UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
OR
 |
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 000-23143
PROGENICS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
13-3379479 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
777 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive offices)
(Zip Code)
(914) 789-2800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No
Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes No
As of May 6, 2005 there were 19,572,360 shares of common stock, par value $.0013 per share, of the registrant outstanding.
PROGENICS PHARMACEUTICALS, INC.
INDEX
2
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
PROGENICS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except for par value and share amounts)
(Unaudited)
March
31, 2005 |
December
31, 2004 |
|||||
| ASSETS: | ||||||
| Current assets: | ||||||
Cash
and cash equivalents
|
$ | 5,820 | $ | 5,227 | ||
Marketable
securities
|
16,831 | 24,994 | ||||
Accounts
receivable
|
728 | 1,112 | ||||
Amount
due from joint venture
|
744 | 189 | ||||
Other
current assets
|
1,170 | 1,810 | ||||
Total
current assets
|
25,293 | 33,332 | ||||
Marketable
securities |
981 | 986 | ||||
Fixed
assets, at cost, net of accumulated depreciation and amortization |
4,474 | 4,692 | ||||
Restricted
cash |
534 | 535 | ||||
Total
assets |
$ | 31,282 | $ | 39,545 | ||
LIABILITIES
AND STOCKHOLDERS’ EQUITY: |
||||||
| Current liabilities: | ||||||
Accounts
payable and accrued liabilities |
$ | 9,055 | $ | 7,260 | ||
Investment
deficiency in joint venture |
403 | 405 | ||||
Total
current liabilities |
9,458 | 7,665 | ||||
Deferred
lease liability |
40 | 42 | ||||
Total
liabilities |
9,498 | 7,707 | ||||
| Commitments and contingencies | ||||||
| Stockholders’ equity: | ||||||
Preferred
stock, $.001 par value, 20,000,000 shares authorized; none issued and outstanding |
||||||
Common
stock–$.0013 par value, 40,000,000 shares authorized; issued and outstanding
17,516,298 in 2005 and 17,280,635 in 2004 |
23 | 22 | ||||
Additional
paid-in capital |
156,372 | 153,469 | ||||
Unearned
compensation |
(2,015 | ) | (2,251 | ) | ||
Accumulated
deficit |
(132, 505 | ) | (119,311 | ) | ||
Accumulated
other comprehensive income (loss) |
(91 | ) | (91 | ) | ||
Total
stockholders’ equity |
21,784 | 31,838 | ||||
Total
liabilities and stockholders’ equity |
$ | 31,282 | $ | 39,545 | ||
The accompanying notes are an integral part of these condensed financial statements.
3
PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands,
except net loss per share)
(Unaudited)
| Three months ended March 31, |
||||||
2005 |
2004 |
|||||
| Revenues: | ||||||
| Contract research and development from joint venture | $ | 440 | $ | 557 | ||
| Research grants and contracts | 2, 145 | 1,186 | ||||
| Product sales | 4 | 5 | ||||
| Total revenues | 2,589 | 1,748 | ||||
| Expenses: | ||||||
| Research and development | 12,099 | 8,374 | ||||
| General and administrative | 3,143 | 2,815 | ||||
| Loss in joint venture | 205 | 675 | ||||
| Depreciation and amortization | 482 | 326 | ||||
| Total expenses | 15,929 | 12,190 | ||||
| Operating loss | (13,340 | ) | (10,442 | ) | ||
| Other income: | ||||||
| Interest income | 146 | 217 | ||||
| Net loss | $ | (13,194 | ) | $ | (10,225 | ) |
| Net loss per share – basic and diluted | $ | (0.76 | ) | $ | (0.61 | ) |
| Weighted-average shares – basic and diluted | 17,420 | 16,708 | ||||
The accompanying notes are an integral part of these condensed financial statements.
