Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 6,962,456 shares of common stock, $0.001 par value per share, issued and outstanding at November 18, 2006.
IMCOR PHARMACEUTICAL CO. AND SUBSIDIARY
See notes to consolidated financial statements.
IMCOR PHARMACEUTICAL CO. AND SUBSIDIARY
IMCOR PHARMACEUTICAL CO. AND SUBSIDIARY
IMCOR PHARMACEUTICAL CO. AND SUBSIDIARY
None.
In February 2005, the Company issued modified options in further settlement of claims by a former employee. The modification of the options resulted in a $42,250 decrease of accrued expenses with a corresponding increase in additional paid-in capital.
In September 2005, the Company entered into two simultaneous agreements with GE Healthcare Ltd. and Alliance Pharmaceutical Corp., for among other things, a technology cross license valued at $1,200,000 in favor of the Company, for which the Company received $1,000,000. By agreement, the balance, or $200,000, was paid directly by GE Healthcare Ltd. to Alliance Pharmaceutical Corp., resulting in an increase in license revenue deferred and a decrease in assumed acquisition liabilities.
The accompanying unaudited consolidated financial statements of IMCOR Pharmaceutical Co. and Subsidiary (Sentigen, Ltd., or “Sentigen”) (together, the “Company”), have been prepared without audit in accordance with generally accepted accounting principles in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. The consolidated balance sheet as of December 31, 2005 was derived from the Company's audited financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005, which has been filed with the Securities and Exchange Commission (“SEC”).
In the opinion of management, all adjustments considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the nine months ended September 30, 2006 may not be indicative of the results that may be expected for the full fiscal year.
The accompanying consolidated financial statements are prepared assuming the Company is a going concern. The Company has reported accumulated losses since inception of $91,269,365 and as of September 30, 2006, has a working capital deficit of $4,289,052. In addition, as indicated in more detail in Note 12, a restructuring plan was implemented commencing in the second quarter of 2005. Efforts to implement this restructuring plan are ongoing, as the Company seeks to maximize the value of its remaining technology assets.
The financial statements do not include any additional adjustments 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 any remaining uncertainties.
On June 7, 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No, 20, Accounting Changes and Statement No. 3 Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in years beginning after December 15, 2005; however, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS No. 154 during the nine months ended September 30, 2006 did not have a material effect on our financial statements or results of operations.
In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (“SFAS No. 155”). This statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first full fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year. We do not expect that the adoption of SFAS No. 155 will have a material effect on our financial statements or our results of operations.
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and liabilities in accordance with SFAS No. 140 be initially measured at fair value, if practicable. Furthermore, this standard permits, but does not require, fair value measurement for separately recognized servicing assets and liabilities in subsequent reporting periods. SFAS No. 156 is also effective for the Company beginning January 1, 2007; however, the standard is not expected to have any impact on the Company's financial position, results of operation or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in tax positions and requires that a Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have any impact on the Company's financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS 157 defines fair value, establishes a framework for measuring far value in generally accepted accounting principles and expands related disclosures about fair value measurements. This Statement focuses on creating consistency and comparability in fair value measurements. SFAS No. 157 is effective for the Company beginning January 1, 2008, including any interim reporting periods. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements.
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS 158 requires a business entity employer to recognize the funded status of a benefit plan (i.e., “over-funded” or “under-funded”), measures defined plan benefit plan assets and liabilities as of the related fiscal year end, and provides additional guidance on matters related to income statement recognition and disclosure in the financial statement notes. SFAS No. 158 is effective for the Company beginning in the current year ending December 31, 2006; however, the standard is not expected to have any impact on the Company's financial position, results of operation or cash flows, as the Company does not have any such plans or related obligations.
Certain reclassifications have been made to the prior periods' financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Basic and diluted loss per common share is computed based on the weighted average number of common shares outstanding. Loss per share excludes the impact of outstanding options, warrants and convertible preferred stock as they are anti-dilutive. Potential common shares excluded from the calculation at September 30 of each year are as follows:
Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123(R), “Share-Based Payments,” (“SFAS 123(R)”) which establishes the accounting for employee stock-based awards. Under the provisions of SFAS No.123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company adopted SFAS No. 123(R) using the modified prospective method and, as a result, periods prior to January 1, 2006 have not been restated. During the nine months ended September 30, 2006, the Company recognized stock-based compensation of $46,529 pursuant to SFAS No.123(R) in the “Selling, general and administrative” line item of the Consolidated Statement of Operations. Additionally, no modifications were made to outstanding stock options prior to the adoption of SFAS No. 123(R), and no cumulative adjustments were recorded in the Company's financial statements.
Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations. Under APB No. 25, compensation cost was recognized based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. In certain cases the Company granted stock options at an exercise price less than the market price on the date of grant, and accordingly compensation expense was recognized for the stock option grants in periods prior to the adoption of SFAS No. 123(R).
SFAS No. 123(R) requires disclosure of pro-forma information for periods prior to the adoption. The pro-forma disclosures are based on the fair value of awards at the grant date, amortized to expense over the service period. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for the period ending September 30 prior to the adoption of SFAS No. 123(R), and the actual effect on net income and earnings per share for the period after the adoption of SFAS No. 123(R).
For purposes of the above table, the fair value of each option granted is estimated as of the date of grant using the Black-Scholes option-pricing model using the weighted-average information for the following assumptions for the nine months ended September 30, 2005. There were no grants during the nine months ended September 30, 2006:
As of September 30, 2006, the Company had unrecognized compensation costs of $81,804 related to unvested stock options. This cost is expected to be recognized over a weighted average period of approximately 0.9 years.
The following summarizes the stock option activity for the nine months ended September 30, 2006:
In connection with its restructuring activities during the year ended December 31, 2005 the Company sold, disposed or wrote off all previously recorded property, plant and equipment. As a result of this activity the Company recorded a loss on disposal of equipment of approximately $249,000, and impairment charges related to equipment and leasehold improvements totaling approximately $3,265,000 during the nine months ended September 30, 2005.
The carrying values of the Purchased Technology had been amortized on a straight-line basis over their estimated useful lives ranging from 10-12 years through December 31, 2005. However, in light of the additional considerations addressed by the Company associated with its continuing restructuring activities, management determined as of December 31, 2005 that an impairment allowance of $11,373,572 for the Purchased Technology was appropriate.
The Purchased Technology is being held in contemplation of reaching one or more alternative transactions which, if successful, will result in net cash payments to the Company that will meet or exceed the Company's current estimate of value for this asset as recorded at December 31, 2005 and September 30, 2006.
During the nine months ended September 30, 2005 the Company sold its technology license assets and recorded an impairment charge of approximately $570,000. Following the sale and recording of the impairment charge, the net carrying value of the technology license assets was zero.
The “assumed acquisition obligations” relates primarily to past due payment obligations owed to several parties totaling $622,750 at December 31, 2005 and September 30, 2006.
