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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER: 000-14879
Cytogen Corporation
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 22-2322400
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(State of Incorporation) (I.R.S. Employer Identification No.)
650 College Road East, Suite 3100, Princeton, New Jersey 08540-5308
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(Address of principal executive offices)(Zip Code)
(609) 750-8200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
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 the
filing requirements for at least the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer |_| Accelerated Filer |X| Non- Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d)of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
|_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock, $.01 par value Outstanding at August 7, 2006:
22,496,889
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CYTOGEN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2006
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 June 30, 2006 and
December 31, 2005........................................ 2
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2006 and 2005............. 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005............................. 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 39
Item 4. Controls and Procedures...................................... 39
PART II. OTHER INFORMATION................................................ 41
Item 1. Legal Proceedings............................................ 41
Item 1A. Risk Factors................................................. 41
Item 4. Submission of Matters to a Vote of Security Holders.......... 47
Item 5. Other Information............................................ 48
Item 6. Exhibits..................................................... 48
SIGNATURES................................................................ 51
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.
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)
June 30, December 31,
2006 2005
---------------- ----------------
ASSETS:
Current assets:
Cash and cash equivalents.......................................... $ 31,400 $ 30,337
Accounts receivable, net........................................... 1,894 1,743
Inventories........................................................ 1,959 3,582
Prepaid expenses................................................... 668 906
Other current assets............................................... 53 354
------------- -------------
Total current assets............................................. 35,974 36,922
Property and equipment, less accumulated depreciation and amortization
of $1,173 and $981 at June 30, 2006 and December 31, 2005,
respectively..................................................... 842 886
QUADRAMET license fee, less accumulated amortization of $2,021 and
$1,673 at June 30, 2006 and December 31, 2005, respectively...... 5,979 6,327
SOLTAMOX license fee, less accumulated amortization of $27 at June
30, 2006......................................................... 1,973 --
Other assets....................................................... 320 655
------------- -------------
$ 45,088 $ 44,790
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term liabilities........................... 59 26
Accounts payable and accrued liabilities........................... 5,283 5,271
------------- -------------
Total current liabilities........................................ 5,342 5,297
Warrant liability....................................................... 1,687 1,869
Other long-term liabilities............................................. 92 46
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Total liabilities................................................ 7,121 7,212
------------- -------------
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, $.01 par value, 50,000,000 shares authorized,
22,496,889 and 22,473,762 shares issued and outstanding at June
30, 2006 and December 31, 2005, respectively..................... 225 225
Additional paid-in capital......................................... 450,700 450,502
Unearned compensation.............................................. -- (610)
Accumulated other comprehensive income............................. 69 28
Accumulated deficit................................................ (413,027) (412,567)
------------- -------------
Total stockholders' equity....................................... 37,967 37,578
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$ 45,088 $ 44,790
============= =============
The accompanying notes are an integral part of these statements.
-2-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- ------------------------------
2006 2005 2006 2005
--------- -------- ---------- ----------
REVENUES:
Product revenue:
QUADRAMET............................................. $ 1,988 $ 2,153 $ 4,244 $ 4,207
PROSTASCINT........................................... 2,180 1,924 4,364 3,823
----------- ----------- ----------- -----------
Total product revenue............................. 4,168 4,077 8,608 8,030
License and contract revenue............................ 4 79 6 120
----------- ----------- ----------- -----------
Total revenues.................................... 4,172 4,156 8,614 8,150
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of product revenue................................. 2,594 2,251 5,010 4,678
Selling, general and administrative..................... 6,994 6,692 13,231 13,716
Research and development................................ 1,463 1,362 4,445 2,101
Equity in (income) loss of joint venture................ (13) 1,704 120 2,202
----------- ----------- ----------- -----------
Total operating expenses.......................... 11,038 12,009 22,806 22,697
----------- ----------- ----------- -----------
Operating loss.................................... (6,866) (7,853) (14,192) (14,547)
INTEREST INCOME.............................................. 392 154 689 297
INTEREST EXPENSE............................................. (6) (42) (12) (84)
GAIN ON SALE OF EQUITY INTEREST IN JOINT VENTURE............. 12,873 -- 12,873 --
DECREASE IN VALUE OF WARRANT LIABILITY....................... 813 -- 182 --
----------- ----------- ----------- -----------
NET INCOME (LOSS)............................................ $ 7,206 $ (7,741) $ (460) $ (14,334)
=========== =========== =========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE................ $ 0.32 $ (0.50) $ (0.02) $ (0.92)
=========== =========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................................ 22,474 15,525 22,474 15,519
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-3-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------------------
2006 2005
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (460) $ (14,334)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................................. 601 492
Decrease in value of warrant liability........................ (182) --
Share-based compensation expense.............................. 772 13
Share-based milestone obligation.............................. -- 500
Increase (decrease) in provision for doubtful
accounts.................................................... 22 (39)
Amortization of premiums on investments....................... -- 52
Gain on sale of equity interest in joint venture.............. (12,873) --
Deferred rent................................................. (10) 21
Changes in assets and liabilities:
Accounts receivable......................................... (173) (376)
Inventories................................................. 1,623 (1,474)
Other assets................................................ 656 690
Liability related to joint venture.......................... -- 704
Accounts payable and accrued liabilities.................... 22 (1,535)
----------- ------------
Net cash used in operating activities......................... (10,002) (15,286)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of SOLTAMOX license......................................... (2,000) --
Purchases of property and equipment.................................. (86) (163)
Proceeds from sale of equity interest in joint venture............... 13,132 --
Maturities of short-term investments................................. -- 22,727
----------- ------------
Net cash provided by investing activities..................... 11,046 22,564
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................... 36 215
Payment of long-term liabilities..................................... (17) (7)
----------- ------------
Net cash provided by financing activities..................... 19 208
----------- ------------
Net increase in cash and cash equivalents............................ 1,063 7,486
Cash and cash equivalents, beginning of period....................... 30,337 13,046
----------- ------------
Cash and cash equivalents, end of period............................. $ 31,400 $ 20,532
=========== ============
Supplemental disclosure of non-cash information:
Capital lease of equipment........................................... $ 96 $ 1
=========== ============
Unrealized holding gain on marketable securities..................... $ 41 $ 50
=========== ============
Supplemental disclosure of cash information:
Cash paid for interest............................................... $ 12 $ 84
=========== ============
The accompanying 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 biopharmaceutical company dedicated to improving the lives of
patients with cancer by acquiring, developing and commercializing innovative
molecules targeting the sites and stages of cancer progression. The Company's
marketed products include QUADRAMET (samarium Sm-153 lexidronam injection),
PROSTASCINT (capromab pendetide) kit for the preparation of Indium In-111
capromab pendetide in the United States and SOLTAMOX(TM) (tamoxifen citrate,
oral solution 10mg/5mL) which the Company expects to launch in the United States
during the third quarter of 2006. The Company's development pipeline consists of
CYT-500, a therapeutic radiolabeled antibody targeting prostate-specific
membrane antigen (PSMA), a protein highly expressed on the surface of prostate
cancer cells and the neovasculature of solid tumors. The Company also has
exclusive United States marketing rights to COMBIDEX(R) (ferumoxtran-10) for all
applications, and the exclusive right to market and sell ferumoxytol (previously
Code 7228) for oncology applications in the United States.
On April 21, 2006, the Company and Savient Pharmaceuticals, Inc.
("Savient") entered into a distribution agreement granting the Company exclusive
marketing rights for SOLTAMOX(TM) (tamoxifen citrate) in the United States.
SOLTAMOX, a cytostatic estrogen receptor antagonist, is the first oral liquid
hormonal therapy approved in the U.S. It is indicated for the treatment of
breast cancer in adjuvant and metastatic settings and to reduce the risk of
breast cancer in women with ductal carcinoma in situ (DCIS) or with high risk of
breast cancer. In addition, the Company entered into a supply agreement with
Rosemont Pharmaceuticals Limited, previously a wholly-owned subsidiary of
Savient ("Rosemont"), for the manufacture and supply of SOLTAMOX.
Cytogen has 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 revenue and credit
concentration risks as a small number of its customers account for a high
percentage of total revenues and corresponding receivables. The loss of one of
these customers or changes in their buying patterns could result in reduced
sales, thereby adversely affecting the Company's operating results.
-5-
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 its existing capital resources should be
adequate to fund operations and commitments at least into 2007. 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 debt or equity
capital, irrespectively of whether and when profitability is reached, for
further product development, product and technology acquisition costs, and
working capital.
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, filed with the Securities
and Exchange Commission, which includes financial statements as of and for the
year ended December 31, 2005. 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
-6-
Inventories
The Company's inventories include PROSTASCINT and SOLTAMOX with the
majority of the inventories 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):
JUNE 30, 2006 DECEMBER 31, 2005
------------- -----------------
Raw materials............................. $ 287 $ 291
Work-in-process........................... 457 2,625
Finished goods............................ 1,215 666
----------- -----------
$ 1,959 $ 3,582
=========== ===========
Net Income (Loss) Per Share
Basic net income (loss) per common share is calculated by dividing the
Company's net income (loss) by the weighted-average common shares outstanding
during each period. Diluted income per common share for the three months ended
June 30, 2006 is computed by dividing net income by the weighted-average common
shares outstanding during the period, increased to include all additional common
shares that would have been outstanding assuming potentially dilutive common
share equivalents had been issued. Dilutive common share equivalents include the
dilutive effect of in-the-money shares, which is calculated based on the average
share price for the three months ended June 30, 2006 using the treasury stock
method. Under the treasury stock method, the exercise price of a security, the
average amount of unrecognized compensation cost during the period, if any, and
the amount of tax benefits that would be recorded in additional paid-in-capital,
if any, when the security is exercised, are assumed to be used to repurchase
shares in the current period. Weighted-average common stock equivalents to
purchase 5,264,022 shares of the Company's common stock were excluded from the
computation of diluted net income per common share for the three months ended
June 30, 2006 because their effect would have been antidilutive. Diluted net
loss per common share is the same as basic net loss per share for each of the
three and six month periods ended June 30, 2005 and the six month period ended
June 30, 2006, because the inclusion of common stock equivalents, which consist
of nonvested shares, warrants and options to purchase shares of the Company's
common stock, would be antidilutive due to the Company's losses.
OTHER COMPREHENSIVE INCOME OR LOSS
Other comprehensive income consisted of net unrealized holding gain on
marketable securities. For the three months ended June 30, 2006, the unrealized
holding loss for these securities was $55,000 and, as a result, the
comprehensive income for the three months ended June 30, 2006 was $7,151,000.
For the six months ended June 30, 2006, the unrealized holding gain of the
securities was $41,000 and as a result, the comprehensive loss for the six
months ended June 30, 2006 was $419,000. For the three months ended June 30,
2005, the unrealized holding loss of those securities was $19,000, and as a
result, the comprehensive loss for the three months ended June 30, 2005 was
$7,760,000. For the six months ended June 30, 2005, the unrealized holding gain
of the securities was $50,000 and as a result the comprehensive loss for the six
months ended June 30, 2005 was $14,284,000.
-7-
RECENT ACCOUNTING PRONOUNCEMENTS
Income Taxes
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is applicable for fiscal years
beginning after December 15, 2006. This Interpretation clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes." This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company is
currently evaluating the impact of the adoption of FIN 48 upon its financial
statements and related disclosures. The Company does not expect that the
adoption will have a material effect on its results of operations or financial
condition.
Sales Tax
In March 2006, the FASB's Emerging Issues Task Force released Issue 06-3,
"How Sales Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement" ("EITF 06-3"). A
consensus was reached that entities may adopt a policy of presenting sales taxes
in the income statement on either a gross or net basis. If taxes are
significant, an entity should disclose its policy of presenting taxes and the
amount of taxes if reflected on a gross basis in the income statement. The
guidance is effective for periods beginning after December 15, 2006. The Company
presents sales net of sales taxes in its consolidated statements of operations
and does not anticipate changing its policy as a result of EITF 06-3.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which revised SFAS No. 123 ("SFAS 123") and superseded Accounting Principles
Board Opinion No. 25, " Accounting for Stock Issued to Employees" ("APB 25").
