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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

for the transition period ended                                                              

Commission File Number 0-23553

PHOTOGEN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

(215) 862-6860
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes o    No ý

        Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 38,842,298 SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE, ISSUED AND OUTSTANDING AT OCTOBER 31, 2002.

INDEX

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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Photogen Technologies, Inc.
(A Development Stage Company)
Consolidated Condensed Balance Sheets
All amounts in $

3

Photogen Technologies, Inc.
(A Development Stage Company)
Consolidated Condensed Statements of Operations
(Unaudited)
All amounts in $

4

Photogen Technologies, Inc.
(A Development Stage Company)
Consolidated Condensed Statements of Shareholders' Equity
(Unaudited)
All amounts in $

5

Photogen Technologies, Inc.
(A Development Stage Company)
Consolidated Condensed Statements of Operations
(Unaudited)
All amounts in $

6

Photogen Technologies, Inc.
(A Development Stage Company)
Notes To Condensed Financial Statements
(Unaudited)

September 30, 2002

1.

BASIS OF PRESENTATION

        The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information pursuant to Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

2.

JOINT VENTURE/INVESTMENT IN AFFILIATE

        The following is summarized financial information for the joint venture Sentigen, Ltd. at September 30, 2002 and 2001.

3.

BASIC AND DILUTED LOSS PER COMMON SHARE

        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 and warrants, preferred stock and convertible debt as they are antidilutive. Potential common shares excluded from the calculation at September 30, 2002 are 1,629,750 options, 593,450 warrants, 299,828 shares issuable upon the conversion of Series A and B Preferred Stock and 42,067 shares issuable upon conversion of the Elan line of credit. Basic and diluted loss per common share includes 124,627 shares of common stock subject to rescission. See Note 6 for issuances after September 30, 2002.

4.

RESTRUCTURING

        In 2000, the Company recorded a restructuring charge of $597,025, included in operating expenses, relating to the closure of its operations in Westborough, Massachusetts. The restructuring charge includes accruals related to estimated lease termination costs and accruals related to employee severance and related expenses in connection with their termination. All employees at the Westborough facility were terminated. The activities previously performed at the Westborough facility will continue at other company locations or with outside consultants. In 2002, the Company recorded an additional restructuring charge related to additional termination costs for one of

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the Westborough employees. As of September 30, 2002, all restructuring costs have been settled.    The restructuring charge is summarized as follows:

5.

LONG-TERM DEBT

        Long-term debt consists of the following:

6.

SUBSEQUENT EVENTS

        On November 12, 2002, the Company closed the following transactions:

•

Sold $9.0 million of its common stock at a price of $1.08 per share to a syndicate of institutional investors. As a condition precedent to the financing, the outstanding balance of the Elan line of credit, including accrued and unpaid interest, was converted into common stock at an exchange rate of $24.00 per share and all of the Company's Series B Preferred Stock, including accrued and unpaid dividends, was converted into common stock at an exchange ratio of 1.06. In the transaction, the Company received $6.7 million in cash and exchanged $2.3 million of outstanding balances under its line of credit with an entity controlled by a director. The line of credit and related security interest in all of the Company's assets was cancelled. The Company no longer has any long-term debt outstanding.



•

Split off its therapeutic line of business to five founding shareholders in exchange for and cancellation of all of their 5,137,109 (post-reverse split) shares of common stock, equaling approximately 52.9 percent of the Company's outstanding common stock, of the Company.

        In conjunction with these transactions, the Company implemented a one-for-four reverse split of its common stock. All amounts have been retroactively stated to reflect this reverse stock split. Following the financing, split-off and reverse split, the Company's outstanding common stock totals approximately 13,475,156 shares.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Portions of the discussion in this item contain forward-looking statements and are subject to the Risk Factors described below.

        We are an emerging, development-stage biopharmaceutical company focused on developing a novel contrast agent with potential applications in the imaging of the cardiovascular system and cancer metastasizing into the lymphatic system. As of September 30, 2002, we also had in development products to treat psoriasis and other topical diseases and cancer for which we have signed an agreement to split-off to five founding shareholders of Photogen. See "Other Products" and "Subsequent Events" below.

        Our principal product is a contrast agent we call PH-50, when referring to cardiovascular applications, and N1177 when referring to lymphography. The lymphography application is being developed in a joint venture with units of Elan Corporation, plc. We own or license the rights for all other medical applications. In December 2001, we announced positive preclinical results of PH-50. Based on these studies, the preclinical toxicology and other study work, including the product's use in 65 patients for lymphography, we shifted the strategic direction of Photogen to focus on the cardiovascular and lymphography applications. We have not completed development of any diagnostic or therapeutic product or process at this time and have no revenue from operations.

        We operate with a small staff of researchers and senior level managers to conduct basic research, oversee and direct third party contractors and perform administrative functions. We contract with third party consultants having expertise in clinical development and regulatory matters to supplement our internal capabilities. We contract with third party research laboratories, contract research organizations and manufacturers for clinical material supplies and the management of clinical trials. We also contract with academic and other institutions to conduct specified research projects.

        We expect that our quarterly and annual results of operations will fluctuate based on several factors including, the timing and amount of expenses involved in conducting our research programs, particularly the conduct of clinical trials, the cost of clinical material used in those trials and required for compliance with FDA regulations and the amount, if any, of fees, milestone payments and research support payments received from potential strategic partners.