During the quarter ended June 30, 2005, the former CEO's employment with the Company was terminated, and the Company recorded a reserve for severance totaling $275,000. This individual is also owed $206,250 for a bonus earned in 2004. No portion of these obligations, totaling $481,250, have been paid; such amounts are included in “accrued payroll, deferred bonuses and related expenses” at December 31, 2005 and September 30, 2006.
One of the Company's law firms had originally agreed to accept shares of the Company's common stock for a portion of their services rendered during the nine months ending June 30, 2005. However, prior to the end of this period, the law firm advised the Company that it preferred to be compensated for these services in cash payment, to the extent the Company is ultimately able to pay. The Company agreed to this request and has accordingly recorded this obligation, totaling $139,153, to “accrued legal fees.”
Incurred but unpaid interest totaling $121,567 and $193,963 at December 31, 2005 and September 30, 2006, respectively, which represents an increase of $72,396 during this period ending September 30, 2006, is included in “accrued interest,” and is associated with various interest-bearing obligations, including “notes payable unsecured” ($192,233), “accrued royalty fees” owed to Schering AG ($401,946) and various payable obligations associated with the “assumed acquisition obligations” referenced above ($622,750).
Incurred but unpaid board of directors fees at December 31, 2005 and September 30, 2006, including related fees for service on various committees, totaled $180,000 and are included in “other accrued expenses.” The respective amounts of $79,000 and $101,000, which comprise this balance, were incurred during the years ending December 31, 2004 and 2005.
10. Commitments and Contingencies:
In connection with litigation filed in 2003 by the Company and Alliance against Amersham Health, Inc. and two of its affiliates (collectively, “Amersham”), the Company entered into a Settlement Agreement and License (the “Amersham Settlement”) dated as of September 19, 2005 with Amersham, Alliance and Molecular Biosystems, Inc. The Amersham Settlement resolved the parties' claims arising under the case described above. Under the terms of the Amersham Settlement, the Company's technology cross license was valued at $1,200,000 in favor of the Company, for which the Company received $1,000,000 directly from Amersham. The balance, or $200,000, was paid directly by Amersham to Alliance which served as the cash consideration to Alliance under the separate but concurrent Alliance Settlement discussed below. The parties dismissed their litigation and granted each other fully paid-up, irrevocable, royalty-free, non-exclusive cross-licenses, with the right to sublicense, and mutual releases.
In addition, the Company entered into a Settlement Agreement with Alliance (the “Alliance Settlement”) dated as of September 19, 2005 pursuant to which: (i) each party's respective ongoing obligations to one another under the Asset Purchase Agreement dated June 10, 2003 between the Company and Alliance were terminated, (ii) each party granted the other a mutual general release (which resolved, among other things, the parties' claims against one another for various accumulated post-closing payments), and (iii) the parties agreed to share in the proceeds of future transactions involving the disposition of the Company's Imagent asset in accordance with the following schedule:
Proceeds | | Alliance Percentage | | IMCOR Percentage | |
| $1 to $1,450,0000 | | | 10%, not to exceed $100,000 | | | 90 | % |
| $1,450,001 to $5,000,000 | | | 30 | % | | 70 | % |
| $5,000,001 and above | | | 33.3 | % | | 66.7 | % |
11. Shareholders' Deficit:
The Company has not had any stock transactions during the nine months ended September 30, 2006.
All of the shares issued in January through April 2005 were subject to pending registration statements which are not currently effective. The effectiveness of the registration statements was delayed while the Company responded to the SEC's various comments which arose during the comment process. Given the Company's current financial circumstances and its goal to maximize the funds available to its creditors, the Company's board of directors has determined that the Company will not continue to pursue its efforts to effect the Company's registration statements currently on file with the SEC (File Nos. 333-122625 and 333-117907). Those registration statements, which are not currently effective, have been withdrawn.
The Company has stopped accruing penalty shares for the security holders who received shares subject to that certain registration rights agreement dated as of April 14, 2004 because without an effective registration statement the Company is unable to abide by the contractual requirement that the penalty shares such parties receive are freely tradable shares. In addition, the Company's obligation to accrue penalty shares stops when the stock has been held for two years and is freely tradable under Rule 144 of the Securities Act of 1933. Because the shares originally issued to the investors have been held for one year, they are tradable subject to the provisions of Rule 144. Therefore, the investors have liquidity despite the absence of an effective registration statement and some investors have already sold under Rule 144.
On January 24, 2005, the Company amended its Articles of Incorporation to increase the number of common shares authorized from 150,000,000 to 200,000,000 shares.
On March 4, 2005, the Company effected a 1-for-20 reverse stock split of its common stock. All share and per share amounts related to common stock in the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
12. Restructuring Plan:
In April 2005, the Company adopted an initial restructuring plan which initially included a reduction-in-force of a majority of the full-time employees and part-time employees or consultants who perform administrative support, manufacturing and related functions. In addition, a limited number of full-time employees were transferred to part-time positions to assist the Company with the actions necessary to curtail its operations. The Company also temporarily suspended its manufacturing operations.
The Company's board of directors later concluded that, for a variety of factors, it was not probable that the Company would obtain additional cash funds to continue operating even on a limited basis in the near term. Therefore, during May 2005, the Company modified its restructuring plan to include the disposition of its furniture, fixtures and equipment, to vacate its premises, and other steps to effect an orderly cessation or suspension of operations other than those necessary to facilitate completion of the restructuring plan. All of the above objectives have been met and concluded by December 31, 2005.
As part of the employee reduction plan, the employment of the Company's CEO and President was terminated effective May 31, 2005. A reserve for severance (equal to one year's salary, as required by this individual's employment contract), amounting to $275,000, was recorded as expense during the quarter ending June 30, 2005, but remains unpaid and is accordingly included in accrued expenses at September 30, 2006.
As part of the Company’s restructuring plan, the Company concluded an agreement with the lessor of the Company's previously occupied administrative and manufacturing facility in San Diego, California. Under the terms of this agreement, the Company vacated the premises on or about July 31, 2005 and surrendered its lease security deposit totaling $297,330. The Company was released from all other obligations, including past due rents totaling approximately $331,292 at July 31, 2005 (approximately $248,469 at June 30, 2005), as well as late payment fees and any future lease payments, commitments and/or contingencies. Future minimum lease payments at June 30, 2005 eliminated as result of the lease termination agreement totaled approximately $2,285,000 at that date. In addition, Alliance, which was the lease guarantor, was also released from any and all claims, commitments and contingencies.
As discussed in Note 10, the Company entered into the Amersham Settlement dated as of September 19, 2005 with Amersham, Alliance and Molecular Biosystems, Inc. The Amersham Settlement resolved the parties' claims arising under the case described above. Under the terms of the Amersham Settlement, the Company's technology cross license was valued at $1,200,000 in favor of the Company, for which the Company received $1,000,000 directly from Amersham. The balance, or $200,000, was paid directly by Amersham to Alliance which served as the cash consideration to Alliance under the separate but concurrent Alliance Settlement discussed below. The parties dismissed their litigation and granted each other fully paid-up, irrevocable, royalty-free, non-exclusive cross-licenses, with the right to sublicense, and mutual releases.