SFAS 123(R) requires that companies recognize compensation expense associated
with share-based compensation arrangements, including employee stock options, in
the financial statements effective as of the first interim or annual reporting
period that begins after June 15, 2005. SFAS 123(R) eliminates the Company's
ability to account for such transactions using the intrinsic method of
accounting under APB 25. SFAS 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
do not meet certain criteria.
In April 2005, the Securities and Exchange Commission announced the
adoption of a new rule allowing companies to implement SFAS 123(R) at the
beginning of their next fiscal year that begins after June 15, 2005.
Accordingly, the Company adopted SFAS 123(R) in its fiscal year beginning
January 1, 2006 using the modified prospective transition method. Under this
method, compensation expense is reflected in the financial statements beginning
January 1, 2006 with no restatement to the prior periods. As such, compensation
expense, which is measured based on the fair value of the instrument on the
grant date, is recognized for awards
-8-
that are granted, modified, repurchased or cancelled on or after January 1, 2006
as well as for the portion of awards previously granted that have not vested as
of January 1, 2006. The Company has implemented the straight-line expense
attribution method for all options granted after January 1, 2006. Prior to
adopting SFAS 123(R), the Company used the accelerated attribution method in
accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" ("FIN 28"). The adoption
of SFAS 123(R) had a material impact on the Company's results of operations (see
Note 2).
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 adopted SFAS No. 151 in its fiscal year beginning January 1, 2006.
The adoption of this standard did not have any impact on the Company in the six
months ended June 30, 2006.
2. SHARE-BASED COMPENSATION
The Company has various share-based compensation plans that provide for the
issuance of common stock and incentive and non-qualified stock options to
purchase the Company's common stock to employees, non-employee directors and
outside consultants. These plans are administered by the Compensation Committee
of the Board of Directors (the "Compensation Committee"). The Company may issue
new common shares or reacquire them on the open market to satisfy option
exercises or upon satisfaction of service requirement for nonvested shares.
Cytogen Stock Options
Currently, the Company has three plans which allow for the issuance of
stock options and other awards: the 2006 Equity Compensation Plan (the "2006
Plan"); the 2004 Stock Incentive Plan (the "2004 Plan"); and the 2004
Non-Employee Director Stock Incentive Plan (the "2004 Director Plan"). An
aggregate of 1,500,000, 1,200,000 and 375,000 shares of Cytogen common stock
have been reserved for issuance upon the exercise of options or stock awards (as
applicable) under the 2006 Plan, 2004 Plan and 2004 Director Plan, respectively.
The Company also has certain other option plans, for which there are options
outstanding but no new options can be granted under those plans.
The 2006 Plan provides for the grant of incentive stock options,
nonqualified stock options, stock units, stock awards, stock appreciation rights
and other stock-based awards to the Company's employees and non-employee
directors. Performance-based awards, which will vest upon the achievement of
objective performance goals, may also be granted under the 2006 Plan. Options
shall become exercisable in accordance with such terms and conditions as may be
determined by the Compensation Committee. As long as Cytogen common stock is
traded on the Nasdaq National Market, the exercise price of Cytogen stock
options under the 2006 Plan will be equal to the last reported sales price for
Cytogen common stock on the date of grant, unless a higher exercise price is
specified by the Compensation Committee. Except for certain
-9-
circumstances, the options will generally expire upon the earlier of ten years
after the date of grant or within a certain period of time after termination of
services as determined by the Compensation Committee. As of June 30, 2006, no
options or awards have been granted under the 2006 Plan.
The 2004 Plan provides for the grant of incentive stock options,
non-qualified stock options or nonvested shares (see below) to the Company's
employees, officers, consultants and advisors. Generally, options granted to
employees will vest 40%, 30% and 30% one year, two years and three years after
the date of grant, respectively. Options granted to officers will generally vest
annually one third each year over a three-year period from the date of grant.
Performance options, which will vest upon the achievement of certain milestones,
may also be granted under the 2004 Plan. The exercise price of Cytogen stock
options is equal to the average of high and low trading prices for Cytogen
common stock on the date of grant, unless a higher exercise price is specified
by the Compensation Committee. Except for certain circumstances, the options
will generally expire upon the earlier of ten years after the date of grant or
90 days after termination of employment.
The 2004 Director Plan provides for the grant of non-qualified stock
options and shares of Cytogen common stock, in certain circumstances, to members
of the Company's Board of Directors who are not employees of the Company.
According to the 2004 Director Plan, each re-elected Director shall
automatically receive options to purchase shares of Cytogen common stock on the
day following each Annual Meeting of Stockholders. Each new Director who is
appointed after the date of the most recent Annual Meeting of Stockholders will
receive a certain number of options, pro-rated for the number of months
remaining until the next Annual Meeting. All options will become excisable on
the first anniversary of the date of grant, unless options are granted to a
Director who has served on the Company's Board of Directors for at least three
years and retires or resigns after reaching 55 years of age. In such case, the
options may be exercised in full regardless of the time lapse since the date of
grant. The exercise price of Cytogen stock options is equal to the average of
high and low trading prices for Cytogen common stock on the date of grant.
Except for certain circumstances, the options will generally expire upon the
earlier of ten years after the date of grant or 90 days after termination date.
-10-
A summary of option activities related to Cytogen stock options other than
performance options, for the six months ended June 30, 2006 is as follows:
NUMBER WEIGHTED- WEIGHTED-
OF AVERAGE AVERAGE
CYTOGEN EXERCISE REMAINING AGGREGATE
STOCK PRICE PER CONTRACTUAL INTRINSIC
Cytogen Options Other Than OPTIONS SHARE LIFE VALUE
Performance Options ---------- --------- ----------- ---------
----------------------------------------
Balance at December 31, 2005............ 980,796 $ 10.04
Granted.............................. 551,600 3.43
Exercised............................ -- --
Forfeited............................ (90,780) 5.27
Expired.............................. (29,800) 19.55
--------- -------- --------- ---------
Balance at June 30, 2006................ 1,411,816 $ 7.56 8.37 --
Exercisable and expected to vest at
June 30, 2006........................ 1,255,854 $ 7.91 8.41 --
Exercisable at June 30, 2006............ 634,584 $ 11.19 7.08 --
At June 30, 2006, the weighted-average exercise price of outstanding,
exercisable and expected to vest, and exercisable options each was higher than
the market price of the Company's underlying common share, and as a result, the
aggregate intrinsic value was zero.
A summary of option activities related to performance options for the six
months ended June 30, 2006 is as follows:
NUMBER WEIGHTED- WEIGHTED-
OF AVERAGE AVERAGE
CYTOGEN EXERCISE REMAINING AGGREGATE
STOCK PRICE PER CONTRACTUAL INTRINSIC
Performance Options OPTIONS SHARE LIFE VALUE
---------------------------------------- --------- ---------- ----------- ---------
Balance at December 31, 2005............ 150,000 $ 3.54
Granted.............................. -- --
Exercised............................ -- --
Forfeited and Expired................ -- --
------- -------- --------- ---------
Balance at June 30, 2006................ 150,000 $ 3.54 6.47 --
Exercisable and expected to vest at
June 30, 2006........................ 50,000 $ 3.54 6.47 --
Exercisable at June 30, 2006............ 50,000 $ 3.54 6.47 --
-11-
In 2002, options to purchase 150,000 shares of Cytogen common stock were
granted to a key employee. These options have three separate and equal tranches
for which vesting are based upon the achievement of certain milestones
established by the Company's Board of Directors. In June 2006, the Board of
Directors determined that one of the performance milestones had been met, and as
a result, approved the vesting of 50,000 performance options. During the three
months ended June 30, 2006, the Company recorded $152,000 in selling, general
and administrative expenses which represent the fair value of the vested options
based on the Black-Scholes option pricing model. The remaining 100,000
performance options are not deemed probable of becoming exercisable at June 30,
2006.
At June 30, 2006, the weighted-average exercise price of outstanding,
exercisable and expected to vest, and exercisable options each was higher than
the market price of the Company's underlying common share, and as a result, the
aggregate intrinsic value was zero.
Nonvested Shares
Under the 2004 Plan, the Company may issue nonvested shares to employees,
officers, consultants and advisors. The maximum number of shares authorized for
grant under the 2004 Incentive Plan is 200,000. Generally, the nonvested shares
will vest in installments over three to six year periods. The Company may also
issue stock awards to its employees and non-employee directors under the 2006
Plan. As of June 30, 2006, no awards have been granted under this plan.
A summary of the Cytogen's nonvested share activities for the six months
ended June 30, 2006 is as follows:
WEIGHTED-
NUMBER WEIGHTED- AVERAGE
OF AVERAGE REMAINING AGGREGATE
NONVESTED GRANT DATE VESTING INTRINSIC
Nonvested Shares SHARES FAIR VALUE TERM VALUE
---------------------------------------- ---------- ------------ ---------- -----------
Balance at December 31, 2005............ 136,200 $ 5.15
Granted.............................. 71,800 3.56
Vested............................... -- --
Forfeited............................ (28,900) 4.70
--------- ---------- ---------- -----------
Balance at June 30, 2006................ 179,100 $ 4.58 2.88 $ 448,000
Vested and expected to vest at
June 30, 2006........................ 134,860 $ 4.50 2.78 $ 337,000
Vested at June 30, 2006................. -- -- -- --
Employee Stock Purchase Plan
In September 2005, the Board of Directors of the Company adopted the 2005
Employee Stock Purchase Plan (the "2005 ESPP"). The 2005 ESPP, which was
approved by the Company's stockholders on June 13, 2006, is effective October 1,
2005, and replaces the
-12-
Company's existing employee stock purchase plan which had no remaining shares
available for future issuance. Under the 2005 ESPP, eligible employees may elect
to purchase shares of Cytogen common stock at 85% of the lower of fair market
value as of the first or last trading day of each participation period. Under
the 2005 ESPP, officers of the Company who purchase shares may not transfer such
shares for a period of 12 months after the purchase date. The initial offering
period was a nine-month period beginning on October 1, 2005 and ending on June
30, 2006. Subsequent purchase periods will be three-month periods beginning on
the first day in July, October, January and April. The Company has reserved
500,000 shares of common stock for future issuance under the 2005 ESPP. The 2005
ESPP plan will be compensatory under SFAS 123(R). In the six months ended June
30, 2006, employees purchased 23,127 shares of common stock for aggregate
proceeds to the Company of $49,000. At June 30, 2006, 476,873 shares remain
available for purchase under the 2005 ESPP.
Warrants and Options Issued to Non-Employees
From time to time, the Company may issue warrants and options to purchase
Cytogen common stock to non-employees, excluding directors, in exchange for
goods or services. Warrants are issued outside of any approved compensation
plans. Terms of warrants and options vary among various arrangements, with
vesting period generally up to one year or become automatically exercised if
certain conditions are met. Contractual term ranges up to ten years.
A summary of the Cytogen warrants and options issued to non-employees for
the six months ended June 30, 2006 is as follows:
NUMBER
OF WEIGHTED- WEIGHTED-
CYTOGEN AVERAGE AVERAGE
WARRANTS EXERCISE REMAINING AGGREGATE
Warrants and Options to AND PRICE PER CONTRACTUAL INSTRINSIC
Non-Employees OPTIONS SHARE LIFE VALUE
---------------------------------------- --------- ----------- ----------- ----------
Balance at December 31, 2005............ 359,978 $ 6.96
Granted.............................. -- --
Exercised............................ -- --
Forfeited............................ -- --
Expired.............................. (70,000) $ 5.65
------- -------- ----------- ----------
Balance at June 30, 2006................ 289,978 $ 7.27 3.59 --
Exercisable and expected to vest at
June 30, 2006........................ 289,978 $ 7.27 3.59 --
Exercisable at June 30, 2006............ 289,978 $ 7.27 3.59 --
-13-
At June 30, 2006, the weighted-average exercise price of outstanding,
exercisable and expected to vest, and exercisable warrants each was higher than
the market price of the Company's underlying common share, and as a result, the
aggregate intrinsic value was zero.