        We consider our investment in the joint venture with affiliates of Elan Corporation to be our only asset subject to a significant estimate. The carrying value of our 80.1% equity interest in Sentigen, Ltd., the joint venture entity, at September 30, 2002 was $10,388,806. At year-end 2001, we reviewed the financial projections of Sentigen and the underlying assumptions and have concluded that there has been no degradation to the carrying value of our investment. The assumptions underlying the financial forecasts were based on then currently available information, including estimates of development costs, pricing, operating expenses and market sizes and penetration. These estimates may change and any such changes may impact our future estimates of appropriate carrying values. At September 30, 2002, no changes had occurred in such estimates.

CORE PRODUCTS

        Our core product is PH-50/N1177, a novel contrast agent that may have multiple applications in vascular and cardiac imaging and lymphography.

        CARDIOVASCULAR IMAGING—PH-50 has application as a novel technique to image the cardiovascular system using standard CT scanners. In animal model studies, encouraging results have been demonstrated to image the heart, liver and other organs. PH-50 could allow the imaging of the cardiovascular system (angiography) and other organs without the need for catheters and high-speed cameras. Over two million angiography procedures are conducted annually in the U.S. Preclinical studies also suggest that PH-50 can be used to detect coronary vulnerable plaque, a condition believed to be a precursor to heart attacks and sudden cardiac failure.

        LYMPHOGRAPHY—Through a joint venture with units of Elan Corporation, we are developing N1177, a proprietary material to precisely locate and diagnose the spread of cancer (micro-metastases) when administered into a patient's lymphatic system. This novel nanoparticulate (a very small particle designed to travel through the lymphatic system) X-ray contrast agent, when used with a standard computed tomography (CT) scanner (a technology called "lymphography"), is being developed to enable imaging and detection of cancer in lymph nodes prior to surgery. Phase 1 studies have been completed. Phase 2 studies are planned to commence within the next six months.

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OTHER PRODUCTS

        As of July 29, 2002 we signed definitive agreements with the five founders of Photogen, to split-off to an entity they control our PH-10 and laser technologies in exchange for all the Company's stock beneficially owned by them (approximately 5,137,109 (post-reverse split) shares or 52.9% of our outstanding common stock, all of which were cancelled at the closing). The corporate separation transaction was approved by our stockholders on October 31, 2002 and closed on November 12, 2002.

        Products and technology that were transferred to the founders related to our therapeutic business, and include:

        PH-10—PH-10 is a compound that reacts with energy and has applications for use in treating:

•

Psoraisis, when applied topically and activated with green light;



•

Actinic keratosis; and



•

Solid tumor cancers, when injected into a tumor and treated with X-rays.

        MULTIPHOTON TECHNOLOGY—A proprietary laser technology that uses ultrashort, pulsed bursts of long wavelength light to activate photoactive agents and other compounds that react with light to destroy diseased tissue. This technology can also be used to create images of tissue for diagnostic purposes.

        Our senior executive and clinical development organization operates from our corporate headquarters in New Hope, Pennsylvania. We have on staff personnel with expertise in clinical development, clinical trial design and regulatory approval processes. We also work closely with consultants experienced in drug development and regulatory requirements. Our scientific research team and certain administrative functions (all of which were transferred in the corporate separation transaction), located in Knoxville, Tennessee, included specialists in molecular biology, non-linear laser physics, interventional radiology, spectroscopy, bioengineering and photochemistry.

RESULTS OF OPERATIONS

        Our efforts have been focused on the development and clinical testing of diagnostic and therapeutic products. To date, we have not generated revenues from the sale of any proposed diagnostic or therapeutic products or other operations.

        Research and development costs for the nine-month period ended September 30, 2002 decreased 12.8% percent to $2,007,641 from $2,301,793 for the comparable nine-month period ended September 30, 2001. The decrease was due principally to our pursuit of the development program for PH-50 at a slower pace than originally planned, lower expense levels for our FDA consultants and reduced costs associated with prosecuting patent protection for our intellectual property.

        General and administrative expenses declined 19.6% percent to $2,166,441 in the nine-month period ended September 30, 2002 from $2,695,167 in the comparable 2001 period. The decline is primarily attributable to the reduction in the amortization of the cost of certain warrants that had been granted to a consultant, the absence of recruiting costs, partially offset by costs of our New Hope, PA office.

        In August 2002, we entered into a contract with Clinical Regulatory Strategies, L.L.C. to provide us with consulting services and support related to the clinical development of PH-50 and N1177 and certain other business development matters as the need may arise. We will pay Clinical Regulatory Strategies on a time and materials basis and have awarded them warrants to purchase 190,000 (post-reverse split) shares of our common stock with vesting to occur on the achievement of specified milestones. No such milestones have been achieved to date.

        In 1999, we entered into a joint venture with affiliates of Elan Corporation for the development of N1177, a potential product to identify and diagnose lymph nodes for the presence of cancer. We own 80.1% of the joint venture entity, Sentigen, Ltd., with the balance owned by Elan. During the first nine months of 2001 and 2002, we recorded losses from the joint venture of $1,514,080 and $1,245,845, respectively. These losses resulted from our share of development expenses incurred in the joint venture by the two participants, including personnel expenses and costs associated with developing a manufacturing process, including the purchase of drug substance and other materials.

