SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| (Mark One) |
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-12950
ALLIANCE PHARMACEUTICAL CORP.
(Exact name of Registrant as specified in its charter)
| New York | 14-1644018 |
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification Number) |
6175 Lusk Boulevard | |
| San Diego, California | 92121 |
| (Address of principal | Zip Code |
| executive offices) | |
Registrant's telephone number, including area code: | (858) 410-5200 |
Indicate by a check whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
| Yes X | No |
As of February 13, 2004, Registrant had 28,398,961 shares of its Common Stock, $.01 par value, outstanding.
Transitional Small Business Form (check one):
| Yes | No X |
ALLIANCE PHARMACEUTICAL CORP.
INDEX
| Page No. | |
| PART I - FINANCIAL INFORMATION | |
Item 1. Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets | 3 |
Condensed Consolidated Statements of Operations | 4 |
Condensed Consolidated Statements of Cash Flows | 5 |
Notes to Condensed Consolidated Financial Statements | 6 |
Item 2. Management's Discussion and Analysis of | |
| Financial Condition and Results of Operations | 14 |
Item 3. Controls and Procedures | 20 |
PART II - OTHER INFORMATION | |
Item 1. Legal Proceedings | 21 |
Item 2. Changes in Securities | 22 |
Item 3. Defaults Upon Senior Securities | 22 |
Item 4. Submission of Matters to a Vote of Security Holders | 22 |
Item 5. Other Information | 22 |
Item 6. Exhibits and Reports on Form 8-K | 22 |
2
Part I Financial Information:
Item 1. Financial Statements
ALLIANCE PHARMACEUTICAL CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2003 | June 30, 2003 | |||||||
| Assets | (Unaudited) | (Note) | ||||||
Current assets: | ||||||||
| Cash and cash equivalents | $ | 421,000 | $ | 763,000 | ||||
| Other current assets | 109,000 | 20,000 | ||||||
| Total current assets | 530,000 | 783,000 | ||||||
Restricted cash | -- | 532,000 | ||||||
| Other assets - net | 466,000 | 590,000 | ||||||
| $ | 996,000 | $ | 1,905,000 | |||||
Liabilities and Stockholders' Deficit | ||||||||
Current liabilities: | ||||||||
| Accounts payable | $ | 3,342,000 | $ | 6,406,000 | ||||
| Accrued expenses | 2,358,000 | 2,696,000 | ||||||
| Short-term debt | 12,617,000 | 12,583,000 | ||||||
| Total current liabilities | 18,317,000 | 21,685,000 | ||||||
Other liabilities | 750,000 | -- | ||||||
Stockholders' deficit: | ||||||||
| Preferred stock - $.01 par value; 5,000,000 shares authorized; | ||||||||
| 793,750 shares of Series F issued and outstanding at | ||||||||
| December 31, 2003 and June 30, 2003 | 8,000 | 8,000 | ||||||
| Common stock - $.01 par value; 125,000,000 shares authorized; | ||||||||
| 28,397,461 and 27,973,961 shares issued and outstanding at | ||||||||
| December 31, 2003 and June 30, 2003, respectively | 284,000 | 280,000 | ||||||
| Additional paid-in capital | 470,494,000 | 468,350,000 | ||||||
| Accumulated deficit | (488,857,000 | ) | (488,418,000 | ) | ||||
| Total stockholders' deficit | (18,071,000 | ) | (19,780,000 | ) | ||||
| $ | 996,000 | $ | 1,905,000 | |||||
| Note: | The balance sheet at June 30, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. |
See Accompanying Notes to Condensed Consolidated Financial Statements
3
ALLIANCE PHARMACEUTICAL CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended December 31, | Six months ended December 31, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||
Revenues: | ||||||||||||||
| Royalty, license and research revenue | $ | 47,000 | $ | 10,000 | $ | 64,000 | $ | 31,000 | ||||||
Operating expenses: | ||||||||||||||
| Research and development | 209,000 | 4,027,000 | 383,000 | 10,190,000 | ||||||||||
| General and administrative | 337,000 | 1,917,000 | 465,000 | 4,797,000 | ||||||||||
| 546,000 | 5,944,000 | 848,000 | 14,987,000 | |||||||||||
| Loss from operations | (499,000 | ) | (5,934,000 | ) | (784,000 | ) | (14,956,000 | ) | ||||||
Investment income | 2,000 | 17,000 | 6,000 | 49,000 | ||||||||||
| Other income | 12,000 | -- | 84,000 | 329,000 | ||||||||||
| Loss on investment | -- | (500,000 | ) | -- | (500,000 | ) | ||||||||
| Interest expense | (2,078,000 | ) | (1,234,000 | ) | (2,156,000 | ) | (1,997,000 | ) | ||||||
| Gain on disposition of asset | 513,000 | -- | 2,412,000 | -- | ||||||||||
| Net loss | $ | (2,050,000 | ) | $ | (7,651,000 | ) | $ | (438,000 | ) | $ | (17,075,000 | ) | ||
Net loss per common share, basic and diluted | $ | (0.07 | ) | $ | (0.41 | ) | $ | (0.02 | ) | $ | (0.95 | ) | ||
Weighted average shares outstanding, | ||||||||||||||
| basic and diluted | 28,301,000 | 18,702,000 | 28,140,000 | 18,035,000 | ||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
4
ALLIANCE PHARMACEUTICAL CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six months ended December 31, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
Operating activities: | ||||||||
| Net loss | $ | (438,000 | ) | $ | (17,075,000 | ) | ||
| Adjustments to reconcile net income (loss) to net cash used in operations: | ||||||||
| Depreciation and amortization | -- | 3,134,000 | ||||||
| Expense associated with option or warrant issuance | 3,000 | 212,000 | ||||||
| Expense associated with debt issuance | 2,000,000 | -- | ||||||
| Loss on investment | -- | 500,000 | ||||||
| Gain on disposition of assets | (2,412,000 | ) | -- | |||||
| Changes in operating assets and liabilities: | ||||||||
| Restricted cash and other assets | 567,000 | 671,000 | ||||||
| Accounts payable and accrued expenses and other | (1,467,000 | ) | 4,377,000 | |||||
| Net cash used in operating activities | (1,747,000 | ) | (8,181,000 | ) | ||||
Investing activities: | ||||||||
| Property, plant and equipment | -- | 45,000 | ||||||
| Proceeds from disposition of assets | 760,000 | -- | ||||||
| Net cash provided by investing activities | 760,000 | 45,000 | ||||||
Financing activities: | ||||||||
| Issuance of common stock | 145,000 | -- | ||||||
| Issuance of convertible preferred stock - net | -- | 250,000 | ||||||
| Proceeds from debt | 500,000 | 5,307,000 | ||||||
| Proceeds from revolving line of credit | -- | 1,370,000 | ||||||
| Net cash provided by financing activities | 645,000 | 6,927,000 | ||||||
Decrease in cash and cash equivalents | (342,000 | ) | (1,209,000 | ) | ||||
| Cash and cash equivalents at beginning of period | 763,000 | 1,416,000 | ||||||
| Cash and cash equivalents at end of period | $ | 421,000 | $ | 207,000 | ||||
Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | -- | $ | 235,000 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Issuance of common stock upon conversion of notes | $ | -- | $ | 552,000 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements
5
ALLIANCE PHARMACEUTICAL CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel medical products.