In addition, the Company entered into the Alliance Settlement with Alliance dated as of September 19, 2005 pursuant to which: (i) each party's respective ongoing obligations to one another under the Asset Purchase Agreement dated June 10, 2003 between the Company and Alliance were terminated, (ii) each party granted the other a mutual general release (which resolved, among other things, the parties' claims against one another for various accumulated post-closing payments), and (iii) the parties agreed to share in the proceeds of future transactions involving the disposition of the Company's Imagent asset.
The Company is evaluating its alternatives with respect to efforts to sell or otherwise maximize asset values related to the Purchased Technology, and will continue to consider as alternatives the sale or license of its remaining assets, a merger or other material transaction. Such a transaction may include selling the Purchased Technology, a license or sale of the patent portfolio underlying the Purchased Technology, a manufacturing rights agreement, or another form of transaction. In this regard, effective as of November 13, 2006, IMCOR has amended and restated its agreement with Kyosei Pharmaceutical Co. Ltd. (See Note 14. Subsequent Events). The Company is still contacting other interested or potentially interested parties, and there remains some potential for a sale, license, development agreement or comparable transaction in other territories.
The Company is not currently able to predict what additional arrangements, if any, might ultimately be made with other potential business partners for Imagent, financial or otherwise. Accordingly, the Company is unable to make any estimates for further potential changes to the fair market value of the Purchased Technology, which was written down to $1,000,000 at December 31, 2005, and which is accordingly carried at the same balance on the Company's balance sheet at September 30, 2006.
Subject to the availability of capital, the Company intends to protect its patent portfolio, and seek additional value for the benefit of creditors and shareholders if factors warrant and the underlying cost-benefit analysis supports such action(s). While the Company's history of enforcing its rights in patents indicates that there is merit in this approach, patent protection, enforcement and/or possible litigation activities can be costly, time consuming and the results are inherently uncertain, so there can be no assurance that this business strategy will result in net benefits to the Company.
Our subsidiary, Sentigen, Ltd., a Bermuda entity, currently has no operations. It is likely to be administratively dissolved by the Bermuda authorities.
13. Gain on Extinguishment of Debt:
Beginning in December 2005, the Company began to negotiate with certain creditors who were willing to settle and provide a full release of claims against the Company, in exchange for significantly discounted payments. During the nine months ended September 30, 2006, the Company paid $30,145 to settle total obligations amounting to $300,445, resulting in a gain on extinguishment of debt totaling $270,300.
14. Subsequent Events:
The Company entered into an Amended and Restated License Agreement with Kyosei Pharmaceutical Co., Ltd. (“Kyosei”), effective as of November 13, 2006, pursuant to which the Company has been relieved of its obligation under the original agreement to manufacture and supply Imagent for Kyosei and Kyosei has been granted certain patent and trademark rights for use in Japan. Under the terms of the amended agreement, Kyosei will pay a total fee of $1,300,000. In accordance with the terms of the Settlement Agreement between the Company and Alliance dated as of September 19, 2005 an aggregate of $100,000 (approximately $91,000 net, after deducting Alliance’s allocated share of direct expenses) of the consideration due from Kyosei is to be paid to Alliance. In addition, after taking into account direct expenditures attributed to this transaction for which the Company has remaining responsibility, and which totaled approximately $104,000 (including agent commission fees and incremental royalty obligations to Schering AG), the Company will net approximately $1,096,000. As of November 17, 2006, $800,000 was funded, representing the first of two payments due from Kyosei. IMCOR made partial payments as of that date to certain parties with contractual rights to a portion of those Kyosei proceeds, netting $688,000 to the Company.
Given the Company’s current financial circumstances and its related goal to maximize funds available to creditors, the board of directors determined to withdraw the Company’s pending Registration Statement with the SEC (File No. 333-122625) and to terminate the Company’s Registration Statement (File No. 333-117907) which had not been updated as required pursuant to Item 512 of Regulation S-B. The required filings with the SEC were made on October 11, 2006.
Portions of the discussion in this Form 10-QSB contain forward-looking statements and are subject to the “Risk Factors” described below. All forward-looking statements included in this Form 10-QSB are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the section captioned “RISK FACTORS” and elsewhere in this Form 10-QSB.
The following should be read in conjunction with the Company's unaudited financial statements included above. References to the “Company,” “IMCOR,” “we,” “us,” or “our” are to IMCOR Pharmaceutical Co. and, where appropriate, our subsidiary, Sentigen, Ltd. (“Sentigen”). References to the “Purchased Technology” are to the medical imaging business of Alliance Pharmaceutical Corp. (“Alliance”) that the Company acquired on June 18, 2003. Imagent® (perflexane lipid microspheres) is a registered trademark owned by IMCOR.
LIQUIDITY AND CAPITAL RESOURCES
The independent registered public accounting firm's report dated April 14, 2006 included in our December 31, 2005 Annual Report on Form 10-KSB, contained the following explanatory paragraph:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations and requirement for additional funding raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are described in Notes 12 and 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
At September 30, 2006, the Company had cash and cash equivalents of $242,040 and negative working capital of $4,289,052.
During the nine month period ended September 30, 2006, our board of directors continued to implement our restructuring plan that had previously resulted in cessation or suspension of substantially all operations, including significant employee reduction-in-force, sale of excess equipment, suspension of manufacturing and clinical activities, cessation of manufacturing and selling activities, vacating our premises, and the sale of certain of our technology.
From January 1, 2006 through September 30, 2006, significant net uses of our cash, totaling approximately $475,000 (listed below), leaving us a net cash amount of approximately $242,000 at September 30, 2006 (all amounts approximate):
| | · | $30,000 to settle and release claims of certain of our unsecured creditors totaling $300,000 for a gain on extinguishment of debt of $270,000 (this is part of our total debt, of which approximately $4,592,000 remains unpaid at September 30, 2006); |
| | | |
| | · | $26,000 as a partial payment on certain other accounts payable obligations; and |
| | | |
| | · | $419,000 for several categories including: legal and intellectual property matters ($177,000), consultant fees ($81,000), audit and accounting review and related tax compliance fees ($59,000), facilities costs ($10,000) and director and officer insurance to mitigate the Company's obligation to provide mandatory indemnification pursuant to our articles of incorporation and bylaws ($76,000). |
Subsequent to September 30, 2006 and through November 17, 2006, we have additionally expended approximately $72,000, a portion of which related to expenses incurred during the quarter ending September 30, 2006, but which remained unpaid as of that date. The most significant expenses paid subsequent to September 30, 2006 (all numbers approximate) relate to intellectual property and patent protection matters ($30,000), accounting and tax compliance matters ($19,000), extinguishment of debt ($6,000 expended, yielding a gain thereon of $55,000), and a portion of direct costs attributed to the conclusion of our Amended and Restated License Agreement with Kyosei Pharmaceutical Co., Ltd. ($7,000) (see Note 14 to Financial Statements).