        In September 2000, we initiated a restructuring of our clinical development operations and closed our Westborough Massachusetts office. We took a charge against earnings at the time of $597,025 for termination of

10

our office lease and associated expenses and termination costs associated with certain of the employees at that location. During the first quarter 2002, we increased the provision by $451,068 to provide for a potential settlement with one of the Westborough employees. As of September 30, 2002, we have fulfilled our obligation under the settlement.

        During the nine months ended September 30, 2002, we had no capital expenditures. During the next twelve months we expect capital expenditures to be less than $100,000. During 2001, as a result of the closing of the Westborough, Massachusetts facility and the shift in the research priorities, we determined that certain equipment we were leasing would no longer be useful in our research. Accordingly, in the first quarter of 2001, we recorded a provision for future lease payments of $696,070. In the fourth quarter of 2001, we increased the accrual to a total of $1,264,208 representing the remaining lease obligations. While we will pursue opportunities to sublease or otherwise mitigate these obligations, there can be no assurance of any success in this regard.

        For the nine months ended September 30, 2002, our investment income decreased to $1,532 from $102,626 in the nine months ended September 30, 2001. The decrease in investment income resulted primarily from lower average balances of securities in our investment portfolio. We expect our investment income to fluctuate both as our capital decreases or increases and as the rates of interest earned by our portfolio vary due to shifts in short term interest rates.

        We recorded dividends on our two series of preferred stock totaling $1,024,300 in the first nine months of 2002 compared to $2,243,832 for the comparable period in 2001. This decrease is due to the absence of the cost of certain beneficial conversion provisions payable under our Series B Preferred Stock originally issued in February 2000. Under the applicable Certificate of Designations the holder of Series A Preferred is entitled to a mandatory payment-in-kind dividend equal to 7% (i.e., 0.07 additional shares of Series A Preferred) which is cumulative, compounds on a semi-annual basis and is payable twice a year. Similarly, under the applicable Certificate of Designation the holders of Series B Preferred were entitled to a payment-in-kind dividend equal to 6% (i.e., 0.06 additional shares of Series B Preferred), which is cumulative and payable annually. On November 12, 2002, all shares of Series B Preferred were converted into common stock and the Series B Preferred is no longer outstanding. See "Subsequent Events" below.

        During the third quarter ended September 30, 2002, we conducted limited operations in order to conserve cash resources pending the anticipated closing of the institutional financing. For the quarter, we reported a net loss applicable to common stockholders of $2,185,238. We funded our operations during the quarter utilizing our available cash resources and borrowings under our credit line from Tannebaum, LLC. As a result of the reduced amount of funding to Photogen, we will continue to pursue the development program for PH-50, but at a slower pace than originally planned.

        As a result of the above factors, our net loss of $6,041,620 for the nine months ended September 30, 2002, decreased by 15% from $7,104,484 reported for the nine months ended September 30, 2001. Our cumulative losses since inception are approximately $35,134,933. Our net loss attributable to common shareholders (including "in kind" preferred dividends) for the nine months ended September 30, 2002, decreased to $7,065,920, or $.73 per share from $9,348,316, or $.99 per share for the nine months ended September 30, 2001.

LIQUIDITY; CAPITAL RESOURCES

        At September 30, 2002 we had cash and cash equivalents totaling approximately $111,830.

        As of September 30, 2002, we had a $4.8 million credit line available from Elan under which we could borrow to fund our portion of the losses incurred by the joint venture. At September 30, 2002 we had borrowed $2,846,910 under this credit line to fund our capital obligations to Sentigen, a portion of which was in turn used by Sentigen to reimburse us for expenses we had incurred on behalf of the joint venture. Borrowings under this facility bore interest at 8% per annum, and were either repayable in 2005 or convertible, at Elan's election, into our common stock. On April 8, 2002, we entered into a credit facility that provided us with a $2,500,000 revolving line of credit, bearing interest at 4.65%, for a period of five years. The loan was secured by a lien on all of our assets. At September 30, 2002, we had borrowed $1,525,000 under this line of credit. In connection with our agreement to sell shares of our common stock to a group of institutional investors, both the Elan note (at a conversion rate of $6.00 per share) and the $2,500,000 credit facility (at a conversion rate of $0.27 per share) were converted into shares of our common stock. See "Subsequent Events" below.

        We have a contingent liability of $650,000 because we sold 124,627 (post-reverse split) shares of common stock in a series of five transactions from April 26 through June 21, 2001 under our Registration Statement

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No. 333-46394 when that Registration Statement did not meet the requirements of Section 10(a)(3) of the Securities Act. As a result, those shares are subject to rescission.

        With the proceeds of the financing we closed in November, 2002, we believe we have sufficient capital to carry out planned activities into the third quarter of 2003. Our ability to conduct operations beyond that date is entirely dependent on our ability to obtain additional capital. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result. However, there can be no assurance that such capital will be available under acceptable terms, if at all. See "Risk Factors—We must raise additional financing in the future and our inability to do so could prevent us from implementing our business development plan," below.