Liquidity and Basis of Presentation
The accompanying financial statements are prepared assuming the Company is a going concern. The Company lacks sufficient working capital to fund its operations for the entire fiscal year ending June 30, 2004. Therefore, substantial additional capital resources will be required to fund the ongoing operations related to the Company’s research, development, manufacturing and business development activities. Management believes there are a number of potential alternatives available to meet the continuing capital requirements, such as public or private financings or collaborative agreements, and is actively pursuing all the alternatives. In addition, the Company continues to reduce its ongoing expenses and has significantly curtailed its operating plans. The quarterly financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary Molecular Biosystems, Inc. (“MBI”) from the acquisition date of December 29, 2000, its wholly owned subsidiaries Astral, Inc., MDV Technologies, Inc., Alliance Pharmaceutical GmbH, its majority-owned subsidiary Talco Pharmaceutical, Inc., and its majority- owned subsidiary PFC Therapeutics, LLC (“PFC Therapeutics”) from June 18, 2003 when Alliance acquired Baxter Healthcare Corporation’s (“Baxter”) ownership interest. Our subsidiaries have minimal operations and significant intercompany accounts and transactions have been eliminated.
Interim Condensed Financial Statements
The condensed consolidated balance sheet as of December 31, 2003, the condensed consolidated statements of operations for the three months and six months ended December 31, 2003 and 2002, and the condensed consolidated statements of cash flows for the six months ended December 31, 2003 and 2002 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2003.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates.
6
Cash and Cash Equivalents
The Company considers instruments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Cash and cash equivalents are financial instruments that potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government securities and debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and modified to take advantage of trends in yields and interest rates. The Company has not experienced any material losses on its short-term investments.
Revenue Recognition
Revenue is generally recognized when all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured.
Research and Development Revenues Under Collaborative Agreements
Research and development revenues under collaborative agreements are recognized as the related expenses are incurred, up to contractual limits. Payments received under these agreements that are related to future performance are deferred and recorded as revenue as they are earned over the specified future performance period. Revenue related to nonrefundable, upfront fees are recognized over the period of the contractual arrangements as performance obligations related to the services to be provided have been satisfied. Revenue related to milestones is recognized upon completion of the milestone’s performance requirement. Revenue from product sales is recognized upon the transfer of title, which is generally when products are shipped.
Licensing and Royalty Revenues
Licensing and royalty revenues for which no services are required to be performed in the future are recognized immediately, if collectibility is reasonably assured.
Research and Development Expenses
Research and development expenditures are charged to expense as incurred. Research and development expenditures include the cost of salaries and benefits for clinical, scientific, manufacturing, engineering and operations personnel, payments to outside researchers for preclinical and clinical trials and other product development work, payments related to facility lease and utility expenses, depreciation and amortization, patent costs, as well as other expenditures.
Computation of Net Loss Per Common Share
Basic loss per share was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. All potential dilutive common shares have been excluded from the calculation of diluted loss per share for the three months and six months ended December 31, 2002 and 2003, as their inclusion would be anti-dilutive.
7
Accounting for Stock–Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, an amendment to SFAS No. 123. In accordance with its provisions, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation cost has been recognized for stock options during the three-month and six-month periods ended December 31, 2003 and 2002. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date and amortized to expense over their vesting period as prescribed by SFAS No. 123, the Company’s net loss and net loss per share would have been increased to the pro forma amounts indicated below for the three months and six months ended December 31:
| Three Months Ended December 31 | Three Months Ended December 31 | Six Months Ended December 31 | Six Months Ended December 31 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Net loss | ||||||||||||||
| As reported | $ | (2,050,000 | ) | $ | (7,651,000 | ) | $ | (438,000 | ) | $ | (17,075,000 | ) | ||
| Fair value of stock-based | ||||||||||||||
| employee compensation | (198,000 | ) | (727,000 | ) | (393,000 | ) | (2,002,000 | ) | ||||||
| Pro forma | $ | (2,248,000 | ) | $ | (8,378,000 | ) | $ | (831,000 | ) | $ | (19,077,000 | ) | ||
| Net loss per share, basic and diluted | ||||||||||||||
| As reported | $ | (0.07 | ) | $ | (0.41 | ) | $ | (0.02 | ) | $ | (0.95 | ) | ||
| Pro forma | $ | (0.08 | ) | $ | (0.45 | ) | $ | (0.03 | ) | $ | (1.06 | ) | ||
The impact of outstanding non-vested stock options granted prior to 1996 (the effective date of SFAS 123) has been excluded from the pro forma calculations; accordingly, the pro forma adjustments for the three-month and six-month periods ended December 31, 2003 and 2002 are not indicative of future period pro forma adjustments if the calculation reflected all applicable stock options. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions for all periods: risk-free interest rate range of 3.25% to 6.5%; dividend yield of 0%; volatility factor of 135%; and a weighted–average expected term of 7 years. The estimated weighted average fair value at grant date for the options granted during the six-month period ended December 31, 2003 was $0.16 per option. (No options were granted during the three-month period ended December 31, 2003.) The estimated weighted average fair value at grant date for the options granted during the three-month and six-month periods ended December 31, 2002 was $0.08 and $0.26 per option, respectively.
Comprehensive Income (Loss)
SFAS No. 130, “Comprehensive Income” requires unrealized gains and losses on the Company’s available-for-sale securities to be included in accumulated comprehensive income (loss). During the three months and six months ended December 31, 2003, the total comprehensive income (loss) was the same as the reported net income. During the three months and six months ended December 31, 2002, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $7.7 million and $17.1 million, respectively.