However, and as noted in Note 14 to our Financial Statements included herein, in November 2006 we entered into an Amended and Restated License Agreement with Kyosei Pharmaceutical Co., Ltd., which will result in additional payments aggregating $1,300,000 from Kyosei Pharmaceutical Co., Ltd. (“Kyosei”). Pursuant to the terms of our Settlement Agreement with Alliance dated as of September 19, 2005 (the “Alliance Settlement”) an aggregate of $100,000 (approximately $91,000 net, after deducting Alliance’s allocated share of direct expenses) of the consideration due from Kyosei is to be paid to Alliance. We will net approximately $1,096,000 after deducting our proportionate share of directly allocable expenditures amounting to approximately $104,000.
As of November 17, 2006, we received net proceeds of $688,000 as a result of Kyosei’s first payment of $800,000. Therefore, at this date our cash reserves have been increased to approximately $858,000, after giving consideration to the above described operating expense disbursements totaling approximately $72,000 made subsequent to September 30, 2006. We estimate that we will receive an additional $439,000 in net cash proceeds upon the disbursement of the final $500,000 from Kyosei, which is due prior to December 31, 2006, and after disbursing our share of remaining related transaction costs.
Based on potential transaction values which might be concluded in the near term (one year or less), we previously determined at December 31, 2005 that the carrying value of the Imagent assets would be written down as of that date, through the establishment of an allowance for valuation impairment, to its currently estimated fair value of $1,000,000. As a result of the transaction completed with Kyosei subsequent to September 30, 2006, and for which we will have received net proceeds aggregating approximately $1,096,000, after giving consideration to required distributions of a portion of such proceeds related to various contractual obligations, we anticipate that will write down this $1,000,000 carrying value by December 31, 2006 due to the uncertainty of any additional future value.
Inasmuch as the lack of adequate capital and a full-time staff make it impracticable to continue normal operating activities, we believe that any potential additional value which might be realized from our intellectual property assets, over and above that realized in the Kyosei transaction, will most likely result from other strategic technology transactions which might be developed from time to time as circumstances warrant.
Therefore we are still considering our alternatives and additional efforts to sell or otherwise maximize asset values related to the Purchased Technology, and will continue to consider as alternatives the sale or license of our remaining assets, a merger or other material transaction in territories other than Japan. Such a transaction may include selling the Purchased Technology, a license or sale of the patent portfolio underlying the Purchased Technology, a manufacturing rights agreement, or another form of transaction.
In the meantime we expect to expend a portion of our available resources toward the objective of promoting and protecting the value of our intellectual property assets.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 and 2006
Revenue and License Fees
We did not generate significant product revenues during the three months ending September 30, 2005 and accordingly, any sales of products during the 2005 period are included in our financial statements under “investment and other income.” No such revenue was recognized during the three months ending September 30, 2006 due to capital constraints which forced us to limit and ultimately curtail our sales, marketing and marketing activities during 2005.
License revenue recognized during the three months September 30, 2005, totaling approximately $174,000, relates to the amortization of the deferred license revenue previously received in 2003 and 2004. During the three months ended September 30, 2006, no license revenue was recognized as a result of writing down deferred revenue balances to zero at December 31, 2005.
Research and Development
Essentially all of our research expenses since the third quarter of 2004 until early second quarter 2005 were directed toward infrastructure and expenses associated with regulatory compliance and continued development of Imagent for new indications and the maintenance of our manufacturing capability. During the third quarter of 2006 (presented below), the only costs incurred related to patent considerations, in keeping with our overall objective to preserve net asset values for the benefit of creditors and shareholders, as our regulatory and clinical operations were discontinued in their entirety by the beginning of the quarter ended September 30, 2005 as part of our restructuring plan.
The following is a summary of our major research and development expenses (all amounts approximate) for the respective periods:
| | | Three Months ended September 30, 2005 | | Three Months ended September 30, 2006 | | Increase/(Decrease) 2005 to 2006 | |
| Contract consultants | | $ | (4,000 | ) | $ | — | | $ | 4,000 | |
| Patent costs | | | 24,500 | | | 38,000 | | | 13,500 | |
| Supplies | | | 1,000 | | | — | | | (1,000 | ) |
| Other | | | 32,500 | | | — | | | (32,500 | ) |
| Total | | $ | 54,000 | | $ | 38,000 | | $ | (16,000 | ) |
Selling, General and Administrative Expense
The following is a summary of the selling general and administrative expenses (all amounts approximate) for the respective periods:
| | | Three Months ended September 30, 2005 | | Three Months ended September 30, 2006 | | Increase/(Decrease) 2005 to 2006 | |
| Personnel | | $ | 78,000 | | $ | — | | $ | (78,000 | ) |
| Contract consultants | | | 117,000 | | | 13,000 | | | (104,000 | ) |
| Stock options | | | 10,000 | | | — | | | (10,000 | ) |
| Legal and accounting | | | 94,000 | | | 32,000 | | | (62,000 | ) |
| Facilities costs | | | 50,000 | | | 1,000 | | | (49,000 | ) |
| Insurance | | | 90,000 | | | 22,000 | | | (68,000 | ) |
Amortization - purchase technology | | | 325,000 | | | — | | | (325,000 | ) |
| Other | | | 114,000 | | | 10,000 | | | (104,000 | ) |
| Total | | $ | 878,000 | | $ | 78,000 | | $ | (800,000 | ) |
Personnel costs were zero in 2006 as a direct result of our restructuring activities; we have had no employees since October, 2005.
Contract consultant charges decreased dramatically from the three months ended September 30, 2005 to the comparable 2006 period due to the restructuring plan commenced in the second quarter of 2005 and continued through September 30, 2006, and have been focused on the most pertinent activities we believe necessary to preserve overall asset values for the benefit of creditors and shareholders and maintaining compliance with our ongoing duties to maintain our public filings with the Securities and Exchange Commission (“SEC”).
Stock option expense decreased primarily due to the reductions of personnel as part of our overall restructuring plan and related activities. The costs incurred in the three months ended September 30, 2005 were calculated on the intrinsic method for option grants previously issued with exercise prices below the then fair market value, which had not yet vested, and which by their terms had not yet expired. The costs all comparable periods in 2006 were calculated on the fair value method, utilizing values in effect at the respective grant dates. However, there were options which vested during the third quarter 2006, and accordingly there was no such expense recognized.
Legal and accounting expense decreased from the three months ended September 30, 2005 to the comparable 2006 period. Costs incurred in 2005 were significantly higher, primarily as a result of the then ongoing litigation, increased activities associated with the amendments of previous annual and quarterly filings with the SEC and various registration statement filings with the SEC.
Insurance costs decreased primarily as a result of lower D&O insurance premium costs resulting from reduced coverage for the policy renewal period commencing March 31, 2006.