AxCell BioSciences Stock Options
AxCell BioSciences, a subsidiary of Cytogen Corporation, also has a stock
option plan that provides for the issuance of incentive and non-qualified stock
options to purchase AxCell common stock ("AxCell Stock Options") to employees,
for which 2,000,000 shares of AxCell common stock have been reserved. AxCell
Stock Options are granted with a term of 10 years and generally become
exercisable in installments over periods of up to 5 years.
A summary of AxCell stock option activities for the six months ended June
30, 2006 is as follows:
WEIGHTED-
NUMBER WEIGHTED- AVERAGE
OF AXCELL AVERAGE REMAINING
STOCK EXERCISE CONTRACTUAL
AxCell Stock Options OPTIONS PRICE TERM
---------------------------------------- ---------- ---------- -----------
Balance at December 31, 2005............ 69,405 $ 4.34 6.10
Granted.............................. -- --
Exercised............................ -- --
Forfeited............................ -- --
Expired.............................. (19,405) 3.60
------- -------- -----------
Balance at June 30, 2006................ 50,000 $ 4.63 5.83
Exercisable and expected to vest at
June 30, 2006........................ 50,000 $ 4.63 5.83
Exercisable at June 30, 2006............ 50,000 $ 4.63 5.83
Effective January 1, 2006, the Company adopted SFAS No. 123(R) which
requires companies to measure and recognize compensation expense for all
share-based payments at fair value. Prior to the adoption of SFAS 123(R), the
Company accounted for its stock-based employee compensation expense under the
recognition and measurement principles of APB 25, and related interpretations.
Under APB 25, compensation costs related to stock options granted with exercise
prices equal to or greater than the fair value of the underlying shares at the
date of grant under those plans were not recognized in the consolidated
statements of operations. Compensation costs related to nonvested shares and
stock options granted with exercise prices below fair value of the underlying
shares at the date of grant were recognized in the consolidated statements of
operations over the requisite service period, generally the vesting periods of
the awards. Compensation costs associated with those awards granted prior to the
adoption of SFAS 123(R) were recognized using the accelerated attribution method
in accordance with FIN 28 and forfeitures recorded as incurred. The following
table illustrates the effect on net income (loss) and net income (loss) per
share as if the fair value method of SFAS 123 had been applied for the three and
six months ended June 30, 2005 (all amounts in thousands, except per share
data):
-14-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
------------- ----------------
Net loss, as reported.................................. $ (7,741) $ (14,334)
Add: Stock-based employee compensation expense
included in reported net loss....................... 13 13
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards...................................... (565) (1,128)
-------- -----------
Pro forma net loss..................................... $ (8,293) $ (15,449)
======== ===========
Basic and diluted net loss per share, as reported...... $ (0.50) $ (0.92)
======== ===========
Pro forma basic and diluted net loss per
share.............................................. $ (0.53) $ (1.00)
======== ===========
The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which requires that share-based compensation cost be based on
the grant-date fair value estimated in accordance with the provisions of SFAS
123(R) and is recognized for all awards granted, modified or settled after the
effective date as well as awards granted to employees prior to the effective
date that remain unvested as of the effective date. For the three months ended
June 30, 2006, the Company recorded $309,000 of stock-based compensation
expense, of which $316,000 was included in selling, general and administrative
expenses and $7,000 of expense reversal was recorded in research and development
expenses to reflect actual forfeitures. For the six months ended June 30, 2006,
the Company recorded $772,000 of stock-based compensation expense, of which
$720,000 was included in selling, general and administrative expenses and
$52,000 in research and development expenses. For the three and six months ended
June 30, 2005, the Company recorded a charge of $13,000 for share-based
compensation. During the six months ended June 30, 2006, there were no
modification to the share-based awards and no compensation cost was capitalized
into assets.
The adoption of SFAS 123(R) resulted in lower income for the three months
ended June 30, 2006 of $254,000, or $0.01 per basic and diluted share, and
higher loss for the six months ended June 30, 2006 of $683,000, or $0.03 per
basic and diluted share, than if the Company had continued to account for the
share-based compensation under APB 25. At June 30, 2006, unrecognized
compensation expense, which includes the impact of estimated forfeitures,
related to unvested awards granted under the Company's share-based compensation
plans is approximately $2.5 million and remains to be recognized over a weighted
average period of 1.2 years. The Company recognizes share-based compensation on
a straight-line basis over the requisite service period for grants on or after
January 1, 2006. Unrecognized compensation expense related to grants made prior
to adoption of SFAS 123(R) are recognized using the accelerated amortization
method. Prior periods were not restated to reflect the impact of adopting the
new standard. No cumulative effect adjustment was recorded for the accounting
change related to recording actual forfeitures as incurred under APB 25 to
estimating forfeitures in accordance with SFAS 123(R) as the amount was de
minimus.
-15-
The Company's share-based compensation costs are generally based on the
fair value of the option awards calculated using a Black-Scholes option pricing
model on the date of grant. The weighted-average grant date fair value per share
of the options granted under the Cytogen stock option plans during the three and
six months ended June 30, 2006 is estimated at $2.79 and $2.77 per share,
respectively, as compared to $3.59 and $3.69, respectively, in the same periods
of 2005, using the Black-Scholes option pricing model with the following
weighted average assumptions:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2006
------------- -------------
Expected life (years).................... 6.53 6.51
Expected volatility...................... 97% 97%
Dividend yield........................... 0% 0%
Risk-free interest rate.................. 4.95% 4.94%
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
------------- -------------
Expected life (years).................... 4.48 4.48
Expected volatility...................... 96% 96%
Dividend yield........................... 0% 0%
Risk-free interest rate.................. 3.94% 3.94%
The compensation costs for nonvested share awards are based on the fair
value of Cytogen common stock on the date of grant. The weighted-average grant
date fair value per share of nonvested share awards granted during the three and
six month periods ended June 30, 2006 was $3.58 and $3.56, respectively, as
compared to $5.15 in each of the same periods in 2005.
The weighted-average fair value per share ascribed to the shares purchased
under the employee stock purchase plan during each of the three and six months
ended June 30, 2006 is estimated at $0.54 per share on the date of grant,
respectively, as compared to $2.16 and $3.58, respectively in the same periods
in 2005 using the Black-Scholes option pricing model with the following
weighted-average assumptions:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2006
------------- -------------
Expected life (months)................... 0.5 0.5
Expected volatility...................... 41% 41%
Dividend yield........................... 0% 0%
Risk-free interest rate.................. 4.90% 4.90%
-16-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
------------- -------------
Expected life (months)................... 3 3
Expected volatility...................... 156% 119%
Dividend yield........................... 0% 0%
Risk-free interest rate.................. 2.79% 2.63%
No warrants were granted to non-employees in exchange for services during
the three and six months ended June 30, 2006 and 2005.
The Company calculates the expected life using the simplified method as
described in the SEC's Staff Accounting Bulletin No. 107 ("SAB 107") for "plain
vanilla" options meeting certain criteria. The simplified method is based on the
vesting period and the contractual term for each grant or each vesting-tranche
of awards with graded vesting. The mid-point between the vesting date and the
expiration date is used as the expected term under this method. The Company
calculates expected volatility for stock-based awards using historical
volatility, measured over a period equal to the expected term of the award,
which it believes is a reasonable estimate of future volatility. As options
granted to the Board of Director members do not meet the criteria of "plain
vanilla" options, the Company determines the expected term for these options by
analyzing the historical exercise experience and post-vesting termination
behaviors. The Company believes the result is a reasonable estimate of the
length of time that the options are expected to be outstanding.
In addition, under SFAS 123(R), the Company is required to estimate
expected forfeitures of options and stock grants over the requisite service
period and adjust shared-based compensation accordingly. The estimate of
forfeitures will be adjusted over the requisite service period to the extent
that actual forfeitures differ, or are expected to differ, from such estimates.
The cumulative effect of changes in estimated forfeitures will be recognized in
the period of change and will also impact the amount of stock compensation
expense to be recognized in future periods. Under the provisions of SFAS 123(R),
the Company will record additional expense if the actual forfeiture rate is
lower than what had been estimated and the Company will record a recovery of
prior expense if the actual forfeiture rate is higher than what had been
estimated.
During the three and six months ended June 30, 2006, total fair value on
the date of vesting of stock options that became vested was $658,000 and
$678,000, respectively, as compared to $976,000 and $1.0 million, respectively,
for the same periods in 2005. There was no vesting of nonvested shares during
the three and six months ended June 30, 2006 and 2005. There were no option
exercises during the three and six months ended June 30, 2006 as compared to
total intrinsic value of $1,300 for options exercised during each of the same
periods in 2005. Cash received from the option exercises was $2,500 for each of
the three and six month periods ended June 30, 2005.
-17-
3. JOINT VENTURE - 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 developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's proprietary PSMA technology. The
Joint Venture was owned equally by Cytogen and Progenics until April 20, 2006
(see below). Cytogen accounted for the Joint Venture using the equity method of
accounting. Cytogen had recognized 50% of the Joint Venture's operating results
in its consolidated statements of operations until April 20, 2006, when the
Company entered into a Membership Interest Purchase Agreement with Progenics to
sell the Company's 50% ownership interest in the Joint Venture. In addition, the
Company entered into an Amended and Restated PSMA/PSMP License Agreement with
Progenics and the Joint Venture pursuant to which the Company licensed the Joint
Venture certain rights in PSMA technology. Under the terms of such agreements,
the Company sold its 50% interest in the Joint Venture for a cash payment of
$13.2 million, potential future milestone payments totaling up to $52 million
payable upon regulatory approval and commercialization of the Joint Venture
products, and royalties on future product sales of the Joint Venture, if any. As
a result, for the three and six months ended June 30, 2006, the Company recorded
$12.9 million in gain on sale of equity interest in the Joint Venture, which
represents the net proceeds after transaction costs less the carrying value of
the Company's investment in the Joint Venture at the time of sale.
For the three and six months ended June 30, 2006, Cytogen recorded an
expense reversal of $13,000 and an expense of $120,000, respectively, of the
Joint Venture's net losses compared to $1.7 million and $2.2 million of the
Joint Venture's losses in the same periods of 2005. At December 31, 2005, the
carrying value of the Company's investment in the Joint Venture was $379,000,
which represented Cytogen's investment in the Joint Venture, less its cumulative
share of losses, which net investment was recorded in other assets. Selected
financial statement information of the Joint Venture is as follows (all amounts
in thousands):
BALANCE SHEET DATA:
DECEMBER 31,
2005
---------------
ASSETS:
Cash...................................................................... $ 873
Prepaid expenses.......................................................... 9
Accounts receivable from Progenics Pharmaceuticals, Inc.,
a related party....................................................... 194
----------
$ 1,076
==========
LIABILITIES AND MEMBERS' EQUITY:
Accounts payable to Cytogen Corporation, a related party.................. $ 3
Accounts payable and accrued expenses..................................... 332
----------
Total liabilities................................................ 335
----------
Capital contributions..................................................... 31,198
Deficit accumulated during the development stage.......................... (30,457)
----------
Total members' equity............................................ 741
----------
Total liabilities and members' equity............................ $ 1,076
==========
-18-
INCOME STATEMENT DATA:
THREE FROM FOR THE PERIOD
FROM MONTHS JANUARY 1, SIX MONTHS FROM JUNE 15,
APRIL 1 TO ENDED 2006 TO ENDED 1999
APRIL 20, JUNE 30, APRIL 20, JUNE 30, (INCEPTION) TO
2006 2005 2006 2005 APRIL 20, 2006
----------- ----------- ----------- ----------- --------------
Interest income................ $ -- $ 2 $ 6 $ 3 $ 256
Total operating (income)
expenses................... (26) 3,409 246 4,406 30,953
----------- ----------- ----------- ----------- -------------
Net income (loss).............. $ 26 $ (3,407) $ (240) $ (4,403) $ (30,697)
=========== =========== =========== =========== =============
During the three and six months ended June 30, 2005, the Company recognized
$78,000 and $119,000, respectively, of contract revenues for limited research
and development services provided by the Company to the Joint Venture,
respectively. The Company did not provide any research services to the Joint
Venture in 2006.
