ITEM 1. BUSINESS.
INTRODUCTION
We are an emerging, development-stage biopharmaceutical company focused on developing a novel contrast agent with potential applications (1) as a blood pool agent to diagnose diseased tissue in the cardiovascular system and other organs and (2) to diagnose cancer metastasizing into the lymphatic system. We also have in development certain minimally invasive products for the treatment of psoriasis and other topical diseases and cancer and certain laser device technology.
During the past eighteen months, we have taken several actions to refocus our efforts on the development of products with significant medical and commercial potential. These actions included:
o revamping our clinical development group,
o advancing PH-10, our photodynamic therapy drug, into human clinical studies as a treatment for psoriasis and actinic keratosis, and
o together with our joint venture partner, Elan Corporation, converting the manufacture of our imaging product to a scalable commercial process meeting manufacturing requirements of the FDA and thus enabling the product, N1177, with FDA approval, to advance into Phase 2 clinical studies in lymphography.
As part of the process of reconstituting Photogen to be a company focused on product development, during 2001 we conducted and, in December, announced the results of research on our contrast agent indicating its potential as a potential significant new cardiovascular imaging agent. The new cardiovascular imaging applications of this product are referred to as PH-50, are subject to patent applications we have filed and have not been licensed to any other party. According to Frost & Sullivan consulting firm, the worldwide market for contrast agents is estimated to be $3.4 billion, most of which are utilized with computed tomography (CT) machines in various applications and approximately half of which is in
the U.S. PH-50, if approved by the FDA, has the potential to take a share of this existing market and, in addition, to be utilized in several additional markets. The medical need and economic potential of this product is of such significance that we determined to focus substantially all of our development efforts in this area and to license, partner or otherwise co-develop our PH-10 and other therapeutic products to or with other companies for further development and commercialization. One possible transaction may involve transferring this therapeutic technology to certain of our founders in exchange for all of their common stock. See "Recent Developments" below.
Our lead compound, which we call PH-50 for cardiovascular imaging applications and N1177 for lymphography, is a contrast agent that is not penetrated by x-rays (called "radiopaque"). When injected systemically into the circulatory system (i.e., the blood stream), it remains within the system, mixing with the blood and flowing throughout the system. As the compound is radiopaque, a physician using a device such as computed tomography (CT) machine along with the contrast agent can create an image of the desired area. When administered subcutaneously (i.e., beneath the skin) in the vicinity of a tumor, the compound can be used to locate lymph nodes and diagnose the presence or absence of cancer metastases.
Our product development portfolio also includes compounds, notably PH-10, that react with energy to destroy diseased cells, remove tissue or identify and diagnose disease. Compounds that react with light energy are called "photoactive agents," those that react with ionizing radiation (which we generically refer to as X-rays) are called "radiosensitizers." We have also discovered and are conducting research on new methods and apparatus for using energy from lasers, X-rays or other sources to activate energy-sensitive compounds within tissue to produce a range of beneficial therapeutic and diagnostic outcomes.
We are pursuing development of products in three areas:
o IMAGING (our core area) - We are the exclusive licensee to a group of proprietary materials, the lead compound of which is a contrast agent named N1177 (for the field of lymphography) or PH-50 (when referring to cardiovascular and all other indications). The product designations PH-50 and N1177 refer to the same chemical entity. We established the two names to distinguish commercialization rights between cardiovascular imaging (and all other indications) to which we retain rights, and the field of lymphography, which we licensed to our joint venture (Sentigen, Ltd.) with affiliates of Elan Corporation. These materials are very small particles designed to travel through the circulatory or lymphatic system (depending on how they are administered) and are called "nanoparticulates." There are numerous potential applications for a contrast agent used in imaging parts or all of the cardiovascular system as well as other organs. For example, evaluating the heart and its arteries by using devices such as CT machines along with a contrast agent to create an image of the structure is a procedure called angiography. Studies of the blood flow through certain organs, such as the liver or kidney, are called perfusion studies. Evaluating lymph nodes (to precisely locate and diagnose the spread of cancer (micro-metastases)) and the lymph system by using devices that create an image of the lymph nodes is called lymphography.
o PHOTODYNAMIC THERAPY - We are developing compounds and technologies to treat tumors confined to specific areas within the body (solid tumors) and to treat diseased tissue on the surface of the body. One of these compounds, named PH-10, is both a photoactive agent and radiosensitizer that accumulates in diseased tissue and absorbs light energy and X-rays. When energy is applied, PH-10 becomes activated, thereby destroying the tissue.
o MULTI-PHOTON TECHNOLOGY - Our proprietary laser technology uses ultrashort, pulsed bursts of long wavelength light to activate photoactive agents and other compounds that react with light to destroy diseased tissue. This technology can also be used to create images of tissue for diagnostic purposes.
Our proposed products have the potential to replace numerous surgical and similar invasive treatments, reduce side effects (such as those resulting from chemotherapy), improve treatment efficacy, enhance a physician's ability to diagnosis the spread of cancer in the lymphatic system and lower the overall cost of care for oncology and other applications.
We have no approved therapeutic or diagnostic products or operating revenues at this time. Our business model for developing, producing and selling our proposed products accounts for the high capital needs and long development times inherent in new drug development and the existing resources available for both manufacturing and product distribution. During each of the last three fiscal years, we spent approximately $2,889,215, $4,308,313 and $3,347,778, respectively, on research and development activities. Our goal is to leverage our cash, technology and human resources in a manner that accelerates product development and sales revenues, and minimizes equity dilution.
We have 13 employees. A majority of our employees hold Ph.D.'s or other advanced degrees. Our senior executive and clinical development team is based at our corporate headquarters in New Hope, Pennsylvania, a suburb of Philadelphia. We have personnel with expertise in clinical development, clinical trial design and regulatory approval processes. We also work closely with consultants experienced in drug development and regulatory requirements. Our scientific research team is located in Knoxville, Tennessee. This team of scientists includes specialists in molecular biology, non-linear laser physics, interventional radiology, spectroscopy, bioengineering and photochemistry.
Photogen Technologies, Inc. is a Nevada corporation that is the successor by merger to Bemax Corporation, a California corporation incorporated in 1984 to develop and market dot matrix computer printer products. In March 1995, Bemax completed a merger with its wholly owned Nevada subsidiary named M T Financial Group, Inc. (organized in 1994). M T Financial was the surviving corporation and Bemax Corporation thereby changed its state of incorporation from California to Nevada. On May 16, 1997, M T Financial, through its wholly-owned subsidiary, effected a reverse merger with Photogen, Inc. (successor to Photogen, L.L.C.) and changed its name to Photogen Technologies, Inc. Photogen, L.L.C. was organized September 10, 1996 to develop proprietary laser-based technologies related to photodynamic therapy. Photogen, Inc. is now a wholly owned subsidiary of Photogen Technologies, Inc.
RECENT DEVELOPMENTS
The conduct of development programs for therapeutics and diagnostic imaging products are significantly different and require substantial amounts of capital and diverse management resources. We have been in discussions with Drs. Dees, Fisher, Scott and Wachter and Mr. Smolik, founders of Photogen, L.L.C., about the possibility of transferring to an entity they control certain of our therapeutic technologies (primarily PH-10 and laser technologies) in exchange for all Photogen stock beneficially owned by them (approximately 20,548,435 shares of common stock). We have not progressed beyond preliminary discussions concerning the possible transaction at this time. The consummation of such a transaction would depend upon the resolution of numerous contingencies, including negotiating a structure for the transaction, resolution of any potential tax and accounting issues, execution of definitive agreements, receipt of appropriate fairness and other opinions, and board and stockholder approval. There can be no assurance that such a transaction can ultimately be consummated.
On March 25, 2002, we entered into an agreement with AmeriCal Securities, Inc. ("AmeriCal"). Under the agreement, AmeriCal will act as our exclusive agent to assist us in the acceleration of the development of PH-50 diagnostics and therapeutics.
On April 8, 2002, we entered into a credit facility that will provide us with a $2,500,000 revolving line of credit, bearing interest at 4.65%, for a period of five years. The loan is secured by a lien on all of our assets. The lender is an entity which our director, Robert J. Weinstein, M.D., may be deemed to control.
CORE TECHNOLOGY
IMAGING
In 1999, we entered into an exclusive license for a group of proprietary materials, the lead compound of which was being developed for the field of lymphography. We call this product N1177 (for use in the field of lymphography) or PH-50 (when referring to all other indications). The product designations PH-50 and N1177 refer to the same chemical entity. Our lead compound has completed Phase 1 clinical trials as a contrast agent administered beneath the skin for lymphography. In 2002, we expect to commence Phase 2 clinical studies in lymphography and Phase 1/2 studies for certain cardiovascular imaging indications. These materials are covered by patents and patent applications filed in the U.S. and elsewhere. As part of the initial acquisition of this product we also acquired patented methods for performing minimally invasive lymphography using X-ray, CT or magnetic resonance imaging ("MRI").
CARDIAC AND VASCULAR IMAGING
Ischemic heart disease is the leading cause of death in the U.S., accounting for one of every five deaths according to 1998 statistics of the National Heart, Lung, and Blood Institute. The American Heart Association (www.americanheart.org) estimates that approximately 1.1 million Americans suffer a myocardial infarction (MI) annually, and over 40 percent will not survive the event. Atherosclerotic coronary artery disease (CAD) is the underlying cause of most ischemic cardiac events and can result in myocardial infarction, congestive heart failure, cardiac arrhythmias, and sudden cardiac death. Clinically significant CAD is uncommon in men under 40 and pre-menopausal women, but risk increases with advancing age and in the presence of risk factors such as smoking, hypertension, diabetes, high cholesterol, and family history of heart disease. Although mortality from heart disease has declined steadily over the past three decades in the U.S., the total burden of coronary disease is predicted to increase substantially over the next 30 years due to the
increasing size of the elderly population. According to the American Heart Association, the cost of medical care and lost economic productivity due to heart disease in the U.S. was estimated to exceed $214 billion.
Angina is the most common presenting symptom of myocardial ischemia and underlying CAD, but in many persons the first evidence of CAD may be myocardial infarction or sudden death. It has been estimated that 1-2 million middle-aged men have asymptomatic but physiologically significant coronary disease, also referred to as silent myocardial ischemia.
GENERAL VASCULAR IMAGING USE FOR PH-50
Imaging of vascular beds in the coronary arteries and other vascular areas is important for the diagnosis of localized and generalized diseases. To that end, contrast media have been used for a long time to enhance the imaging of these areas in the human body. Current imaging techniques for the visualization of vascular beds are coronary angiography, and angiography in other vascular areas (kidney, brain, liver etc.).
In animal experiments, our investigators have shown that PH-50 can be used as an effective imaging agent to visualize cardiac structures after a single, low-dose intravenous injection/infusion. The methodology is currently being refined but holds great promise over existing contrast media. We are working with experienced researchers at Stanford University and Memorial Sloan Kettering Cancer Center to refine the use of the product in this indication and prepare for human clinical evaluation in the near future.
CARDIOVASCULAR IMAGING DEVELOPMENT PROGRAM
We have recently concluded pre-clinical studies of PH-50 for potentially significant new applications in cardiovascular imaging and have filed for additional patent protection of the use of the compound for vascular and organ imaging applications. We plan to develop PH-50 as a blood pool contrast agent for several indications. Based on considerable existing preclinical studies and human clinical experience, we believe that we can commence further clinical studies in the near future. Our initial development strategy would be to evaluate PH-50 in Phase 1/2 studies for cardiovascular and blood pool imaging using advanced computed tomography and PH-50 as a contrast agent. As part of the original acquisition and our further research, we have a substantial body of safety information in both animals and humans. Pre-clinical toxicology and pharmacology data for PH-50/N1177 includes testing in multiple animal models including studies in several models utilizing intravenous administration, the route of administration to be utilized in the cardiovascular indications. In addition, the product has been tested for lymphography, through subcutaneous administration in 122 patients.
We have an open investigational new drug application (IND) with the FDA for the product in the lymphography indication. We intend to file an amendment to this application for the intravenous administration of PH-50 for use as a blood pool agent. Scaled-up manufacturing of PH-50 is currently being performed for us by Elan through its Nanosystems group. Over the past two years, considerable work has been undertaken by Nanosystems to manufacture PH-50 in compliance with the FDA's cGMP ("current Good Manufacturing Practices") regulations and in a scalable process sufficient to support commercial quantities. Material is currently being
manufactured in cGMP conditions in anticipation of conducting human clinical studies for certain cardiovascular imaging indications.
LYMPHOGRAPHY
Lymphography is a procedure used to determine if a patient's cancer has spread to the lymph nodes. The presence or absence of cancer in the sentinel lymph node (the first lymph node to receive lymphatic drainage from a tumor) is an important indication of whether the disease has spread from the original tumor and the seriousness of the disease. It also provides oncologists with critical information to help determine the stage of the disease and the appropriate course of treatment. Current lymphography procedures are costly due to the time it takes to locate the sentinel node and have the pathologist analyze a sample. If the node contains cancer, then surgical removal of all the regional lymph nodes may be performed.
It is generally accepted that breast cancer and melanoma are spread by way of the lymph system. Similarly, cancers of the lung, prostate and many other cancers spread through the local lymph system. Clinical studies have demonstrated that patients with cervical cancer have an increased survival rate if lymph nodes with cancerous tissue are removed. Effective and successful treatment of these cancers is aided by an early assessment of the presence or absence of disease (micro-metastases) in the lymph nodes.
Patients believed to have cancer are currently subjected to injections of blue dye or radioactive particles that track the materials to the general area of the sentinel node. In some of these diseases, the location of the sentinel node is difficult to access. In the case of breast cancer, oncologists may remove 15-30 underarm lymph nodes for biopsy. Additional treatment will be required if cancer is discovered. Approximately 80% of the patients diagnosed with breast cancer or melanoma who undergo these painful procedures are found to have no sign of disease in their nodes.