4
PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(in thousands)
(Unaudited)
| ACCUMULATED | ||||||||||||||||||
| ADDITIONAL | OTHER | TOTAL | ||||||||||||||||
| COMMON STOCK | PAID-IN | UNEARNED | ACCUMULATED | COMPREHENSIVE | STOCKHOLDERS' | COMPREHENSIVE | ||||||||||||
| Shares | Amount | CAPITAL | COMPENSATION | DEFICIT | LOSS | EQUITY | LOSS | |||||||||||
| Balance at December 31, 2004 |
17,281 | $22 | $153,469 | ($2,251 | ) | ($119,311 | ) | ($91 | ) | $31,838 | ($42,124 | ) | ||||||
| Issuance of Restricted Stock, net of forfeitures | (1 | ) | (43 | ) | 43 | |||||||||||||
| Amortization of unearned compensation | 193 | 193 | ||||||||||||||||
| Issuance of compensatory stock options | 140 | 140 | ||||||||||||||||
| Sale of Common Stock under employee stock purchase plans and exercise of stock options | 236 | 1 | 2,806 | 2,807 | ||||||||||||||
| Net (loss) | (13,194 | ) | (13,194 | ) | (13,194 | ) | ||||||||||||
| Change in unrealized gain on marketable securities | 0 | 0 | ||||||||||||||||
| Balance at March 31, 2005 |
17,516 | $23 | $156,372 | ($2,015 | ) | ($132,505 | ) | ($91 | ) | $21,784 | ($13,194 | ) | ||||||
The accompanying notes are an integral part of these condensed financial statements.
5
PROGENICS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three month ended March
31, |
||||||||||
2005 |
2004 |
|||||||||
| Cash flows from operating activities: | ||||||||||
| Net loss | $ | (13,194 | ) | $ | (10,225 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
| Depreciation and amortization | 482 | 326 | ||||||||
| Amortization of discounts, net of premiums, on marketable securities | 77 | 202 | ||||||||
| Amortization of unearned compensation | 193 | |||||||||
| Noncash expenses incurred in connection with issuance of common stock and stock options | 140 | 156 | ||||||||
| Loss in joint venture | 205 | 675 | ||||||||
| Adjustment to loss in joint venture | 293 | 134 | ||||||||
| Changes in assets and liabilities: | ||||||||||
| Decrease in accounts receivable | 384 | 515 | ||||||||
| Increase in amount due from joint venture | (555 | ) | (582 | ) | ||||||
| Decrease in other current assets and other assets | 640 | 356 | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | 1,795 | (83 | ) | |||||||
| Increase in investment in Joint Venture | (500 | ) | (950 | ) | ||||||
| Decrease in deferred lease liability | (2 | ) | (2 | ) | ||||||
| Net cash used in operating activities | (10,042 | ) | (9,478 | ) | ||||||
| Cash flows from investing activities: | ||||||||||
| Capital expenditures | (264 | ) | (542 | ) | ||||||
| Decrease (increase) in restricted cash | 1 | (1 | ) | |||||||
| Sales of marketable securities | 13,541 | 23,990 | ||||||||
| Purchase of marketable securities | (5,450 | ) | (19,448 | ) | ||||||
| Net cash provided by investing activities | 7,828 | 3,999 | ||||||||
| Cash flows from financing activities: | ||||||||||
| Proceeds from the exercise of stock options and sale of common stock under the Employee Stock Purchase Plan | 2,807 | 1,924 | ||||||||
| Net cash provided by financing activities | 2,807 | 1,924 | ||||||||
| Net increase (decrease) in cash and cash equivalents | 593 | (3,555 | ) | |||||||
| Cash and cash equivalents at beginning of period | 5,227 | 11,837 | ||||||||
| Cash and cash equivalents at end of period | $ | 5,820 | $ | 8,282 | ||||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||||
| Net fixed assets included in accounts payable and accrued expenses: | $ | 10 | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
6
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(amounts in thousands, except share and per
share amounts or unless otherwise noted)
1. Interim Financial Statements
Progenics Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company focusing on the development and commercialization of innovative therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. The Company’s principal programs are directed toward symptom management and supportive care and the treatment of Human Immunodeficiency Virus (“HIV”) infection and cancer. The Company was incorporated in Delaware on December 1, 1986. All of the Company’s operations are located in New York. The Company operates in a single segment.