4. 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 $4.7 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 for five successive one-year periods unless terminated by BMSMI or Cytogen
on two years prior written notice. During the three months ended June 30, 2006
and 2005, Cytogen incurred $1.2 million and $1.0 million, respectively, of
manufacturing costs for QUADRAMET, all of which is included in cost of product
revenue. During the six month periods ended June 30, 2006 and 2005, Cytogen
incurred $2.3 million and $2.1 million, respectively, 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.
5. 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
-19-
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 anticipates it will pay at least an aggregate of $5.1
million through the end of the term of contract. Approximately $4.1 million has
been incurred under this agreement through June 30, 2006, and was recorded as
inventory when purchased. No amount was recorded during the three and six month
periods ended June 30, 2006 compared to $1.1 million and $1.8 million,
respectively, in the same periods of 2005.
6. WARRANT LIABILITY
In July and August 2005, the Company sold 3,104,380 shares of common stock
and 776,096 warrants to purchase shares of its common stock having an exercise
price of $6.00 per share. These warrants are exercisable beginning six months
and ending ten years after their issuance. The shares of common stock underlying
the warrants were registered under the Company's existing shelf registration
statement. The Company is required to maintain the effectiveness of the
registration statement as long as any warrants are outstanding.
Under EITF No. 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"),
to qualify as permanent equity, the equity derivative must permit the issuer to
settle in unregistered shares. The Company does not have that ability under the
securities purchase agreement for the warrants issued in July and August 2005
and, as EITF 00-19 considers the ability to keep a registration statement
effective as beyond the Company's control, the warrants cannot be classified as
permanent equity and are instead classified as a liability in the accompanying
consolidated balance sheet. At June 30, 2006 and December 31, 2005, the Company
recorded the warrant liability at its fair value of $1.7 million and $1.9
million, respectively, using a Black-Scholes option-pricing model with the
following assumptions:
JUNE 30, DECEMBER 31,
2006 2005
-------------- -------------
Dividend yield................................. 0% 0%
Expected volatility............................ 107% 106%
Expected life.................................. 9.1 years 9.6 years
Risk-free interest rate........................ 5.22% 4.40%
Cytogen common stock price..................... $2.50 $2.74
Equity derivatives not qualifying for permanent equity accounting are
recorded at fair value and are remeasured at each reporting date until the
warrants are exercised or expired. Changes in the fair value of the warrants
will be reported in the consolidated statements of operations as non-operating
income or expense. At June 30, 2006, the fair value of the warrants was $1.7
million, resulting in a gain of $813,000 and $182,000 for the three and six
months ended June 30, 2006, respectively.
7. SAVIENT PHARMACEUTICALS, INC.
On April 21, 2006, the Company and Savient entered into a distribution
agreement granting the Company exclusive marketing rights for SOLTAMOX in the
United States.
-20-
SOLTAMOX, a cytostatic estrogen receptor antagonist, is the first oral liquid
hormonal therapy approved in the U.S. It is indicated for the treatment of
breast cancer in adjuvant and metastatic settings and to reduce the risk of
breast cancer in women with ductal carcinoma in situ (DCIS) or with high risk of
breast cancer. The Company expects to launch SOLTAMOX during the third quarter
of 2006.
In addition, the Company entered into a supply agreement with Rosemont for
the manufacture and supply of SOLTAMOX. Under the terms of the final
transaction, the Company paid Savient an upfront licensing fee of $2.0 million
and may pay additional contingent sales-based payments of up to a total of $4.0
million to Savient and Rosemont. The Company is also required to pay Savient and
Rosemont royalties on net sales of SOLTAMOX. Beginning in 2007, Cytogen is
obligated to pay Savient and Rosemont quarterly minimum royalties based on an
agreed upon percentage of total tamoxifen prescriptions in the United States.
Unless terminated earlier, the distribution agreement with Savient and the
supply agreement with Rosemont will each terminate upon the expiration of the
last to expire patent covering SOLTAMOX in the United States, which is currently
June 2018. In the event the tamoxifen prescriptions for an agreed upon period of
time are less than the pre-established minimum, the agreement may be terminated
if the parties are unable to reach an agreement to amend the terms of the
contract to account for such impact.
The up-front license payment of $2.0 million was capitalized as SOLTAMOX
license fee in the accompanying consolidated balance sheet and is being
amortized on a straight-line basis over approximately twelve years which is the
estimated performance period of the agreement. The amortization expense is
recorded as cost of product revenue.
8. BERLEX, INC.
On May 8, 2006, the Company entered into a royalty buyout agreement with
Berlex, Inc. for QUADRAMET which was to close within 90 days, subject to certain
closing conditions. Under the terms of the agreement, Cytogen would have no
longer paid Berlex a royalty on QUADRAMET sales in exchange for a one-time cash
payment and a certain number of shares of Cytogen common stock. The closing of
the transaction did not occur and the parties are discussing a revised
transaction to complete the royalty buyout. Until a royalty buyout is completed,
if at all, Cytogen will continue to pay Berlex royalties on net sales of
QUADRAMET.
9. ONCOLOGY THERAPEUTICS NETWORK, J.V.
On June 20, 2006, the Company entered into a purchase and supply agreement
with Oncology Therapeutics Network, J.V. ("OTN") appointing OTN as the exclusive
distributor of SOLTAMOX in the United States. Under the terms of the agreement,
OTN will purchase SOLTAMOX from the Company and distribute SOLTAMOX in the
United States through its warehousing and distribution facilities. The Company
is obligated to pay OTN a minimal set up fee upon execution of the agreement
which was recorded as selling, general and administrative expense during the
three months ended June 30, 2006. In addition, the Company will pay OTN
management fees based upon a percentage of SOLTAMOX sales, subject to a minimum
annual amount. This agreement has a three-year term and will automatically renew
for successive one-year periods unless terminated by OTN or Cytogen on a 90 days
written notice prior to the end of
-21-
the applicable term. Either party also may terminate the agreement, without
cause, on 180 days written notice.
10. LITIGATION
In December 2005, Trapeziod Healthcare Communications LLC filed a complaint
against the Company in the Superior Court of New Jersey, Law Division, Mercer
County, seeking approximately $426,000 in damages arising from the Company's
alleged failure to pay Trapezoid for marketing services allegedly provided to
the Company. On May 22, 2006, the Company settled this matter for $365,000,
without any admission of fault or liability. The Company had previously
established a reserve for the full amount of this claim.
In January 2006, the Company filed a complaint against Advanced Magnetics
in the Massachusetts Superior Court for breach of contract, fraud, unjust
enrichment, and breach of the implied covenant of good faith and fair dealing in
connection with the parties' 2000 license agreement. The complaint seeks damages
along with a request for specific performance requiring Advanced Magnetics to
take all reasonable steps to secure FDA approval of COMBIDEX in compliance with
the terms of the licensing agreement. In February 2006, Advanced Magnetics filed
an answer to the Company's complaint and asserted various counterclaims,
including tortuous interference, defamation, consumer fraud and abuse of
process. The Company believes these counterclaims have no merit and plans to
conduct a vigorous defense of such counterclaims. Legal proceedings are subject
to uncertainties, and the outcomes are difficult to predict. Consequently, the
Company is unable to estimate the ultimate financial impact, if any, to its
results of operations and financial condition.
In addition, 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. 2006 EQUITY COMPENSATION PLAN
On June 13, 2006, the Company's stockholders approved the Cytogen
Corporation 2006 Equity Compensation Plan at the 2006 Annual Meeting of
Stockholders. The 2006 Plan provides for grants in any of the following forms:
(i) incentive stock options, (ii) nonqualified stock options, (iii) stock units,
(iv) stock awards, (v) stock appreciation rights, and (vi) other stock-based
awards. The Company has reserved 1,500,000 shares of Cytogen common stock for
future issuance under the 2006 Plan.
-22-
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 the timing of the product launch for SOLTAMOX, growth and
market penetration for QUADRAMET and PROSTASCINT, 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, our
ability to launch a new product, 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 Item 1A "Risk
Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2005, 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, 2005, and from time to time in our other filings with the
Securities and Exchange Commission.
OVERVIEW
Founded in 1980, Cytogen Corporation of Princeton, New Jersey, is a
biopharmaceutical company dedicated to improving the lives of patients with
cancer by acquiring, developing and
-23-
commercializing innovative molecules targeting the sites and stages of cancer
progression. Our marketed products include QUADRAMET (samarium Sm-153 lexidronam
injection), PROSTASCINT (capromab pendetide) kit for the preparation of Indium
In-111 capromab pendetide, and SOLTAMOX (tamoxifen citrate, oral solution
10mg/5mL) which the Company expects to launch in the United States during the
third quarter of 2006. Our development pipeline consists of CYT-500, a
therapeutic radiolabeled antibody targeting prostate-specific membrane antigen
(PSMA), a protein highly expressed on the surface of prostate cancer cells and
the neovasculature of solid tumors. We also have exclusive United States
marketing rights to COMBIDEX (ferumoxtran-10) for all applications, and the
exclusive right to market and sell ferumoxytol (previously Code 7228) for
oncology applications in the United States.
SIGNIFICANT EVENTS IN 2006
Cytogen Announces that FDA Clears IND for CYT-500, a Monoclonal Antibody for the
Treatment of Metastatic Hormone-Refractory Prostate Cancer
On May 8, 2006, we announced that the U.S. Food and Drug Administration
cleared an Investigational New Drug application for CYT-500, our lead
therapeutic candidate targeting PSMA. We expect to begin the first U.S. Phase I
clinical trial of CYT-500 in patients with hormone- refractory prostate cancer,
subject to Institutional Review Board (IRB) approval at the planned clinical
site. CYT-500 uses the same monoclonal antibody from our PROSTASCINT molecular
imaging agent, but is linked through a higher affinity linker than is used for
PROSTASCINT to a therapeutic as opposed to an imaging radionuclide. This novel
product candidate is designed to enable targeted delivery of a cytotoxic agent
to PSMA-expressing cells. We retain full and exclusive development rights to
CYT-500.
Cytogen Sells Ownership in PSMA Development Joint Venture to Progenics
On April 20, 2006, we entered into a Membership Interest Purchase Agreement
with Progenics Pharmaceuticals, Inc. ("Progenics") providing for the sale to
Progenics of our 50% ownership interest in PSMA Development Company LLC ("PDC"),
our joint venture with Progenics for the development of in vivo cancer
immunotherapies based on PSMA. In addition, we entered into an Amended and
Restated PSMA/PSMP License Agreement with Progenics and PDC pursuant to which we
licensed PDC certain rights in PSMA technology. Under the terms of such
agreements, we sold our 50% interest in PDC for a cash payment of $13.2 million,
potential future milestone payments totaling up to $52.0 million payable upon
regulatory approval and commercialization of PDC products, and royalties on
future PDC product sales, if any. We will no longer be responsible for funding
PDC.
Cytogen and Savient Execute Marketing Agreement for SOLTAMOX(TM)
On April 21, 2006, we and Savient entered into a distribution agreement
granting us exclusive marketing rights for SOLTAMOX(TM) (tamoxifen citrate) in
the United States. SOLTAMOX, a cytostatic estrogen receptor antagonist, is the
first oral liquid hormonal therapy approved in the U.S. It is indicated for the
treatment of breast cancer in adjuvant and metastatic settings and to reduce the
risk of breast cancer in women with ductal carcinoma in situ (DCIS) or with high
risk of breast cancer. In addition, we entered into a supply agreement with
Rosemont
-24-
Pharmaceuticals Limited, previously a wholly-owned subsidiary of Savient
("Rosemont"), for the manufacture and supply of SOLTAMOX. Under the terms of the
final transaction, we paid Savient an upfront licensing fee of $2.0 million and
may pay additional contingent sales-based payments of up to a total of $4.0
million to Savient and Rosemont. We are also required to pay Savient and
Rosemont royalties on net sales of SOLTAMOX. We expect to launch SOLTAMOX during
the third quarter of 2006.