We are developing an advanced lymphography technology through a joint venture with affiliates of Elan Corporation, plc. Our goal is to demonstrate that the use of N1177 will enable physicians to precisely locate sentinel nodes following injection of the material in the vicinity of the tumor and then taking an image (picture) using a computed tomography device. The particular properties of N1177 enable it to travel through the lymph system to the lymph nodes most likely to be affected if the cancer has spread. As N1177 is radiopaque, it is seen on a CT scan as white spots. The difference in contrast created by the presence or absence of the imaging agent serves as the basis to determine the presence or absence of disease. We expect that N1177 would remain in the node to allow for an effective imaging procedure with a good safety profile and acceptable clearance times. In most cases, we expect that the image may provide enough information to determine the position of nodes and the presence of cancer. A further benefit of these minimally invasive procedures is that they could be used multiple times and therefore provide a means to monitor the results of cancer treatment and detect recurrence.
Phase 1 clinical studies of N1177 have been completed. In these studies, the safety of N1177 was evaluated in a total of 122 patients. N1177 was administered subcutaneously, imaging the lymph nodes was performed, and safety assessment of the patients was evaluated. No adverse events were recorded.
We plan to commence Phase 2 clinical studies for detection of cancer metastasis in lymph nodes in patients with cervical cancer in 2002. In this patient population, studies document an increase in survival when lymph nodes containing cancer are removed. Tumor identification by CT imaging will be correlated to the results of biopsy results from patients undergoing surgery to demonstrate effectiveness in locating nodes and identifying those with cancer in them.
Elan is manufacturing N1177. The nanoparticulate material is currently being made in compliance with FDA good manufacturing practices regulations for use in additional clinical studies.
We also have technology for the use of a laser system, coupled with fluorescent diagnostic agents which target and concentrate in diseased tissue and signal processing technology, to cause diseased tissue to emit light that can be converted into images. This could supplement current X-ray, mammography and MRI techniques to detect suspicious masses. We have one issued patent and other pending patent applications regarding this technology.
OTHER PRODUCTS
PHOTODYNAMIC THERAPY
We have identified a promising compound, PH-10, that offers a wide variety of potential uses. We discovered that PH-10 selectively accumulates in diseased tissue (such as tumors) for many days, whereas PH-10 in normal tissue clears rapidly from the body. When activated with low-dosage X-ray, or with green light, PH-10 reacts to effectively destroy those diseased cells. Our preclinical studies to date lead us to believe that PH-10, when combined with particular light or radiation sources, has the potential to treat a variety of cancers and certain dermatological conditions. PH-10 has a long history of safe use as an FDA approved compound for other medical applications. This prior human experience with PH-10 gives us confidence that the risk of the drug being unsafe is small.
When PH-10 is used with ionizing radiation (such as X-rays or gamma rays) it enhances the killing effect of the radiation, allowing the destruction of cancerous tissue deep within the body (using markedly lower levels of radiation energy than required in conventional therapy). Treatment at these reduced radiation dosages means that the results of the interaction between energy and PH-10, which in this case is cell destruction, will tend to be limited to the diseased tissue with less damage to the healthy tissue. This feature alone holds the potential to significantly improve current methods and apparatus for radiation therapy.
PH-10, when used with green light, may be effective in the treatment of topical diseases on the skin. Green light is strongly absorbed by skin and thus only penetrates the body to a depth of 3-5 millimeters. This feature is especially important and useful for surface applications where serious damage can result from deeper treatment. We are exploring this capability for treatment of psoriasis and other surface conditions such as actinic keratosis. We have patents and patent applications for the use of PH-10 in combination with visible light and with ionizing radiation to treat and diagnose diseased tissue.
PSORIASIS - Our initial focus in dermatology is to treat psoriasis. Psoriasis is a common chronic disorder of the skin characterized by dry scaling patches, for which current treatments are
few and those that are available have potentially serious side effects. According to the National Psoriasis Foundation, of the approximately seven million people in the United States who suffer from psoriasis (there are estimated to be between 150,000 and 260,000 new psoriasis cases diagnosed each year in the United States), more than 65% are treated with topical steroids that can have unpleasant side effects. None of the other treatments for moderate cases of psoriasis have proven completely effective, and there is no known cure for the disease at this time. The 25-30% of patients who suffer from more severe cases are candidates for PUVA (Psoralen with ultraviolet A light) and more intensive drug therapies. While PUVA treatment is one of the more effective treatments, it increases a patient's risk of skin cancer.
PH-10 clears rapidly from the body and is photobleached during the treatment process. All other PDT agents known to us have longer residence times (i.e., half life) in the body and are present in all tissues resulting in sensitivities to sunlight. Furthermore, PH-10 applied to normal tissue and activated with light does not damage the normal tissue. The result of the rapid clearance, selective application, and bleaching results in patients not having the light sensitivities that are experienced with other agents.
We have sponsored a human pilot study in Denmark to study the safety of activating PH-10 with green light (delivered by a laser) to treat psoriasis. In this study, PH-10 was applied topically to the psoriatic plaque and illuminated with green light. The results of this study demonstrated up to a 58% reduction in psoriatic plaque thickness following a single treatment session, a result that was maintained for the course of the study. Plaque reduction is a precursor to other clinical improvements such as lessening of redness and reduction of scaling.
In April 2001, we commenced a U.S. Phase 1 clinical study of PH-10 as a treatment for psoriasis. The study is evaluating the safety of three different doses of PH-10 in separate patient groups. Patients in the study each received a single dose of PH-10 followed by administration of green light on psoriatic plaques. The patient's visit to the doctor's office was generally less than one hour. While more than one treatment session will likely be required to achieve optimal remission, significantly fewer visits are expected for the initial treatment regimen as well as the ongoing maintenance visits than is the case for competing treatment regimens. Patient accrual was completed in the fourth quarter of 2001, and results of the study are being compiled.
ACTINIC KERATOSIS - Actinic keratosis (also called solar keratosis or senile keratosis) is the most common pre-cancerous skin lesion among fair-skinned people. It is a skin disease of rough, scaly patches caused by excessive exposure to the sun. It afflicts over five million people in the U.S. It is estimated that in 10 to 20 percent of patients this disease will progress to squamous cell cancer, the second leading cause of death due to skin cancer.
Early stages of this disease have proven responsive to photodynamic therapy. We are researching the use of PH-10 with green light activation to treat early and advanced stages of the disease. We commenced a Phase 1 clinical study of this therapy in late summer 2001 and have completed patient accrual. The study protocol is similar to that of the psoriasis study. The safety data and efficacy data generated so far, while preliminary and anecdotal, are encouraging.
RESEARCH PIPELINE
In addition to the programs described above we are conducting research for the following potential applications of our technology:
CANCER RADIATION THERAPY - When PH-10 is used with ionizing radiation (such as X-rays or gamma rays) it enhances the killing effect of the radiation, allowing the destruction of cancerous tissue deep within the body (using markedly lower levels of radiation energy than required in conventional therapy). Treatment at these reduced radiation dosages means that the results of the interaction between energy and PH-10, which in this case is cell destruction, will tend to be limited to the diseased tissue with less damage to the healthy tissue. This feature alone holds the potential to significantly improve current methods and apparatus for radiation therapy.
MULTI-PHOTON EXCITATION - We have developed a method of activating photosensitive drugs and other compounds using an ultra fast, pulsed laser based on our proprietary simultaneous two-photon and multi-photon excitation technologies. (We refer to simultaneous two-photon and multi-photon excitation collectively as "multi-photon excitation" to distinguish them from traditional single-photon activation as used to activate PH-10.) Our multi-photon excitation technologies are covered by four issued U.S. patents (three for therapy and another for diagnostics) and are subject to additional pending patent applications in the U.S. and other foreign jurisdictions. This technology provides us with the following capabilities:
o Spatial control of an activation area to more selectively deliver a therapeutic effect: Multi-photon activation limits the field of activation to the focus of the laser beam. This focus can be made exceedingly small, providing fine control over where the photodynamic effect is produced.
o Use of many photoactive agents: Our multi-photon technology uses a broader range of energy levels that we may use to activate photoactive agents that otherwise could not be used.
o Deeper penetration: Multi-photon activation uses longer wavelength light that delivers activating energy more deeply within tissue.
o Delivery of large amounts of energy while minimizing damaging effects to healthy tissue.
SQUAMOUS AND BASAL CELL CARCINOMA - According to the American Cancer Society, more than one million new cases of squamous and basal cell carcinoma--common surface cancers that appear on the skin, lips, inside the mouth, throat or esophagus--are expected to be diagnosed in 2001 and their occurrence is increasing in the fair-skinned population of the United States, Europe and Australia. We are currently researching use of PH-10 combined with green light activation for potential treatment of these cancers.
BARRETT'S ESOPHAGUS - Barrett's esophagus is a pre-cancerous condition in which the lining of the esophagus changes tissue type as a result of long-standing acid reflux. It has been estimated that there is a 10% chance that the Barrett's tissue will advance to esophageal cancer if not properly treated. We are researching whether PH-10, when topically applied to esophageal tissue and treated with the proper light source, could selectively target and treat diseased tissue. The research may lead to a new treatment that is less expensive and safer than current methods of treating Barrett's esophagus.
HAIR REMOVAL - We are investigating the application of our multi-photon excitation technology to remove blond and red hair, using a melanin precursor present in the hair follicle as the photoactive agent to destroy the hair follicle. Our approach, if successful, may yield an improvement over current hair removal technologies by removing light colored hair and by removing hair without generating heat or requiring cooling for the skin. It has been estimated that there were approximately 1.5 million hair removal procedures in 2000 and projections of three million procedures in 2003.
TWO-PHOTON MICROSCOPY - We have evaluated a portion of this technology by incorporating our designs into a conventional two-photon microscope. Our technology for signal processing can potentially improve contrast of the diagnostic signal over background noise, which should improve image clarity and diagnostic sensitivity.
DIAGNOSTIC IMAGING - We also have technology for the use of a laser system, coupled with fluorescent diagnostic agents which target and concentrate in diseased tissue and signal processing technology, to cause diseased tissue to emit light that can be converted into images. This could supplement current X-ray, mammography and MRI techniques to detect suspicious masses. We have one issued patent and other pending patent applications regarding this technology.
DEVELOPMENT AND COMMERCIALIZATION STRATEGY
Our overall strategy is to leverage our proprietary technologies through contractual collaborations with third parties. In particular, we plan to:
o Address product development by demonstrating basic technical feasibility in test tube and animal models internally and then, using third party laboratories and/or clinicians experienced in the specific indication, conduct highly focused, formal preclinical trials. We intend to use the expertise of the third party clinicians to collect data necessary to obtain IND's (an Investigational New Drug Application with the FDA) or IDE's (an Investigational Device Exemption from the FDA) required to begin human trials.
o Utilize our clinical development team and contractual collaborative arrangements with third parties to access the skills and resources required to design, test, obtain regulatory approval, and manufacture our potential products.
o Market potential products through strategic or distribution collaborations as determined by the specific characteristics of each product application. If appropriate, we would consider developing an internal U.S. sales and marketing division to market certain products directly.
o Consider opportunities in related fields for technological licensing when those opportunities could lead to faster development of products and FDA approval. This includes obtaining technology through licenses from others and licensing our own technology to third parties.
We do not expect to generate material revenues from operations in the near future. If we develop a saleable product, we expect to generate revenues from product sales or licensing fees. Currently, we have not developed any therapeutic or diagnostic products that are available to manufacture or sell to the public nor do we have a pricing structure for any potential products.
Our ability to develop and manufacture any product successfully is subject to numerous contingencies and uncertainties, including certain Risk Factors described below. Our objectives, business strategy and product development efforts are subject to change based on numerous factors, including the results of preclinical and clinical testing, the availability of suitable collaborative relationships, the nature of competition, regulatory requirements and the availability of capital. The description of our business and business strategy contains forward-looking statements that should be read in conjunction with the Risk Factors described below. Also, we may transfer our therapeutic technologies, as described in "Recent Developments" above.
Some of our research agreements provide generally that inventions developed during the course of research by the institution's investigators, alone or jointly with us, will be owned by the institution and subject to a right of first refusal that we can exercise for a stated period allowing us to enter into an exclusive license for that invention. Our agreements with Tufts University School of Veterinary Medicine, Massachusetts Eye and Ear Infirmary, Massachusetts General Hospital's Center for Imaging and Pharmaceutical Research, the University of Arizona and other research institutions each contain provisions of this type. In some cases the key terms of the license are stated in the research agreement, with other terms to be negotiated at the time we exercise the right of first refusal (if we choose to exercise it).
SENTIGEN LTD. - JOINT VENTURE WITH ELAN CORPORATION
In October 1999 we entered into a joint venture with affiliates of Elan Corporation, plc (collectively, "Elan"), a multi-national, billion dollar pharmaceutical company. The joint venture company, Sentigen Ltd., is developing and commercializing N1177, a nanoparticulate agent used to image lymph nodes to detect cancer. We licensed to Sentigen certain methods and other proprietary technology for use in lymphography, and we sub-licensed to Sentigen proprietary compounds we obtained by license from Massachusetts General Hospital and Nycomed Imaging AS. Elan, through its drug delivery division, Elan Pharmaceutical Technologies, licensed to Sentigen its NanoCrystal(TM) stabilized nanoparticulate formulation technology to develop the diagnostic imaging agents.
As part of the joint venture agreement, Elan provided us with a $4.8 million credit facility we can draw on to fund our share of the anticipated development costs of the joint venture. At December 31, 2001, we had drawn down approximately $2,314,005 on this credit facility, all of which occurred during 2001, to fund certain of Sentigen's development expenses. Borrowings under the credit facility are due in 2005 or can be converted into our common stock, at Elan's option, at a price of $18.15 per share.
