UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended December 31, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
_______ to _______.
Commission File Number: 000-25669
IMMTECH INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1523370
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 573-0033
Indicate by checkmark 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of January 31, 2003, 7,661,310 shares of the Registrant's common stock, par
value $0.01 ("Common Stock"), were outstanding.
INDEX
Page No.
PART I. FINANCIAL INFORMATION.................................................1
Item 1. Condensed Financial Statements.....................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........20
Item 4. Controls and Procedures...........................................20
PART II. OTHER INFORMATION...................................................21
Item 1. Legal Proceedings.................................................21
Item 2. Changes in Securities and Use of Proceeds.........................21
Item 3. Defaults Upon Senior Securities...................................23
Item 4. Submission of Matters to a Vote of Security Holders...............23
Item 5. Other Information.................................................24
Item 6. Exhibits, and Reports on Form 8-K.................................24
Exhibit Index................................................................25
SIGNATURES...................................................................26
-i-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
------------------------------
IMMTECH INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
ASSETS 2002 2002
CURRENT ASSETS:
Cash and cash equivalents $ 1,034,739 $ 2,037,813
Restricted funds on deposit 3,137,161 602,400
Other current assets 35,000 39,881
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Total current assets 4,206,900 2,680,094
PROPERTY AND EQUIPMENT - Net 120,054 175,950
OTHER ASSETS 19,848 19,848
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TOTAL $ 4,346,802 $ 2,875,892
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 343,463 $ 545,017
Accrued expenses 856 4,257
Deferred revenue 3,138,838 563,435
------------ ------------
Total current liabilities 3,483,157 1,112,709
DEFERRED RENTAL OBLIGATION 22,371 27,145
------------ ------------
Total liabilities 3,505,528 1,139,854
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,440,000 shares
authorized and unissued
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 142,800 and 160,100 shares
outstanding as of December 31, 2002 and March 31, 2002, respectively;
aggregate liquidation
preference of 3,633,287 as of December 31, 2002 3,633,287 4,031,900
Series B convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 240,000 shares authorized, 76,725 shares
outstanding as of December 31, 2002; aggregate liquidation
preference of $1,950,075 as of December 31, 2002 1,950,075
Common stock, par value $0.01 per share, 30,000,000 shares
authorized, 6,395,647 and 6,066,459 shares issued and outstanding
as of December 31, 2002 and March 31, 2002, respectively 63,957 60,664
Additional paid-in capital 36,479,567 34,679,844
Deficit accumulated during the developmental stage (41,285,612) (37,036,370)
------------ -----------
Total stockholders' equity 841,274 1,736,038
------------ -----------
TOTAL $ 4,346,802 $ 2,875,892
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See notes to condensed financial statements.
2
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
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OCTOBER 15,
1984
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------- ---------------
2002 2001 2002 2001 2002
REVENUES $ 233,830 $ 954,660 $ 1,024,082 $ 2,914,082 $ 8,258,055
---------- ---------- ------------ ----------- -------------
EXPENSES:
Research and development 401,667 1,205,808 1,864,193 2,986,881 30,365,354
General and administrative 723,978 689,328 3,059,166 2,370,330 20,399,652
Equity in loss of joint venture 135,002
---------- ---------- ------------ ----------- -------------
Total expenses 1,125,645 1,895,136 4,923,359 5,357,211 50,900,008
---------- ---------- ------------ ----------- ------------
LOSS FROM OPERATIONS (891,815) (940,476) (3,899,277) (2,443,129) (42,641,953)
---------- ---------- ------------ ----------- -------------
OTHER INCOME (EXPENSE):
Interest income 3,130 2,409 13,031 38,769 576,759
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942)
Cancelled offering costs (584,707)
---------- ---------- ------------ ----------- -------------
Other income (expense) - net 3,130 2,409 13,031 38,769 (1,140,392)
---------- ---------- ------------ ----------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (888,685) (938,067) (3,886,246) (2,404,360) (43,782,345)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF
DEBT 1,427,765
---------- ---------- ------------ ----------- -------------
NET LOSS (888,685) (938,067) (3,886,246) (2,404,360) (42,354,580)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (96,249) (362,996) (1,300,931)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS 2,369,899
---------- ---------- ------------ ----------- -------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (984,934) $ (938,067) $ (4,249,242) $(2,404,360) $ (41,285,612)
========== ========== ============ =========== =============
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss $ (0.14) $ (0.16) $ (0.62) $ (0.40)
Convertible preferred stock dividends (0.02) (0.06)
---------- ---------- ------------ -----------
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.16) $ (0.16) $ (0.68) $ (0.40)
========== ========== ============ ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE 6,350,855 6,055,371 6,246,023 6,003,208
========== ========== ============ ===========
See notes to condensed financial statements.