Cytogen Enters into QUADRAMET Royalty Buyout Agreement with Berlex
On May 8, 2006, we entered into a royalty buyout agreement with Berlex,
Inc. for QUADRAMET, which was to close within 90 days, subject to certain
closing conditions. Under the terms of the agreement, we would have no longer
paid Berlex a royalty on QUADRAMET sales in exchange for a one-time cash payment
and a certain number of shares of our common stock. The closing of the
transaction did not occur and the parties are discussing a revised transaction
to complete the royalty buyout. Until a royalty buyout is completed, if at all,
we will continue to pay Berlex royalties on net sales of QUADRAMET.
Cytogen Enters into Purchase and Supply Agreement with Oncology Therapeutics
Network
On June 20, 2006, we entered into a purchase and supply agreement with
Oncology Therapeutics Network, J.V. ("OTN") appointing OTN as the exclusive
distributor of SOLTAMOX in the United States. Under the terms of the agreement,
OTN will purchase SOLTAMOX from us and distribute SOLTAMOX in the United States
through its warehousing and distribution facilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 AND 2005
REVENUES
INCREASE/(DECREASE)
------------------------
2006 2005 $ %
---- ---- --------- ---------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
QUADRAMET.......................... $ 1,988 $ 2,153 $ (165) (8)%
PROSTASCINT........................ 2,180 1,924 256 13%
License and Contract............... 4 79 (75) (95)%
-------- --------- --------
$ 4,172 $ 4,156 $ 16 0%
======== ========= ========
Total revenues for each of the second quarters of 2006 and 2005 were $4.2
million. Product revenues accounted for 100% and 98% of total revenues for the
second quarters of 2006 and 2005, respectively. License and contract revenues
accounted for the remainder of revenues.
QUADRAMET. QUADRAMET sales were $2.0 million for the second quarter of
2006, compared to $2.2 million in the second quarter of 2005. QUADRAMET sales
accounted for 48% and 53% of product revenues for the second quarters of 2006
and 2005, respectively. The decrease from the prior year period was due to lower
unit sales offset, in part, by the effect
-25-
of a 5% price increase implemented in June 2005. Currently, we market QUADRAMET
only in the United States and have no rights to market QUADRAMET in Europe. We
believe that we have made significant progress in key areas designed to position
QUADRAMET for future growth and market penetration by: (i) distinguishing the
physical properties of QUADRAMET from first-generation agents within its class;
(ii) empowering and marketing to key prescribing audiences; (iii) broadening
palliative use within label beyond prostate cancer to include breast, lung and
multiple myeloma; (iv) evaluating the role of QUADRAMET in combination with
other commonly used oncology agents; and (v) expanding clinical development to
evaluate the potential tumoricidal versus palliative attributes of QUADRAMET. We
cannot assure you 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 $2.2 million for the second quarter of
2006, compared to $1.9 million in the second quarter of 2005. PROSTASCINT sales
accounted for 52% and 47% of product revenues for the second quarters of 2006
and 2005, respectively. The increase from the prior year period was due to the
implementation of a price increase for PROSTASCINT in June 2005, increased
demand associated with our focused marketing programs and our continued
identification of new distribution channels to better accommodate customer
needs. We believe that we have made significant progress in key areas designed
to position PROSTASCINT for future growth and market penetration by: (i)
improving image quality through fusion technology; (ii) validating the antigen
targeted by PROSTASCINT as an independent prognostic factor; (iii) the
publication and presentation of outcomes data; (iv) development of image-guided
applications including brachytherapy, intensity modulated radiation therapy,
surgery, and cryotherapy; and (v) expanding clinical development to evaluate the
potential for PROSTASCINT to monitor response to cytotoxic therapies and image
other cancers. We cannot assure you 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.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $4,000
and $79,000 for the second quarters of 2006 and 2005, respectively. During the
second quarter of 2005, we recognized $78,000 of contract revenues for limited
research and development services provided by us to the PSMA Development Company
LLC, our joint venture with Progenics. We did not provide any research services
to the joint venture in 2006.
OPERATING EXPENSES
INCREASE/(DECREASE)
---------------------
2006 2005 $ %
---- ---- ------- ------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenue.......................... $ 2,594 $ 2,251 $ 343 15%
Selling, general and administrative.............. 6,994 6,692 302 5%
Research and development......................... 1,463 1,362 101 7%
Equity in (income) loss of joint venture......... (13) 1,704 (1,717) (101)%
------- -------- ------
$11,038 $ 12,009 $ (971) (8)%
======= ======== ======
Total operating expenses for the second quarter of 2006 were $11.0 million
compared to $12.0 million in the same quarter of 2005.
-26-
COST OF PRODUCT REVENUE. Cost of product revenue for the second quarters of
2006 and 2005 were $2.6 million and $2.3 million, respectively, and primarily
reflects manufacturing costs for PROSTASCINT and QUADRAMET, royalties on our
sales of products and amortization of the up-front payments to acquire the
marketing rights to QUADRAMET in 2003 and SOLTAMOX in April 2006. The increase
in cost of product revenue is attributable to a higher product revenue in 2006.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the second quarter of 2006 were $7.0 million compared to $6.7
million in the same period of 2005. The increase from the prior year period is
primarily driven by $284,000 of pre-launch costs associated with SOLTAMOX, which
we expect to launch in the third quarter 2006, and by the recognition of
$316,000 of share-based compensation in 2006 for options and nonvested shares
granted to employees, partially offset by the expanded investment for the
commercial support of both QUADRAMET and PROSTASCINT in 2005. Any future changes
to our share-based compensation strategy or programs would likely affect the
amount of compensation expense recognized under SFAS 123(R).
RESEARCH AND DEVELOPMENT. Research and development expenses for the second
quarter of 2006 were $1.5 million compared to $1.4 million in the same period of
2005. The increase from the prior year period is primarily driven by new
clinical development initiatives for both QUADRAMET and PROSTASCINT and the
preclinical development costs associated with our radiolabeled therapeutic
program to attach the therapeutic radionuclide lutetium-177 as a payload to the
7E11 monoclonal antibody utilized in PROSTASCINT, partially offset by a $500,000
charge in the second quarter of 2005 for a non-cash milestone obligation
incurred related to the progress of the PSMA development programs.
EQUITY (INCOME) IN LOSS OF JOINT VENTURE. During the second quarters of
2006 and 2005, we recorded an expense reversal of $13,000 and an expense of $1.7
million, respectively, with respect to our share of the loss in PDC, our joint
venture with Progenics. Such amounts represented 50% of the joint venture's net
losses. We equally shared ownership and costs of the joint venture with
Progenics and accounted for the joint venture using the equity method of
accounting until April 20, 2006 when we sold to Progenics our ownership interest
in PDC. We will no longer be responsible for funding PDC.
INTEREST INCOME/EXPENSE. Interest income for the second quarter of 2006 was
$392,000 compared to $154,000 in the same period of 2005. The increase in 2006
from the prior year period was due to a higher average yield on higher average
cash balances in 2006. Interest expense for the second quarter of 2006 was
$6,000 compared to $42,000 in the same period in 2005. Interest expense includes
interest on outstanding debt, which was repaid in August 2005, and finance
charges related to various equipment leases that are accounted for as capital
leases.
GAIN ON SALE OF EQUITY INTEREST IN JOINT VENTURE. On April 20, 2006, we
entered into a Membership Interest Purchase Agreement with Progenics providing
for the sale to Progenics of our 50% ownership interest in PDC, our joint
venture with Progenics for the development of in vivo cancer immunotherapies
based on PSMA. In addition, we entered into an Amended and Restated PSMA/PSMP
License Agreement with Progenics and PDC pursuant to which we licensed PDC
certain rights in PSMA technology. Under the terms of such agreements, we sold
-27-
our 50% interest in PDC for a cash payment of $13.2 million, potential future
milestone payments totaling up to $52.0 million payable upon regulatory approval
and commercialization of PDC products, and royalties on future PDC product
sales, if any. As a result of the transaction, for the three months ended June
30, 2006, we recorded $12.9 million in gain on sale of equity interest in the
joint venture, which represents the net proceeds after transaction costs less
the carrying value of our investment in the joint venture at the time of sale.
DECREASE IN WARRANT LIABILITY. In connection with the sale of our common
stock and warrants in July and August 2005, we recorded the warrants as a
liability at their fair value using a Black-Scholes option-pricing model and
will remeasure them at each reporting date until exercised or expired. Changes
in the fair value of the warrants are reported in the statements of operations
as non-operating income or expense. For the three months ended June 30, 2006, we
reported a gain of $813,000 related to the decrease in fair value of these
warrants since March 31, 2006. The market price for our common stock has been
and may continue to be volatile. Consequently, future fluctuations in the price
of our common stock may cause significant increases or decreases in the fair
value of these warrants.
NET INCOME (LOSS). We had net income of $7.2 million or $0.32 per basic and
diluted share for the second quarter of 2006, compared to a net loss of $7.7
million or $0.50 per basic and diluted share in the same quarter of 2005. The
significant fluctuation in results was due to the gain on the sale of our equity
interest in the joint venture.
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
REVENUES
INCREASE/(DECREASE)
-----------------------
2006 2005 $ %
---- ---- ------- ------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
QUADRAMET.................................... $ 4,244 $ 4,207 $ 37 1%
PROSTASCINT.................................. 4,364 3,823 541 14%
License and Contract......................... 6 120 (114) (95)%
------- -------- ------
$ 8,614 $ 8,150 $ 464 6%
======= ======== ======
Total revenues for the first half of 2006 were $8.6 million compared to
$8.2 million for the same period in 2005. Product revenues accounted for 100%
and 99% of total revenues for the first half of each of 2006 and 2005,
respectively. License and contract revenues accounted for the remainder of
revenues.
QUADRAMET. QUADRAMET sales were $4.2 million for each of the first half of
2006 and 2005. QUADRAMET sales accounted for 49% and 52% of product revenues for
the first half of 2006 and 2005, respectively. Currently, we market QUADRAMET
only in the United States and have no rights to market QUADRAMET in Europe. We
believe that we have made significant progress in key areas designed to position
QUADRAMET for future growth and market penetration by: (i) distinguishing the
physical properties of QUADRAMET from first-generation agents within its class;
(ii) empowering and marketing to key prescribing
-28-
audiences; (iii) broadening palliative use within label beyond prostate cancer
to include breast, lung and multiple myeloma; (iv) evaluating the role of
QUADRAMET in combination with other commonly used oncology agents; and (v)
expanding clinical development to evaluate the potential tumoricidal versus
palliative attributes of QUADRAMET. We cannot assure you 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 $4.4 million for the first half of
2006, an increase of $541,000 from $3.8 million in the first half of 2005. Sales
of PROSTASCINT accounted for 51% and 48% of product revenues for the first half
of 2006 and 2005, respectively. The increase from the prior year period was due
to the implementation of a price increase for PROSTASCINT in June 2005,
increased demand associated with our focused marketing programs and our
continued identification of new distribution channels to better accommodate
customer needs. We believe that we have made significant progress in key areas
designed to position PROSTASCINT for future growth and market penetration by:
(i) improving image quality through fusion technology; (ii) validating the
antigen targeted by PROSTASCINT as an independent prognostic factor; (iii) the
publication and presentation of outcomes data; (iv) development of image-guided
applications including brachytherapy, intensity modulated radiation therapy,
surgery, and cryotherapy; and (v) expanding clinical development to evaluate the
potential for PROSTASCINT to monitor response to cytotoxic therapies and image
other cancers. We cannot assure you 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.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $6,000
and $120,000 for the first half of 2006 and 2005, respectively. During the first
half of 2005, we recognized $119,000 of contract revenues for limited research
and development services provided by us to the PSMA Development Company LLC, our
joint venture with Progenics. We did not provide any research services to the
joint venture in 2006.