Our agreement with Elan provides that Elan has the right to nominate a member to our Board of Directors until October 2004 or as long as Elan owns 10% of our common stock (Elan currently owns less than 10% of our common stock). The Elan Board nominee is Aidan King, Vice President of Business Development for Elan. Elan also has a preemptive right to participate in our future equity offerings to maintain its pro rata interest in Photogen.
PATENTS
We are continuing to pursue patent protection for our proprietary technologies with the U.S. Patent and Trademark Office, and in various foreign jurisdictions. We plan to prosecute, assert and defend our patent rights whenever appropriate. However, securing patent protection does not necessarily assure us of competitive success. See "Risk Factors - If we do not obtain and maintain patent or other protection of our core technologies (namely PH-10, our lymphography materials and methods, and our laser technologies), we may have difficulty developing or commercializing product using these technologies," below. We are currently the owner of eleven patents issued in various foreign jurisdiction and seven patents issued by the U.S. Patent and Trademark Office which are summarized generally below:
o Method of diagnosing disease of the lymph nodes through indirect lymphography (U.S. Patent No. 5,114,703)
o Method of diagnosing disease of the lymph nodes through indirect lymphography using ultrasound or MRI (U.S. Patent No. 5,496,536)
o Method of treatment of tissue with simultaneous two-photon excitation (U.S. Patent No. 5,829,448)
o Method for identifying tissue using simultaneous two-photon excitation (U.S. Patent No. 5,832,931)
o Method for producing at least one photoactivated molecular agent using simultaneous two-photon excitation (U.S. Patent No. 5,998,597)
o Apparatus for treating tissue containing at least one photo-active molecular agent using a light source to promote simultaneous two-photon excitation and focusing apparatus (U.S. Patent No. 6,042,603)
o Method of treating tumor or cancer diseased tissue by administering a radiosensitizer to the tissue and treating the tissue with ionizing radiation to activate the radiosensitizer (U.S. Patent No. 6,331,286)
These patents expire at various times between 2012 and 2018.
We have exclusive licenses to the following technologies:
o Method of treating tissue using radiodense compositions and a radiation source.
We are continuing to pursue patent protection for our other proprietary technologies with the U.S. Patent and Trademark Office, under the Patent Cooperation Treaty and in various foreign jurisdictions. In addition to our seven issued patents in the United States and patent applications discussed above, we have another 23 pending U.S. patent applications (along with corresponding Patent Cooperation Treaty applications and foreign applications) relating to inventions in the following areas:
o PH-50 - methods of vascular imaging
o Multi-photon excitation technology
o Methods and apparatus for imaging and treating tissue using photodynamic therapies
o Additional photodynamic therapy methods and apparatus for topical treatment of disease
o Methods and apparatus for treatment of tissue containing an endogenous pigment (for example, melanoma destruction)
o Radiation contrast agents and methods for treating tissue using those agents
o Radiosensitizer agents and methods for treating tissue using those agents
o Methods for enhanced production of cell lines
o Topical medicaments for photodynamic treatment of disease
o Intracorporeal medicaments for photodynamic treatment of disease
o Methods and apparatus for optical imaging
o Intracorporeal medicaments for high energy phototherapeutic treatment of disease
o Intracorporeal medicaments for chemotherapeutic treatment of disease
o Phototherapeutic vaccination and immunotherapy against tumors
Some of our patented or licensed technology arose from research that was partially funded by the United States Government. As with other entities whose research is sponsored in any manner by the United States Government, certain patents that we own or license are subject to Confirmatory Licenses in favor of the United States Government, as required by applicable federal regulations. These regulations require us or the patent owner to agree to convey to the Government, upon the Government's request, rights in the technology if we decide not to continue prosecution of the patent applications or if the patent owner does not wish to retain title to the inventions covered in the patents. The Government also retains certain "march in rights" that permit the Government to use the technology under certain circumstances, including if that action is necessary because we or the patent owner have not taken or are not expected to take effective steps to achieve practical application of the inventions; it is necessary to alleviate health or safety needs not being met by us or the patent owner; or to meet the requirements for public use specified in certain federal regulations and those requirements are not being met by us or the patent owner. We intend to prosecute patent applications and in other respects develop patents we own so that the Government will not exercise its rights under these Confirmatory Licenses.
"Photogen," the "ray of light" logo and "PulseView" are trademarks of Photogen. All other trademarks or trade names used in this Form 10-K are trademarks or trade names of their respective owners.
GOVERNMENT REGULATIONS
All of the products we currently contemplate developing will require approval by the United States Food and Drug Administration ("FDA") prior to sales being made within the United States and by comparable foreign agencies prior to sales being made outside the United States. The FDA and comparable regulatory agencies impose substantial requirements on the manufacturing and marketing of pharmaceutical products and medical devices. These agencies and other entities extensively regulate, among other things, research and development activities and the testing, manufacturing, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our proposed products. See "Risk Factors--Our proposed products are subject to extensive testing and government approval, and we may not obtain the approvals necessary to sell our proposed products," below.
The regulatory process required by the FDA through which our products must successfully pass before they may be marketed in the U.S. generally involves the following:
o Preclinical laboratory and animal testing;
o Submission of an application that must become effective before clinical trials may begin;
o Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication; and
o FDA approval of the application to market a given product for a given indication.
For imaging and pharmaceutical products, preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product. Where appropriate (for example, for human disease indications for which there exist inadequate animal models), we will attempt to obtain preliminary data concerning safety and efficacy of proposed products using carefully designed human pilot studies. We will require sponsored work to be conducted in compliance with pertinent local and international regulatory requirements, including those providing for Institutional Review Board approval, national governing agency approval and patient informed consent, using protocols consistent with ethical principles stated in the Declaration of Helsinki and other internationally recognized standards. We expect any pilot studies to be conducted outside the United States; but if any are conducted in the United States, they will comply with applicable FDA regulations. Data obtained through pilot studies will allow us to make more informed decisions concerning possible expansion into traditional FDA-regulated clinical trials.
If the FDA is satisfied with the results and data from preclinical tests, it will authorize human clinical trials. Human clinical trials are typically conducted in three sequential phases, which may overlap. Each of the three phases involves testing and study of specific aspects of the effects of the pharmaceutical on human subjects, including testing for safety, dosage tolerance, side effects, absorption, metabolism, distribution, excretion and clinical efficacy.
We have established a core clinical development team and have been working with outside regulatory consultants to assist us in developing product-specific development and approval strategies, preparing the required submittals, guiding us through the regulatory process, and providing input to the design and site selection of human clinical studies. The testing and approval process requires substantial time, effort, and financial resources, and we may not obtain FDA approval on a timely basis, if at all. Success in preclinical or early-stage clinical trials does not
assure success in later stage clinical trials. The FDA or the research institution sponsoring the trials may suspend clinical trials or may not permit trials to advance from one phase to another at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Once issued, the FDA may withdraw a product approval if we do not comply with pertinent regulatory requirements and standards or if problems occur after the product reaches the market. If the FDA grants approval of a product, the approval may impose limitations, including limits on the indicated uses for which we may market a product. In addition, the FDA may require additional testing and surveillance programs to monitor the safety and/or effectiveness of approved products that have been commercialized, and the agency has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Further, later discovery of previously unknown problems with a product may result in restrictions on the product, including its withdrawal from the market. Marketing our products abroad will require similar regulatory approvals by equivalent national authorities and is subject to similar risks.
Historically, obtaining FDA approval for photodynamic therapies has been a significant challenge. Not only must the photoactive agent be approved as a drug, but the laser activation system must also be approved as a medical device. Wherever possible, we intend to utilize lasers or other activating systems that have been previously approved by the FDA to mitigate this risk.
In the ordinary course of business, we must also comply with a variety of other federal and state governmental regulations. These regulations impose, among other things, standards of conduct, record keeping, labeling and reporting.
Specific regulations affecting our current and proposed operations include: environmental-type discharge requirements, good laboratory practices governing animal testing, good manufacturing practices regarding the manufacture of drugs and other FDA-regulated products, animal care and use regulations, laws and regulations relating to labor and the use of lasers, and required general business practices. We do not currently anticipate that the cost of compliance in these areas, other than obtaining FDA approval, will present a major obstacle to achieving our goals.
Another area of regulation that will impact our business is the recent developments in health care reimbursement and delivery practices as a means to better control health care costs. See "Risk Factors -- Changes in health care reimbursement policies or legislation may make it difficult for patients to use or receive reimbursement for using our products, which could reduce our revenues," below.
COMPETITION
The industry in which we operate is intensely competitive, and there is rapid change with respect to technology for the diagnosis and treatment of disease. Existing or future pharmaceutical and device companies, government entities and universities may create developments that accomplish similar functions to our technologies in ways that are less expensive, receive faster regulatory approval, or receive greater market acceptance than our potential products. See "Risk Factors -- Our potential markets are extremely competitive, and many of our competitors have greater resources and have products that are in more advanced stages of development" below.
Our competitors have, in general, been in existence for considerably longer than we have, and thus generally have greater capital resources and access to capital; greater internal resources for activities in research and development, clinical testing and trials, production and distribution; existing collaborative relationships with third parties; and have made greater progress in the preclinical and clinical testing of their products. In addition, our competitors may be disinclined to form collaborative relationships with us directly, or to permit their collaborative partners to work with us. See "Risk Factors -- We have to rely on third parties and collaborative relationships for the manufacturing, clinical testing and marketing for our proposed products, and it may be difficult to implement our business development plans without these collaborations," below.
The existing market for radiopaque contrast agents is estimated to be approximately $3.4 billion worldwide. The dominant uses of media, totaling 86 percent, are those employed in conjunction with CT or X-ray scans. Approximately half of the usage is in the U.S. Omnipaque(R), marketed by a unit of Amersham, is believed to be the leading agent utilized in coronary angiography. Other companies marketing contrast agents include Mallinckrodt, Inc. (a unit of Tyco International Ltd.), Bristol-Myers Squibb Medical Imaging (a unit of Bristol-Myers Squibb Company), Berlex Laboratories, Inc., Abbott Laboratories and Bracco.
More broadly defined, other modalities, such as magnetic resonance imaging and ultrasound, are also used by physicians to image internal vasculature and organs. These modalities, including CT imaging, each have particular attributes that may make their use applicable to any particular situation.
In the market of photodynamic agents to treat topical diseases and cancer, we are aware of one competitor, QLT, Inc. that has already received FDA approval for use of its proprietary photoactive agent, "Photofrin," in the treatment of esophageal cancer and non-small cell lung cancer. In conjunction with CIBA Vision, QLT, Inc. has a second product, "Visudyne," approved for photodynamic treatment of certain forms of macular degeneration. Another competitor, Dusa Pharmaceuticals, has received FDA approval for use of its proprietary photodynamic product, Levulan(R) Kerastik(TM), for treatment of actinic keratosis. Other competitors, namely Miravant Medical Technologies, Inc. and Pharmacyclics, Inc., have advanced their proprietary photoactive agents to Phase 2/3 clinical trials. Laser manufacturers are also making progress in using laser technologies to treat certain indications. For example, Ethicon Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, uses a laser to treat prostate cancer. In addition, there have been many dramatic developments in treatments for cancer and other diseases that do not involve photodynamic therapy. These treatments include new chemotherapy agents or other drugs, vaccines, hyperthermic treatments, and ultrasound. Certain other companies, notably Biogen, Inc., are in late stages of developing systemic treatments for psoriasis. All of these alternatives potentially compete with products we may offer because they provide alternative methods and treatments for certain indications.
RISK FACTORS
This Form 10-K contains (and press releases and other public statements we may issue from time to time may contain) a number of forward-looking statements regarding our business and operations. Statements in this document that are not historical facts are forward-looking statements. Such forward-looking statements include those relating to:
o our current business and product development plans,
o our future business and product development plans,
o the timing and results of regulatory approval for proposed products, and
o projected capital needs, working capital, liquidity, revenues, interest costs and income.
Examples of forward-looking statements include predictive statements, statements that depend on or refer to future events or conditions, and statements that may include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "should," "may," or similar expressions, or statements that imply uncertainty or involve hypothetical events.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from what is currently anticipated. We make cautionary statements in certain sections of this Form 10-K, including under "Risk Factors." You should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this Form 10-K, in the materials referred to in this Form 10-K, in the materials incorporated by reference into this Form 10-K, or in our press releases or other public statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-K or other documents incorporated by reference might not occur. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement.
The following are some of the key risk factors that may affect our future results:
WE ARE A DEVELOPMENT STAGE COMPANY, WE HAVE CONDUCTED ONLY LIMITED STUDIES ON OUR PRODUCTS IN DEVELOPMENT AND WE DO NOT HAVE ANY REVENUES FROM SALES.
Our Company and our technologies are in early stages of development. We began our business as a biopharmaceutical company in 1997. We have not generated revenues from sales or operations, and we do not expect to generate sufficient revenues to enable us to be profitable for at least several years.
Our proposed technologies and products generally must complete preclinical tests in animals and three phases of tests (also called clinical trials) in humans before we can market them for use. Use of our technology has been limited primarily to laboratory experiments, animal testing or human pilot studies and only one compound has completed Phase 1 clinical trials. We have therefore not yet conducted substantive studies on the effectiveness of our compounds on human subjects. The drug products we currently contemplate developing will require costly and time-consuming research and development, preclinical and clinical testing and regulatory approval before they can be commercially sold. We may not be able to develop our technology into marketable products or develop our technology so it is effective for diagnosis or treatment of human diseases. As a result of changing economic considerations, market, clinical or regulatory conditions, or clinical trial results, we may shift our focus or determine not to continue one or more of the projects we are currently pursuing.
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE OR PAY CASH DIVIDENDS.
We have incurred losses since the beginning of our operations. As of December 31, 2001, we have incurred cumulative net losses (before dividends on preferred stock) of approximately $29,093,000. We expect our losses to increase in the future as our financial resources are used for research and development, preclinical and clinical testing, regulatory activities, manufacturing, marketing and other related expenses. We may not be able to achieve or maintain profitability in the future. We have never declared or paid any cash dividends to stockholders, and do not expect to do so in the foreseeable future.