With the exception of the years ended December 31, 1997 and 1998, the Company has had recurring losses and had, at March 31, 2005, an accumulated deficit of approximately $132.5 million. At March 31, 2005, the Company had cash, cash equivalents and marketable securities, including non-current portion, totaling $23.6 million. During the quarter then ended, the Company had a net loss of $13.2 million and used cash in operating activities of $10.0 million. Other than potential revenues from methylnaltrexone (“MNTX”), which could occur as early as late 2006, the Company does not anticipate generating significant recurring revenues, from product sales or otherwise, in the near term, and the Company expects its expenses to increase. Consequently, the Company will require significant additional external funding to continue its operations at the current levels.
On April 6, 2005, the Company received $29.4 million, net of underwriting discounts and offering expenses, through a public offering of 2.0 million shares of its common stock. The Company expects that the proceeds from this offering, together with cash, cash equivalents and marketable securities at March 31, 2005, will be sufficient to fund current operations through mid-2006. The Company would, however, expect to raise additional funds, or implement significant cost-saving measures, by the end of 2005. The Company is seeking to obtain additional funding from potential collaboration agreements with one or more pharmaceutical companies. The Company is currently in negotiations with potential collaborators for MNTX programs, and the Company is seeking to finalize a collaboration agreement in 2005. The Company expects that such a collaboration agreement would include up-front license fees or other payments as well as milestone payments. The Company also expects that a collaborator would assume some or all of the financial responsibility for further clinical development and commercialization of a majority of the MNTX programs. The Company may also enter into a collaboration agreement, or license or sale transaction, with respect to other of its product candidates. The Company may also seek to raise additional capital through the sale of its common stock or other securities and expects to fund aspects of its operations through government grants and contracts.
Adequate additional funding may not be available to the Company on acceptable terms or at all. The Company has the ability to make cost-saving changes in its operations in the event that the Company is unable to secure additional funding. Such changes would likely involve focusing the Company’s resources on its late-stage MNTX program, which the Company believes has the greatest likelihood of generating near-term cash flows, and reducing or eliminating funding to some or all of its other programs. The Company believes that these measures would significantly reduce its operating expenses. The extent to which these changes will be implemented, if at all, will depend upon a variety of factors, including cash in-flows from collaborations, financings or other sources, the extent to which negative cash flows from operations continue and the perceived likelihood of success, and expected costs to completion, of the Company’s various product development programs.
The interim Condensed Financial Statements of the Company included in this report have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, these financial statements reflect all adjustments, consisting primarily of normal recurring accruals, necessary for a fair statement of results for the periods presented. The results of operations for interim periods are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
7
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued)
(amounts in thousands, except share and per
share amounts or unless otherwise noted)
2. Change in Accounting Policy- Revenue Recognition
During the quarters ended March 31, 2005 and 2004, the Company recognized revenue from PSMA Development Company LLC (the “JV”) (a related party), the Company’s joint venture with Cytogen Corporation, for contract research and development (see Note 7); from government research grants and contracts from the National Institutes of Health (the “NIH”), which are used to subsidize certain of the Company’s research projects (“Projects”), and from the sale of research reagents.
Effective January 1, 2005, the Company elected to change the method it uses to recognize revenue under SAB 104 for payments received under research and development collaboration agreements that contain substantive at-risk milestone payments. There was no cumulative effect of this change in accounting principle because the Company does not currently have any of these contracts. Under the new method, non-refundable up-front license payments received from collaborators, not tied to achieving a specific performance milestone, are recognized as revenue ratably over the period during which the Company expects to perform services, because no separate earnings process has been completed. Payments for research and development activities are recognized as revenue as the related services are earned by the Company. Substantive at-risk milestone payments, which are based on the Company achieving a specific performance milestone, are recognized as revenue when the milestone is achieved and the related payment is due, provided there is no future service obligation on the part of the Company associated with that milestone (the “Substantive Milestone Method”). The change in accounting method was made because the Company believes that it will enhance the comparability of its financial results with those of its peer group companies in the biotechnology industry and because it is expected to better reflect the substance of the Company’s collaborative arrangements.