8
2. PFC THERAPEUTICS, LLC
In May 2000, Alliance and Baxter entered into a joint venture for the manufacture, marketing, sales, and distribution ofOxygent TM in the Europe and North America. The companies formed PFC Therapeutics to oversee the further development, manufacture, marketing, sales, and distribution ofOxygent. The Company accounted for its investment of $5 million in PFC Therapeutics from May 2000 through June 2003 using the equity method of accounting. There was no operating activity within the joint venture from May 2000 through June 2003 and, therefore, there were no gains and losses resulting in the joint venture.
In June 2003, Alliance acquired Baxter’s 50% interest in PFC Therapeutics in exchange for contingent payments to Baxter based on the future commercial sales ofOxygent and other products. The percentage fee shall be two percent (2%) of all of Alliance’s or PFC Therapeutics’ future gross sales, if any, of the products, with a maximum percentage fee of $30 million. In accordance with FASB No. 141,Business Combinations, the Company has not recorded the value of the potential consideration to be issued to Baxter for Baxter’s ownership interest in PFC Therapeutics as the future payments are contingent on future commercial sales of an undeveloped product.
PFC Therapeutics maintained $10 million of assets (of which the Company’s investment in PFC Therapeutics was $5 million) as of June 30, 2002 and 2001, and had no operating activity (except the purchase of the prepaid royalty of $10 million from Alliance in 2000) since inception of the joint venture.
3. SALE OF Imagent® BUSINESS
On June 18, 2003, Photogen Technologies, Inc. (“Photogen”) acquired certain assets and assumed certain liabilities from Alliance for approximately $1.1 million in cash and $3.5 million of Photogen common stock. During the period between 90 and 365 days after the closing, Photogen is obligated to pay up to $3 million and deliver up to an aggregate of 1,985,522 shares of its common stock to certain creditors of Alliance. The amount of consideration was determined through arms-length negotiation. Alliance recorded a gain from sale of assets of $10.6 million during the year ended June 30, 2003 related to this disposition of an asset. During the second fiscal quarter ended December 31, 2003, Alliance recorded $513,000 as a gain on the disposition of an asset as a result of Photogen funding $498,000 of Alliance’s obligations and $15,000 related to settlement agreements entered into with creditors to reduce its obligations. For the six-month period ended December 31, 2003, Alliance recorded $2.4 million as a gain on the disposition of an asset as a result of Photogen funding $760,000 of Alliance’s obligations and $1.7 million related to creditor settlements. To date, Alliance has recorded $13 million as a gain on the disposition of an asset as a result of Photogen funding $1.4 million of Alliance’s obligations, and $11.6 million related to settlement agreements.
The remaining required cash payments and issuances of common stock by Photogen will not be applied against the corresponding liabilities of Alliance until Alliance is legally released from the associated liabilities. Alliance will record an additional gain on disposition of assets at the time that Alliance is legally released from the liabilities.
In addition, subsequent to the closing and through 2010, Photogen is obligated to pay Alliance further consideration in the form of an earn-out based onImagent revenue invoiced (subject to certain reductions). The assets acquired by Photogen include all of Alliance’s assets related to designing, developing, manufacturing, marketing, selling, licensing, supporting and maintaining itsImagent product, an ultrasound contrast agent that was approved by the Federal Food & Drug Administration (“FDA”) for marketing in the United States in June 2002.
9
The amount of the earn-out will equal, for each year of the earn-out: (i) 7.5% ofImagent revenue up to $20,000,000; (ii) 10% ofImagent revenue between $20,000,000 and $30,000,000; (iii) 15% ofImagent revenue between $30,000,000; and (iv) $40,000,000 and 20% ofImagent revenue above $40,000,000. The earn-out will be reduced by amounts Photogen must pay pursuant to a license agreement with Schering Aktiengesellschaft (“Schering”), net of payments they receive from Schering under the license, and amounts of any indemnification claims Photogen has against Alliance. The earn-out is subject to three additional offsets (which are to be applied in the manner described in the Asset Purchase Agreement dated June 18, 2003 by and between Alliance and Photogen (the “Asset Purchase Agreement”) that entitle Photogen to retain portions of the earn-out otherwise payable to Alliance:
| • | Up to approximately $1,600,000 for a fixed price offset, depending on the satisfaction of certain conditions; |
| • | The amount of any payments not committed to at closing Photogen makes after the closing to Alliance’s creditors plus up to $1,000,000 of litigation expenses for certain patent and other litigation; and |
| • | Between $4,000,000 and $5,000,000, which is the principal and accrued interest under Photogen’s bridge loans to Alliance, depending on the satisfaction of certain conditions. |
The gain on disposition ofImagentassets of $2.4 million for the six months ended December 31, 2003 is calculated as follows (in thousands):
| Photogen funding of Alliance's obligations | $ | 760 | |||
| Settlement agreements entered into with vendors and creditors | 1,652 | ||||
| Gain on dispostion of Imagent assets for the six months ended 12/31/03 | $ | 2,412 | |||
The gain on disposition ofImagentassets of $13 million from the date of the sale to December 31, 2003 is calculated as follows (in thousands):
| Photogen bridge loan to Alliance of $4,725 and accrued | |||||
| interest of $86, which was converted into a requirement by | |||||
| Alliance to provide future royalty payments to Photogen | $ | 4,811 | |||
| Cash payments by Photogen for operating expenses on behalf of Alliance | 1,417 | ||||
| Assumption by Photogen of operating liabilities and other debt | |||||
| and settlements with vendors and creditors of Alliance | 6,040 | ||||
| Assumption by Photogen of Cardinal Health Agreement and related | |||||
| line of credit | 2,460 | ||||
| Assumption by Photogen of secured debentures, which held an effective | |||||
| 100% annualized interest rate (Photogen has made payments of | |||||
| $1.25 million as of June 30, 2003) | 5,541 | ||||
| Carrying value of fixed assets of Alliance acquired by Photogen | (7,240 | ) | |||
| Gain on sale of assets of Imagent to Photogen | $ | 13,029 | |||
10
4. DEBT OBLIGATIONS
On November 20, 2003, PFC Therapeutics sold a Secured Convertible Note in the principal amount of $500,000 (the “PFC Note”) to an investor. According to the terms of the PFC Note, upon consummation of a financing, the outstanding principal amount of the PFC Note shall, at the option of the investor, convert into an equity interest in PFC Therapeutics on the terms of equity portion (if any) of the financing. For purposes of the PFC Note, “financing” is defined as any financing pursuant to which the Company receives gross proceeds of $10 million. In the event the PFC Note is not converted in connection with a financing, Alliance shall assign to the investor, as full repayment of the PFC Note, 100% of the earn-out, up to an aggregate maximum amount of $1.5 million, to be paid toOxygentcreditors after January 1, 2006 (as defined in theImagent Asset Purchase Agreement dated June 18, 2003 by and between Alliance and Photogen). The investor also received a warrant to purchase a number of units of membership interests of PFC Therapeutics representing 10% of its issued and outstanding units (determined on a fully-diluted basis on the date of exercise of the warrant) at an exercise price of $0.01 per unit, at any time or from time to time from January 31, 2004 to and including January 31, 2009. The principal amount of the PFC Note is classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2003. The Company recorded imputed interest expense of $1 million and a beneficial conversion feature charge of $1 million (included in interest expense) during the three months ended December 31, 2003 based on the valuation of the warrant issued in connection with the PFC Note.