WE MUST RAISE ADDITIONAL FINANCING IN THE FUTURE AND OUR INABILITY TO DO SO WILL PREVENT US FROM IMPLEMENTING OUR BUSINESS DEVELOPMENT PLAN.
We believe that through the use of our cash and lines of credit, we will have cash resources for our current commitments over the next twelve months (depending on the pace of our spending for preclinical and clinical testing and other commitments, which, to an extent, we can adjust to preserve cash). We will need substantial additional financing for our research, clinical testing, product development and marketing programs. We cannot accurately estimate the amount of additional financing required; however, the amount could be an additional $30 million or more over the next several years. We are aggressively seeking to raise additional capital through stock and debt offerings, collaborative relationships and other available sources. Additional funds may not be available on acceptable terms, if at all, and existing stockholders may be diluted as a result of those offerings. The pricing of our common stock, or other security convertible into common stock, in any such transaction may also result in an increase in the number of shares of common stock issuable upon conversion of Series B preferred stock or exercise of warrants in accordance with the anti-dilution provisions in the instruments governing those securities.
OUR PROPOSED PRODUCTS ARE SUBJECT TO EXTENSIVE TESTING AND GOVERNMENT APPROVAL, AND WE MAY NOT OBTAIN THE APPROVALS NECESSARY TO SELL OUR PROPOSED PRODUCTS.
None of our proposed imaging, drug and device products has received the Food and Drug Administration's approval. An extensive series of clinical trials and other associated requirements must be completed before our proposed products can be approved and sold in the United States or other countries. Requirements for FDA approval of a product include preclinical and clinical testing for effective use and safety in animals and humans; that testing can be extremely costly. The time frame necessary to perform these tasks for any individual product is long and uncertain, and we may encounter problems or delays that we cannot predict at this time. Even if testing is successful, our proposed products may not demonstrate sufficient effectiveness or safety to warrant approval by the FDA or other regulatory authorities. Any regulatory approval may not cover the clinical symptoms or indications that we may seek. Marketing our products in other
countries will require seeking and obtaining regulatory approvals comparable to those required in the United States.
IF WE DO NOT OBTAIN AND MAINTAIN PATENT OR OTHER PROTECTION OF OUR CORE TECHNOLOGIES (NAMELY PH-50 FOR CARDIOVASCULAR IMAGING, N1177 AND OUR OTHER LYMPHOGRAPHY MATERIALS AND METHODS, PH-10 AND OUR LASER TECHNOLOGIES), WE MAY HAVE DIFFICULTY COMMERCIALIZING PRODUCTS USING THESE TECHNOLOGIES.
Our success depends in part on our ability to obtain, assert and defend our patents, protect trade secrets and operate without infringing the intellectual property of others. Among the important risks in this area are that:
o Our patent applications may not result in issued patents. Moreover, any issued patents may not provide us with adequate protection of our intellectual property or competitive advantages, and the law on the scope of patent coverage is continually changing.
o Various countries limit the subject matter that can be patented and limit the ability of a patent owner to enforce patents in the medical field. This may limit our ability to obtain or utilize those patents internationally.
o Existing or future patents or patent applications (and the products or methods they cover) of our competitors (or others, such as research institutions or universities) may interfere, invalidate, conflict with or infringe our patents or patent applications. Similarly, the use of the methods or technologies contained in our patents, patent applications and other intellectual property may conflict with or infringe the rights of others.
o If an advance is made that qualifies as a joint invention, the joint inventor or his or her employer may have rights in the invention. We are currently in litigation with our former Medical Director and his former employer, Massachusetts General Hospital, concerning his claims of joint inventorship of some of our PH-10 inventions.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that these rights are covered by valid and enforceable patents or effectively maintained as trade secrets. We own seven patents in the U.S., and eleven other patents in foreign countries including Taiwan, Australia, Singapore, Japan and New Zealand. We are also the exclusive licensee to a group of patented proprietary compounds known as nanoparticulates from Massachusetts General Hospital and Nycomed Imaging AS. We have filed patent applications under the Patent Cooperation Treaty covering a number of foreign countries. These patents and the patent applications relate to the use of PH-50 as a cardiovascular imaging agent, laser and ionizing radiation technology, photoactive agents and methods, methods for enhanced cell production and methods for performing lymphography.
The patent position of biopharmaceutical companies involves complex legal and factual questions, and therefore we cannot assure the enforceability of these
patents. Litigation over patents and other intellectual property rights occurs frequently in our industry, and there is a risk that we may not prevail in disputes over the ownership of intellectual property. Further, interference may occur over the rights to certain inventions, and there is a risk that we may not prevail in an interference. Those disputes can be expensive and time consuming, even if we prevail. Intellectual property disputes are often settled through licensing arrangements that could be costly to us. In any intellectual property litigation, it is possible that licenses necessary to settle the dispute would not be available, or that we would not be able to redesign our technologies to avoid any claimed infringement.
Confidentiality agreements covering our intellectual property may be violated and we may not have adequate remedies for any violation. Third parties may challenge our existing patents and seek to hold them invalid or unenforceable. Also, our intellectual property may in other ways become known or be independently discovered by competitors.
To the extent we use intellectual property through licenses or sub-licenses (as is the case for some of our lymphography technology), our rights are subject to us performing the terms of the license or sub-license agreement with third parties. Our rights are also subject to the actions of third parties we may not be able to control, such as our sub-licensor complying with the terms of its license with the patent owner and the patent owner maintaining the patent.
Where intellectual property results from a research project supported by U.S. Government funding, the Government has limited rights to use the intellectual property without paying us a royalty.
WE ARE HIGHLY DEPENDENT UPON A SMALL NUMBER OF EMPLOYEES AND CONSULTANTS WHO PROVIDE SCIENTIFIC AND MANAGEMENT EXPERTISE, AND IT MAY BE DIFFICULT TO IMPLEMENT OUR BUSINESS DEVELOPMENT PLANS WITHOUT THIS EXPERTISE.
These individuals have entered into employment or consulting agreements, confidentiality and/or non-competition agreements with us. We could suffer competitive disadvantage, loss of intellectual property or other material adverse effects on our business and results of operations if any employee or consultant violates or terminates these agreements or terminates his or her association with us. Our growth and future success also depends upon the continued involvement and contribution from these individuals, as well as our ability to attract and retain highly qualified personnel now and in the future.
We currently employ three senior scientists (Drs. Dees, Scott and Wachter) and three senior executive officers, including Dr. Williams (our CEO), Mr. Boveroux (our CFO) and Dr. Reinhard Koenig (Senior Vice President of Medical and Regulatory Affairs). We also have retained consultants to advise us in regulatory affairs and product development matters. If we lost the services of our executive officers or outside consultants, we could experience a delay in the implementation of our business plan until we arranged for another individual or firm to fulfill the
role. The loss of one of our scientists could cause delay in implementing our business plan and also jeopardize development of new technologies.
WE HAVE TO RELY ON THIRD PARTIES AND COLLABORATIVE RELATIONSHIPS FOR THE MANUFACTURE, CLINICAL TESTING AND MARKETING OF OUR PROPOSED PRODUCTS, AND IT MAY BE DIFFICULT TO IMPLEMENT OUR BUSINESS DEVELOPMENT PLANS WITHOUT THESE COLLABORATIONS.
We are currently involved in a joint venture with affiliates of Elan Corporation, plc, called Sentigen Ltd., to develop and commercialize materials in the field of lymphography. We have had and expect to continue in the future to have a variety of research agreements with universities and other research institutions to investigate specific protocols. We also contract and expect to continue to contract with research organizations and other third parties to manage clinical trials of our proposed products in development. We must continue to enter into collaborative relationships with third parties for additional research and development, preclinical and clinical testing, marketing and distribution of our proposed products.
We are also dependent on third parties for the manufacture of supplies of our products and for the supply of lasers and radiotherapy devices and similar hardware in physicians' offices and hospitals. We have several research and supply agreements with third parties. However, we may not be able to negotiate other acceptable collaborative and supply arrangements in the future.
Collaborative relationships may limit or restrict our operations or may not result in an adequate supply of necessary resources. Our collaborative partner could also pursue alternative technologies as a means of developing or marketing products for the diseases targeted by our collaborative program. If a third party we are collaborating with fails to perform under its agreement or fails to meet regulatory standards, this could delay or prematurely terminate clinical testing of our proposed products.
OUR POTENTIAL MARKETS ARE EXTREMELY COMPETITIVE, AND MANY OF OUR COMPETITORS HAVE GREATER RESOURCES AND HAVE PRODUCTS THAT ARE IN MORE ADVANCED STAGES OF DEVELOPMENT.
We face substantial competition from competitors with greater financial, technical and human resources and with greater experience in developing products, conducting preclinical or clinical testing, obtaining regulatory approvals, manufacturing and marketing. We understand that the existing market for radiopaque contrast agents is estimated to be approximately $3.4 billion worldwide. The dominant uses of media are those employed in conjunction with CT or X-ray scans. Approximately half of the usage is in the U.S. Omnipaque(R), marketed by a unit of Amersham is estimated to be the leading agent utilized in coronary angiography. Other companies marketing contrast agents include Mallinckrodt, Inc. (a unit of Tyco International Ltd.), Bristol-Myers Squibb Medical Imaging (a unit of Bristol-Myers Squibb Company), Berlex Laboratories, Inc., Abbott Laboratories and Bracco.
More broadly defined, other modalities, such as magnetic resonance imaging and ultrasound, are also used by physicians to image internal vasculature and organs. These modalities, including CT imaging, each have particular attributes that may make their use applicable to any particular situation.
Competitors in the field of using light energy to treat and diagnose disease include: Miravant Medical Technologies, Pharmacyclics, Inc., QLT Inc., Axcan Pharma Inc., Dusa Pharmaceuticals, Inc. and PhotoCure ASA. There are also numerous companies developing other technologies to image the vascular system and various body organs, and to treat and/or diagnose psoriasis, actinic keratosis, cancer and other diseases. Examples of the technologies from those other companies are the use of magnetic resonance imaging or ultrasound techniques to create internal organ images, drug or genetic treatments, procedures that use sound waves and procedures that destroy diseased tissue using heat. Some of these firms have drugs or devices that have completed or are in advanced stages of clinical trials and regulatory approvals.
Others may develop technologies and obtain patent protection that could render our technologies or products obsolete or less competitive or our patents invalid or unenforceable. Due to the inherent risk of failure associated with the testing, development and production of new and innovative technologies, our technologies and products may be found to be ineffective, have unanticipated limitations or otherwise be unsuccessful in the marketplace. Also, although we believe our estimates of the possible size of markets for our potential products are based on information we consider reliable (including data from the American Heart Association, American Cancer Society and similar sources in the public domain), that data or our analysis of the data could prove incorrect.
CHANGES IN HEALTH CARE REIMBURSEMENT POLICIES OR LEGISLATION MAY MAKE IT DIFFICULT FOR PATIENTS TO USE OR RECEIVE REIMBURSEMENT FOR USING OUR PRODUCTS, WHICH COULD REDUCE OUR REVENUES.
Our success will depend, in part, on the extent to which health insurers, managed care entities and similar organizations provide coverage or reimbursement for using the medical procedures and devices we plan to develop. These third-party payers are increasingly challenging the price of medical procedures and services and establishing guidelines that may limit physicians' selections of innovative products and procedures. We also cannot predict the effect of any current or future legislation or regulations relating to third-party coverage or reimbursement on our business. We may not be able to achieve market acceptance of our proposed products or maintain price levels sufficient to achieve or maintain any profits on our proposed products if adequate reimbursement coverage is not available.
THE CURRENT BOARD OF DIRECTORS CONTROLS PHOTOGEN, WHICH MAY MAKE IT DIFFICULT FOR STOCKHOLDERS WHO ARE NOT IN THAT GROUP TO INFLUENCE MANAGEMENT.
A small group of our officers, directors and others control approximately 83% of our outstanding common stock. Several of our principal stockholders are also parties to an Amended and Restated Voting Agreement, dated as of September 4, 2001, concerning the election of certain designees to the Board of Directors of Photogen Technologies, Inc. and Photogen, Inc. The Voting Agreement requires these stockholders to vote their shares for the election of the current Board of Directors or, in the case of a vacancy, for the person nominated by a majority of the remaining Directors. This concentration of ownership and control may delay or prevent a change in control of Photogen, and may also result in a small supply of shares available for purchase in the public securities markets. These factors may affect the market and the market price for our common stock in ways that do not reflect the intrinsic value of the stock.
THE PRICE AND TRADING VOLUME OF OUR COMMON STOCK FLUCTUATES SIGNIFICANTLY, WHICH MAY MAKE IT DIFFICULT FOR US OR A STOCKHOLDER TO SELL OUR COMMON STOCK AT A SUITABLE PRICE AND MAY CAUSE DILUTION FOR EXISTING STOCKHOLDERS WHEN WE ISSUE ADDITIONAL SHARES.
During the period from January 1, 2001 through December 31, 2001 our closing stock price ranged from $0.98 to $7.00 per share. Daily trading volume ranged from 0 (zero) shares to approximately 77,900 shares during that period.
The following factors may have an impact on the price of our stock:
o Announcements by us or others regarding scientific discoveries, technological innovations, commercial products, patents or proprietary rights;
o Announcements by us concerning the licensing or other transactions of our products or technologies;
o The progress of preclinical or clinical testing;
o Changes in government regulation;
o Public concern about the safety of devices or drugs;
o Limited coverage by securities analysts;
o The occurrence of any of the risk factors described in this section;
o Sales of large blocks of stock by an individual or institution;
o Changes in our financial performance from period to period; securities analysts' reports; and general market conditions.
OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH WOULD MAKE TRADING IN OUR STOCK MORE DIFFICULT.