        We have used, and expect over the next 12 months to use the capital available from sales of common stock, for general corporate purposes, including activities related to preparing for and conducting clinical trials, purchase and preparation of clinical material, conduct of preclinical studies, administrative expenses to support our research and development activities, capital expenditures and to meet working capital needs. Proceeds from the sale of our common stock to the institutional investors in November, 2002 must be used for the following purposes (including related general and administrative costs) in the following order or priority, unless otherwise authorized by a majority of the Board:

•

To seek FDA approval for the use of PH-50 (our cardiovascular diagnostic technology) as a CT contrast agent.



•

To seek FDA approval for the use of N1177 (being developed through our joint venture with Elan) as a lymphography contrast agent.



•

To perform pre-clinical exploration of the use of PH-50 to identify vulnerable plaque.



•

To acquire or license compounds to build a product pipeline for the Company.

        We evaluate from time to time the acquisition or license of businesses, technologies or products. The purchase of any such licenses or technologies would be funded by a portion of any net proceeds of future offerings or the issuance of debt or equity securities specifically for that purpose. We also expect our use of capital to increase as we conduct further clinical trials.

        Our only long-term commitment that is not recorded on our financial statements is for our office space in Pennsylvania. Annual rent for this lease, which expires in 2004, is approximately $190,765.

SUBSEQUENT EVENTS

        The Company held its reconvened annual meeting of stockholders on October 31, 2002 in Chicago, Illinois. At the annual meeting, the stockholders approved the following matters:

•

A corporate separation transaction pursuant to which the Company would split off its therapeutic line of business to its five founding stockholders in exchange for and in redemption of all of their common stock of the Company (Proposal 1).



•

A financing transaction in which the Company would issue more than 20% of its common stock to certain institutional investors (Proposal 2).



•

An amendment to the Company's Articles of Incorporation to effect a one-for-four reverse split of the common stock (Proposal 3).



•

An amendment to the Company's 2000 Long Term Incentive Compensation Plan to increase the number of shares of common stock reserved for issuance under the plan to 4,568,750 (post-reverse split) shares (Proposal 4).



•

The election of Taffy J. Williams, Ph.D., Eric A. Wachter, Ph.D., Robert J. Weinstein, M.D., Lester H. McKeever, Jr. and Gene Golub to the Board of Directors (Proposal 5).



•

The ratification of BDO Seidman, LLP as the Company's independent certified public accountants for 2002 (Proposal 6).

        Each proposal was approved by a significant majority of the shares voting at the meeting. In addition, the corporate separation transaction (Proposal 1) was approved by a majority of the shares other than those held by the Company's five founding stockholders, as required by the Proxy Statement.

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        On November 12, 2002, the Company closed the following transactions:

•

Sold $9,000,000 of its common stock at a price of $1.08 per share to a syndicate of institutional investors. As a condition precedent to the financing, the outstanding balance of the Elan line of credit, including accrued and unpaid interest, was converted into common stock at an exchange rate of $24.00 per share and all of the Company's Series B Preferred Stock, including accrued and unpaid dividends, was converted into common stock at an exchange ratio of 1.06. In the transaction, the Company received $6.7 million in cash and exchanged $2.3 million of outstanding balances under its line of credit with an entity controlled by a director. The line of credit and related security interest in all of the Company's assets was cancelled. The Company no longer has any long-term debt outstanding.



•

Split off its therapeutic line of business to five founding shareholders in exchange for and cancellation of all of their 5,137,109 (post-reverse split) shares of common stock, equaling approximately 52.9 percent of the Company's outstanding common stock, of the Company

        In conjunction with these transactions, the Company implemented a one-for four reverse split of its common stock. All amounts have been retroactively stated to reflect this reverse stock split. Following the financing, split-off and reverse split, the Company's outstanding common stock totals approximately 13,475,156 shares.

        In connection with the financing, we have entered into a confidential settlement agreement with Broadmark Capital, Inc. as of September 13, 2002. The dispute was regarding the payment of brokerage commissions. The settlement includes, among various terms, the dismissal of all parties' claims and mutual releases, and certain payments to Broadmark.

        Eric A. Wachter, Ph.D. resigned from the Board of Directors upon completion of the corporate separation transaction. Also, on Wednesday, October 30, 2002, Aidan King notified the Company that he would not stand for reelection to the Board of Directors. Elan has the right to designate another representative to sit on the Board of Directors. In accordance with the Bylaws, the Board of Directors appointed William D. McPhee and Alan D. Watson to fill these vacancies.

        Although the current institutional investor group purchased $9,000,000 of common stock, we received stockholder approval to issue up to $15,000,000 of common stock to accredited institutional investors by means of a private placement in one or more closings on the terms described in our proxy materials. We may use a broker to find additional institutional investors on a best efforts basis, and we may pay commissions and grant warrants to the broker not to exceed 10% of the gross proceeds (or such greater amount as is permitted by applicable law and approved by our Board of Directors). We have no agreement with any broker at this time.

Changes to Elan holdings

        As part of the financing, all of the outstanding principal and accrued interest under our note to Elan in the amount of $3,082,487.30 was converted into common stock at a conversion price of $6.00 (reduced from $18.15) resulting in the issuance of 128,437 (post-reverse split) shares of our common stock.