As of June 18, 2003, the Company had received $5.8 million through the issuance of 8% Convertible Secured Promissory Notes (the “Notes”) to various institutional investors ($1.1 million) and Photogen ($4.7 million). The Notes were to mature in two years from the date of issuance and were convertible into shares of Alliance’s common stock at $0.35 per share. Alliance’s obligations under the Notes were secured by certain of its assets, including all of its assets related to and its rights and interests inImagent andOxygent. In connection with the issuance of the Notes, Alliance obtained the consent and waiver of anti-dilution rights from a majority of the investors in the Company’s October 2001 private placement. The Company also obtained a similar consent and waiver from the holders of its 5% Convertible Debentures (the “2004 Debentures”) issued in 2000. As amended in February 2003, these consents and waivers applied to any future issuance of notes by the Company on the same terms as the Notes up to an aggregate of $5 million. The Company reduced the exercise price on the warrants issued to the investors in the October 2001 private placement from $3.38 to $0.35 per share, in accordance with the terms of the warrants. Alliance reduced the conversion rate of the 2004 Debentures to $1.60 per share. Alliance also agreed to issue warrants exercisable for an aggregate of 2,000,000 shares of common stock, at an exercise price of $0.50 per share, to holders of its 2004 Debentures and granted them a junior lien in the assets securing the Notes.
In connection with the sale of all of the assets related to designing, developing, manufacturing, marketing, selling, licensing, supporting and maintainingImagent, the holders of the Notes (excluding Photogen) and the holders of the 2004 Debentures agreed to accept a Payout Amount (as defined in the Asset Purchase Agreement) in full satisfaction of Alliance’s obligations and liabilities under such Notes and 2004 Debentures. To induce the debt holders to enter into this agreement, Alliance and Photogen agreed to deliver certain consideration to each as described in the Asset Purchase Agreement and summarized below. The outstanding balance of the Notes is $1.2 million, including accrued interest, at December 31, 2003, and is classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2003. The debt of $4.8 million, including accrued interest, due to Photogen has been forgiven by Photogen and will be repaid through a reduction of futureImagentroyalty payments, if any. In the event there are no futureImagent royalty payments, the value of the Notes will remain forgiven.
11
Upon delivery of the specified consideration, Alliance’s obligations under the Notes and the 2004 Debentures shall be terminated and satisfied in full, and each of the loan documents shall be deemed terminated and of no further effect. The obligation of Photogen to the debt holders to deliver the consideration contemplated in the Asset Purchase Agreement is a direct obligation of Photogen for the benefit of Alliance, fully enforceable against Photogen irrespective of any actions, financial condition or other circumstances relating to Photogen. The Company will reduce the carrying value of the short-term debt totaling $12.1 million and accrued interest of $0.9 million at December 31, 2003 upon Photogen providing the remaining required cash payments and as the common stock is distributed to the debt holders. The Company will not receive a formal legal release of the outstanding obligations from the related debt holders until the payments are made and/or the shares are distributed; therefore, the Company will maintain these liabilities until settled by Photogen, at which time the Company will record a corresponding gain on disposition of assets.
Alliance’s specified consideration includes the issuance of an aggregate of 4,555,000 shares of common stock, which were issued on June 19, 2003, to certain secured creditors; cash payments funded by Photogen made at closing and to be made during the period between 90 and 365 days after the closing; and up to an aggregate of 14.84% interest ofOxygent technology. If Photogen meets its obligation in funding the cash payments to Alliance’s debt holders and creditors, Alliance’s short-term debt as recorded at December 31, 2003, will be decreased by $12.1 million, along with reductions in accounts payable and accrued expenses; however, the Company will value the interest inOxygent technology provided to certain creditors and record this value as deferred royalty payments. As of December 31, 2003, the Company has recorded deferred royalty payments of $750,000. Reductions to accounts payable and accrued expenses totaled $760,000 due to cash payments, which were funded by Photogen, to vendors and creditors and $1.7 million due to settlements with vendors and creditors during the six-month period ended December 31, 2003. For settlement agreements with vendors and creditors that provide for extended repayment terms, the Company will continue to record the entire outstanding obligation, less payments to date, as the Company will not be released from the full liability until it has repaid the entire settlement amount. Upon repaying the agreed-upon settlement amount, the Company will record a gain on settlement with creditors.
In July and August 2002, the Company entered into two separate loan and security agreements, totaling $3 million, with an investment firm. In connection with these transactions, the Company issued warrants to purchase up to 200,000 shares of common stock at an exercise price of $3.38 per share. As part of the sale of theImagent assets, Photogen assumed Alliance’s obligation under these two loan and security agreements.
In November 2000, the Company sold $7 million of five-year 6% subordinated convertible notes. The notes were convertible at any time after November 15, 2001, at each investor’s option into shares of Alliance common stock at $78.60 per share (as adjusted for the 1:5 reverse stock split), subject to certain antidilution provisions. In connection with the transaction, Alliance placed $1.5 million in a restricted cash account to be used to pay interest on the issued notes. The balance of the restricted cash account of $532,000 was withdrawn by the investors during the quarter ended September 30, 2003. The outstanding principal balance of $6.5 million is due and payable and classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2003. Photogen is responsible for the remaining balance of the liabilities; however, if Photogen is unable to make the necessary payments, the convertible note holders have recourse against the Company. Pursuant to the agreement, the investors will also receive shares of Photogen common stock.