Previously, the Company had recognized non-refundable fees, including payments for services, up-front licensing fees and milestone payments, as revenue based on the percentage of efforts incurred to date, estimated total efforts to complete, and total expected contract revenue in accordance with EITF Issue No. 91-6, “Revenue Recognition of Long-Term Power Sales Contracts,” with revenue recognized limited to the amount of non-refundable fees received. Depending on the magnitude and timing of milestone payments, revenue may be recognized sooner under the Substantive Milestone Method than it would have been under the EITF 91-6 model.
The accounting change will not affect revenue from NIH grants and contracts, services performed on behalf of the JV, or from product sales.
NIH grant and contract revenue is recognized as efforts are expended and as related subsidized Project costs are incurred. The Company performs work under the NIH grants and contract on a best-efforts basis. The NIH reimburses the Company for costs associated with the preclinical research, development and early clinical testing of a prophylactic vaccine designed to prevent HIV from becoming established in uninfected individuals exposed to the virus, as requested by the NIH. Substantive at-risk milestone payments are uncommon in these arrangements, but would be recognized as revenue on the same basis as the Substantive Milestone Method.
Both the Company and Cytogen are required to fund the JV equally to support ongoing research and development efforts conducted by the Company on behalf of the JV. The Company recognizes payments for research and development as revenue as services are performed. For the quarters ended March 31, 2005 and 2004, the Company recognized approximately $0.4 million and $0.6 million, respectively, of contract research and development revenue for services performed on behalf of the JV.
For three months ended March 31, 2005 and 2004, the Company’s research grant and contract revenue and contract research and development revenue came exclusively from the NIH and the JV, respectively.
8
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(amounts in thousands, except share and per share
amounts or unless otherwise noted)
3. Stock-Based Employee Compensation
The accompanying statements of financial position and results of operations have been prepared in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Under APB No. 25, generally no compensation expense is recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, all terms associated with the award are fixed and the fair value of the Company’s stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. The Company recognizes compensation expense if the terms of an option grant are not fixed or the quoted market price of the Company’s common stock on the grant date is greater than the amount an employee must pay to acquire the stock. Compensation expense is also recognized for performance-based vesting of stock options upon achievement of defined milestones. Unearned compensation for restricted stock awards granted is recorded on the date of the grant based on the intrinsic value of such awards. Such unearned compensation is expensed using a straightline method as the related restrictions on such stock lapse.
The Company intends to adopt Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS No.123R”) on January 1, 2006, using the modified prospective application (see Note 10). In anticipation of the adoption of SFAS No.123R, the Company has revised certain assumptions used in the Black-Scholes option pricing model to value equity-based awards. The estimate of expected term has been increased from 5 years to 6.5 years for all awards granted on or after January 1, 2005, in accordance with the simplified method described in Staff Accounting Bulletin No. 107 for options with five-year graded vesting. The period used to calculate historical volatility of the Company’s common stock has also been revised to 6.5 years. The impact of these revisions is expected to increase the amount of compensation expense recognized by the Company as compared to the amount that would have been recognized using the previous estimates.
The following table summarizes the pro forma operating results and compensation costs for the Company’s incentive stock option and stock purchase plans, which have been determined in accordance with the fair value-based method of accounting for stock-based compensation as prescribed by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Since option grants and restricted stock awarded during 2005 and 2004 vest over several years and additional awards are expected to be issued in the future, the pro forma results shown below are not likely to be representative of the effects on future years of the application of the fair value-based method.
9
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued)
(amounts in thousands, except share and per
share amounts or unless otherwise noted)
| Three Months Ended March
31, |
|||||||
2005 |
2004 |
||||||
| Net loss, as reported | $ | (13,194 | ) | $ | (10,225 | ) | |
| Add: Stock-based employee compensation expense included in reported net loss | 205 | ||||||
Deduct:
Total stock-based employee compensation expense determined
under fair value based method for all awards |
(1,813 | ) | (2,431 | ) | |||
| Pro forma net loss | $ | (14,802 | ) | $ | (12,656 | ) | |
| Net loss per share amounts, basic and diluted: | |||||||
As
reported |
$ | (0.76 | ) | $ | (0.61 | ) | |
Pro
forma |
$ | (0.85 | ) | $ | (0.76 | ) | |
For the purpose of the above pro forma calculations, the fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used in computing the fair value of options granted: expected volatility of 92% in 2005 and 2004 (47% for the employee stock purchase plan), expected lives of 6.5 years in 2005 and 5 years in 2004 (six months for the employee stock purchase plan), zero dividend yield, and weighted-average risk-free interest rates of 3.29% in 2005 and 3.10% in 2004.