Since November 1999, our common stock has been quoted in the Nasdaq SmallCap Market. Our shares could be delisted if we fail to meet the listing requirements of the Nasdaq SmallCap Market, which would force us to list our shares on the OTC Bulletin Board or some other quotation medium, such as pink sheets, depending upon our ability to meet the specific listing requirements of
those quotation systems. As a result, an investor might find it more difficult to dispose of, or to obtain accurate price quotations for, our shares. Delisting might also reduce the visibility, liquidity, and price of our common stock. If our common stock were delisted from the Nasdaq SmallCap Market and were not traded on another national securities exchange, we could become subject to penny stock regulations that impose additional sales practice disclosure and market making requirements on broker/dealers who sell or make a market in our stock. The rules of the SEC generally define "penny stock" to be common stock that has a market price of less than $5.00 per share and is not traded on a national exchange. If our stock became subject to penny stock regulations, it could adversely affect the ability and willingness of broker/dealers who sell or make a market in our common stock and of investors to purchase or sell our stock in the secondary market.
IF STOCKHOLDERS HOLDING SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK SHOULD SELL IN THE PUBLIC MARKET, THE PRICE OF OUR STOCK COULD FALL OR IT MAY BE MORE COSTLY FOR US TO RAISE CAPITAL.
As of March 15, 2002, we had reserved 11,474,700 shares of common stock for future issuance upon grants of options, or exercise or conversion of outstanding options and warrants and convertible securities and notes. If these options and warrants are all issued and exercised, investors may experience significant dilution in the book value and earnings per share of their common stock.
Approximately 6,798,765 shares of our common stock were eligible for sale in the public market free of restrictions under the Securities Act of 1933. Approximately 5,490,162 shares are currently subject to agreements requiring us to permit the holders of the shares, under certain circumstances, to join a public offering of our stock or to demand that we register their shares. On May 9, 2001, Drs. Dees, Wachter, Scott and Fisher and Mr. Smolik entered into a lock-up agreement prohibiting them, without the company's approval, from selling in the public markets 20,548,435 shares until May 9, 2004 (except for limited sales by each of them of between 42,000 and 78,000 shares each year at prices above $5.00 per share).
ITEM 2.
ITEM 2. PROPERTIES.
We are occupying approximately 4,000 square feet of office and laboratory space in Knoxville, Tennessee. We negotiated an extension to this lease agreement with a term expiring May 2002. We have one more option to renew this lease agreement for an additional term of three years and an option to purchase the facility at any time during the term of the lease or any renewal.
We have a three-year lease agreement for approximately 6,164 square feet of office space located in New Hope, Pennsylvania. The initial term of the lease expires in August 2004. The lease permits us to extend the lease for two additional three-year terms. This space is being used for our executive officer headquarters and for our clinical development group.
To our knowledge, the property and equipment in our Knoxville and New Hope locations are in good condition. In the opinion of management, our interest in these facilities is adequately covered by insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In conjunction with the September 2000 restructuring of our clinical development office at Westborough, Massachusetts, we filed a lawsuit captioned PHOTOGEN, INC. V. GERALD L. WOLF (Case No. 00C 5841), in the United States District Court for the Northern District of Illinois. In that litigation, we allege that Dr. Wolf, our former Medical Director, breached his employment agreement and other obligations to us. We also seek a declaration from the Court that Dr. Wolf is not a co-inventor of certain of our discoveries relating to PH-10. We have filed a number of patent applications for multiple inventions involving PH-10. Dr. Wolf has asserted that he is a co-inventor of certain of those inventions described in certain of the patent applications, apparently claiming he conceived them outside the scope of his role as Principal Investigator under our Research Agreement with Massachusetts General Hospital (which gives us the right to an exclusive license to all jointly invented technology) or his Employment Agreement (which vests in us title to all inventions he develops). Dr. Wolf filed counterclaims against Photogen and Dr. Williams alleging breach of contract, interference with economic advantage and similar matters.
If Dr. Wolf's assertion that he co-invented certain of our PH-10 inventions is correct, he (or his assignee) may be considered a joint owner of the invention. If Dr. Wolf conceived of the invention outside the scope of the Research Agreement or his Employment Agreement and we were unable to obtain an exclusive license to Dr. Wolf's interest in any allegedly co-invented technology, we could nonetheless use the co-invented technology as a joint owner (but we might face possible competition for any products resulting from that technology if it is not covered by any other patent of which we are the exclusive owner or licensee), and our other inventions involving PH-10 should not be affected. It is not currently possible for us to determine whether or how this would affect our revenues, financial condition or prospects.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to our common stockholders, Series A convertible preferred stockholders or Series B convertible preferred stockholders for a vote during the fourth quarter of the 2001 fiscal year.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded from time to time on the Nasdaq SmallCap Market under the symbol "PHGN."
COMMON STOCK
As of March 15, 2002 there were 38,842,298 shares of our common stock outstanding and held by approximately 324 stockholders of record. Holders of our Common Stock are entitled to receive such dividends as may be declared by the Board of Directors. We have not declared or paid cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
The high and low trading prices for our common stock during each quarter of the last two fiscal years are set forth below.
For the period January 1, 2002 through March 15, 2002, the high and low trading prices for our common stock were $1.51 and $0.63 respectively. Aggregate trading volume for the period January 1, 2002 through March 15, 2002 was approximately 253,757 shares. The foregoing information was obtained from the National Association of Securities Dealers as reported on the Nasdaq SmallCap Market. The quotations generally reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The foregoing information for 2000 and 2001, however, reflects trade prices, and not bid or ask prices. See "Risk Factors -- A small group of stockholders control Photogen, which may make it difficult for stockholders who are not in that group to influence management," and "The price and trading volume of our common stock fluctuates significantly, which may make it difficult for us or a stockholder to sell our common stock at a suitable price and may cause dilution for existing stockholders when we issue additional shares," above, regarding the possible effects of the concentrated ownership of our stock on the market and price of the stock.
In 2001, we granted qualified and non-qualified stock options pursuant to our 1998 Long Term Incentive Plan to purchase an aggregate of 340,000 shares of common stock, and 535,000 qualified stock options pursuant to our 2000 Long Term Incentive Compensation Plan. The options vest at various times up to four years from the date of the grant. Per share exercise prices range from $1.14 to $5.3125. During 2001, we did not sell any securities without registration under the Securities Act of 1933 (the "Securities Act").
We are subject to six sets of registration rights agreements. All of the agreements contain piggyback registration rights and one contains demand registration rights upon the occurrence of certain events and subject to various terms and conditions.
o Under the first two agreements, we granted certain piggyback registration rights to the holders of warrants covering an aggregate of 260,000 shares of our common stock owned by two shareholders; which warrants will expire on May 15, 2002.
o Under a third agreement, the holder of warrants covering 1,000,000 shares of our common stock may demand registration for those shares in the event that holders of 50% or more of those warrants make a request covered by at least 100,000 shares (in addition to certain piggyback registration rights). Demand registration, however, is subject to Board approval.
o Under the fourth and fifth agreements, the holders of options to acquire a total of 4,000,000 shares of our common stock (granted under our Senior Executive Long Term Incentive Compensation Plan) have piggyback registration rights until we file a Form S-8 registration statement covering those shares. Options covering 1,333,333 of those shares have vested at this time.
o Under the sixth agreement, we granted demand and piggyback registration rights covering approximately 230,162 shares of our common stock issuable on exercise of the warrant and conversion of amounts due under the convertible note we sold to Elan.
Pursuant to the terms of the Securities Purchase Agreement dated as of October 20, 1999 between Photogen and a unit of Elan, Elan has the right to participate in any equity financing consummated by us in order to maintain its pro rata interest in the Company. This right expires on October 20, 2003.
On May 9, 2001, Drs. Dees, Wachter, Scott and Fisher and Mr. Smolik entered into a lock-up agreement prohibiting them, without the Company's approval, from selling in the public markets 20,548,435 shares until May 9, 2004 (except for limited sales by each of them of between 42,000 and 78,000 shares each year at prices above $5.00 per share).
Approximately 32,043,533 shares of our common stock and preferred stock convertible into common stock are "restricted stock" or are beneficially owned by persons who as of March 15, 2002 were affiliates of the Company as defined in Rule 144 under the Securities Act. For purposes of this calculation only (and the comparable disclosure on the cover page of this Form 10-K) we have assumed that officers, directors and 10% stockholders are affiliates of the company and that a person beneficially owns stock subject to an option, warrant or convertible instrument that is exercisable or convertible 60 days from the date of determination. Stock held by Elan may be subject to Rule 144. A portion of those shares subject to Rule 144 would be eligible for resale by company affiliates and others who have satisfied the requisite holding periods, subject to the volume limitations and other provisions of Rule 144 and applicable law. As of March 15, 2002, 875,000 shares of common stock that we sold in our March, 1998 private placement and 327,240 shares of Series B Convertible Preferred Stock that we sold in our February, 2000 private placement are no longer restricted stock or subject to Rule 144 because two years have now passed.
SERIES A CONVERTIBLE PREFERRED STOCK
On October 20, 1999, we issued 12,015 shares of Series A Preferred Stock to Elan International Services, Ltd. ("EIS"), an affiliate of Elan, in conjunction with the formation of Sentigen Ltd., our joint venture with Elan. Under the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Preferred Stock, the holder of Series A Preferred
has a liquidation preference entitling it to the first $12,015,000 of funds available for distribution to stockholders upon liquidation of the Company and has the right to convert shares of Series A Preferred into common stock at any time after October 20, 2001 at a conversion price of $21.17 per share. The conversion price is subject to adjustment for certain dilutive events. Alternatively, the holder of Series A Preferred may exchange shares of Series A Preferred for common shares of Sentigen so that the holder of Series A Preferred owns 50% of the equity of Sentigen. Each share of Series A Preferred will be paid a mandatory payment-in-kind dividend equal to 7% (i.e., 0.07 additional shares of Series A Preferred). The payment-in-kind dividend is cumulative, compounds on a semi-annual basis and is payable twice a year, beginning April 2000. Pursuant to this dividend requirement, we declared a dividend of approximately 932 shares of Series A Preferred in 2001 and as of March 15, 2002, there were approximately 13,788 shares of Series A Preferred outstanding. The holder of Series A Preferred is only entitled to vote on matters that adversely affect or change the rights of holders of Series A Preferred Stock. The holder of Series A Preferred does not have the right to vote on the election of directors of the Company.
SERIES B CONVERTIBLE PREFERRED STOCK
In February, 2000, we issued 327,240 shares of Series B Convertible Preferred Stock ("Series B Preferred") to 32 accredited investors in a private placement, for a purchase price of $16.88 per share and 9,816 shares to the placement agent in connection with services rendered in our private placement of Series B Preferred.
Each share of Series B Preferred is entitled to a payment-in-kind dividend payable in additional shares of Series B Preferred, at a rate of 6% (i.e., 0.06 additional shares of Series B Preferred). Dividends will be payable on January 15 of each year, beginning January 15, 2001 and will accrue from the date of such share's issuance. As of December 31, 2001 there were 357,280 shares of Series B Preferred outstanding. On January 15, 2002, we declared a dividend of approximately 21,437 shares of Series B Preferred to Series B Preferred Stockholders pursuant to the payment-in-kind dividend. As of March 15, 2002, there were approximately 378,717 shares of Series B Preferred outstanding (or to become outstanding on delivery of the in-kind dividend), that are convertible into approximately 548,015 shares of our common stock. We may not make dividends or distributions on common stock unless we also pay a dividend on the Series B Preferred equal to the amount a holder of Series B Preferred would have received on conversion of Series B Preferred into common stock.
Each share of Series B Preferred is entitled to a liquidation preference equal to $16.88 per share, before any amounts are paid on the common stock on liquidation, but subject to the senior preference of our Series A Preferred and the liquidation preference of any senior or pari passu securities we create in the future with the requisite consent of the holders of Series B Preferred. After payment of the Series B Preferred liquidation preference, we will distribute our remaining assets pro rata among the holders of the common stock and Series A Preferred and Series B Preferred (subject to the rights of any senior securities). If we are acquired by another entity or sell all or substantially all of our assets, and if we pay an amount equal to the liquidation preference of the Series A Preferred and any other senior security, holders of Series B Preferred will be entitled to receive the liquidation preference unless our stockholders prior to the transaction hold at least 50% of the voting power of the surviving or acquiring entity or if the holders of a majority of Series B Preferred agree by vote or written consent to exclude the acquisition or sale from this provision.
Each share of Series B Preferred has the number of votes equal to the number of shares of common stock into which the share of Series B Preferred would be convertible (as of March 15, 2002, 1.44703 shares of common stock for each share of Series B Preferred), and will be entitled to vote together with the common stock. Certain matters, such as an amendment to the terms of the Series B Preferred Certificate of Designation or a change in the preferences or any relative or other rights of the Series B Preferred, may have to be approved by a majority of the holders of Series B Preferred voting as a separate class.
A holder of Series B Preferred may convert shares of Series B Preferred into an initial conversion ratio of 1.4 shares of common stock at any time. The conversion ratio is subject to adjustment for certain dilutive events, including issuance of common stock or equivalent securities at less than $16.88 per share. As we have issued common stock in our shelf registration at less than $16.88, the revised conversion ratio for the number of shares of common stock issuable upon conversion of our Series B Preferred is 1.44703 at March 15, 2002. We may require holders of Series B Preferred to convert their shares into common stock (at the same ratios that would apply for a voluntary conversion, except as described in the second and third bullet points below) in connection with any of the following events:
o If the holders of a majority of the Series B Preferred approve a mandatory conversion;
o Immediately prior to a firm commitment, underwritten public offering of our common stock in which we receive $20 million or more in gross proceeds;
o If the holders of a majority of Series B Preferred do not approve any transaction to issue a security senior or pari passu to the Series B Preferred in a transaction involving any vendor, licensor or joint venturer or other commercial transaction (a "special senior security"), the purpose of which is not solely to provide financing, and which the Board has approved and recommended; or
o At any time after January 1, 2005.