12
In August and September 2000, the Company sold $12 million of four-year 5% subordinated convertible debentures to certain investors. In connection with the issuance of the Notes described above, Alliance obtained the consent and waiver of antidilution rights from the investors. On June 18, 2003, the balance outstanding on these debentures was $5.9 million. Pursuant to a payout agreement, the Company issued 1,250,000 shares of common stock and paid $100,000 in cash to one of the investors. As of December 31, 2003, the outstanding principal balance is $4.5 million and accrued interest is $733,000. The outstanding principal balance and accrued interest are due and payable and classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2003. Photogen is responsible for the remaining balance of the liabilities; however, if Photogen is unable to make the necessary payments, the convertible debenture holders have recourse against the Company. Pursuant to the agreement, the investors will also receive shares of Photogen common stock.
Pursuant to a settlement agreement with a former landlord, the Company has a commitment to pay $420,000 pursuant to a schedule included in the agreement. Accordingly, Alliance made its first payment of $15,000 and has included the balance of the compromised amount in accrued expenses in the Consolidated Balance Sheet at December 31, 2003.
5. PREFERRED STOCK
In May 2000, the Company entered into a joint venture with Baxter and sold 500,000 shares of its convertible Series F Preferred Stock for $20 million. For the 2003, 2002 and 2001 fiscal years, the Company sold to Baxter 6,250, 187,500 and 100,000 additional shares of its convertible Series F Preferred Stock for $250,000, $7.5 million and $4 million, respectively. The shares are convertible at Baxter’s option on or after May 14, 2004. If Alliance’s common stock price averages $22 per share over a 20-day period within the next two years, the conversion price for the Series F Preferred Stock will be $22 (prior to effect of reverse-stock split) per share. If the stock does not reach that price, the conversion price will be based on the market value of Alliance’s common stock at the time of conversion, subject to certain limitations. The Series F Preferred Stock has no annual dividend and is not entitled to any voting rights except as otherwise required by law. There are currently no shares of Series G Preferred Stock or Series H Preferred Stock outstanding.
“Certain limitations” refers to the situation where if a conversion event occurs or a conversion election is made and conversion of shares of Series F Preferred Stock, Series G Preferred Stock or Series H Preferred Stock (the shares of the three series collectively, the “Preferred Shares”) would, when taken together with the conversion of any other Preferred Shares, result in the issuance by the Company of a number of shares (the “Additional Shares”) of its Common Stock greater than the “Issuance Limit,” then the Company need not issue the Additional Shares, unless it first obtains shareholder approval of the issuance of the Additional Shares. “Issuance Limit” means 9,389,477 shares (before reverse-stock split) of Common Stock (that is, 19.9% of the shares of Common Stock issued and outstanding as of May 16, 2000). If the Company does not obtain shareholder approval for the issuance of the Additional Shares or, in any event, does not, prior to the expiration of 120 days after such conversion event or conversion election, issue the Additional Shares required to be issued as a result of such conversion event or conversion election, the Company shall pay to each person entitled to receive such Additional Shares an amount in cash equal to the aggregate market price of such Additional Shares on the day that the conversion event occurred or the conversion election was made. The market price for such day shall be the last reported sales price on the principal exchange on which the Common Stock is listed, or, if it is not so listed, the Nasdaq National Market or, if it is not so listed, on the over-the-counter market.
13
6. SUBSEQUENT EVENTS
IMCOR Pharmaceutical Co. (“IMCOR”), formerly known as Photogen Technologies, Inc., held a special meeting of its stockholders on February 5, 2004, where its stockholders approved the issuance of more than 20% of the Company’s voting stock to certain creditors of Alliance and IMCOR in connection with IMCOR’s acquisition of Alliance’s assets related to its imaging and diagnostic imaging business, which closed on June 18, 2003. When such stock is issued to Alliance’s creditors, short-term debt will be reduced by approximately $8.4 million.
The Company reached an agreement on February 13, 2004 pursuant to which the PFC Note will be converted into equity in PFC Therapeutics, and the warrant issued to the holder of the PFC Note will be cancelled.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(References to years are to the Company’s fiscal years ended June 30.)
Since commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred operating losses since inception and, as of December 31, 2003, has an accumulated deficit of $488.9 million. The Company expects to incur significant operating losses over at least the next few years as the Company continues its research and product development efforts and attempts to commercialize its products.
The Company’s revenues have come primarily from collaborations with corporate partners, including research and development, milestone and royalty payments. The Company’s expenses have consisted primarily of research and development costs and administrative costs. To date, the Company’s revenues from the sale of products have not been significant. The Company believes its future operating results may be subject to quarterly fluctuations due to a variety of factors, including the timing of future collaborations and the achievement of milestones under collaborative agreements, whether and when new products are successfully developed and introduced by the Company or its competitors, and market acceptance of products under development.
Forward-Looking Information
Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company’s business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company’s actual results and could cause the Company’s actual consolidated results for 2004, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company’s development efforts; the inability to enter into collaborative relationships to further develop and commercialize the Company’s products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company’s products; the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties associated with obtaining and enforcing patents important to the Company’s business; and possible competition from other products. Furthermore, even if the Company’s products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the Securities and Exchange Commission from time to time, including the latest Form 10-K.
14
Research and Development
In fiscal 2003, 2002 and 2001, the Company incurred research and development expenses forOxygent, an intravascular oxygen carrier being developed to augment oxygen delivery in surgical and other patients at risk of acute oxygen deficit, of $3.1 million, $13.9 million, and $27.1 million, respectively. Research and development costs to date for our oxygen-carrying product candidates, includingOxygent, total approximately $154 million. While difficult to predict, we estimate that the completion of clinical trials will cost at least an additional $60 million. We do not anticipate thatOxygent will reach the market for at least a few years, and, because of the numerous risks and uncertainties associated with product development efforts, we are unable to predict the extent of any future expenditures or when material net cash inflows fromOxygent may commence, if at all.
Astral Inc. is engaged in the development of immunoglobulins that are engineered to bear specific disease-associated peptides. In fiscal 2003, 2002 and 2001, Astral incurred research and development expenses of $1.5 million, $2.9 million, and $2 million, respectively. Astral’s research and development costs to date total approximately $11 million. Because of the numerous risks and uncertainties associated with early-stage technology platform research efforts, we are unable to estimate with any certainty the costs of continued development of Astral’s product candidates for commercialization. We do not anticipate that any of Astral’s early-stage product candidates will reach the market for at least several years, if at all.