The fair value of options and warrants granted to non-employees for services, determined using the Black-Scholes option pricing model with the foregoing assumptions, is included in the financial statements and expensed as they vest. Net loss and pro forma net loss include $128 and $156 of non-employee compensation expense in the three month periods ended March 31, 2005 and 2004, respectively.
In March 2005, upon achievement of a defined performance milestone, an officer vested 5,520 stock options for which the Company recognized approximately $12 of non-cash compensation expense in accordance with APB No. 25.
4. Revised Classification of Certain Securities
At December 31, 2004, the Company had reclassified its auction rate securities as marketable securities in current assets. Prior to that reclassification, such investments had been classified as cash and cash equivalents. Accordingly, the Company has reflected these securities as marketable securities in the current assets section of its balance sheets as of March 31, 2005, December 31, 2004 and 2003. The Company has also made corresponding adjustments to its statements of cash flows for the quarters ended March 31, 2005 and 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents since the effect of such reclassifications would have been reflected in the Company’s March 31, 2004 balance sheet. This reclassification does not affect previously reported cash flows from operations or from financing activities in the Company’s previously reported statements of cash flows or its previously reported statements of operations for any period.
At December 31, 2003 and March 31, 2004, $35.9 and 25.6 million, respectively, of these current investments had originally been classified as cash equivalents on the Company’s balance sheet. These investments have been reclassified to short-term investments from cash and cash equivalents as previously reported.
For the quarter ended March 31, 2004, $10.3 million of net cash provided by investing activities resulted from the reclassification of these short-term auction rate securities.
10
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued)
(amounts in thousands, except share and per
share amounts or unless otherwise noted)
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of March 31, 2005 and December 31, 2004 consist of the following:
| March 31, | December 31, | |||||
| 2005 | 2004 | |||||
| Accounts payable | $ | 622 | $ | 1,438 | ||
| Accrued consulting and clinical trial costs | 6,541 | 3,832 | ||||
| Accrued payroll and related costs | 428 | 734 | ||||
| Legal and professional fees payable | 1,168 | 1,256 | ||||
| Other | 296 | |||||
| $ | 9,055 | $ | 7,260 | |||
6. Net Loss Per Share
The Company’s basic net loss per share amounts have been computed by dividing net loss by the weighted average number of common shares outstanding during the respective periods. For the three months ended March 31, 2005 and 2004, the Company reported a net loss and, therefore, no common stock equivalents were included in the computation of diluted net loss per share since such inclusion would have been antidilutive. The calculations of net loss per share, basic and diluted, are as follows:
| Net Loss | Shares | Per Share | ||||||
| (Numerator) | (Denominator) | Amount | ||||||
| Three months ended March 31, 2005 | ||||||||
| Basic and Diluted | $ | (13,194 | ) | 17,420 | $ | (0.76 | ) | |
| Three months ended March 31, 2004 | ||||||||
| Basic and Diluted | $ | (10,225 | ) | 16,708 | $ | (0.61 | ) | |
Common stock equivalents, which have been excluded from the diluted per share amounts because their effect would have been antidilutive, consist of the following:
| Three Months Ended March 31, | ||||||||||||
| 2005 | 2004 | |||||||||||
| Wtd. Avg. Number |
Wtd. Avg. Exercise Price |
Wtd. Avg. Number |
Wtd. Avg. Exercise Price |
|||||||||
| Stock options | 4,806 | $ |
10.08 | 5,150 | $ | 10.19 |
||||||
| Restricted stock | 176 | |||||||||||
Total
|
4,982 | 5,150 | ||||||||||
11
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued)
(amounts in thousands, except share and per
share amounts or unless otherwise noted)
7. PSMA Development Company LLC
PSMA Development Company LLC (the “JV”) was formed on June 15, 1999 as a joint venture between the Company and Cytogen Corporation (each a “Member” and collectively, the “Members”) for the purposes of conducting research, development, manufacturing and marketing of products related to prostate-specific membrane antigen (“PSMA”). Each Member has equal ownership and equal representation on the JV’s management committee and equal voting rights and rights to profits and losses of the JV. In connection with the formation of the JV, the Members entered into a series of agreements, including an LLC Agreement and a Licensing Agreement (collectively, the “Agreements”), which generally define the rights and obligations of each Member, including the obligations of the Members with respect to capital contributions and funding of research and development of the JV for each coming year. The Agreements generally terminate upon the last to expire of the patents granted by the Members to the JV or upon breach by either party, which is not cured within 60 days of written notice or upon dissolution of the JV in accordance with the LLC Agreement.