We must obtain the approval of a majority of the then outstanding shares of Series B Preferred if we seek to amend our Restated Articles of Incorporation in a way that adversely affects the shares of Series B Preferred (except for issuance of a special senior security), create certain senior or pari passu securities, or if we change the rights of Series B Preferred in the Certificate of Designation in any other material respect. This right is subject to our ability to require mandatory conversion of Series B Preferred if a "special senior security" is not approved.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following information is qualified by reference to and should be read in conjunction with our Consolidated Financial Statements and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included below. The selected financial data presented below for the years ended December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from our audited financial statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Portions of the discussion in this item contain forward-looking statements and are subject to the Risk Factors described above.
We are an emerging, development-stage biopharmaceutical company focused on developing a novel contrast agent with potential applications in the imaging of the cardiovascular system and cancer metastasizing into the lymphatic system. We also have in development products to treat psoriasis and other topical diseases and cancer. Our principal product is an X-ray contrast agent we call PH-50, when referring to cardiovascular applications, and N1177 when referring to lymphography. The lymphography application is being developed in a joint venture with units of Elan Corporation plc. We have or own the rights for all other applications. In December 2001, we announced positive preclinical results of PH-50. Based on these studies, the extensive preclinical toxicology and other study work, including the product's use in over 120 patients for lymphography, we shifted the strategic direction of Photogen to focus on the cardiovascular and lymphography applications. We plan to focus our efforts on these high value opportunities and to license or co-develop our other products. We have not completed development of any diagnostic or therapeutic product or process at this time and have no revenue from operations.
As of April 8, 2002, we entered into a credit facility that will provide us with a $2,500,000 revolving line of credit, bearing interest at 4.65%, for a period of five years. The loan is secured by a lien on all of our assets. Absent additional funding from the sale of debt or equity securities or the sale or licensing of any of our products in development, we expect to sustain operations through December 2002. Our ability to conduct operations beyond that date is entirely dependent on our ability to obtain additional capital, and we are aggressively seeking such capital. See "Risk Factors -- We must raise additional financing in the future and our ability to do so could prevent us from implementing our business plan," above.
We operate with a small staff of researchers and senior level managers to conduct basic research, oversee and direct third party contractors and perform administrative functions. We contract with third party consultants having expertise in clinical development and regulatory
matters to supplement our internal capabilities. We also contract with third party research laboratories, contract research organizations and manufacturers for clinical material supplies and the management of clinical trials. We also contract with academic and other institutions to conduct specified research projects.
We expect that our quarterly and annual results of operations will fluctuate based on several factors including, the timing and amount of expenses involved in conducting our research programs, particularly the conduct of clinical trials, the cost of clinical material used in those trials and required for compliance with FDA regulations and the amount, if any, of fees, milestone payments and research support payments received from potential strategic partners.
We consider our investment in the joint venture with affiliates of Elan to be our only asset subject to a significant estimate. The carrying value of our 80.1% equity interest in Sentigen, Ltd., the joint venture entity, at December 31, 2001 was $10,994,680. We have reviewed the financial projections of Sentigen and the underlying assumptions and have concluded that there has been no degradation to the carrying value of our investment. The assumptions underlying the financial forecasts were based on currently available information, including estimates of development costs, pricing, operating expenses and market sizes and penetration. These estimates may change and any such changes may impact our future estimates of appropriate carrying values.
RESULTS OF OPERATIONS
Our efforts have been focused on the development and clinical testing of diagnostic and therapeutic products. To date, we have not generated revenues from the sale of any proposed diagnostic or therapeutic products or other operations. Net loss applicable to common shareholders (after preferred dividends) was $6,273,518, $13,491,813 and $12,666,771 for the years ended December 31, 1999, 2000 and 2001, respectively, and our cumulative losses since inception, including "in kind" preferred stock dividends totaling $5,869,183, are approximately $34,962,496.
Research and development expenses for the years ended December 31, 1999, 2000 and 2001 were $2,889,215, $4,308,313 and $3,347,778, respectively.
Research expenses in 1999 were due to costs incurred as we expanded our development activities for PH-10 and for initiating research spending for N1177. During the fourth quarter of 1999 we in-licensed N1177 for all diagnostic and therapeutic applications and subsequently granted a license to N1177 in the field of lymphography to Sentigen, Ltd. the joint venture between Photogen and units of Elan Corporation plc. We established a clinical development group in Westborough, Massachusetts during the fourth quarter of 1999 to support development of products approaching the stages of human clinical testing. Substantially all research expenses incurred by Photogen on N1177 are charged to the joint venture. See additional information on this subject discussing the joint venture and the restructuring, in 2000, of our clinical development operations in the paragraphs below.
Research expenses increased in 2000 resulting from costs associated with the Westborough, Massachusetts operations through September, 2000 and costs associated with consultants we retained having expertise in the development of cancer therapeutics and diagnostics as well as dermatological products. In addition, we reversed approximately $810,000 in billings to the
Sentigen joint venture as we concluded, following the restructuring of our clinical development operations, that the joint venture should not be charged for certain work previously conducted in Westborough. The increase in research expense was partially offset by a reduction in research contract expense as contracts with certain academic institutions reached their conclusion.
Research expenses in 2001 decreased by $960,535 to $3,347,778. The reduction was due principally to lower expense levels following the closing of our Westborough, Massachusetts facility in October 2000, including a one-time credit in 2000 of $810,000 to Sentigen, our joint venture with Elan, partially offset by clinical trial expenses and other costs incurred as our products undergo human clinical testing.
General and administrative expenses were $3,037,392, $5,095,442 and $3,269,013 for the years ended December 31, 1999, 2000 and 2001, respectively. These expenses include costs associated with obtaining patent protection for our intellectual property, costs associated with administrative personnel and corporate management, the amortization of warrants granted to a service provider, legal and related expenses and facilities expenses. Expense increases in 2000 resulted primarily from the full year impact of warrants issued during 1999 and additional warrants granted to a service provider in 2000, costs of hiring and compensating our new senior management and legal expenses incurred in connection with the reorganization of the clinical development group. In 2001, general and administrative expenses were reduced by $1,826,429 primarily due to the completion of the amortization of warrants granted to a service provider.
In September 2000, we initiated a restructuring of our clinical development operations. We closed our Westborough, Massachusetts office and delivered notices of material breaches and/or dissatisfaction pursuant to the employment agreements with three employees who worked there at that time. Clinical development activities formerly carried on in Westborough were assumed by outside consultants and other company employees. We took a charge against earnings of $597,025 for termination of our office lease and associated expenses and termination costs associated with certain of the employees at that location. We have reached termination agreements with two of these employees. At December 31, 2001, approximately $173,932 of this charge was remaining. We cannot estimate at this time additional costs or obligations (if any) related to any litigation arising from the office closing. See Item 3 "Legal Proceedings" of this Form 10-K for additional information concerning this restructuring.
In the fourth quarter of 1999, we entered into a joint venture with affiliates of Elan Corporation for the development of N1177, a potential product to identify and diagnose lymph nodes for the presence of cancer. We own 80.1% of the joint venture entity, Sentigen, Ltd., with the balance owned by Elan. During 1999, 2000 and 2001, we recorded losses from the joint venture of $306,029, $1,203,392 and $1,952,758, respectively. These losses resulted from our share of development expenses incurred in the joint venture by the two participants, including personnel expenses and costs associated with developing a manufacturing process, including the purchase of drug substance and other materials.
In accordance with the joint venture agreement between Photogen and Elan, we charged certain research and development work performed at the Westborough facility to Sentigen. As part of the restructuring of our clinical development operations, we conducted an internal review of the activities conducted at Westborough during 2000 and concluded that the joint venture should not be charged for those activities. Accordingly, in the third quarter of 2000, we reversed the billings previously
made to Sentigen and recorded the entire amount of research and development costs on our financial statements. The effect on us was an increase in research and development costs for 2000 of $810,000 less a decrease in the loss from Sentigen of $649,000.
Investment income for the years ended December 31, 1999, 2000 and 2001 was $179,795, $417,110 and $110,741, respectively. Investment income is generated by the amount of capital in our investment portfolio prior to it being used to fund our operations and the rate of interest earned on that capital. We invest funds in the investment portfolio in United States Government obligations. The 1999 investment income resulted primarily from interest earned on the proceeds of a common stock offering in March 1998 and on approximately $6,000,000 of capital received from Elan through their purchase of our common stock at the time of the creation of the joint venture. In the first quarter of 2000, we raised a total of $5,276,340 from the issuance of Series B Preferred to qualified investors. The increase in investment income in 2000 resulted primarily from investment of those proceeds. In the first half of 2001, we received a total of $1,068,723 in net proceeds of common stock sold under our shelf registration statement that was declared effective in February 2001. Investment income declined in 2001 due primarily to the decline in the average balances of our investment portfolio as funds were used to support operations and, to a lesser extent, the general decline in short term interest rates. We expect investment income to continue to fluctuate both as the size of the investment portfolio decreases or increases and as the rate of interest earned by the portfolio varies due to shifts in short term interest rates.
Purchases of equipment and leasehold improvements for the years ended December 31, 1999, 2000 and 2001 were $374,741, $516,186 and $45,938, respectively. These purchases were primarily for the acquisition of laboratory and other equipment necessary to conduct pre-clinical and clinical studies and leasehold improvements in the Knoxville, New Hope and Westborough offices. During the next twelve months we expect capital expenditures for equipment to be less than $100,000.
During 2001, as a result of the closing of the Westborough facility and the shift in the research priorities, we determined that certain equipment we were leasing would no longer be useful in our research. Accordingly, we recorded provisions for future lease payments totaling $1,264,208 representing the remaining lease obligations. While we will pursue opportunities to sublease or otherwise mitigate these obligations, there can be no assurance of any success in this regard.
We have two series of convertible preferred stock outstanding: Series A, issued in October 1999 and Series B, issued in February 2000. The holder of Series A Preferred is entitled to a mandatory, cumulative, semi-annual payment-in-kind dividend of 7% (i.e., 0.07 additional shares of Series A Preferred). Similarly, the holders of Series B Preferred are entitled to a cumulative, annual payment-in-kind dividend equal to 6% (i.e., 0.06 additional shares of Series B Preferred). Additionally, the terms of both the Series A Preferred and the Series B Preferred create additional preferred returns for the holders. The Series A Preferred was issued with detachable warrants. The value allocated to those warrants caused the preferred shareholders to receive an additional return. That additional return has been amortized over the period from issuance through October 2001, when the stock was first convertible. The additional return related to the Series A Preferred recorded was $480,928 in 2000 and $391,154 in 2001. The terms of the Series B Preferred include beneficial conversion rates if the stock is converted to common stock after specified dates.
The value of the beneficial conversion also creates an additional return to the Series B holders. The value of the beneficial conversion feature was amortized over the period from issuance until January 1, 2002, the date the most beneficial conversion rate became effective. The preferred return related to the Series B Preferred recorded in 2000 was $1,059,097 and in 2001 was $1,263,219. As a result of the combination of the mandatory dividends and the preferential value amortization, we recorded preferred stock dividends of $220,677, $2,704,751 and $2,943,755 in 1999, 2000 and 2001 for Series A Preferred stock and Series B Preferred stock.
As a result of the above factors, the net loss applicable to common shareholders (after preferred dividends) was $6,273,518, $13,491,813 and $12,666,771 for the years ended December 31, 1999, 2000 and 2001, respectively. Basic and diluted loss per common share was $0.17, $0.36 and $0.33, respectively, for these periods.
LIQUIDITY; CAPITAL RESOURCES
At December 31, 2001 we had cash and cash equivalents totaling approximately $1,352,904. We have a $4.8 million credit line available from Elan under which we may borrow to fund our portion of the losses incurred by the joint venture. At December 31,2001 we had borrowed $2,314,005 under this credit line. We have an effective shelf registration statement pursuant to which we may issue up to $40 million, of which we have issued $1,068,723, of our common stock. On April 8, 2002, we entered into a credit facility that will provide us with a $2,500,000 revolving line of credit, bearing interest at 4.65%, for a period of five years. The loan is secured by a lien on all of our assets.
Absent additional funding from the sale of debt or equity securities or the sale or licensing of any of our products in development, we expect to sustain operations through December 2002. Our ability to conduct operations beyond that date is entirely dependent on our ability to obtain additional capital, and we are aggressively seeking such capital. We have and continue to take actions to minimize our spending until we raise additional capital through the sale of securities or the sale/licensing of certain assets. However, there can be no assurance that such capital will be available under acceptable terms, if at all. We have access to certain additional capital through borrowings under our credit line with Elan to reimburse our development costs of N1177 and borrowings under our revolving line of credit. In addition, at our option, our registration statement gives us the ability to sell from time to time up to a remaining $39 million of our common stock. See "Risk Factors -- We must raise additional financing in the future and our ability to do so could prevent us from implementing our business plan," above.
We have used, and if additional capital is secured, expect over the next 12 months to use the capital available in our lines of credit as well as potential proceeds from sales of common stock under our shelf registration statement or from other issuances of debt or other equity securities, for general corporate purposes, including activities related to preparing for and conducting clinical trials, purchase and preparation of clinical material, conduct of preclinical studies, administrative expenses to support our research and development activities, capital expenditures and to meet working capital needs. If our financial condition permits, we expect to evaluate from time to time the acquisition or license of businesses, technologies or products. The purchase of any such licenses or technologies would be funded by a portion of any net proceeds of future offerings or the issuance of debt or equity securities specifically for that purpose; at this time
we have no plan or commitments for any acquisition or license. We expect our use of capital to increase as we conduct further clinical trials.
We have a $4.8 million credit facility from Elan to fund a portion of the operations of the Sentigen joint venture. Borrowings under this facility bear interest at 8% per annum, are repayable in 2005 or at Elan's election, may be converted into our common stock at a conversion price of $18.15 per share. At December 31, 2001, we had borrowed $2,314,005 under this credit facility.