In December 2002, Alliance entered into an exclusive license agreement with Mixture Sciences, Inc. (“Mixture Sciences”) for Mixture Sciences to acquire all rights to a proprietary immunotherapy platform technology developed by Astral, Inc. Mixture Sciences provided financing to support the overhead and salaries of key employees involved with this technology for a secured position in the technology subject to a royalty-bearing license. Alliance has certain rights to repurchase the technology by paying Mixture Sciences a break-up fee. Alliance has recorded the funds, totaling $285,000 at December 31, 2003, from Mixture Sciences as a current liability.
In fiscal 2003, 2002 and 2001, the Company incurred research and development expenses forImagent (an ultrasound contrast agent that was approved by the Federal Food and Drug Administration for marketing in the United States in June 2002) of $11 million, $12.9 million, and $12.4 million, respectively. Research and development costs to June 18, 2003 forImagent, totaled approximately $159 million. In fiscal 2003, 2002 and 2001, Alliance incurred research and development expenses of $0.6 million, $3.8 million, and $13.8 million, respectively, associated with identifying and developing new product candidates from proprietary technology platforms. Research and development costs to date for these early-stage efforts total approximately $165 million. Because of the numerous risks and uncertainties associated with early-stage technology platform research efforts, we are unable to estimate with any certainty the costs of continued development of any product candidates for commercialization. Alliance’s development programs will depend upon our ability to fund them. We do not anticipate that any of our early-stage product candidates will reach the market for at least several years, if at all.
15
The Company may encounter unforeseen technical or other problems that may force delay, abandonment or substantial change in the development of a specific product or process, technological change, or product development by others, any of which may materially adversely affect its business.
Results of Operations
Six Months ended December 31, 2003 as Compared with Six Months ended December 31, 2002
For the six months ended December 31, 2003, the Company recorded a gain on the disposition of assets of $2.4 million resulting from payments (totaling $760,000) from Photogen to fund Alliance’s obligations and settlements (totaling $1.7 million) with various vendors and creditors during the period in connection with theImagent asset sale transaction. For settlement agreements with vendors and creditors that provide for extended repayment terms, the Company has recorded the entire outstanding obligation less payments to date, as the Company will not be released from the full liability until completing the repayment terms. Upon repaying the agreed-upon settlement amount, the Company will reduce the outstanding obligation to zero and will record a gain on settlement with creditors.
The Company’s revenue increased to $64,000 for the six months ended December 31, 2003, compared to $31,000 for the six months ended December 31, 2002. This increase is due to an increase in royalties received.
Research and development expenses decreased by 96% to $383,000 for the six months ended December 31, 2003, compared to $10.2 million for the six months ended December 31, 2002. The decrease in expenses was primarily due to the downsizing, consolidation of facilities and no manufacturing, all of which are connected with the sale of theImagent assets, as well as to decreases related to the Company’s other research and development activities.
General and administrative expenses decreased by approximately 90% to $465,000 for the six months ended December 31, 2003, compared to $4.8 million for the six months ended December 31, 2002. The decrease in general and administrative expenses was primarily due to a $1.7 million decrease in professional fees related to marketing activities, as well as to decreases in other expenses due to the downsizing and consolidation of facilities connected with the sale of theImagent assets.
Investment income was $6,000 for the six months ended December 31, 2003, compared to $49,000 for the six months ended December 31, 2002. The decrease was primarily a result of lower average cash balances.
Other income was $84,000 for the six months ended December 31, 2003, primarily a result of proceeds recorded from insurance dividends and distributions, compared to $329,000 for the six months ended December 31, 2002, which was primarily a result of proceeds recorded from the settlement of a lawsuit.
Loss on investment of $500,000 was recorded in fiscal year 2003 when the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.”
16
Interest expense was $2.2 million for the six months ended December 31, 2003, compared to $2 million for the six months ended December 31, 2002. The increase was primarily a result of imputed interest and beneficial conversion expenses of $2 million recorded in connection with the terms of the PFC Note, partially offset by debt settlements connected with the sale of theImagent assets.
Three Months ended December 31, 2003 as Compared with Three Months ended December 31, 2002
For the three months ended December 31, 2003, the Company recorded a gain on the disposition of assets of $513,000 resulting from payments (totaling $498,000) from Photogen to fund Alliance’s obligations and settlements (totaling $15,000) with various vendors and creditors during the period in connection with the Imagent asset sale transaction. For settlement agreements with vendors and creditors that provide for extended repayment terms, the Company has recorded the entire outstanding obligation less payments to date, as the Company will not be released from the full liability until completing the repayment terms. Upon repaying the agreed-upon settlement amount, the Company will reduce the outstanding obligation to zero and will record a gain on settlement with creditors.
The Company’s revenue increased to $47,000 for the three months ended December 31, 2003, compared to $10,000 for the three months ended December 31, 2002. This increase is due to an increase in royalties received.
Research and development expenses decreased by 95% to $209,000 for the three months ended December 31, 2003, compared to $4 million for the three months ended December 31, 2002. During the quarter, as a result of the PFC Note, the Company was able to make payments for the initiation of certainOxygentdevelopment activities. The decrease in expenses was primarily due to the downsizing, consolidation of facilities and no manufacturing, all of which are connected with the sale of theImagent assets, as well as to decreases related to the Company’s other research and development activities.
General and administrative expenses decreased by 82% to $337,000 for the three months ended December 31, 2003, compared to $1.9 million for the three months ended December 31, 2002. General and administrative expenses recorded for the quarter were primarily legal and accounting fees, and SEC-related expenses (i.e., proxy, annual report, etc.) The decrease in general and administrative expenses was primarily due to no marketing activities costs, as well as to decreases in other expenses due to the downsizing and consolidation of facilities connected with the sale of theImagent assets.
Investment income was $2,000 for the three months ended December 31, 2003, compared to $17,000 for the three months ended December 31, 2002. The decrease was primarily a result of lower average cash balances.
Loss on investment of $500,000 was recorded in fiscal year 2003 when the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.”
Interest expense was $2.1 million for the three months ended December 31, 2003, compared to $1.2 million for the three months ended December 31, 2002. The increase was primarily the result of imputed interest and beneficial conversion expenses of $2 million recorded in connection with the terms of the PFC Note, partially offset by debt settlements connected with the sale of theImagent assets.
Alliance expects to continue to incur substantial expenses associated with its research and development programs. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company’s historical results are not necessarily indicative of future results.
17
Liquidity and Capital Resources
Through December 31, 2003, the Company has financed its activities primarily from public and private sales of equity, debt issuance and funding from collaborations with corporate partners.