        The Company learned immediately prior to its annual stockholders meeting on October 31, 2002 that Elan Pharmaceutical Investments II, Ltd., the holder of the Series A Preferred Stock, would not be in a position to consent to the elimination of the liquidation preference (or the reduction of the conversion price), a condition precedent to the closing of the financing. The institutional investors agreed to waive this condition, and Elan Corporation, plc agreed that in the event of a liquidation of the Company, Elan will make whole Mi3 L.P., Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P. if they incur losses as a result of the Series A liquidation preference upon liquidation of the Company. The Company's stockholders will have an opportunity to ratify this agreement before February 1, 2003.

Changes to Series B Preferred Stock

        As a condition to the closing of the financing transaction, the holders of over a majority of the Series B Preferred Stock agreed to convert their shares into common stock. As a result, all shares of Series B Preferred Stock (including all shares of Series B Preferred Stock paid as in-kind dividends) were converted into common stock on November 12, 2002. Each share of Series B Preferred Stock was converted into 4.25 shares of common stock contemporaneously with the closing of the financing transaction. The result was that all shares of Series B Preferred Stock were converted into a total of approximately 422,316 (post reverse-split) shares of common stock

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on November 12, 2002; and the shares of Series B Preferred Stock are no longer outstanding, nor will there be any liquidation preference associated with the Series B Preferred Stock.

Reverse Split

        On November 12, 2002, we amended our Articles of Incorporation to effect a one for four reverse split of our common stock.

PLAN OF OPERATION

        During the next twelve months we will focus our efforts on the development of PH-50 and N1177 reflecting the strategic shift in the direction of the Company and the split-off of our therapeutic PH-10 and laser technologies to certain founders of Photogen. Specifically, we expect to conduct preclinical and human clinical studies, prepare required filings to the FDA, and as required to foreign regulatory bodies and acquire quantities of clinical grade drug formulations of these products. We expect to continue to incur increasing losses for at least the next three years as we intensify research and development, preclinical and clinical testing and associated regulatory approval activities and engage in or provide for the manufacture and/or sale of any products that we may develop.

        As we progress further into human clinical trials, our use of capital will increase. We expect to continue to incur increasing losses for at least the next several years as we intensify research and development, preclinical and clinical testing and associated regulatory approval activities and engage in or provide for the manufacture and/or sale of any products that we may develop. Greater capital resources would enable us to quicken and expand our research and development activities, and our failure to raise additional capital will (absent a suitable collaborative agreement providing for a third party to take over these functions) significantly impair or curtail our ability to conduct further research and development activities and our ability to seek regulatory approval for any possible product resulting from that research. In any event, complete development and commercialization of our technology will require substantial additional funds. See "Risk Factors—We must raise additional financing in the future and our inability to do so could prevent us from implementing our business plan," below.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The primary market risk that could impact us is the fluctuation in interest rates related to our investments in Government bonds. As our investments all have short-term maturities, the investment return will reflect the current market rates. To date, we have not engaged in any derivative or hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

        The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in filings made pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

        Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II.    OTHER INFORMATION

ITEM 5.    OTHER INFORMATION

RISK FACTORS

        This Form 10-Q contains (and press releases and other public statements we may issue from time to time may contain) a number of forward-looking statements regarding our business and operations. Statements in this document that are not historical facts are forward-looking statements. Such forward-looking statements include those relating to:

•

our current business and product development plans,



•

our future business and product development plans,



•

the timing and results of regulatory approval for proposed products, and



•

projected capital needs, working capital, liquidity, revenues, interest costs and income.

        Examples of forward-looking statements include predictive statements, statements that depend on or refer to future events or conditions, and statements that may include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "should," "may," or similar expressions, or statements that imply uncertainty or involve hypothetical events.

        Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from what is currently anticipated. We make cautionary statements in certain sections of this Form 10-Q, including under "Risk Factors." You should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q, in the materials referred to in this Form 10-Q, in the materials incorporated by reference into this Form 10-Q, or in our press releases or other public statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q or other documents incorporated by reference might not occur. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement.

        The following are the key risk factors that may affect our future results:

WE ARE A DEVELOPMENT STAGE COMPANY, WE HAVE CONDUCTED ONLY LIMITED STUDIES ON OUR PRODUCTS IN DEVELOPMENT AND WE DO NOT HAVE ANY REVENUES FROM SALES.

        Our Company and our technologies are in early stages of development. We began our business as a biopharmaceutical company in 1997. We have not generated revenues from sales or operations, and we do not expect to generate sufficient revenues to enable us to be profitable for at least several years.

        Our proposed technologies and products generally must complete preclinical tests in animals and three phases of tests (also called clinical trials) in humans before we can market them for use. Use of our technology has been limited primarily to laboratory experiments, animal testing or human pilot studies and only one compound has completed Phase 1 clinical trials. We have therefore not yet conducted substantive studies on the effectiveness of our compounds on human subjects. The drug products we currently contemplate developing will require costly and time-consuming research and development, preclinical and clinical testing and regulatory approval before they can be commercially sold. We may not be able to develop our technology into marketable products or develop our technology so it is effective for diagnosis or treatment of human diseases. As a result of changing economic considerations, market, clinical or regulatory conditions, or clinical trial results, we may shift our focus or determine not to continue one or more of the projects we are currently pursuing.

WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE OR PAY CASH DIVIDENDS.

        We have incurred losses since the beginning of our operations. As of September 30, 2002, we have incurred cumulative net losses (before dividends on preferred stock) of approximately $35,134,933. We expect our losses to increase in the future as our financial resources are used for research and development, preclinical and clinical testing, regulatory activities, manufacturing, marketing and other related expenses. We may not be able to achieve or maintain profitability in the future. We have never declared or paid any cash dividends to stockholders, and do not expect to do so in the foreseeable future.

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WE MUST RAISE ADDITIONAL FINANCING IN THE FUTURE AND OUR INABILITY TO DO SO WILL PREVENT US FROM IMPLEMENTING OUR BUSINESS DEVELOPMENT PLAN.

        We believe that through the use of our cash and lines of credit, we will have cash resources for our current commitments through the third quarter of 2003 (depending on the pace of our spending for preclinical and clinical testing and other commitments, which, to an extent, we can adjust to preserve cash). We will need substantial additional financing for our research, clinical testing, product development and marketing programs. As of November 12, 2002, we sold $9.0 million of our common stock to a syndicate of institutional investors at a price of $1.08 per share. We cannot accurately estimate the amount of additional financing required; however, the amount could be an additional $30 million or more over the next several years. Additional funds may not be available on acceptable terms, if at all, and existing stockholders may be diluted as a result of those offerings. The pricing of our common stock, or other security convertible into common stock, in any such transaction may also result in an increase in the number of shares of common stock issuable upon exercise of warrants in accordance with the anti-dilution provisions in the instruments governing those securities.

OUR PROPOSED PRODUCTS ARE SUBJECT TO EXTENSIVE TESTING AND GOVERNMENT APPROVAL, AND WE MAY NOT OBTAIN THE APPROVALS NECESSARY TO SELL OUR PROPOSED PRODUCTS.

        None of our proposed imaging, drug and device products has received the Food and Drug Administration's approval. An extensive series of clinical trials and other associated requirements must be completed before our proposed products can be approved and sold in the United States or other countries. Requirements for FDA approval of a product include preclinical and clinical testing for effective use and safety in animals and humans; that testing can be extremely costly. The time frame necessary to perform these tasks for any individual product is long and uncertain, and we may encounter problems or delays that we cannot predict at this time. Even if testing is successful, our proposed products may not demonstrate sufficient effectiveness or safety to warrant approval by the FDA or other regulatory authorities. Any regulatory approval may not cover the clinical symptoms or indications that we may seek. Marketing our products in other countries will require seeking and obtaining regulatory approvals comparable to those required in the United States.

IF WE DO NOT OBTAIN AND MAINTAIN PATENT OR OTHER PROTECTION OF OUR CORE TECHNOLOGIES (NAMELY PH-50 FOR CARDIOVASCULAR IMAGING, N1177 AND OUR OTHER LYMPHOGRAPHY MATERIALS AND METHODS, WE MAY HAVE DIFFICULTY COMMERCIALIZING PRODUCTS USING THESE TECHNOLOGIES.

        Our success depends in part on our ability to obtain, assert and defend our patents, protect trade secrets and operate without infringing the intellectual property of others. Among the important risks in this area are that:

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Our patent applications may not result in issued patents. Moreover, any issued patents may not provide us with adequate protection of our intellectual property or competitive advantages, and the law on the scope of patent coverage is continually changing.



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Various countries limit the subject matter that can be patented and limit the ability of a patent owner to enforce patents in the medical field. This may limit our ability to obtain or utilize those patents internationally.



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Existing or future patents or patent applications (and the products or methods they cover) of our competitors (or others, such as research institutions or universities) may interfere, invalidate, conflict with or infringe our patents or patent applications. Similarly, the use of the methods or technologies contained in our patents, patent applications and other intellectual property may conflict with or infringe the rights of others.



•

If an advance is made that qualifies as a joint invention, the joint inventor or his or her employer may have rights in the invention.

        We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that these rights are covered by valid and enforceable patents or effectively maintained as trade secrets. We own two patents in the U.S., and sixteen other patents in foreign countries including Taiwan, Australia, Singapore, Japan and New Zealand. We are also the exclusive licensee to a group of patented proprietary compounds known as nanoparticulates from Massachusetts General Hospital and Nycomed Imaging AS. We have filed patent applications under the Patent Cooperation Treaty covering a number of foreign countries. These patents and the patent applications relate to the use of PH-50 as a cardiovascular imaging agent, laser and ionizing radiation

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technology, photoactive agents and methods, methods for enhanced cell production and methods for performing lymphography.

        The patent position of biopharmaceutical companies involves complex legal and factual questions, and therefore we cannot assure the enforceability of these patents. Litigation over patents and other intellectual property rights occurs frequently in our industry, and there is a risk that we may not prevail in disputes over the ownership of intellectual property. Further, interference may occur over the rights to certain inventions, and there is a risk that we may not prevail in an interference. Those disputes can be expensive and time consuming, even if we prevail. Intellectual property disputes are often settled through licensing arrangements that could be costly to us. In any intellectual property litigation, it is possible that licenses necessary to settle the dispute would not be available, or that we would not be able to redesign our technologies to avoid any claimed infringement.