OPERATING EXPENSES
INCREASE/(DECREASE)
---------------------------
2006 2005 $ %
---- ---- ----------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenues..................... $ 5,010 $ 4,678 $ 332 7%
Selling, general and administrative.......... 13,231 13,716 (485) (4)%
Research and development..................... 4,445 2,101 2,344 112%
Equity in loss of joint venture.............. 120 2,202 (2,082) (95)%
---------- ---------- ----------
$ 22,806 $ 22,697 $ 109 0%
========== ========== ==========
Total operating expenses for the first half of 2006 were $22.8 million
compared to $22.7 million in the same period of 2005.
COST OF PRODUCT REVENUES. Cost of product revenues for the first half of
2006 were $5.0 million compared to $4.7 million in the same period of 2005 and
primarily reflects
-29-
manufacturing costs for PROSTASCINT and QUADRAMET, royalties on our sales of
products and amortization of the up-front payments to acquire the marketing
rights to QUADRAMET in 2003 and SOLTAMOX in April 2006. The increase in cost of
product revenues from the prior year period is attributable to the higher
product revenues in 2006.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first half of 2006 were $13.2 million compared to $13.7 million
in the same period of 2005. The decrease from the prior year period is primarily
driven by $724,000 of pre-launch costs in 2005 associated with COMBIDEX, which
is currently awaiting approval from the FDA, and the expanded investment for the
commercial support of both QUADRAMET and PROSTASCINT in 2005, partially offset
by $452,000 of costs associated with pre-launch activities for SOLTAMOX and by
the recognition of $720,000 of share-based compensation in 2006 for options and
nonvested shares granted to employees. Any future changes to our share-based
compensation strategy or programs would likely affect the amount of compensation
expense recognized under SFAS 123(R).
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
half of 2006 were $4.4 million compared to $2.1 million in the same period of
2005. The increase from the prior year period is primarily driven by new
clinical development initiatives for both QUADRAMET and PROSTASCINT and the
preclinical development costs associated with our radiolabeled therapeutic
program to attach the therapeutic radionuclide lutetium-177 as a payload to the
7E11 monoclonal antibody utilized in PROSTASCINT, partially offset by a $500,000
charge in the second quarter of 2005 for a non-cash milestone obligation
incurred related to the progress of the PSMA development programs.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $120,000 during
the first half of 2006 compared to $2.2 million in the same period of 2005. Such
amounts represented 50% of the joint venture's net losses. We equally shared
ownership and costs of the joint venture with Progenics and accounted for the
joint venture using the equity method of accounting until April 20, 2006 when we
sold to Progenics of our ownership interest in PDC. We will no longer be
responsible for funding PDC.
INTEREST INCOME/EXPENSE. Interest income for the first half of 2006 was
$689,000 compared to $297,000 in the same period of 2005. The increase in 2006
from the prior year period was due to a higher average yield on higher average
cash balances in 2006. Interest expense was $12,000 and $84,000 for the first
half of 2006 and 2005, respectively. Interest expense includes interest on
outstanding debt, which was repaid in August 2005, and finance charges related
to various equipment leases that are accounted for as capital leases.
GAIN ON SALE OF EQUITY INTEREST IN JOINT VENTURE. On April 20, 2006, we
entered into a Membership Interest Purchase Agreement with Progenics providing
for the sale to Progenics of our 50% ownership interest in PDC, our joint
venture with Progenics for the development of in vivo cancer immunotherapies
based on PSMA. In addition, we entered into an Amended and Restated PSMA/PSMP
License Agreement with Progenics and PDC pursuant to which we licensed PDC
certain rights in PSMA technology. Under the terms of such agreements, we sold
our 50% interest in PDC for a cash payment of $13.2 million, potential future
milestone payments totaling up to $52.0 million payable upon regulatory approval
and commercialization
-30-
of PDC products, and royalties on future PDC product sales, if any. As a result
of the transaction, for the six months ended June 30, 2006, we recorded $12.9
million in gain on sale of equity interest in the joint venture, which
represents the net proceeds after transaction costs less the carrying value of
our investment in the joint venture at the time of sale.
DECREASE IN WARRANT LIABILITY. In connection with the sale of our common
stock and warrants in July and August 2005, we recorded the warrants as a
liability at their fair value using a Black-Scholes option-pricing model and
will remeasure them at each reporting date until exercised or expired. Changes
in the fair value of the warrants are reported in the statements of operations
as non-operating income or expense. For the six months ended June 30, 2006, we
reported a gain of $182,000 related to the decrease in fair value of these
warrants since December 31, 2005. The market price for our common stock has been
and may continue to be volatile. Consequently, future fluctuations in the price
of our common stock may cause significant increases or decreases in the fair
value of these warrants.
NET INCOME (LOSS). We had net loss of $460,000 in the first half of 2006
compared to $14.3 million reported in the first half of 2005. The basic and
diluted net loss per share for the first half of 2006 was $0.02 based on 22.5
million weighted average common shares outstanding, compared to a basic and
diluted net loss per share of $0.92 based on 15.5 million weighted average
common shares outstanding for the same period in 2005. The significant
fluctuation in results was due to the gain on the sale of our equity interest in
the joint venture.
COMMITMENTS
We have entered into various contractual and commercial commitments. The
following table summarizes our obligations with respect to theses commitments as
of June 30, 2006:
LESS
THAN 1 TO 3 4 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
------- ------- -------- ---------- -----------
(ALL AMOUNTS IN THOUSANDS)
Capital lease obligations ........................ $ 59 $ 92 $ -- $ -- $ 151
Facility leases.................................... 338 113 -- -- 451
Research and development and
other obligations............................... 306 153 150 513 1,122
Manufacturing contracts((1)) ...................... 4,689 4,689 -- -- 9,378
Minimum royalty payments((2))...................... 1,000 2,000 2,000 2,333 7,333
------- ------- -------- ---------- -----------
Total........................................ $ 6,392 $ 7,047 $ 2,150 $ 2,846 $ 18,435
======= ======= ======== ========== ===========
(1) Effective January 1, 2004, we entered into a new manufacturing and supply
agreement with BMS-MI for QUADRAMET whereby BMS-MI 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 $4.7 million annually, subject to future annual price
adjustment, through 2008, unless terminated by BMS-MI or us on a two year
prior written notice. This agreement will automatically renew for five
-31-
successive one-year periods unless terminated by BMS-MI or us on a two-year
prior written notice. Accordingly, we have not included commitments beyond
June 30, 2008.
(2) 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 2006 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:
SIX MONTHS ENDED
JUNE 30, 2006
--------------------------
(ALL AMOUNTS IN THOUSANDS)
Net loss................................................ $ (460)
Adjustments to reconcile net loss to net cash
used in operating activities.......................... (9,542)
-------
Net cash used in operating activities................... (10,002)
Net cash provided by investing activities............... 11,046
Net cash provided by financing activities............... 19
-------
Net increase in cash and cash equivalents............... $ 1,063
=======
OVERVIEW
Our cash and cash equivalents were $31.4 million as of June 30, 2006,
compared to $30.3 million as of December 31, 2005. During the six months ended
June 30, 2006 and 2005, net cash used in operating activities was $10.0 million
and $15.3 million, respectively. The decrease in cash usage from the prior year
period was primarily due to the prior year's build-up of PROSTASCINT inventory,
pre-launch costs associated with COMBIDEX in 2005 and a reduction in 2006 of our
investment in the PDC joint venture, partially offset by costs associated with
pre-launch activities for SOLTAMOX and increased investment in clinical
programs. On April 20, 2006, we sold our 50% interest in PDC for a cash payment
of $13.2 million. Effective after that date, we are no longer funding the PDC's
operations. We expect our operating expenditures in the second half of 2006 to
increase compared to the first half of 2006 as we prepare to launch SOLTAMOX.
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.
-32-
Our long-term 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 revenues. We cannot assure you of 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.
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 2007. 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. We cannot assure you 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.
OTHER LIQUIDITY EVENTS
On April 20, 2006, we entered into a Membership Interest Purchase Agreement
with Progenics providing for the sale to Progenics of our 50% ownership interest
in PDC. In addition, we entered into an Amended and Restated PSMA/PSMP License
Agreement with Progenics and PDC pursuant to which we licensed PDC certain
rights in PSMA technology. Under the terms of
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such agreements, we sold our 50% interest in PDC for a cash payment of $13.2
million, potential future milestone payments totaling up to $52.0 million
payable upon regulatory approval and commercialization of PDC products, and
royalties on future PDC product sales, if any. Effective after the sale, we are
no longer funding the PDC's operations.
On April 21, 2006, we and Savient entered into a distribution agreement
granting us exclusive marketing rights for SOLTAMOX(TM) (tamoxifen citrate) in
the United States. SOLTAMOX, a cytostatic estrogen receptor antagonist, is the
first oral liquid hormonal therapy approved in the U.S. It is indicated for the
treatment of breast cancer in adjuvant and metastatic settings and to reduce the
risk of breast cancer in women with ductal carcinoma in situ (DCIS) or with high
risk of breast cancer. In addition, we entered into a supply agreement with
Rosemont for the manufacture and supply of SOLTAMOX. Under the terms of the
final transaction, we paid Savient an upfront licensing fee of $2.0 million and
may pay additional contingent sales-based payments of up to a total of $4.0
million to Savient and Rosemont. We expect to launch SOLTAMOX during the third
quarter of 2006. We are also required to pay Savient and Rosemont royalties on
net sales of SOLTAMOX. Beginning in 2007, Cytogen is obligated to pay Savient
and Rosemont quarterly minimum royalties based on an agreed upon percentage of
total tamoxifen prescriptions in the United States. Unless terminated earlier,
each of the distribution agreement with Savient and the supply agreement with
Rosemont will terminate upon the expiration of the last to expire patent
covering SOLTAMOX in the United States, which is currently June 2018. In the
event the tamoxifen prescriptions for an agreed upon period of time are less
than the pre-established minimum, the agreement may be terminated if the parties
are unable to reach an agreement to amend the terms of the contract to account
for such impact.
On June 20, 2006, we entered into a purchase and supply agreement with
Oncology Therapeutics Network, J.V. ("OTN") appointing OTN as the exclusive
distributor of SOLTAMOX in the United States. Under the terms of the agreement,
OTN will purchase SOLTAMOX from us and distribute SOLTAMOX in the United States
through its warehousing and distribution facilities. We will pay OTN management
fees based upon a percentage of SOLTAMOX sales, subject to a minimum annual
amount. This agreement has a three-year term and will automatically renew for
successive one-year periods unless terminated by OTN or us on a 90 days written
notice prior to the end of the applicable term. Either party also may terminate
the agreement, without cause, on 180 days written notice.
In September 2004, we entered into a non-exclusive manufacturing agreement
with Laureate Pharma, L.P. pursuant to which Laureate is manufacturing
PROSTASCINT and its primary raw materials 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 anticipate paying at least an aggregate of $5.1 million through
the end of the contract term. Approximately $4.1 million has been incurred under
this agreement through June 30, 2006, and is recorded as inventory when
purchased. No payment was made during the first half of 2006. 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.
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Effective January 1, 2004, we entered into a new manufacturing and supply
agreement with Bristol-Myers Squibb Medical Imaging, Inc. ("BMS-MI") whereby
BMS-MI 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 $4.7 million annually, subject to future annual
price adjustment, through 2008, unless terminated by BMS-MI or us on two years
prior written notice. During the six months ended June 30, 2006, we incurred
$2.3 million of manufacturing costs for QUADRAMET. This agreement will
automatically renew for five successive one-year periods unless terminated by
BMS-MI or us on a two year prior written notice. We also pay BMS-MI a variable
amount per month for each QUADRAMET order placed to cover the costs of customer
service.
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 2006 through 2012 and $833,000 in 2013.