The Company provides research and development services to the JV and is compensated for its services based on agreed upon terms. Until January 2004, such services were provided to the JV pursuant to a Services Agreement and extensions thereof. The Services Agreement, as extended, expired effective January 31, 2004, and the Members have not yet agreed upon the terms of a replacement services agreement. The Services Agreement provided that all inventions made by the Company in connection with its research and development services for the JV are to be assigned to the JV for its use and benefit.
The Company was required to fund the initial cost of research up to $3.0 million. As of December 31, 2001, the Company had surpassed the $3.0 million in funding for research costs. Each Member thereafter made equal capital contributions to fund research costs. Such contributions, in total, were $1.0 million, and $1.9 million in the three month periods ended March 31, 2005 and 2004, respectively. Each Member made a capital contribution to the JV of $0.5 million in January 2005, which was used to fund obligations outstanding regarding work performed under the approved 2004 work plan.
The level of commitment by the Members to fund the JV is based on an annual budget and work plan that is developed by the Members. The budget is intended to provide for sufficient funds to conduct the research and development projects specified in the work plan for the then-current year. At March 31, 2005, the JV had no approved budget or work plan for the year ending December 31, 2005 because the Company and Cytogen had not yet reached agreement with respect to a number of matters relating to the JV. However, the Members have approved the JV’s expenses for the quarter ended March 31, 2005 and have both the intent and ability to fund those expenses. The Members are in discussions to finalize a work plan and budget for the remainder of the year ending December 31, 2005. However, they may not succeed in doing so.
Amounts received by the Company from the JV as payment for research and development services and reimbursement of related costs in excess of the initial $3.0 million provided by the Company (see above) are recognized as contract research and development revenue. For the three months ended March 31, 2005 and 2004, such amounts totaled approximately $440 and $557, respectively. According to the Agreements, the Company may directly pursue and obtain government grants directed to the conduct of research utilizing PSMA related technologies. In consideration of the Company’s initial incremental capital contribution of $3.0 million of joint venture research expenditures, the Company may retain $3.0 million of such government grant funding. To the extent that the Company retains grant revenue in respect of work for which it has also been compensated by the joint venture (“JV Compensation Work”), the remainder of the $3.0 million to be retained by the Company is reduced and the Company records an adjustment in its financial statements to reduce both joint venture losses and contract revenue from the joint venture. Such adjustments were $293 and $134 for the three months ended March 31, 2005 and 2004, respectively, and $2.0 million cumulatively through March 31, 2005. Subsequent to retention in full by the Company of $3.0 million in grant funding related to JV Compensation Work, grant funding from PSMA programs will reduce the funding obligations of the Members equally. The Company is the recipient and obligor under the PSMA-related government grants and activity under those grants is reflected in the Company’s financial statements. In the event that the Members do not reach agreement on a work plan and budget for 2005, the ability of the JV to benefit from those grants, and the Company’s revenue from those grants, may be adversely affected.
Contract research and development revenue recognized by the Company related to services provided to the JV may vary in the future due to potential future funding limitations on the part of the Members, disagreements between the Members regarding JV funding or operations, the extent to which the JV requests Progenics to perform research and development under the terms of a new Services Agreement or other form of agreement between the Members with respect to such services.
12
PROGENICS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued)
(amounts in thousands, except share and
per share amounts or unless otherwise noted)
The Company accounts for its investment in the JV in accordance with