On June 18, 2003, Photogen acquired theImagent assets and assumed certain liabilities from Alliance for approximately $1.1 million in cash and $3.5 million of Photogen common stock. During the period between 90 and 365 days after the closing, Photogen is obligated to pay up to $3 million and deliver up to an aggregate of 1,985,522 shares of its common stock to certain creditors. The amount of consideration was determined through arms-length negotiation. In addition, subsequent to the closing and through 2010, Photogen is obligated to pay Alliance further consideration in the form of an earn-out based onImagent revenue invoiced (subject to certain reductions). See Note 2 to the Unaudited Condensed Consolidated Financial Statements above.
As part of Photogen’s purchase of theImagent assets, Photogen assumed certain debt obligations that Alliance entered into in July and August 2002, which included two separate loan and security agreements that totaled $3 million with an investment firm at an effective 100% annualized interest rate. Photogen assumed a total of $3.8 million plus unpaid accrued interest.
The rights Alliance was entitled to under the Schering License Agreement were transferred to Photogen at the consummation of its acquisition of theImagent assets. Photogen also assumed a marketing agreement and line of credit totaling $2.5 million in connection with its acquisition of theImagent assets.
As of June 18, 2003, the Company had received $5.8 million through the issuance of the Notes to various institutional investors and Photogen. In connection with the sale of theImagent assets, the holders of the Notes (excluding Photogen) and the holders of the 2004 Debentures agreed to accept a Payout Amount (as defined in the Asset Purchase Agreement) in full satisfaction of Alliance’s obligations and liabilities under such Notes and 2004 Debentures. To induce the debt holders to enter into this agreement, Alliance and Photogen agreed to deliver certain consideration to each as described in the Asset Purchase Agreement. Upon delivery of the specified consideration, Alliance’s obligations shall be terminated and satisfied in full, and each of the loan documents shall be deemed terminated and of no further effect. It is understood that the obligation of Photogen to the debt holders to deliver the consideration contemplated in the Asset Purchase Agreement is a direct obligation of Photogen for the benefit of Alliance, fully enforceable against Photogen irrespective of any actions, financial condition or other circumstances relating to Photogen hereafter. The outstanding principal balance on the Notes of $1.1 million and accrued interest of $146,000 are due and payable and classified as short-term debt in the Consolidated Balance Sheet at December 31, 2003. Pursuant to the agreement, the investors will also receive shares of Photogen common stock.
In November 2000, the Company sold $7 million of five-year 6% subordinated convertible notes to certain investors. In connection with the transaction, Alliance placed $1.5 million in a restricted cash account to be used to pay interest on the issued notes. The balance of the restricted cash account of $532,000 was withdrawn by the investors during the quarter ended September 30, 2003. The outstanding principal balance of $6.5 million is due and payable and classified as short-term debt in the Consolidated Balance Sheet at December 31, 2003. Pursuant to the agreement, the investors will also receive shares of Photogen common stock.
18
In August and September 2000, the Company sold $12 million of four-year 5% subordinated convertible debentures to certain investors. On June 18, 2003, the balance outstanding on these debentures was $5.9 million. Pursuant to the payout agreement, the Company issued 1,250,000 shares of common stock and paid $100,000 in cash to one of the investors. The outstanding principal balance of $4.5 million and accrued interest are due and payable and classified as short-term debt in the Consolidated Balance Sheet at December 31, 2003. Pursuant to the agreement, the investors will also receive shares of Photogen common stock.
On October 18, 2002, Alliance’s common stock was delisted from the Nasdaq National Market for failure to meet the continued listing requirements. The Company’s common stock is now trading on the Over-the-Counter Bulletin Board under the symbol ALLP.OB.
The Company had a net working deficit of $17.8 million at December 31, 2003, compared to $20.9 million at June 30, 2003. The Company’s cash and cash equivalents decreased to $421,000 at December 31, 2003, from $763,000 at June 30, 2003. The decrease resulted primarily from net cash used in operations of $1.7 million, partially offset by cash received from Photogen of $760,000 for payments to creditors in connection with the sale of theImagent assets, the $500,000 received from the sale of the PFC Note, and $145,000 received from the exercise of warrants and stock options. The Company’s operations to date have consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.
If the Company is successful in securing additional financing, the Company expects to incur substantial expenditures associated with product development. The Company may seek additional collaborative research and development relationships with suitable corporate partners for its products. There can be no assurance that such relationships, if any, will successfully reduce the Company’s funding requirements. Additional equity or debt financing may be required, and there can be no assurance that such financing will be available on reasonable terms, if at all. Because adequate funds were not available, the Company has delayed itsOxygent development efforts and it has delayed, scaled back, and eliminated one or more of its other product development programs, and it may be required to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish.
The Company lacks sufficient working capital to fund operations for the entire fiscal year ending June 30, 2004. Therefore, substantial additional capital resources will be required to fund the ongoing operations related to the Company’s research, development, and business development activities. The report of the Company’s independent auditors on the Company’s fiscal 2003 financial statements includes a paragraph that notes that the Company’s financial condition raises substantial doubt about its ability to continue as a going concern. Management believes there are a number of potential alternatives available to meet the continuing capital requirements such as public or private financings or collaborative agreements. Under the Asset Purchase Agreement of the sale of theImagent assets, the following debt was either assumed by Photogen or settled through payout agreements: $5.5 million of secured debt, $2.5 million drawn on a line of credit, a $2.4 million capital lease, $2.5 million in accounts payable and accrued expenses, and $12.1 million in secured convertible debt (which is still included in liabilities as of December 31, 2003). Also, as part of the agreement, the Photogen portion of the 8% convertible debt of $4.8 million has been forgiven and will be repaid by a reduction of futureImagent royalty payments, if any. See Note 2 to the Unaudited Condensed Consolidated Financial Statements above.
19
The Company is taking continuing actions to reduce its ongoing expenses. If adequate funds are not available, the Company will be required to significantly curtail its plans and may have to sell or license out significant portions of the Company’s remaining technologies or potential products. The quarterly 2004 financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
The Company’s future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in collaborative relationships, and the ability of the Company to establish additional collaborative relationships.
Critical Accounting Policies
We prepare our financial statements in conformity with generally accepted accounting principles in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These estimates and assumptions affect the reported balances and amounts within our financial statements and supporting notes thereto. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:
Basis of Presentation
The accompanying financial statements have been prepared assuming the Company is a going concern. The Company lacks sufficient working capital to fund operations for the entire fiscal year ending June 30, 2004. The fiscal 2004 financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from this uncertainty.