In February 2001, our shelf registration statement to enable us to issue up to $40 million of our common stock was declared effective by the SEC. This shelf registration permits us to issue common stock from time to time at our option. During 2001, we sold 695,486 shares of common stock pursuant to this registration statement to institutional investors for proceeds, net of related expenses, of $1,068,723.
Pursuant to certain anti-dilution provisions granted to Elan as part of their purchase in 1999 of our common stock, we were required to issue additional shares to Elan so that the weighted average price for the common stock would equal the effective price of our first offering after Elan's purchase. In the third quarter we issued 763,426 additional shares of common stock to Elan in full satisfaction of this right.
PLAN OF OPERATION
During the next twelve months we will focus our efforts primarily on the development of PH-50 and N1177 reflecting the strategic shift in the direction of the company. Specifically we expect to conduct preclinical and human clinical studies, prepare required filings to the FDA, and as required to foreign regulatory bodies and acquire quantities of clinical grade drug formulations of these products. If we obtain sufficient funds to finance further development of our dermatology and cancer therapy products (PH-10), we will conduct similar development activities for those indications. Alternatively, we may license, co-develop or sell our therapeutic technologies (see "Recent Developments" above). We expect to continue to incur increasing losses for at least the next three years as we intensify research and development, preclinical and clinical testing and associated regulatory approval activities and engage in or provide for the manufacture and/or sale of any products that we may develop.
Greater capital resources would enable us to quicken and expand our research and development activities, and our failure to raise additional capital will (absent a suitable collaborative agreement providing for a third party to take over these functions) significantly impair or curtail our ability to conduct further research and development activities and our ability to seek regulatory approval for any possible product resulting from that research. In any event, complete development and commercialization of our technology will require substantial additional funds. See "Risk Factors -- We must raise additional financing in the future and our inability to do so could prevent us from implementing our business plan," above. Accordingly, we are aggressively pursuing capital formation opportunities, either through offerings of equity or debt or as part of collaborative arrangements with third parties.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 is effective for years beginning after June 15, 2000. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative or hedging activities.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company is currently assessing but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. The provisions of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the implications of adoption of SFAS 144 and anticipates adopting its provisions in fiscal year 2002.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk that could impact us is the fluctuation in interest rates related to our investments in Government bonds. As our investments all have short-term maturities, the investment return reflects the current market rates. To date, we have not engaged in any derivative or hedging activities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
Board of Directors Photogen Technologies, Inc. New Hope, Pennsylvania
We have audited the accompanying consolidated balance sheets of Photogen Technologies, Inc., a development stage company, as of December 31, 2000 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for the period from November 3, 1996 (inception) to December 31, 2001 and for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Photogen Technologies, Inc. at December 31, 2000 and 2001, and the results of its operations and its cash flows for the period from November 3, 1996 (inception) to December 31, 2001 and for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ BDO Seidman, LLP
Chicago, Illinois March 22, 2002, except for Note 11 which is as of April 8, 2002
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Warrants issued in exchange for consulting services of $1,366,050.
$300,000 of patent costs were paid through the issuance of common stock.
Warrants issued in exchange for consulting services of $2,629,041.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Photogen Technologies, Inc. (the "Company"), through its subsidiary Photogen, Inc., successor to Photogen, L.L.C., is a development-stage biopharmaceutical company that is focusing on developing a novel contrast agent with potential applications (1) as a blood pool agent to diagnose diseased tissue in the cardiovascular system and other organs and (2) to diagnose cancer metastasizing into the lymphatic system. The Company also has in development certain minimally invasive products for the treatment of psoriasis and other topical diseases and cancer and certain laser device technology. The Company also has an investment in a joint venture (Note 3).
PRINCIPLES OF Intercompany balances and transactions have CONSOLIDATION been eliminated in consolidation.
ESTIMATES The financial statements include estimated amounts and disclosures based on management's assumptions about future events. Actual results may differ from those estimates.
CASH EQUIVALENTS Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
UNITED STATES TREASURY United States Treasury notes are classified NOTES as held-to-maturity securities and all investments mature within one year. Held-to-maturity securities are stated at amortized cost which approximates market.
EQUIPMENT AND LEASEHOLD Equipment and leasehold improvements are IMPROVEMENTS stated at cost. Depreciation and amortization of equipment are provided for using the straight-line method over the estimated useful lives of the assets. Computers and laboratory equipment are being depreciated over five years, furniture and fixtures are being depreciated over seven years and leasehold improvements are being amortized over five years. Leasehold improvements are being amortized on a straight-line basis over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Depreciation expense was $264,688, $374,845 and $400,525 for 1999, 2000 and 2001, respectively.
The Company reviews the carrying values of its other long-lived assets for possible impairment whenever an event or change in circumstances indicates that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell.
PATENT COSTS Internal patent costs are expensed in the period incurred. Patents purchased are capitalized and amortized over the life of the patent.
RESEARCH AND DEVELOPMENT Research and development costs are charged to expense when incurred.
INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax basis and financial reporting basis of certain assets and liabilities based upon currently enacted tax rates expected to be in effect when such amounts are realized or settled.
The Company has not recorded an income tax benefit for net operations losses incurred of approximately $20,510,000 primarily expiring in 2018 through 2021, or for equity losses in affiliate of approximately $3,462,000. The Company is in the development stage and realization of the losses is not considered more likely than not. An income tax valuation allowance has been provided for the losses realized to date.
BASIC AND DILUTED LOSS Basic and diluted loss per common share is PER COMMON SHARE computed based on the weighted average number of common shares outstanding. Loss per share excludes the impact of outstanding options, warrants, convertible preferred stock and convertible debt as they are antidilutive. Potential common shares excluded from the calculation at December 31, 2001 are 6,519,000 options, 1,149,724 warrants, 1,124,268 shares issuable upon the conversion of Series A and B Preferred Stock and 130,162 shares issuable upon conversion of long-term debt.
FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash, treasury notes, accounts payable and accrued expenses approximate fair value because of the short-term nature of these amounts. The Company believes the fair value of its fixed-rate borrowings approximates the market value.
RECLASSIFICATION Certain 2000 amounts have been reclassified to conform with the 2001 presentation.
RECENT ACCOUNTING In June 1998, the FASB issued Statement of PRONOUNCEMENTS Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 is effective for years beginning after June 15, 2000. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative or hedging activities.
In June 2001, the Financial Accounting Standards Board finalized SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company is currently assessing but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The provisions of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the implications of adoption of SFAS 144 and anticipates adopting its provisions in fiscal year 2002.
2. RECAPITALIZATION AND On May 16, 1997, MT Financial Group, Inc. MERGER (an inactive public company), through its wholly owned subsidiary, effected a reverse merger with Photogen, Inc. ("Photogen"), successor to Photogen, L.L.C. Photogen, L.L.C. was incorporated on September 10, 1996 and commenced operations November 3, 1996. Photogen, L.L.C. was formed to develop proprietary laser-based technologies related to photodynamic therapy. Legally, Photogen is a wholly owned subsidiary of Photogen Technologies, Inc. (formerly known as MT Financial Group, Inc.).
For financial reporting purposes, Photogen was deemed to be the acquiring entity. The transaction has been reflected in the accompanying financial statements as (1) a recapitalization of Photogen (consisting of a 48,000-for-one stock split and change in par value) and (2) an issuance of shares by Photogen in exchange for all of the outstanding shares of MT Financial Group, Inc.
As part of the recapitalization, the Company sold 6,312,833 shares of common stock for a total purchase price of approximately $1,803,450. Further, as consideration for the acquisition of Photogen, 24,000,000 shares of common stock were issued. Five founding shareholders have agreed not to sell these shares until May 2004 without the prior consent of the Company. These shareholders currently hold approximately 20,548,000 shares.
Legal and brokerage fees of approximately $371,000 were charged to additional paid-in capital as costs of the recapitalization and merger. Included in the paid-in capital is the net cash of approximately $109,000 from MT Financial Group, Inc.
3. JOINT VENTURE/ On October 7, 1999, the Company formed a INVESTMENT IN joint venture with Elan International AFFILIATE Services, Ltd. ("Elan") to develop and commercialize nanoparticulate diagnostic imaging agents for the detection and treatment of cancer through lymphography.
Sentigen Ltd. ("Sentigen") was formed to hold the operations, assets and liabilities of the joint venture. Elan purchased 2,980 shares of Sentigen nonvoting convertible preferred stock for $2,985,000 representing a 19.9% ownership interest. Elan also purchased 12,015 shares of the Company's Series A convertible exchangeable preferred stock for $12,015,000. In connection with the issuance of the preferred stock to Elan, the Company granted warrants to Elan to purchase 100,000 shares of the Company's common stock at $21.17 per share which was valued at $678,000. As a result, a preferred stock dividend of $436,041 is being recorded for the accretion of the preferred stock to its face value of $12,015,000 over the period until it is first convertible. Beginning in 2000, in accordance with EITF 00-27, the Company recorded an additional preferred stock dividend to represent the beneficial conversion feature associated with the intrinsic value of the Series A Preferred conversion option. As a result, an additional preferred stock dividend of $436,041 is being recorded over the period until it is first convertible. As of December 31, 2001, the beneficial conversion feature had been fully recorded.
The Company purchased 12,000 shares of Sentigen's common stock for $12,015,000 representing an 80.1% ownership interest.
Sentigen used the $15,000,000 received from the Company and Elan to purchase from Elan a worldwide license to certain patented Elan technology related to the joint venture. Expenses incurred by the Company and Elan, which relate to the development of the diagnostic imaging agents, are charged to Sentigen.
Elan granted the Company a line of credit of $4,806,000 to be used by the Company to fund their portion of Sentigen's research and development. Principal and interest under the line of credit, if any, become due and payable in 2005 or, at the option of Elan, can be converted into the Company's common stock at $18.15 per share. Any borrowings under the line of credit would bear interest at 8%. There were no borrowings on this line of credit at December 31, 2000. At December 31, 2001, borrowings on this line of credit were $2,314,005 and accrued interest was $48,429.
In connection with the joint venture agreement, Elan also purchased 461,538 shares of the Company's common stock for $6,000,000. If in the Company's next third-party offering after the issuance of the Series A Preferred, it sells common stock at a price less than $13 per share, the Company must issue additional shares to Elan so that Elan's overall price for its common stock equals the effective price in that third-party offering. During 2001, the Company issued 763,426 shares of common stock to satisfy this requirement.
The total cash proceeds from the equity issuance to Elan of $18,015,000 were allocated to the common stock, preferred stock and the warrants.
Elan has substantive participating rights in Sentigen, including the requirement for approval of the business plan and budgets and equal representation on the management committee which decides all day-to-day functions. As a result, the Company's investment in Sentigen is recorded under the equity method.
Following is summarized financial information for Sentigen at December 31, 2000 and 2001:
4. ACCRUALS Accrued expenses consist of the following:
5. COMMITMENTS (a) At December 31, 2001, the Company has a lease for office and laboratory space in Knoxville, Tennessee, expiring in May 2002 and a lease for office space in New Hope, Pennsylvania, expiring in August 2004.
The Company also has an operating lease for laboratory equipment expiring in 2004. During 2001, the Company determined that equipment leased by the Company under this operating lease would no longer be used by the Company in its research. As a result, in 2001, the Company recorded a provision for all future lease payments of $1,264,208. $568,138 of this provision was recorded in the fourth quarter. At December 31, 2001, $1,123,740 remains to be paid. In conjunction with this operating lease, the Company provided $500,000 as cash collateral to be refunded over the term of the lease. In 2002, $100,000 was refunded and, accordingly, this amount has been recorded as a current deposit at December 31, 2001. The Company and the lessor have agreed to offset certain future lease payments with the remaining $400,000 deposit. As a result, an amount representing 2002 lease payments of $374,580 has been classified as a current deposit at December 31, 2001.
Total rental expense charged to operations for the years ended December 31, 1999, 2000 and 2001 aggregated approximately $44,000, $352,000 and $358,000, respectively.
Minimum future rental payments under these leases are as follows:
(b) The Company has entered into employment agreements with certain officers and employees for initial terms ranging between three and five years expiring in 2002 and 2003. Under the terms of these agreements, the officers and employees are each entitled to initial annual salaries ranging between $100,000 and $265,000 plus fringe benefits (subject to adjustments).
6. EQUITY TRANSACTIONS (a) The Company applies the recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," in accounting for stock options issued to nonemployees. The Company has issued options and warrants in exchange for consulting services rendered. The Company issued 10,000 options and 502,000 warrants in 1999, 21,000 options and 515,000 warrants in 2000 and 30,000 options in 2001. As the fair market value of these services was not readily determinable, these services were valued based on the fair market value, determined using the Black-Scholes option pricing model, for the options issued which ranged from $5.22 to $9.52 in 1999, $1.34 to $9.51 in 2000 and $1.70 in 2001. Consulting costs charged to operations were $1,199,787 in 1999, $2,316,282 in 2000 and $825,092 in 2001. At December 31, 2000, $760,363 was classified as prepaid consulting expense as this amount represented payment in fully vested nonforfeitable warrants for services to be provided in the future. There was no prepaid consulting at December 31, 2001.
(b) In August 1999, the Company purchased patents for $500,000 which were satisfied by the issuance of 42,328 shares of the Company's common stock valued at $300,000 and cash of $200,000.
(c) In 1999, the Company issued 740,000 variable stock options to employees which would vest upon completion of performance milestones. Exercise prices ranged from $9.38 to $18.13 and expired in 10 years. As of December 31, 1999, 75,000 of these shares had vested. Compensation charged to operations was $225,000 in 1999. In 2000, all of these variable stock options were cancelled.
