of product sales. The Company's estimate of
21
future product demand may prove to be inaccurate, in which case the Company may
have understated or overstated its reserve for excess and obsolete inventories.
Carrying Value of Fixed and Intangible Assets
The Company's fixed assets and certain of its acquired rights to market
its 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, the Company 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, the Company measures 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The Company does not have exposure to market
risks associated with changes in interest rates, as it has no variable interest
rate debt outstanding. The Company does not believe it has any other material
exposure to market risks associated with interest rates.
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 chief financial officer 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.
22
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
Charter Amendment
On October 25, 2002, the Company filed a Certificate of Amendment to
its Restated Certificate of Incorporation, as amended (the "Charter Amendment")
with the Secretary of State of the State of Delaware. Such Charter Amendment
affected a one-for-ten reverse split (the "Reverse Split") of all outstanding,
issued and authorized shares of the Company's common Stock, $0.01 par value per
share (the "Common Stock"). The rights of such stockholders holding more than
ten shares of Common Stock as of the close of business on October 25, 2002, the
record date for determining shares affected by the Reverse Split, were
unaffected but for the proportionate reduction in the number of shares of Common
Stock so held by each such stockholder as a result of the Reverse Split. Those
stockholders holding less than an aggregate of ten shares of Common Stock, and
those stockholders having holdings not evenly divisible by ten, will receive a
cash payment equal to such stockholder's resulting fractional interest after the
Reverse Split multiplied by $0.395, in lieu of receiving post-Reverse Split
shares of Common Stock.
The Company's 5,400,000 shares of the Company's preferred stock, $0.01
par value per share (the "Preferred Stock") authorized, including such 200,000
shares of Preferred Stock designated as Series C Junior Participating Preferred
Stock, were unaffected by Charter Amendment.
Issuance of Unregistered Shares of Common Stock
Pursuant to a Stock Exchange Agreement ("Prostagen Agreement") related
to the Company's acquisition of Prostagen Inc. ("Prostagen") in June 1999, the
Company agreed to issue up to an additional $4.0 million worth of Cytogen common
stock to the shareholders and debtholders of Prostagen (the "Prostagen
Partners"), if certain milestones are achieved in the dendritic cell therapy and
PSMA development programs. During the first quarter of 2002, the Company and the
Prostagen Partners agreed that a milestone was achieved based on the progress of
the dendritic cell prostate cancer clinical trials at Northwest Biotherapeutics,
Inc.
In May 2002, the Company entered into an addendum to the Prostagen
Agreement, as amended in August 2002 (the "Addendum"), which clarifies the
milestone payments to be made under the Prostagen Agreement, as well as the
timing of such payments. Accordingly, on September 16, 2002, the Company issued
122,699 shares of Common Stock to the Prostagen Partners (the "Prostagen
Shares") at consideration equivalent to approximately $16.30 per share of Common
Stock in satisfaction of the stock liability recorded in the first quarter of
2002. The Company issued the Prostagen Shares in satisfaction of the Company's
current milestone payment liabilities to the Prostagen Partners, and therefore,
did not receive cash from the Prostagen Partners in exchange for the Prostagen
Shares.
23
The Company subsequently filed a Registration Statement on Form S-3
(File No. 333-100315) (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") on October 4, 2002 registering the
Prostagen Shares. The Registration Statement was subsequently amended on October
21, 2002, and declared effective by the Commission on October 24, 2002.
The Company believes that the issuance of the Prostagen Shares to the
Prostagen Partners was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving any public
offering. The Prostagen Partners had adequate access to information about the
Company.
Item 4 - Submission of Matters to a Vote of Security Holders
On October 25, 2002, the Company held a Special Meeting of Stockholders
(the "Special Meeting"). Information relating to the matters voted upon at the
Special Meeting and the number of votes cast for, against and withheld with
respect to each such matter is contained in the Company's Current Report on Form
8-K which was filed with the Commission on October 25, 2002. There were no
broker non-votes with respect to either proposal presented to the stockholders
of the Company at the Special Meeting.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 - Certificate of Amendment to Restated Certificate of Incorporation,
as amended, as filed with the Secretary of State of the State of
Delaware on October 25, 2002. Filed as an exhibit to the Company's
Current Report on Form 8-K dated October 25, 2002, and incorporated
herein by reference.
99.1 - Certification of Disclosure on Form 10-Q for the period ended
September 30, 2002 by H. Joseph Reiser, President and Chief Executive
Officer of Cytogen Corporation. Filed herewith.
99.2 - Certification of Disclosure on Form 10-Q for the period ended
September 30, 2002 by Lawrence R. Hoffman, Vice President and Chief
Financial Officer of Cytogen Corporation. Filed herewith.
24
(b) Reports on Form 8-K
During the three months ended September 30, 2002, the Company filed two
Current Reports on Form 8-K with the Securities and Exchange
Commission. On August 19, 2002, the Company filed a Current Report on
Form 8-K, under "Item 5. Other Events", on which the Company reported
that it had been notified by the Nasdaq Stock Market Inc. ("Nasdaq")
regarding the Company's non-compliance with the minimum closing bid
price requirement relating to Cytogen Common Stock. On September 17,
2002, the Company filed a Current Report on Form 8-K, under "Item 5.
Other Events", on which the Company: (i) reported the internal
restructuring of the Company's AxCell Biosciences subsidiary; and (ii)
announced an agreement in principle to enter into a five year agreement
for the Company to be the sole United States distributor for
Matritech's NMP22(R) BladderChek(TM) test.
25
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 November 13, 2002 By: /s/ H. Joseph Reiser
------------------ -------------------------------------------
H. Joseph Reiser
President and Chief Executive Officer
Date November 13, 2002 By /s/ Lawrence R. Hoffman
------------------ --------------------------------------------
Lawrence R. Hoffman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
Certifications
I, H. Joseph Reiser, 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 officers 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. Theregistrant's other certifying officers 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
27
6. The registrant's other certifying officers 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: November 13, 2002 /s/ H. Joseph Reiser
----------------- -------------------------------------
H. Joseph Reiser
President and Chief Executive Officer
Certifications
I, Lawrence R. Hoffman, 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 officers 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;
28
5. The registrant's other certifying officers 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
6. The registrant's other certifying officers 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: November 13, 2002 /s/ Lawrence R. Hoffman
----------------- -------------------------
Lawrence R. Hoffman
Vice President and
Chief Executive Officer
29