Depreciation and amortization of property, plant and equipment (including leasehold improvements) and technology license decreased from amounts recorded during the three months ended September 30, 2005 to zero in the comparable period in 2006, because all such assets were taken out of service and/or ultimately disposed of or otherwise abandoned as part of our restructuring activities.
Amortization of Purchased Technology ceased in 2005, as we wrote down the carrying value to $1,000,000, which we estimate to be potentially recoverable in the near term (one year or less) if one or more possible strategic transactions can be successfully negotiated. One such transaction was entered into subsequent to September 30, 2006, for which the net realizable cash value accruing to us exceeds this carrying value (see Note 14 to Financial Statements and Liquidity and Capital Resources for additional discussion).
Loss on Disposal of Property, Plant & Equipment; Impairment Losses, net
There were no expenses related to impairment losses and/or loss on disposal of property, plant and equipment for the quarters ended September 30, 2005 and 2006.
Investment and Other Income
Investment and other income in the third quarter of 2006 decreased from the comparable period in 2005, primarily due to the decreasing amount of excess cash held in interest-bearing accounts.
Gain on Extinguishment of Debt
In late 2005, we began to negotiate with certain creditors who were willing to settle and provide a full release of claims on amounts we owed them, at a significant discount, in exchange for nominal payments. During the three months ending September 30, 2006, we paid $2,743, resulting in a gain on extinguishment of debt totaling $24,683.
Interest Expense
Interest expense in the three months ending September 30, 2006 increased by approximately $8,000 over that of the comparable 2005 period, primarily as a result of increased interest rates on one underlying interest bearing obligation related to unpaid royalties; all other interest rate accruals have not increased on our notes payable and other remaining interest bearing obligations have not been increased or decreased during the intervening periods, as those interest rates are fixed and the underlying principal balances remain unchanged.
RESULTS OF OPERATIONS
Nine months Ended September 30, 2005 and 2006
Revenue and License Fees
We did not generate significant product revenues during the nine months ending September 30, 2005 and accordingly, any sales of products during the 2005 period are included in our financial statements under “investment and other income.” No such revenue was recognized during the nine months ending September 30, 2006 due to capital constraints which forced us to limit and ultimately curtail our sales, marketing and manufacturing activities during 2005.
License revenue recognized during the nine months September 30, 2005, totaling approximately $522,000, relates to the amortization of the deferred license revenue previously received in 2003 and 2004. During the nine months ended September 30, 2006, no license revenue was recognized as a result of writing down deferred revenue balances to zero at December 31, 2005.
Research and Development
Essentially all of our research expenses since the third quarter of 2004 until early second quarter 2005 were directed toward infrastructure and expenses associated with regulatory compliance and continued development of Imagent for new indications and the maintenance of our manufacturing capability. During the first nine months of 2006 (presented below), the only costs incurred related to patent considerations, in keeping with our overall objective to preserve net asset values for the benefit of creditors and shareholders, as our regulatory and clinical operations were discontinued in their entirety by the beginning of the quarter ended September 30, 2005 as part of our restructuring plan.
The following is a summary of our major research and development expenses (all amounts approximate) for the respective periods:
| | | Nine Months ended | | Nine Months ended | | Increase/(Decrease) | |
| | September 30, 2005 | | September 30, 2006 | | 2005 to 2006 | |
| Personnel | | $ | 746,000 | | $ | — | | $ | (746,000 | ) |
| Contract consultants | | | 341,000 | | | — | | | (341,000 | ) |
| Patent costs | | | 108,500 | | | 111,000 | | | 2,500 | |
| Production facilities costs | | | 27,000 | | | — | | | (27,000 | ) |
| Supplies | | | 17,000 | | | — | | | (17,000 | ) |
| Other | | | 169,500 | | | — | | | (169,500 | ) |
| Total | | $ | 1,409,000 | | $ | 111,000 | | $ | (1,298,000 | ) |
Selling, General and Administrative Expense
The following is a summary of selling general and administrative expenses (all amounts approximate) for the respective periods:
| | | Nine Months ended | | Nine Months ended | | Increase/(Decrease) | |
| | September 30, 2005 | | September 30, 2006 | | 2005 to 2006 | |
| Personnel | | $ | 825,000 | | $ | — | | $ | (825,000 | ) |
| Contract consultants | | | 564,000 | | | 81,000 | | | (483,000 | ) |
| Stock options | | | 1,088,000 | | | 47,000 | | | (1,041,000 | ) |
| Legal and accounting | | | 1,302,000 | | | 155,000 | | | (1,147,000 | ) |
| Fees | | | 1,677,000 | | | — | | | (1,677,000 | ) |
| Facilities costs | | | 836,000 | | | 10,000 | | | (826,000 | ) |
| Insurance | | | 389,000 | | | 155,000 | | | (234,000 | ) |
| Depreciation & amortization | | | 617,000 | | | — | | | (617,000 | ) |
| Amortization-purchase technology | | | 977,000 | | | — | | | (977,000 | ) |
| Other | | | 408,000 | | | 26,000 | | | (382,000 | ) |
| Total | | $ | 8,683,000 | | $ | 474,000 | | $ | (8,209,000 | ) |
Personnel costs were zero in 2006 as a direct result of our restructuring activities; we have had no employees since October, 2005.
Contract consultant charges decreased dramatically from the nine months ended September 30, 2005 to the comparable 2006 period due to the restructuring plan commenced in the second quarter of 2005 and continued through September 30, 2006, and have been focused on the most pertinent activities we believe necessary to preserve overall asset values for the benefit of creditors and shareholders and maintaining compliance with our ongoing duties to maintain our public filings with the Securities and Exchange Commission (“SEC”).
Stock option expense decreased primarily due to the reductions of personnel as part of our overall restructuring plan and related activities. The costs incurred in the nine months ended September 30, 2005 were calculated on the intrinsic method for option grants previously issued with exercise prices below the then fair market value, which had not yet vested, and which by their terms had not yet expired. Included in stock option expense for the three months ended September 30, 2005 was the recognition of expense attributed to 88,290 options-shares which had previously been issued at then below market process to our former chief executive officer, but which became 100% vested on his employment termination date of May 31, 2005. The costs in the comparable period in 2006 were calculated on the fair value method, utilizing values in effect at the respective grant dates. The 2006 charges only relate to those options vesting during the first and second quarter, and which are held by two current members of our Board of Directors.
Legal and accounting expense decreased from the nine months ended September 30, 2005 to the comparable 2006 period. Costs incurred in 2005 were significantly higher, primarily as a result of the then ongoing litigation, increased activities associated with the amendments of previous annual and quarterly filings with the SEC and various registration statement filings with the SEC.