(d) Series A Preferred Stock - The Company originally designated 12,015 shares of preferred stock as Series A Preferred Stock ("Series A Preferred"). For the first six years from issuance, the preferred stock has a mandatory dividend of 7%. Such dividends are cumulative and compound on a semiannual basis and are payable semiannually solely by the issuance of additional preferred Series A stock. The Company has a deficit and, as a result, the dividends have been recorded against paid-in capital. In accordance with the provisions of the agreement, the Company issued 841 additional preferred shares in 2000 in settlement of dividend requirements. Therefore, at December 31, 2001, there were 12,856 shares of Series A Preferred outstanding. The Company has accrued and will issue 932 preferred shares in fulfillment of the 2001 dividend requirement. The Series A Preferred shall rank senior to any future series of preferred stock unless the majority of the Series A shareholders agree to rank pari passu with any future issuances. The liquidation preference is $1,000 per share. The Series A Preferred is convertible, after two years but before six years from issuance, into common stock of the Company with an initial
conversion price of $21.17. The conversion price is subject to adjustment for certain dilutive events. Alternatively, the holder of the Series A Preferred can elect to exchange the Series A preferred shares for the number of shares in Sentigen which would allow the Series A holder to then own a total of 50% of Sentigen. The Series A holder is currently the minority shareholder in Sentigen. The exchange right is not available for any shares which have been converted to common stock. The exchange right terminates six years from the issuance of the Series A Preferred. The Series A Preferred was issued in October 1999.
The holder of Series A Preferred is only entitled to vote on matters that adversely affect or change the rights of holders of Series A Preferred and does not have the right to vote on the election of directors of the Company. The holder of Series A Preferred also has a preemptive right until October 2003 to participate in any offering of the Company.
(e) Series B Preferred Stock - In February 2000, the Company completed a private placement of its Series B Convertible Preferred Stock ("Series B Preferred"). The Company received cash proceeds, net of related expenses, of $5,276,340 in exchange for 337,056 shares of the Series B Preferred. The Series B Preferred has an annual dividend rate of 6%. Such dividends are cumulative, shall compound on an annual basis and are payable annually by the issuance of additional preferred Series B stock. The Company has a deficit and, as a result, the dividends will be recorded against paid-in capital. In accordance with the provisions of the agreement, the Company issued 20,224 additional preferred shares in settlement of dividend requirements. Therefore, at December 31, 2001, there were 357,280 shares of Series B Preferred outstanding. The Company has accrued and will issue 21,437 preferred shares in 2002. The Series B Preferred is subordinate to the Series A Preferred.
Subject to the senior liquidation preference of the Series A Preferred stockholder, and the liquidation preference of any senior or pari passu securities created by the Company in the future with the requisite consent of the holders of Series B Preferred, each share of Series B Preferred is entitled to a liquidation preference equal to $16.88 per share, before any amounts are paid on the common stock on liquidation. If the Company is acquired by another entity or sells all or substantially all of its assets, and if it pays an amount equal to the liquidation preference of the Series A Preferred and any other senior security, holders of Series B Preferred will be entitled to receive the liquidation preference unless the stockholders prior to the transaction hold at least 50% of the voting power of the surviving or acquiring entity or if the holders of a majority of Series B Preferred agree by vote or written consent to exclude the acquisition or sale from this provision.
Each share of Series B Preferred has the number of votes equal to the number of shares of common stock into which the share of Series B Preferred would be convertible, and is entitled to vote together with the common stock. Certain matters, such as an amendment to the terms of the Series B Preferred Certificate of Designation or a change in the preferences or any relative or other rights of the Series B Preferred (except for issuance of a special senior security), may have to be approved by a majority of the holders of Series B Preferred voting as a separate class. This right is subject to the Company's ability to require mandatory conversion of Series B Preferred if a special senior security (discussed below) is not approved.
Holders of Series B Preferred may convert shares of Series B Preferred into 1.4 shares of common stock at any time.
The Series B Preferred contains beneficial conversion features. Emerging Issues Task Force Issue 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," requires the issuer to assume that the holder will not convert the instrument until the time of the most beneficial conversion which would occur after January 1, 2002. Using the conversion ratio at January 1, 2002 of 1.4 shares of common stock and the stock price at the date of issuance, the maximum beneficial conversion amount is $2,322,316. This amount will be recorded as additional preferred stock dividends over the period from issuance until January 1, 2002. Through December 31, 2001, this full amount has been recorded as additional dividends.
The conversion ratio is subject to adjustment for certain dilutive events, including issuance of common stock or equivalent securities at less than $16.88 per share. In 2001, the Company issued common stock at less than $16.88. As a result, the revised conversion ratio for the number of shares of common stock issuable upon conversion of Series B Preferred is 1.44703 at December 31, 2001.
The Company may require holders of Series B Preferred to convert their shares into common stock (at the same ratios that would apply for a voluntary conversion, except as described in the second and third bullet points below) in connection with any of the following events:
- If the holders of a majority of the Series B Preferred approve a mandatory conversion;
- Immediately prior to a firm commitment, underwritten public offering of the Company's common stock in which they receive $20 million or more in gross proceeds;
- If the holders of a majority of Series B Preferred do not approve any transaction to issue a security senior or pari passu to the Series B Preferred in a transaction involving any vendor, licensor or joint venturer or other commercial transaction (a "special senior security"), the purpose of which is not solely to provide financing, and which the Board has approved and recommended; or
- At any time after January 1, 2005.
(f) Common Stock - The Company is subject to six sets of registration rights agreements covering an aggregate of 5,490,162 shares of the Company's common stock, warrants that have vested covering the Company's common stock and common stock issuable upon conversion of the Company's Series A and B Preferred. All of the agreements contain piggyback registration rights and two contain demand registration rights upon the occurrence of certain events and subject to various terms and conditions. Of the 5,490,162 shares, 4,260,000 shares are entitled to piggyback registration only and 1,230,162 are entitled to both demand and piggyback registration. Warrants that have vested covering 1,149,724 shares of the Company's common stock have weighted average anti-dilution rights.
On March 13, 1998, the Company completed a private placement of 875,020 shares of common stock for $8.00 per share to a number of accredited investors. The Company received $7,000,000 in gross proceeds from this offering.
On February 9, 2001, the Company's shelf registration on Form S-3 was declared effective. Under the shelf registration, the Company may issue up to $40,000,000 of common stock. As of December 31, 2001, 695,486 shares have been issued under the shelf registration for cash proceeds of $1,068,723, net of related expenses of $56,252.
7. STOCK INCENTIVE PLANS The Company maintains three long-term AND WARRANTS incentive compensation plans, which are described as follows:
- The 1998 Long-Term Incentive Compensation Plan, which provides for the granting of up to 2,000,000 stock options to key employees, directors and consultants;
- The 2000 Long-Term Incentive Compensation Plan, which provides for the granting of up to 2,000,000 stock options to key employees, directors and consultants;
- The 2000 Senior Executive Long-Term Incentive Compensation Plan, which provides for the granting of up to 5,000,000 stock options to senior executives.
Options granted under these plans may be either "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code, or nonqualified options.
The stock options are exercisable over a period determined by the Board of Directors (through its Compensation Committee), but generally no longer than 10 years after the date they are granted.
Information with respect to the plans follows:
The Company applies APB Opinion 25 and related interpretations in accounting for stock options granted to employees and directors. Under APB Opinion 25, no compensation cost is recorded if the exercise price is equal to the market price on the date of grant and the number of shares is fixed at that date.
The weighted-average, grant date fair value of stock options granted to employees and directors during the year, and the significant assumptions used to determine those fair values, using a modified Black-Scholes option pricing model, and the pro forma effect on earnings of the fair value accounting for stock options under SFAS No. 123, are as follows:
8. DIVIDENDS Dividends are comprised of the following:
9. RESTRUCTURING In 2000, the Company recorded a restructuring charge of $597,025, included in operating expenses, relating to the closure of its operations in Westborough, Massachusetts. The restructuring charge includes accruals related to estimated lease termination costs and accruals related to employee severance and related expenses in connection with their termination. All employees at the Westborough facility were terminated. The activities previously performed at the Westborough facility will continue at other company locations or with outside consultants. The restructuring charge is summarized as follows:
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
11. Subsequent (a) On April 8, 2002, the Company entered into a credit Events facility that will provide the Company with a $2,500,000 revolving line of credit, bearing interest at 4.65%, for a period of five years. The loan is secured by a lien on all of the Company's assets. The lender is an entity which is controlled by a director of the Company.
(b) The Company has been in discussions with the founders of Photogen, L.L.C., about the possibility of transferring to an entity they control certain of the Company's therapeutic technologies (primarily PH-10 and laser technologies) in exchange for the Company's stock beneficially owned by the founders (approximately 20,548,435 shares of common stock). The Company has not progressed beyond preliminary discussions concerning the possible transaction at this time. The consummation of such a transaction would depend upon the resolution of numerous contingencies, including negotiating a structure for the transaction, resolution of any potential tax and accounting issues, execution of definitive agreements, receipt of appropriate fairness and other opinions, and board and stockholder approval. There can be no assurance that such a transaction can ultimately be consummated.
Independent Auditors' Report
To the Board of Directors and Shareholders of Sentigen Ltd.
We have audited the accompanying balance sheets of Sentigen Ltd., a development stage company, as of December 31, 2001 and 2000, and the related statements of operations, shareholders' equity and cash flows for the period from October 7, 1999 (inception) to December 31, 2001 and for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sentigen Ltd. at December 31, 2001 and 2000, and the results of its operations and its cash flows for the period from October 7, 1999 (inception) to December 31, 2001 and the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO International
Hamilton, Bermuda April 5, 2002
SENTIGEN LTD. BALANCE SHEETS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
SENTIGEN LTD. STATEMENTS OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
SENTIGEN LTD. STATEMENTS OF SHAREHOLDERS' EQUITY
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
SENTIGEN LTD. STATEMENTS OF CASH FLOWS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
SENTIGEN LTD. NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Sentigen Ltd. (the "Company") was incorporated on October 7, 1999 in Bermuda. The Company is owned jointly by Photogen Technologies, Inc. ("Photogen") and Elan International Services, Ltd. ("EIS"), a wholly owned subsidiary of Elan Corporation plc ("Elan"), holding 80.1% and 19.9% (nonvoting shares) of the shares, respectively. The primary objective of the Company is to develop and commercialize nanoparticulate diagnostic imaging agents for the detection and treatment of cancer through lymphography.
BASIS OF PRESENTATION The Company's ability to continue as a going concern is entirely dependent upon the funds it receives from its shareholders per the Subscription, Joint Development and Operating Agreement.
ESTIMATES The financial statements include estimated amounts and disclosures based on management's assumptions about future events. Actual results may differ from those estimates.
RESEARCH AND Research and development costs are charged to DEVELOPMENT expense when incurred.
INCOME TAXES Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on either income or capital gains.
RECENT ACCOUNTING In October 2001, the Financial Accounting PRONOUNCEMENTS Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The provisions of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the implications of adoption of SFAS 144 and anticipates adopting its provisions in fiscal year 2002.
2. RELATED PARTY The amount due to shareholders represents costs TRANSACTIONS for research and development that are subcontracted to Photogen and Elan. The amount due to shareholders is unsecured, and interest free with no set terms of repayment. Research and development expense represents costs under the subcontract agreements with Photogen and Elan. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
3. LICENSE OF ELAN In 1999, the Company paid a license fee to Elan in TECHNOLOGY the amount of $15,000,000 to acquire rights to certain Elan intellectual property. This license is being amortized on a straight-line basis over 184 months, which is the end of the life of the latest licensed patent.
The Company reviews the carrying values of its license for possible impairment whenever an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable.
4. SHAREHOLDERS' EQUITY PREFERRED STOCK
In October 1999, the Company issued 2,980 shares of nonvoting convertible preferred stock to EIS for $2,985,000 with a par value of $1.00 per share. At any time after October 2002, the holder of the preferred stock has the right to convert the preferred stock on a one-to-one basis into common shares. Additionally, there exists an exchange right which upon exercise, could increase EIS's ownership to 50% of Sentigen Ltd.
COMMON STOCK
In October 1999, the Company issued 12,000 voting common shares to Photogen for $12,015,000 with a par value of $1.00 per share.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference to the information under the captions "Directors, Executive Officers, Promoters and Control Persons; and Compliance with Section 16(a) of the Exchange Act" in our definitive proxy statement for the 2002 annual meeting of stockholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the information under the caption "Executive Compensation" in our definitive proxy statement for the 2002 annual meeting of stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement for the 2002 annual meeting of stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference to the information under the caption "Certain Relationships and Related Transactions" in our definitive proxy statement for the 2002 annual meeting of stockholders.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The following is a list of our financial statements and our subsidiaries and supplementary data included in this report under Item 8:
PHOTOGEN TECHNOLOGIES, INC.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 and for the period from November 3, 1996 (inception) to December 31, 2001.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 and for the period from November 3, 1996 (inception) to December 31, 2001.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 and for the period from November 3, 1996 (inception) to December 31, 2001.
Notes to Consolidated Financial Statements.
SENTIGEN LTD.
Independent Auditors' Report.
Balance Sheets as of December 31, 2001 and 2000.
Statements of Operations for the years ended December 31, 2001 and 2000 and for the period from October 7, 1999 (inception) to December 31, 2001.
Statements of Stockholders' Equity for the years ended December 31, 2001 and 2000 and for the period from October 7, 1999 (inception) to December 31, 2001.
Statements of Cash Flows for the years ended December 31, 2001 and 2000 and for the period from October 7, 1999 (inception) to December 31, 2001.
Notes to Financial Statements.
FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto.
EXHIBITS.
The following is a list of exhibits filed as part of this Form 10-K. Exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filings is indicated in parentheses.
REPORTS ON FORM 8-K.
During the quarter ended December 31, 2001, we did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 11, 2002 Photogen Technologies, Inc.
By: /s/ Taffy Williams -------------------------------- Taffy J. Williams, Ph.D., President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
*Filed herewith +Incorporated herein by reference