        Confidentiality agreements covering our intellectual property may be violated and we may not have adequate remedies for any violation. Third parties may challenge our existing patents and seek to hold them invalid or unenforceable. Also, our intellectual property may in other ways become known or be independently discovered by competitors.

        To the extent we use intellectual property through licenses or sub-licenses (as is the case for some of our lymphography technology), our rights are subject to us performing the terms of the license or sub-license agreement with third parties. Our rights are also subject to the actions of third parties we may not be able to control, such as our sub-licensor complying with the terms of its license with the patent owner and the patent owner maintaining the patent.

        Where intellectual property results from a research project supported by U.S. Government funding, the Government has limited rights to use the intellectual property without paying us a royalty.

WE ARE HIGHLY DEPENDENT UPON A SMALL NUMBER OF EMPLOYEES AND CONSULTANTS WHO PROVIDE SCIENTIFIC AND MANAGEMENT EXPERTISE, AND IT MAY BE DIFFICULT TO IMPLEMENT OUR BUSINESS DEVELOPMENT PLANS WITHOUT THIS EXPERTISE.

        These individuals have entered into employment or consulting agreements, confidentiality and/or non-competition agreements with us. We could suffer competitive disadvantage, loss of intellectual property or other material adverse effects on our business and results of operations if any employee or consultant violates or terminates these agreements or terminates his or her association with us. Our growth and future success also depends upon the continued involvement and contribution from these individuals, as well as our ability to attract and retain highly qualified personnel now and in the future.

        We currently employ three senior executive officers, including Dr. Williams (our CEO), Mr. Boveroux (our CFO) and Dr. Reinhard Koenig (Senior Vice President of Medical and Regulatory Affairs). We also have retained consultants to advise us in regulatory affairs and product development matters. If we lost the services of our executive officers or outside consultants, we could experience a delay in the implementation of our business plan until we arranged for another individual or firm to fulfill the role.

WE HAVE TO RELY ON THIRD PARTIES AND COLLABORATIVE RELATIONSHIPS FOR THE MANUFACTURE, CLINICAL TESTING AND MARKETING OF OUR PROPOSED PRODUCTS, AND IT MAY BE DIFFICULT TO IMPLEMENT OUR BUSINESS DEVELOPMENT PLANS WITHOUT THESE COLLABORATIONS.

        We are currently involved in a joint venture with affiliates of Elan Corporation, plc, called Sentigen Ltd., to develop and commercialize materials in the field of lymphography. We have had and expect to continue in the future to have a variety of research agreements with universities and other research institutions to investigate specific protocols. We also contract and expect to continue to contract with research organizations and other third parties to manage clinical trials of our proposed products in development. We must continue to enter into collaborative relationships with third parties for additional research and development, preclinical and clinical testing, marketing and distribution of our proposed products.

        We are also dependent on third parties for the manufacture of supplies of our products and for the supply of lasers and radiotherapy devices and similar hardware in physicians' offices and hospitals. We have certain research and supply agreements with third parties. However, we may not be able to negotiate other acceptable collaborative and supply arrangements in the future.

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        Collaborative relationships may limit or restrict our operations or may not result in an adequate supply of necessary resources. Our collaborative partner could also pursue alternative technologies as a means of developing or marketing products for the diseases targeted by our collaborative program. If a third party we are collaborating with fails to perform under its agreement or fails to meet regulatory standards, this could delay or prematurely terminate clinical testing of our proposed products.

OUR POTENTIAL MARKETS ARE EXTREMELY COMPETITIVE, AND MANY OF OUR COMPETITORS HAVE GREATER RESOURCES AND HAVE PRODUCTS THAT ARE IN MORE ADVANCED STAGES OF DEVELOPMENT.

        We face substantial competition from competitors with greater financial, technical and human resources and with greater experience in developing products, conducting preclinical or clinical testing, obtaining regulatory approvals, manufacturing and marketing. We understand that the existing market for radiopaque contrast agents is estimated to be approximately $3.4 billion worldwide. The dominant uses of media are those employed in conjunction with CT or X-ray scans. Approximately half of the usage is in the U.S. Omnipaque(R), marketed by a unit of Amersham is estimated to be the leading agent utilized in coronary angiography. Other companies marketing contrast agents include Mallinckrodt, Inc. (a unit of Tyco International Ltd.), Bristol-Myers Squibb Medical Imaging (a unit of Bristol-Myers Squibb Company), Berlex Laboratories, Inc., Abbott Laboratories and Bracco.

        More broadly defined, other modalities, such as magnetic resonance imaging and ultrasound, are also used by physicians to image internal vasculature and organs. These modalities, including CT imaging, each have particular attributes that may make their use applicable to any particular situation.

        Competitors in the field of using light energy to treat and diagnose disease include: Miravant Medical Technologies, Pharmacyclics, Inc., QLT Inc., Axcan Pharma Inc., Dusa Pharmaceuticals, Inc. and PhotoCure ASA. There are also numerous companies developing other technologies to image the vascular system and various body organs. Examples of the technologies from those other companies are the use of magnetic resonance imaging or ultrasound techniques to create internal organ images.