There were no fees incurred in the first nine months of 2006, which in the comparable 2005 period related almost entirely to late registration penalties that began accruing in January 2005 for shares for which we had filed two registration statements. One was declared effective, which we decided to suspend because updated information was required, and the second of which has never been declared effective. We have stopped accruing penalty shares for the security holders who received shares subject to that certain registration rights agreement dated as of April 14, 2004 because without an effective registration statement we are unable to abide by the contractual requirement that the penalty shares such parties receive are freely tradable shares. In addition, we entered into an agreement with Oxford Bioscience Partners IV, L.P., MRNA Fund II, L.P. and Mi3, L.P. to cease accruing penalty shares as of June 30, 2005. In general, privately issued shares held by the investors for one year may be sold under Rule 144.
Insurance costs decreased primarily as a result of lower D&O insurance premium costs resulting from reduced coverage for the policy renewal period commencing March 31, 2006.
Depreciation and amortization of property, plant and equipment (including leasehold improvements) and technology license decreased from amounts recorded during the nine months ended September 30, 2005 to zero in the comparable period in 2006, because all such assets were taken out of service and/or ultimately disposed of or otherwise abandoned as part of our restructuring activities.
Amortization of Purchased Technology ceased in 2005, as we wrote down the carrying value to $1,000,000, which we estimate to be potentially recoverable in the near term (one year or less) if one or more possible strategic transactions can be successfully negotiated. One such transaction was entered into subsequent to September 30, 2006, for which the net realizable cash value accruing to us exceeds this carrying value (see Note 14 to Financial Statements and Liquidity and Capital Resources for additional discussion).
Loss on Disposal of Property, Plant & Equipment; Impairment Losses, net
Expenses related to the $3,836,000 approximate impairment losses and $249,000 approximate loss on disposal of property, plant and equipment (all numbers approximate) for the nine months ended September 30, 2005 decreased to zero during the nine months ended September 30, 2006 because all corresponding write-offs were taken during the year ending December 31, 2005 and, therefore, no additional write-offs were required in 2006.
Investment and Other Income
Investment and other income in the first nine months of 2006 decreased from the comparable period in 2005, primarily due to the lack of revenues from sales of our Imagent product as a result of our curtailing of marketing efforts in 2006 as part of our restructuring plan.
Gain on Extinguishment of Debt
In late 2005, we began to negotiate with certain creditors who were willing to settle and provide a full release of claims on amounts we owed them, at a significant discount, in exchange for nominal payments. Through December 31, 2005, we had settled on approximately $115,000 in vendor claims in exchange for approximately $10,000. During the nine months ending September 30, 2006, we paid approximately $30,000 to settle approximately $300,000 in vendor claims, resulting in a gain on extinguishment of debt totaling $270,000.
Interest Expense
Interest expense in the nine months ending September 30, 2006 increased by approximately $11,000 over that of the comparable 2005 period, primarily as a result of increased interest rates on one underlying interest bearing obligation related to unpaid royalties; all other interest rate accruals have not increased on our notes payable and other remaining interest bearing obligations have not been increased or decreased during the intervening periods, as those interest rates are fixed and the underlying principal balances remain unchanged.
Plan of Operation
In April and May 2005, we adopted a restructuring plan that resulted in cessation or suspension of substantially all operations, including significant employee reduction-in-force, sale of excess equipment, suspension of manufacturing and clinical activities, cessation of current selling activities, vacating its premises, and the sale of certain of our technology. We were also successful in helping locate a third party to occupy our facility, and accordingly were able to successfully negotiate a lease termination agreement which was concluded in July 2005. However, abandoning our facility resulted in us no longer being able to manufacture Imagent ourselves.
We have also sold our equipment and other licensed technology assets except for the Purchased Technology.
Therefore, we are currently unable to operate in a manner that would allow us to further develop or promote the Imagent product. In August 2005, we notified the FDA that we suspended any activity related to the Investigational New Drug Application. During the next several months, we will focus our limited resources primarily on preserving the value of the Purchased Technology, to the extent possible, and exploring various options concerning our business, including joint venturing, licensing or selling our Purchased Technology and other possible strategic transactions. We no longer have current human, financial and other resources available to us at this time to carry out our original business plan or fully develop and commercialize Imagent on our own.
Contractual Obligations
The following table summarizes our approximate contractual obligations as of September 30, 2006 and the effect such obligations are expected to have on our liquidity and cash flow for future periods:
| | | Total Obligations All Years | | 2006 | | 2007 | | 2008 | | 2009 | |
Imagent purchase obligations and related notes (remaining) | | $ | 808,000 | | $ | 808,000 | | $ | — | | $ | — | | $ | — | |
| Notes payable | | | 192,000 | | | 192,000 | | | — | | | — | | | — | |
| Accrued royalty liabilities | | | 402,000 | | | 402,000 | | | — | | | — | | | — | |
| Severance and unpaid bonus to former CEO | | | 481,000 | | | 481,000 | | | — | | | — | | | — | |
| Settlement amounts owed and guaranteed pursuant to equipment lease settlement | | | 493,000 | | | 493,000 | | | — | | | — | | | — | |
| Other liabilities - past due | | | 671,000 | | | 671,000 | | | — | | | — | | | — | |
| Accounts payable - past due | | | 1,545,000 | | | 1,545,000 | | | — | | | — | | | — | |
| Total contractual cash | | $ | 4,592,000 | | $ | 4,592,000 | | $ | — | | $ | — | | $ | — | |
We have been released from operating lease obligations totaling approximately $2,285,000, which were related to our facilities lease at 6175 Lusk Boulevard in San Diego, pursuant to a lease termination agreement executed July 19, 2005 and made effective on or about July 31, 2005.
As of September 30, 2006, we have not entered into any purchase orders for capital equipment.
Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an on-going basis, we evaluate our estimates and judgments. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our most significant estimates relate to the impairment analysis we perform on our Purchased Technology assets to assess when a change in circumstances indicates that the carrying value may not be recoverable and we estimate the probable future cash flows related to that asset. These estimates may change and such changes may impact future estimates of carrying value.
Recent Accounting Pronouncements
In December 2004, the FASB issued revised SFAS No. 123 (SFAS No. 123R), “Share-Based Payment.” This statement eliminates the ability to account for share-based compensation transactions using the intrinsic value-based method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires instead that such transactions be accounted for using a fair-value-based method. SFAS No. 123R is effective for Small Business Issuers for financial statements issued for the first interim period beginning after December 15, 2005. In connection with our adoption of SFAS No. 123R, effective January 1, 2006, utilizing the modified prospective method of transition, we recognized stock based compensation expense in the amount of $46,529 during the nine months ended September 30, 2006.
On June 7, 2005, FASB issued Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No, 20, Accounting Changes and Statement No. 3 Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in years beginning after December 15, 2005; however, SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. We do not expect our adoption of SFAS No. 154 during the nine months ended September 30, 2006 will have a material effect on our financial statements or results of operations.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (“SFAS No. 155”). This statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first full fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity's fiscal year. We do not expect that the adoption of SFAS No. 155 will have a material effect on our financial statements or our results of operations.