On May 6, 2005, we entered into a license agreement with The Dow Chemical
Company to create a targeted oncology product designed to treat prostate and
other cancers. The agreement applies proprietary MeO-DOTA bifunctional chelant
technology from Dow to radiolabel our PSMA antibody with a therapeutic
radionuclide. Under the agreement, proprietary chelation technology and other
capabilities, provided through ChelaMedSM radiopharmaceutical services from Dow,
will be used to attach a therapeutic radioisotope to the 7E11-C5 monoclonal
antibody utilized in our PROSTASCINT molecular imaging agent. As a result of the
agreement, we are obligated to pay a minimal license fee and aggregate future
milestone payments of $1.9 million for each licensed product and royalties based
on sales of related products, if any. Unless terminated earlier, the Dow
agreement terminates at the later of (a) the tenth anniversary of the date of
first commercial sale for each licensed product or (b) the expiration of the
last to expire valid claim that would be infringed by the sale of the licensed
product. We may terminate the license agreement with Dow on 90 days written
notice.
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, 2005, as amended,
includes a summary of our significant accounting policies and methods used in
the preparation of our Consolidated Financial Statements. The following is a
brief discussion of the more significant accounting policies and methods used by
us. The preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results could differ materially from
those estimates.
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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 or
determinable. Product returns are accepted under limited circumstances and an
allowance for returned products is 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. We defer non-refundable 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 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
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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.
WARRANT LIABILITY
We follow Emerging Issues Task Force (EITF) No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" which provides guidance for distinguishing between
permanent equity, temporary equity and assets and liabilities. Under EITF 00-19,
to qualify as permanent equity, the equity derivative must permit us to settle
in unregistered shares. We do not have that ability under the securities
purchase agreement for the warrants issued in July and August 2005 and, as EITF
00-19 considers the ability to keep a registration statement effective as beyond
our control, the warrants cannot be classified as permanent equity and are
instead classified as a liability in the accompanying consolidated balance
sheet.
We record the warrant liability at its fair value using a Black-Scholes
option-pricing model and remeasure it at each reporting date until the warrants
are exercised or expired. Changes in the fair value of the warrants are reported
in the consolidated statements of operations as non-operating income or expense.
The fair value of the warrants is subject to significant fluctuation based on
changes in our stock price, expected volatility, expected life, the risk-free
interest rate and dividend yield. The market price for our common stock has been
and may continue to be volatile. Consequently, future fluctuations in the price
of our common stock may cause significant increases or decreases in the fair
value of the warrants issued in July and August 2005.
SHARE-BASED COMPENSATION
We account for share-based compensation in accordance with SFAS No. 123(R),
"Share-Based Payment." Under the fair value recognition provision of this
statement, the share-based compensation, which is generally based on the fair
value of the awards calculated using the Black-Scholes option pricing model on
the date of grant, is recognized on a straight-line basis over the requisite
service period, generally the vesting period, for grants on or after January 1,
2006. For nonvested shares, we use the fair value of the underlying common stock
on the date of grant. Determining the fair value of share-based awards at the
grant date requires judgment, including estimating expected dividend yield,
expected forfeiture rates, expected volatility, the expected term and expected
risk-free interest rates. If we were to use different estimates or a different
valuation model, our share-based compensation expense and our results of
operations could be materially impacted.
RECENT ACCOUNTING PRONOUNCEMENTS
Income Taxes
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is applicable for fiscal years
beginning after December 15, 2006. This Interpretation clarifies the accounting
for uncertainty in income taxes recognized in
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an enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. We are currently evaluating the impact of the adoption of FIN 48
upon our financial statements and related disclosures. We do not expect that the
adoption will have a material effect on our results of operations or financial
condition.
Sales Tax
In March 2006, the FASB's Emerging Issues Task Force released Issue 06-3,
"How Sales Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement" or ("EITF 06-3"). A
consensus was reached that entities may adopt a policy of presenting sales taxes
in the income statement on either a gross or net basis. If taxes are
significant, an entity should disclose its policy of presenting taxes and the
amount of taxes if reflected on a gross basis in the income statement. The
guidance is effective for periods beginning after December 15, 2006. We present
sales net of sales taxes in our consolidated statements of operations and do not
anticipate changing our policy as a result of EITF 06-3.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which revised SFAS No. 123 ("SFAS 123") and superseded Accounting Principles
Board Opinion No. 25, " Accounting for Stock Issued to Employees" ("APB 25").
SFAS 123(R) requires that companies recognize compensation expense associated
with share-based compensation arrangements, including employee stock options, in
the financial statements effective as of the first interim or annual reporting
period that begins after June 15, 2005. SFAS 123(R) eliminates the Company's
ability to account for such transactions using the intrinsic method of
accounting under APB 25. SFAS 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
do not meet certain criteria.
In April 2005, the Securities and Exchange Commission announced the
adoption of a new rule allowing companies to implement SFAS 123(R) at the
beginning of their next fiscal year that begins after June 15, 2005.
Accordingly, we adopted SFAS 123(R) in its fiscal year beginning January 1, 2006
using the modified prospective transition method. Under this method,
compensation expense is reflected in the financial statements beginning January
1, 2006 with no restatement to the prior periods. As such, compensation expense,
which is measured based on the fair value of the instrument on the grant date,
is recognized for awards that are granted, modified, repurchased or cancelled on
or after January 1, 2006 as well as for the portion of awards previously granted
that have not vested as of January 1, 2006. We have implemented the
straight-line expense attribution method for all options granted after January
1, 2006. Prior to adopting SFAS 123(R), we used the accelerated attribution
method in accordance with FASB Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock
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Option or Award Plans" ("FIN 28"). The adoption of SFAS 123(R) had a material
impact on our results of operations.
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 adopted SFAS No. 151 in its fiscal year beginning January 1, 2006. The
adoption of this standard did not have any impact on the Company in the six
months ended June 30, 2006.
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.
We are exposed to certain risks arising from changes in the price of our
common stock, primarily due to potential effect of changes in fair value of the
warrant liability related to the warrants issued in July and August 2005. The
warrant liability is measured at fair value using a Black-Scholes option-pricing
model at each reporting date and is subject to significant increases or
decreases in value and a corresponding loss or gain in the statement of
operations due to the effects of changes in the price of common stock at period
end and the related calculation of volatility.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
vice president, finance, evaluated the effectiveness of our disclosure controls
and procedures as of June 30, 2006. 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
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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 vice president, finance concluded that, as of June 30, 2006, 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 June 30, 2006 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 1. LEGAL PROCEEDINGS
In December 2005, Trapezoid Healthcare Communications LLC filed a complaint
against us in the Superior Court of New Jersey, Law Division, Mercer County,
seeking approximately $426,000 in damages arising our of our alleged failure to
pay Trapezoid for marketing services allegedly provided to us. On May 22, 2006,
we settled this matter for $365,000, without any admission of fault or
liability. We had previously established a reserve for the full amount of this
claim.
In January 2006, we filed a complaint against Advanced Magnetics in the
Massachusetts Superior Court for breach of contract, fraud, unjust enrichment,
and breach of the implied covenant of good faith and fair dealing in connection
with the parties' 2000 license agreement. The complaint seeks damages along with
a request for specific performance requiring Advanced Magnetics to take all
reasonable steps to secure FDA approval of COMBIDEX in compliance with the terms
of the licensing agreement. In February 2006, Advanced Magnetics filed an answer
to our complaint and asserted various counterclaims, including tortuous
interference, defamation, consumer fraud and abuse of process. We believe these
counterclaims have no merit and we plan to conduct a vigorous defense of such
counterclaims.
ITEM 1A. RISK FACTORS
This section sets forth changes in the risks factors previously disclosed
in our Annual Report on Form 10-K due to our activities during the quarter ended
June 30, 2006.
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below together with the
other risks described in our Annual Report on Form 10-K and the information
included or incorporated by reference in this Quarterly Report on Form 10-Q and
our Annual Report on Form 10-K in your decision as to whether or not to invest
in our common stock. If any of the risks or uncertainties described below or in
our Annual Report on Form 10-K actually occur, our business, financial condition
or results of operations would likely suffer. In that case, the trading price of
our common stock could fall, and you may lose all or part of the money you paid
to buy our common stock.
We have a history of operating losses and an accumulated deficit and expect to
incur losses in the future.
Given the high level of expenditures associated with our business and our
inability to generate revenues sufficient to cover such expenditures, we have
had a history of operating losses since our inception. For the three months
ended June 30, 2006, we reported net income of $7.2 million. Such net income is
primarily due to the sale to Progenics, in April 2006, of our 50% ownership
interest in PDC, our joint venture with Progenics for the development of in vivo
cancer immunotherapies based on PSMA, in which we received a cash payment of
$13.2 million. We had a net loss of $460,000 for the six months ended June 30,
2006. We had an accumulated deficit of $413 million as of June 30, 2006.
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In order to develop and commercialize our technologies, particularly our
prostate-specific membrane antigen technology, and expand our products, we
expect to incur significant increases in our expenses over the next several
years. As a result, we will need to generate significant additional revenue to
become profitable.
To date, we have taken affirmative steps to address our trend of operating
losses. Such steps include, among other things:
o undergoing steps to realign and implement our focus as a
product-driven biopharmaceutical company;
o establishing and maintaining our in-house specialty sales force;
o reacquiring North American and Latin American marketing rights to
QUADRAMET from Berlex Laboratories in August 2003; and
o enhancing our marketed product portfolio through marketing alliances
and strategic arrangements.
Although we have taken these affirmative steps, we may never be able to
successfully implement them, and our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the risk factors
discussed elsewhere in this section entitled, "Risk Factors" or in our Annual
Report on Form 10-K for the year ended December 31, 2005. As a result, we may
never be able to generate or sustain significant additional revenue or achieve
profitability.
We depend on sales of QUADRAMET and PROSTASCINT for substantially all of our
near-term revenues.
We expect QUADRAMET and PROSTASCINT to account for substantially all of our
product revenues in the near future. For the quarter ended June 30, 2006,
revenues from QUADRAMET and PROSTASCINT accounted for approximately 48% and 52%,
respectively, of our product revenues. For the six months ended June 30, 2006,
revenues from QUADRAMET and PROSTASCINT accounted for approximately 49% and 51%,
respectively, of our product revenues. If QUADRAMET or PROSTASCINT does not
achieve broader market acceptance, either because we fail to effectively market
such products or our competitors introduce competing products, we may not be
able to generate sufficient revenue to become profitable.
On April 21, 2006, we and Savient entered into a distribution agreement
granting us exclusive marketing rights for SOLTAMOX(TM) (tamoxifen citrate) in
the United States. We expect to launch SOLTAMOX during the third quarter of
2006. We have not yet made any sales of SOLTAMOX.
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A Small Number of Customers Account for the Majority of Our Sales, and the Loss
of One of Them, or Changes in Their Purchasing Patterns, Could Result in Reduced
Sales, Thereby Adversely Affecting Our Operating Results.
We sell our products to a small number of radiopharmacy networks. During
the six months ended June 30, 2006, we received 62% of our total revenues from
three customers, as follows: 39% from Cardinal Health (formerly Syncor
International Corporation); 14% from Mallinckrodt Inc.; and 9% from GE
Healthcare (formerly Amersham Health). During the year ended December 31, 2005,
we received 67% of our total revenues from three customers, as follows: 47% from
Cardinal Health (formerly Syncor International Corporation); 11% from
Mallinckrodt Inc.; and 9% from GE Healthcare (formerly Amersham Health). During
the year ended December 31, 2004, we received 68% of our total revenues from
three customers, as follows: 46% from Cardinal Health (formerly Syncor
International Corporation); 12% from Mallinckrodt Inc.; and 10% from GE
Healthcare (formerly Amersham Health).
The small number of radiopharmacies, consolidation in this industry or
financial difficulties of these radiopharmacies could result in the combination
or elimination of customers for our products. We anticipate that our results of
operations in any given period will continue to depend to a significant extent
upon sales to a small number of customers. As a result of this customer
concentration, our revenues from quarter to quarter and business, financial
condition and results of operations may be subject to substantial
period-to-period fluctuations. In addition, our business, financial condition
and results of operations could be materially adversely affected by the failure
of customer orders to materialize as and when anticipated. None of our customers
have entered into an agreement requiring on-going minimum purchases from us. We
cannot assure you that our principal customers will continue to purchase
products from us at current levels, if at all. The loss of one or more major
customers could have a material adverse effect on our business, financial
condition and results of operations.