        Some of these firms have drugs or devices that have completed or are in advanced stages of clinical trials and regulatory approvals. Others may develop technologies and obtain patent protection that could render our technologies or products obsolete or less competitive or our patents invalid or unenforceable. Due to the inherent risk of failure associated with the testing, development and production of new and innovative technologies, our technologies and products may be found to be ineffective, have unanticipated limitations or otherwise be unsuccessful in the marketplace. Also, although we believe our estimates of the possible size of markets for our potential products are based on information we consider reliable (including data from the American Heart Association, American Cancer Society and similar sources in the public domain), that data or our analysis of the data could prove incorrect.

CHANGES IN HEALTH CARE REIMBURSEMENT POLICIES OR LEGISLATION MAY MAKE IT DIFFICULT FOR PATIENTS TO USE OR RECEIVE REIMBURSEMENT FOR USING OUR PRODUCTS, WHICH COULD REDUCE OUR REVENUES.

        Our success will depend, in part, on the extent to which health insurers, managed care entities and similar organizations provide coverage or reimbursement for using the medical procedures and devices we plan to develop. These third-party payers are increasingly challenging the price of medical procedures and services and establishing guidelines that may limit physicians' selections of innovative products and procedures. We also cannot predict the effect of any current or future legislation or regulations relating to third-party coverage or reimbursement on our business. We may not be able to achieve market acceptance of our proposed products or maintain price levels sufficient to achieve or maintain any profits on our proposed products if adequate reimbursement coverage is not available.

THE CURRENT BOARD OF DIRECTORS CONTROLS PHOTOGEN, WHICH MAY MAKE IT DIFFICULT FOR STOCKHOLDERS WHO ARE NOT IN THAT GROUP TO INFLUENCE MANAGEMENT.

        As of November 12, 2002, a small group of stockholders control approximately 61.5% of our outstanding common stock (calculated on a fully-diluted basis). Several of our principal stockholders are also parties to a Voting, Drag-Along and Right of First Refusal Agreement concerning the election of certain designees to the Board of Directors. The Voting Agreement requires these stockholders to vote their shares for the election of certain individuals nominated by parties to the Voting Agreement. This concentration of ownership and control

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may delay or prevent a change in control of Photogen, and may also result in a small supply of shares available for purchase in the public securities markets. These factors may affect the market and the market price for our common stock in ways that do not reflect the intrinsic value of the stock.

THE PRICE AND TRADING VOLUME OF OUR COMMON STOCK FLUCTUATES SIGNIFICANTLY, WHICH MAY MAKE IT DIFFICULT FOR US OR A STOCKHOLDER TO SELL OUR COMMON STOCK AT A SUITABLE PRICE AND MAY CAUSE DILUTION FOR EXISTING STOCKHOLDERS WHEN WE ISSUE ADDITIONAL SHARES.

        During the period from January 1, 2002 through September 30, 2002 our closing stock price ranged from $1.32 to $6.04 per share. Daily trading volume ranged from 0 (zero) shares to approximately 10,450 shares during that period. The above data are stated on a post-reverse split basis.

        The following factors may have an impact on the price of our stock:

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Announcements by us or others regarding scientific discoveries, technological innovations, commercial products, patents or proprietary rights;



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Announcements by us concerning the licensing or other transactions of our products or technologies;



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The progress of preclinical or clinical testing;



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Changes in government regulation;



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Public concern about the safety of devices or drugs;



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Limited coverage by securities analysts;



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The occurrence of any of the risk factors described in this section;



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Sales of large blocks of stock by an individual or institution;



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Changes in our financial performance from period to period; securities analysts' reports; and general market conditions.

OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH WOULD MAKE TRADING IN OUR STOCK MORE DIFFICULT.

        Since November 1999, our common stock has been quoted in the Nasdaq SmallCap Market. We received a letter dated September 25, 2002 from NASDAQ notifying us that our stock has traded at less than $1 for a period of 30 consecutive trading days and that we have until March 4, 2003 to regain compliance with Marketplace Rule 4310(c)(4). Our shares could be delisted if we fail to meet the listing requirements of the Nasdaq SmallCap Market, which would force us to list our shares on the OTC Bulletin Board or some other quotation medium, such as pink sheets, depending upon our ability to meet the specific listing requirements of those quotation systems. As a result, an investor might find it more difficult to dispose of, or to obtain accurate price quotations for, our shares. Delisting might also reduce the visibility, liquidity, and price of our common stock. If our common stock were delisted from the Nasdaq SmallCap Market and were not traded on another national securities exchange, we could become subject to penny stock regulations that impose additional sales practice disclosure and market making requirements on broker/dealers who sell or make a market in our stock. The rules of the SEC generally define "penny stock" to be common stock that has a market price of less than $5.00 per share and is not traded on a national exchange. If our stock became subject to penny stock regulations, it could adversely affect the ability and willingness of broker/dealers who sell or make a market in our common stock and of investors to purchase or sell our stock in the secondary market.

IF STOCKHOLDERS HOLDING SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK SHOULD SELL IN THE PUBLIC MARKET, THE PRICE OF OUR STOCK COULD FALL OR IT MAY BE MORE COSTLY FOR US TO RAISE CAPITAL.