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and liabilities in accordance with SFAS No. 140 be initially measured at fair value, if practicable. Furthermore, this standard permits, but does not require, fair value measurement for separately recognized servicing assets and liabilities in subsequent reporting periods. SFAS No. 156 is also effective for the Company beginning January 1, 2007; however, the standard is not expected to have any impact on the Company's financial position, results of operation or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax positions and requires that a Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have any impact on the Company's financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS 157 defines fair value, establishes a framework for measuring far value in generally accepted accounting principles and expands related disclosures about fair value measurements. This Statement focuses on creating consistency and comparability in fair value measurements. SFAS No. 157 is effective for us beginning January 1, 2008, including any interim reporting periods. We are currently evaluating the impact of adopting SFAS No. 157 on our financial statements.
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS 158 requires a business entity employer to recognize the funded status of a benefit plan (i.e., “over-funded” or “under-funded”), measures defined plan benefit plan assets and liabilities as of the related fiscal year end, and provides additional guidance on matters related to income statement recognition and disclosure in the financial statement notes. SFAS No. 158 is effective for us beginning in the current year ending December 31, 2006; however, the standard is not expected to have any impact on our financial position, results of operation or cash flows, as we do not have any such plans or related obligations.
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (“SAB 108”) to require registrants to quantify financial statement misstatements that have been accumulating in their financial statements for years and to correct them, if material, without restating. Under the provisions of SAB 108, financial statement misstatements are to be quantified and evaluated for materiality using both balance sheet and income statement approaches. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact of adopting SAB 108 on its financial statements.
ITEM 3. CONTROLS AND PROCEDURES
In September 2004, our management concluded that there were certain reportable conditions and material weaknesses in our internal controls and procedures. As noted in our Annual Report on Form 10-KSB for the year ended December 31, 2004, as amended, we had taken steps and had started to implement remediation procedures to address the identified reportable conditions and material weaknesses. However, based on our limited capital resources and the adoption of a restructuring plan in April 2005, which included a reduction-in-force of our full-time employees and part-time employees or consultants who perform administrative support, manufacturing and related functions, we have been unable to complete the previously identified remediation plans. As a result, the previously identified reportable conditions and material weaknesses still exist.
Although weaknesses in internal controls and procedures previously disclosed have not been remediated, we believe that changes and procedures that were implemented and remain in place, mitigate and reduce the likelihood of material misstatements or improper disclosures in our financial statements and reports. These changes and procedures include (i) engaging of Larry D. Grant as a financial consultant, (ii) adding Darlene Deptula-Hicks to our Audit Committee, (iii) requiring the Executive Committee of the Board to ratify routine and/or recurring expenditures and approve significant commitments and non-routine expenditures and payments, (iv) requiring both Larry D. Grant and our other senior officers review and approve incurring all significant obligations and remitting payments, (v) adopting separate Codes of Ethics for all employees and for senior executives and finance personnel, (vi) adopting or updating the charters of our Audit and Compensation Committees, and (vii) creating a Disclosure Committee and adopting a Disclosure Committee Charter. In addition, the cessation of operations and discharge of employees simplifies the complexity and reduces the number of transactions we must monitor, thereby significantly simplifying the internal control process.
Our senior officers have previously consulted with Larry D. Grant and have participated in the evaluation of our disclosure controls (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of September 30, 2006 and, based on that evaluation, concluded that due to insufficient staff our disclosure controls and procedures were not fully effective to ensure timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act, and the rules and regulations thereunder. However, to the extent corrections and improvements in internal controls and disclosure controls and procedures cannot be implemented and/or maintained, management believes appropriate oversight and review is currently in place in light of the minimal transactions conducted during this fiscal quarter to prevent material misstatements in our annual financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended September 30, 2006, we had no legal proceedings described in Item 103 of Regulation S-B.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ending September 30, 2006, we did not issue any shares of our common stock.
Given our current financial circumstances and our goal to maximize the funds available to our creditors, our board of directors determined to withdraw our pending Registration Statement with the SEC (File No. 333-122625) and to terminate our Registration Statement (File No. 333-117907) which had not been updated as required pursuant to Item 512 of Regulation S-B. The required filings with the SEC were made on October 11, 2006. We have stopped accruing penalty shares for the security holders who received shares subject to that certain registration rights agreement dated as of April 14, 2004 because without an effective registration statement we are unable to abide by the contractual requirement that the penalty shares such parties receive freely tradable shares. In general, privately issued shares held by investors for more than one year may be sold under Rule 144.
Many of our investors have held their shares in the Company for more than a year and are qualified to sell their shares under Rule 144, subject to the restrictions set forth therein; indeed, several such investors have sold shares utilizing Rule 144. However, given our current financial situation, at some point in 2006 or thereafter we may elect to cease reporting under the Exchange Act, and as a result, investors will no longer be eligible to resell their shares of our common stock under Rule 144.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
RISK FACTORS
We currently have insufficient funds available to pay all of our liabilities.
Our cash and cash equivalents at September 30, 2006 was approximately $242,000. At September 30, 2006, we had current liabilities totaling approximately $4,592,000.
If we are unable to find a partner or buyer of our remaining assets at acceptable prices we will continue to be unable to meet our obligations to our creditors and may enter into bankruptcy proceedings, or liquidate and dissolve under applicable state laws.
We have implemented a restructuring plan which resulted in a reduction-in-force of all our employees, terminating sales efforts and manufacturing operations, terminating clinical development, vacating our leased premises, selling our furniture, fixtures and manufacturing equipment, and selling our rights to N1177 (an iodine-based nanoparticulate contrast agent) and PH-50, which is the same or substantially similar compound as N1177 for a different indication. Our board of directors has authorized actions necessary to effectuate the restructuring plan.
We plan to focus our efforts primarily on exploring various options concerning our business, including licensing or selling all or a portion of our remaining assets ( Imagent ), finding a partner with whom to pursue the clinical development and commercialization of Imagent and maintain our patent portfolio. To date, we have not been able to raise sufficient capital to operate the company, and the difficulties and delays in settling the lawsuit with Amersham Health, Inc. have resulted in our vacating our manufacturing facility, stopping the manufacturing of our Imagent product, and terminating clinical development. We need to find an acceptable buyer or partner for our Imagent assets in order to proceed with any type of development plan. If we are not able to find a buyer or partner for these assets in a timely manner and at acceptable prices, we will continue to not have sufficient funds to meet our obligations to our creditors and may be forced into voluntary or involuntary bankruptcy proceedings, or liquidate and dissolve under applicable state laws. The steps to sell or otherwise dispose of our assets (including negotiating agreements and obtaining shareholder approval to the extent required) are costly and will diminish the proceeds available for other purposes.
We expect to incur significant costs in connection with Securities Exchange Act of 1934 compliance and may elect to remove the company from the Securities Exchange Act of 1934 reporting requirements, which would make Rule 144 resales unavailable to investors.