We rely heavily on our collaborative partners.
Our success depends largely upon the success and financial stability of our
collaborative partners. We have entered into the following agreements for the
development, sale, marketing, distribution and manufacture of our products,
product candidates and technologies:
o a license agreement with The Dow Chemical Company relating to the
QUADRAMET technology;
o a manufacturing and supply agreement for the manufacture of QUADRAMET
with Bristol-Myers Squibb Medical Imaging, Inc.;
o a manufacturing agreement for the manufacture of PROSTASCINT with
Laureate Pharma, L.P.;
o marketing, license and supply agreements with Advanced Magnetics, Inc.
related to COMBIDEX and ferumoxytol (formerly Code 7228);
o a distribution services agreement with Cardinal Health 105, Inc.
(formerly CORD
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Logistics, Inc.) for PROSTASCINT;
o a license agreement with The Dow Chemical Company relating to Dow's
proprietary MeO-DOTA bifunctional chelant technology for use with our
Therapeutic 7E11-C5 Monoclonal Antibody program; o a development and
manufacturing agreement with Laureate Pharma, L.P. for the scale-up
for the cGMP manufacturing of a MeO-DOTA chelator conjugate of the
7E11-C5 monoclonal antibody;
o a distribution agreement with Savient Pharmaceuticals, Inc. and a
manufacture and supply agreement with Savient and Rosemont
Pharmaceuticals Limited related to the supply and marketing of
SOLTAMOX; and
o a purchase and supply agreement with OTN for the distribution of
SOLTAMOX.
Because our collaborative partners are responsible for certain
manufacturing and distribution activities, among others, these activities are
outside our direct control and we rely on our partners to perform their
obligations. In the event that our collaborative partners are entitled to enter
into third party arrangements that may economically disadvantage us, or do not
perform their obligations as expected under our agreements, our products may not
be commercially successful. As a result, any success may be delayed and new
product development could be inhibited with the result that our business,
financial condition and results of operation could be significantly and
adversely affected.
In January 2006, we filed a complaint against Advanced Magnetics in the
Massachusetts Superior Court for breach of contract, fraud, unjust enrichment,
and breach of the implied covenant of good faith and fair dealing in connection
with the parties' 2000 license agreement. The complaint seeks damages along with
a request for specific performance requiring Advanced Magnetics to take all
reasonable steps to secure FDA approval of COMBIDEX in compliance with the terms
of the licensing agreement. In February 2006, Advanced Magnetics filed an answer
to our complaint and asserted various counterclaims, including tortuous
interference, defamation, consumer fraud and abuse of process. We believe these
counterclaims have no merit and we plan to conduct a vigorous defense of these
claims.
Our products, generally, are in the early stages of development and
commercialization and we may never achieve the revenue goals set forth in our
business plan.
We began operations in 1980 and have since been engaged primarily in
research directed toward the development, commercialization and marketing of
products to improve the diagnosis and treatment of cancer and other diseases. In
October 1996, we introduced for commercial use our PROSTASCINT imaging agent. In
March 1997, we introduced for commercial use our QUADRAMET therapeutic product.
In April 2006, we executed a distribution agreement with Savient granting
us exclusive marketing rights for SOLTAMOX (tamoxifen citrate) in the United
States. SOLTAMOX, an
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oral liquid hormonal therapy, is approved for marketing in the United States. We
expect to launch SOLTAMOX in the third quarter of 2006.
In May 2006, the U.S. Food and Drug Administration cleared an
Investigational New Drug application for CYT-500, our lead therapeutic candidate
targeting PSMA. We expect to begin the first U.S. Phase I clinical trial of
CYT-500 in patients with hormone- refractory prostate cancer, subject to
Institutional Review Board (IRB) approval at the planned clinical site. CYT-500
uses the same monoclonal antibody from our PROSTASCINT molecular imaging agent,
but is linked through a higher affinity linker than is used for PROSTASCINT to a
therapeutic as opposed to an imaging radionuclide. This PSMA technology is still
in the early stages of development.
In August 2000, we entered into a license and marketing agreement with
Advanced Magnetics for COMBIDEX, for all applications, and ferumoxytol (formerly
Code 7228) for oncology applications only. We have exclusive United States
marketing rights to COMBIDEX. On March 3, 2005, the FDA's Oncologic Drugs
Advisory Committee (ODAC) voted 15 to 4 to not recommend approval of the
proposed broad indication for COMBIDEX being sought by Advanced Magnetics. On
March 24, 2005, Advanced Magnetics, Inc. informed us that Advanced Magnetics
received an approvable letter from the FDA for COMBIDEX, subject to certain
conditions.
We cannot assure you, however, that Advanced Magnetics will obtain approval
from the FDA for COMBIDEX on a timely basis, if at all. If Advanced Magnetics
does not secure regulatory approval for COMBIDEX, we will not be permitted to
sell and market COMBIDEX as we have anticipated and we will not realize any
return on the significant amount of time and resources we have allocated to
COMBIDEX. Ferumoxytol is being developed by Advanced Magnetics for use as an
iron replacement therapeutic in chronic kidney disease patients and Advanced
Magnetics has stated that no clinical applications are currently planned or
contemplated for oncology applications. We cannot assure you that ferumoxytol
will be developed for oncology applications.
In July 2004, as part of our continuing efforts to reduce non-strategic
expenses, we initiated the closure of facilities at our AxCell Biosciences
subsidiary. Research projects through academic, governmental and corporate
collaborators will continue to be supported and additional applications for the
intellectual property and technology at AxCell are being pursued. We may be
unable to further develop or commercialize any of these products and
technologies in the future.
Our business is therefore subject to the risks inherent in an early-stage
biopharmaceutical business enterprise, such as the need:
o to obtain sufficient capital to support the expenses of developing our
technology and commercializing our products;
o to ensure that our products are safe and effective;
o to obtain regulatory approval for the use and sale of our products;
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o to manufacture our products in sufficient quantities and at a
reasonable cost;
o to develop a sufficient market for our products; and
o to attract and retain qualified management, sales, technical and
scientific staff.
The problems frequently encountered using new technologies and operating in
a competitive environment also may affect our business, financial condition and
results of operations. If we fail to properly address these risks and attain our
business objectives, our business could be significantly and adversely affected.
We depend on attracting and retaining key personnel.
We are highly dependent on the principal members of our management and
scientific staff. The loss of their services might significantly delay or
prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. Competition for personnel is intense, and therefore we may
not be able to retain existing personnel or attract and retain additional highly
qualified employees in the future.
On June 20, 2006, Christopher P. Schnittker resigned as our Senior Vice
President and Chief Financial Officer to pursue other career opportunities. We
have initiated a search for Mr. Schnittker's successor.
We do not carry key person life insurance policies and we do not typically
enter into long-term arrangements with our key personnel. If we are unable to
hire and retain personnel in key positions, our business, financial condition
and results of operations could be significantly and adversely affected unless
qualified replacements can be found.
We may need to raise additional capital, which may not be available.
Our cash, cash equivalents and short-term investments were $31.4 million at
June 30, 2006. We expect that our existing capital resources should be adequate
to fund our operations and commitments into 2007.
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 based upon the:
o success of our product commercialization efforts;
o success of any future acquisitions of complementary products and
technologies we may make;
o magnitude, scope and results of our product development and research
and development efforts;
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o progress of preclinical studies and clinical trials;
o progress toward regulatory approval for our products;
o costs of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
o competing technological and market developments; and
o expansion of strategic alliances for the sale, marketing and
distribution of our products.
Our business or operations may 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. To the extent that our
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. These financial sources may not be
available when we need them or they may be available, but on terms that are not
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2006, we held our annual meeting of stockholders to: (i) elect
nine directors; (ii) consider and vote upon a proposal to approve the Company's
2005 Employee Stock Purchase Plan; (iii) consider and vote upon a proposal to
approve the Company's 2006 Equity Compensation Plan; and (iv) transact such
other business as may come before the meeting.
There were represented at our annual meeting, either in person or by proxy,
19,982,535 shares of our common stock out of a total number of 22,473,762 shares
of common stock issued and outstanding and entitled to vote at the meeting.
The following tables set forth information regarding the number of votes
cast for, withheld, abstentions and broker non-votes, with respect to each
matter presented at the meeting.
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(i) Election of Directors:
BROKER NON-
NOMINEES FOR WITHHELD ABSTENTIONS VOTES
----------------------- ---------- ------------- ------------- ------------
John E. Bagalay, Jr. 20,270,063 693,577 N/A N/A
Michael D. Becker 20,522,202 440,438 N/A N/A
Allen Bloom 20,435,287 527,353 N/A N/A
Stephen K. Carter 20,540,261 422,379 N/A N/A
James A. Grigsby 20,488,087 474,553 N/A N/A
Dennis H. Langer 20,430,265 532,375 N/A N/A
Robert F. Hendrickson 20,434,295 528,345 N/A N/A
Kevin G. Lokay 20,435,200 527,440 N/A N/A
Joseph A. Mollica 20,530,661 431,979 N/A N/A
(ii) Proposal to approve the Company's 2005 Employee Stock Purchase Plan:
BROKER NON-
FOR AGAINST ABSTENTIONS VOTES
------------- ------------- ------------------ ----------------
6,131,106 549,759 42,213 14,239,562
(iii) Proposal to approve the Company's 2006 Equity Compensation Plan:
BROKER NON-
FOR AGAINST ABSTENTIONS VOTES
------------- ------------- ------------------ ----------------
5,655,404 1,011,666 56,007 14,239,563
ITEM 5. OTHER INFORMATION.
On June 20, 2006, we announced that that Christopher P. Schnittker, Senior
Vice President and Chief Financial Officer of the Company, has resigned from the
Company effective June 20, 2006 to pursue other career opportunities.
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
10.1 Cytogen Corporation 2006 Equity Compensation Plan.
Filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
2006, filed with the Commission on May 10, 2006,
and incorporated herein by reference.
10.2 Membership Interest Purchase Agreement dated as of
April 20, 2006 between the Company and Progenics
Pharmaceutical, Inc. Filed as an exhibit to the
Company's Quarterly Report on Form
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10-Q for the quarter ended March 31, 2006, filed
with the Commission on May 10, 2006, and
incorporated herein by reference.
10.3 Amended and Restated PSMA/PSMP License Agreement
dated April 20, 2006 among the Company, Progenics
Pharmaceuticals, Inc. and PSMA Development Company
LLC.* Filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006, filed with the Commission on May
10, 2006, and incorporated herein by reference.
10.4 Exclusive Distribution Agreement dated as of April
21, 2006 between the Company and Savient
Pharmaceuticals, Inc.* Filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006, filed with the
Commission on May 10, 2006, and incorporated herein
by reference.
10.5 Manufacture and Supply Agreement dated April 21,
2006 between the Company, Savient Pharmaceuticals,
Inc. and Rosemont Pharmaceuticals Limited.* Filed
as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006,
filed with the Commission on May 10, 2006, and
incorporated herein by reference.
10.6 Product Purchase and Supply Agreement dated as of
June 20, 2006 between the Company and Oncology
Therapeutics Network, J.V. * Filed herewith.
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 Vice President, Finance, 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. Furnished herewith.
32.2 Certification of Vice President, Finance, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
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* The Company has submitted an application for confidential treatment with the
Securities and Exchange Commission with respect to certain provisions contained
in this exhibit. The copy filed as an exhibit omits the information subject to
the confidentiality application.
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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: August 9, 2006 By:/s/ Michael D. Becker
--------------------------------------------
Michael D. Becker
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2006 By:/s/ Thu A. Dang
--------------------------------------------
Thu A. Dang
Vice President, Finance
(Principal Financial and Accounting Officer)
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