Revenue Recognition
Revenue is generally recognized when all contracted obligations have been satisfied and collection of the resulting receivables has occurred or is reasonably assured. Licensing and royalty agreements where we have no future obligations include the AmendedOptison Product Rights Agreement dated as of August 6, 2001 and the Supplemental Agreement with Inhale Therapeutic Systems, Inc. dated as of May 15, 2002.
Item 3. Controls And Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our Company (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.
20
(b) Changes in Internal Controls over Financial Reporting. During the most recent fiscal quarter, there have not been any significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II Other Information:
Item 1. Legal Proceedings
In September 2003, Mt. Sinai School of Medicine of New York University (“Mt. Sinai”) sued Alliance in a New York state court for alleged breach of two license and research agreements dating back to 1987 and 2001. The suit alleges that Alliance breached both the 1987 and 2001 agreements and demands $326,502.95 in damages plus interest. The suit also seeks a declaratory judgment that both the 1987 and 2001 agreements are void and of no effect. In answering the lawsuit, Alliance brought counterclaims of its own against Mt. Sinai alleging breach of the 1987 and 2001 agreements, a breach of good faith and fair dealing as to the 1987 agreement, a declaratory judgment that the 1987 agreement was still in effect and for an accounting of money spent by Alliance under both the 1987 and 2001 agreements. Alliance believes the suit lacks merit and plans a vigorous defense of its rights under both agreements; however, there can be no assurances that Alliance will ultimately prevail or that the outcome will not have a material adverse effect on the Company’s future financial position or results of operations.
On June 13, 2003, Alliance and Photogen jointly brought a patent infringement action against Amersham Health Inc., Amersham Health AS and Amersham Health plc (collectively, “Amersham”) in the United States District Court for the District of New Jersey. The lawsuit alleges that through the sale of Amersham’sOptison product, Amersham and its related entities infringe on seven patents acquired by Photogen through its purchase of theImagent assets. Alliance and Photogen are seeking damages and injunctive relief against Amersham. Amersham brought counterclaims against Alliance and Alliance’s subsidiary MBI asserting breach of contract claims, breach of good faith and fair dealing, and tortious interference with contractual relations against Alliance and MBI. Alliance and MBI believe that Amersham’s counterclaims are completely without merit; however, there can be no assurances that Alliance and MBI will ultimately prevail or that the outcome will not have a material adverse effect on the Company’s future financial position or results of operations.
On July 2, 2003, Hub Properties Trust (“Hub”) filed a lawsuit against Alliance, Immune Complex Corporation, Immune Complex, LLC (collectively “Immune Complex”), and Vaccine Research Institute of San Diego (“Vaccine”). Hub alleges that the defendants are liable for slightly less than $3.5 million of damages Hub suffered because Hub was unable to lease two properties due to defendants’ failure to timely deactivate the radiological materials licenses on the properties. Alliance was the primary tenant, Immune Complex was Alliance’s subtenant, and Vaccine was Immune Complex’s sub-subtenant. Immune Complex tendered its defense to Alliance. Alliance did not accept the tender of defense. On August 21, 2003, Immune Complex filed its cross-complaint for indemnity against Alliance. The dispute revolves primarily around Hub’s contention that Alliance and Vaccine did not obtain decommissioning of the Radioactive Material Licenses from the State of California prior to expiration of the leases, and should therefore pay for a holdover tenancy for the period between the time that Alliance, Immune Complex, and Vaccine vacated the property and the time of decommissioning. Alliance disputes Hub’s theory, and plans to file a cross-complaint against Hub for return of the Security Deposit funds remaining, approximately $500,000. A settlement conference has been scheduled for March of 2004.
21
On February 23, 2001, a lawsuit was filed by two former shareholders of MBI purportedly on behalf of themselves and others against the Company and certain of its officers. On March 1, 2001 and March 19, 2001, two additional similar lawsuits were filed by other former shareholders of MBI. The lawsuits, filed in the U.S. District Court for the Southern District of New York, allege that the Company’s registration statement filed in connection with the acquisition of MBI contains misrepresentations and omissions of material facts in violation of certain federal securities laws. In May 2001, the actions were consolidated. The plaintiffs are seeking rescission or compensatory damages, payment of fees and expenses, and further relief. In January 2002, the plaintiffs filed a second amended complaint adding an additional securities claim against the Company and the named officers. In August 2003, the court granted summary judgment as to certain securities claims and dismissed the claims, and denied summary judgment as to other securities claims. No trial date has been set in the lawsuit. The Company believes that the lawsuit is completely without merit; however, there can be no assurances that the Company will ultimately prevail or that the outcome will not have a material adverse effect on Company’s future financial position or results of operations.
In December 2001, a lawsuit was filed against MBI in the U.S. District Court for the Northern District of Illinois. The plaintiff in the action alleged that MBI breached a license agreement and sought an accounting, damages, a declaratory judgment terminating the license agreement, and payment of fees and expenses. In December 2003, the court entered a judgment in favor of MBI. On January 29, 2004, the court denied plaintiff’s motion to amend the judgment. Plaintiff has indicated that it intends to appeal the court’s judgment. The Company believes that an appeal is without merit; however, there can be no assurances that MBI will ultimately prevail or that the outcome will not have a material adverse effect on Company’s future financial position or results of operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| 4.1 | Secured Convertible Note Purchase Agreement dated November 20, 2003 by and among PFC Therapeutics and Technology Gateway Partnership, L.P. |
| 4.2 | Security Agreement dated November 20, 2003 by and among PFC Therapeutics and Technology Gateway Partnership, L.P. |
| 4.3 | Secured Convertible Note in the Principal Amount of $500,000, issued November 20, 2003 by PFC Therapeutics in favor of Technology Gateway Partnership, L.P. |
22
| 4.4 | Warrant issued November 20, 2003 by PFC Therapeutics to Technology Gateway Partnership, L.P. |
| 4.5 | Guaranty and Security Agreement dated November 20, 2003 by and among the Company and Technology Gateway Partnership, L.P. |
| 31.1 | Chief Executive Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Chief Accounting Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32. | Chief Executive and Chief Accounting Officers' Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K |
| None |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALLIANCE PHARMACEUTICAL CORP. | |
| (Registrant) | |
| /s/ DUANE J. ROTH | |
| Duane J. Roth | |
| Chairman, CEO, and Chief Financial Officer |
Date: February 19, 2004
24