We are currently subject to the rules of the Exchange Act and the related reporting requirements. Compliance with the reporting requirements of the Exchange Act requires the timely filing of Quarterly Reports on Form 10-QSB, Annual Reports on Form 10-KSB and Current Reports on Form 8-K, among other actions. Our compliance with the reporting requirements involves significant costs and expenditures of management's time. Given our current financial position and the limited resources of our management, our board of directors may elect to remove the company from the reporting obligations of the Exchange Act at some point in 2006 or thereafter. If we make such an election, investors would not be able to utilize Rule 144 in connection with the resale of their shares of our common stock (until the shares become freely tradable under Rule 144(k)).
Our current financial situation could lead to shareholder or creditor litigation which could result in substantial costs and distract our management from our restructuring efforts.
Historically, companies in financial situations similar to ours have often been the target of litigation by creditors or shareholders. We may become involved in this type of litigation as a result of the actions we have taken and/or our inability to meet our obligations to our creditors and others. If such a lawsuit is filed against us, the litigation is likely to be expensive, and, even if we ultimately prevail, the process will divert our attention away from implementing our current restructuring plan. If we do not prevail in such a lawsuit, we may be liable for damages. We cannot predict the amount of such damages, but they may be significant and could further reduce our limited available cash.
We have a history of losses, and we do not expect to achieve or maintain profitability in the future or pay cash dividends.
We have incurred losses since the beginning of our operations. As of September 30, 2006, we have incurred cumulative net losses (before dividends on preferred stock) of approximately $91,269,000. We expect our losses to increase in the future as our financial resources are used to preserve the value of our assets and to the extent possible, pay creditors. It is unlikely that we will be able to achieve or maintain profitability in the future.
We do not anticipate paying any dividends on our common stock in the foreseeable future, and, given our outstanding debt to creditors, it is unlikely that shareholders will receive funds from us if it is dissolved.
We no longer maintain a manufacturing facility and we may encounter difficulties restarting our manufacturing operations if we chose to do so in the future or contracting with a contract manufacturer.
We have suspended manufacturing operations and vacated our leased manufacturing facility located in San Diego, California. We do not have the resources to resume manufacturing at another facility ourselves and we cannot assume that a third party would be able to take over manufacturing. Any purchaser of Imagent or development or manufacturing partner will be required to comply with FDA manufacturing standards. A new manufacturing facility would require FDA submissions and approvals. Timing of this event, should it occur, would affect initiation of clinical trials and regulatory submissions.
We no longer maintain any internal quality control and stability program for Imagent.
Since we have suspended manufacturing operations and vacated our leased manufacturing facility located in San Diego, California, we entered into an agreement with Cardinal Health, Inc. to maintain and conduct our stability samples. On August 17, 2005, we terminated this agreement and consequently the testing program, resulting in the inability to support any clinical testing of the product.
We no longer maintain any clinical or regulatory staff.
We are required to rely on the services of outside consultants for clinical and regulatory advice, and maintenance of the IND and NDA. If we cannot use the services of those consultants, the IND and NDA may have to be abandoned, significantly reducing the assets of the corporation. In August 2005, we notified the FDA that we suspended any activity related to the IND.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports and prevent fraud, our operating results could be harmed and current and potential stockholders could lose confidence in our financial reporting, which could have a material adverse effect on our stock price and ability to raise capital. In September 2004, we and our independent registered public accounting firm concluded that our internal controls and procedures had certain material weaknesses and reportable conditions. For further information concerning our controls, see “ Part I. Financial Information, Item 3. Controls and Procedures.”
Beginning in May 2004, we began to implement steps to address our internal controls and procedures. We have completed certain steps and had started to implement remediation procedures to address the identified reportable conditions and material weaknesses. However, based on our limited capital resources and the adoption of a restructuring plan in April 2005, which included a reduction-in-force of our full-time employees and part-time employees or consultants who perform administrative support, manufacturing and related functions, we have been unable to complete the previously identified remediation plans. Since it is unlikely that we can further rectify these material weaknesses through measures and improvements to our systems and procedures, management may encounter difficulties in timely assessing business performance and identifying incipient strategic and oversight issues.
We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, management time and attention being focused on compliance activities. In particular, although the SEC has granted an extension for compliance with certain aspects of Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm's audit of that assessment, compliance with these regulations will require the commitment of significant financial and managerial resources. In addition, if we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
We depend on a small number of consultants to provide management expertise, and the loss of this expertise may interfere with our operations or delay our ability to implement our restructuring plan.
We currently have one acting Principal Executive Officer (Mr. DeFranco) who was a part-time employee of the Company until October 2005. Mr. DeFranco became a consultant to the company in November 2005 and is engaged by us on a part-time, as needed basis through June 30, 2007. We also have retained Larry D. Grant, a consultant, to provide advisory and management services, on a part-time basis, on financial, operational and strategic matters. These individuals have entered into consulting agreements, confidentiality and/or non-competition agreements with us. If an individual performing one of these executive or consulting functions for us terminates his association with us or breaches their agreement with us:
| | · | We would not have anyone available to promote or negotiate a sale or development transaction with a third-party, |
| | | |
| | · | We could suffer competitive disadvantage or loss of intellectual property protection, and |
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| | · | We could experience a delay in our ability to implement our restructuring plan until we arrange for another individual or firm to fulfill the role. |
Two related stockholders have significant voting power, which may delay or prevent a change of control of IMCOR and may limit the trading volume of our common stock.
As of September 30, 2006, two related stockholders controlled approximately 4,652,969 shares, or 66.8% of our issued and outstanding common stock at that date. This concentration of ownership and control may delay or prevent a change in control of IMCOR, 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 its common stock in ways that do not reflect the intrinsic value of our common stock.
We have issued a substantial number of securities convertible into shares of our common stock that will result in substantial dilution to the ownership interests of our existing shareholders.
As of September 30, 2006, we had reserved 2,437,701 shares of our common stock for issuance upon exercise or conversion of warrants or stock options (including options that have been granted and that are available for grant in the future). Furthermore, on October 29, 2004, we issued and sold 4,500 shares of our newly issued Series A Convertible Preferred Stock which are convertible into 833,334 shares of our common stock.
If our options and warrants are all issued and exercised, or convertible securities converted, investors may experience significant dilution in the voting power of their common stock. The sale of these shares could also place downward pressure on the overall market price of our common stock.
Applicable Securities and Exchange Commission rules governing the trading of “penny stocks” limits the trading and liquidity of our common stock, which may affect the trading price of our common stock.
Our common stock currently is quoted on the Pink Sheets. We are not considering seeking a listing of our shares on another exchange at this time. As a result, our common stock may have fewer market makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock Market. These factors may result in higher price volatility and less market liquidity for our common stock.
Because our common stock is currently trading below $5.00 per share, our common stock is considered a “penny stock” and subject to Securities and Exchange Commission rules and regulations, which impose limitations upon the manner in which our shares can be publicly traded. Our common stock may also trade below $5.00 per share in the future. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser's written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