3
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
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OCTOBER 15,
1984
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------- --------------
2002 2001 2002 2001 2002
OPERATING ACTIVITIES:
Net loss $ (888,685) $ (938,067) $ (3,886,246) $ (2,404,360) $(42,354,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation recorded related to issuance of common
stock, common stock options and warrants 55,963 85,087 1,132,286 246,911 14,714,886
Depreciation and amortization of property and equipment 23,654 25,480 71,965 73,341 615,725
Deferred rental obligation (1,591) (1,592) (4,774) (4,774) 22,371
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942
Amortization of debt discounts and issuance costs 134,503
Extraordinary gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit (1,843,265) 751,339 (2,534,761) 2,311,653 (3,137,161)
Other current assets (35,000) 50,000 4,881 28,289 (35,000)
Other assets (19,848)
Accounts payable (5,047) 419,092 (201,554) 157,751 672,603
Accrued expenses (6) (3,401) (20,000) 663,869
Deferred revenue 1,817,170 (858,215) 2,575,403 (2,379,484) 3,138,838
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (876,807) (466,876) (2,846,201) (1,990,673) (26,873,615)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities (1,803,469)
Proceeds from sales and maturities of investment securities 1,800,527
Purchases of property and equipment (5,397) (16,069) (61,994) (709,255)
Investment in and advances to joint venture (135,002)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (5,397) (16,069) (61,994) (847,199)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Proceeds from issuance of redeemable preferred stock 3,330,000
Net proceeds from issuance of common stock 125 18,843 16,317,280
Net proceeds from issuance of convertible preferred
stock and warrants 25,000 1,859,333 5,707,848
Payments for convertible preferred stock dividends and for
fractional shares of common stock resulting
from the conversions of convertible preferred stock (86) (262) (262)
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 24,914 1,859,196 18,843 28,755,553
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (857,290) (466,876) (1,003,074) (2,033,824) 1,034,739
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 1,892,029 530,770 2,037,813 2,097,718
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,034,739 $ 63,894 $ 1,034,739 $ 63,894 $ 1,034,739
============ ============ ============ ============ ============
See notes to condensed financial statements.
4
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by
Immtech International, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments necessary for a fair
statement of results for each period shown (unless otherwise noted herein,
all adjustments are of a normal recurring nature). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such SEC rules
and regulations. The Company believes that the disclosures made are
adequate to prevent the financial information given from being misleading.
It is suggested that these financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q.
2. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. is a pharmaceutical
company focused on the discovery, development and commercialization of
drugs to treat infectious diseases that include fungal infections, malaria,
tuberculosis, hepatitis C, Pneumocystis carinii pneumonia and tropical
medicine diseases including African sleeping sickness (Trypanosomiasis) and
Leishmaniasis. The Company is a development stage enterprise and since its
inception on October 15, 1984, the Company has engaged in research and
development programs, expanding its network of scientists and scientific
advisors, technology licensing agreements, and advancing its technology
platform toward commercialization. The Company uses the expertise and
resources of strategic partners and contracted parties in a number of
areas, including: (i) laboratory research, (ii) pre-clinical and human
clinical trials and (iii) the manufacture of pharmaceutical products. The
Company holds worldwide patents, licenses and rights to license worldwide
patents, patent applications and technologies from third parties that are
integral to the Company's business. The Company has licensing and
commercialization rights to a dicationic anti-infective pharmaceutical
platform and is developing drugs intended for commercial use based on that
platform.
The Company does not have any products currently available for sale, and no
products are expected to be commercially available for sale prior to the
4th calendar quarter of 2003 if at all.
Going Concern Presentation and Related Risks and Uncertainties - The
accompanying condensed financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Since inception, the Company has incurred accumulated losses of
approximately $42,355,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
continues its research, development and commercialization activities and
clinical trial efforts. There can be no assurance that the Company's
continued research will lead to the development of commercially viable
products. The Company's operations to date have consumed substantial
amounts of cash. Negative cash flow from operations is expected to continue
in the foreseeable future. The Company will require substantial funds to
conduct research and
5
development, laboratory and clinical testing and to manufacture (or have
manufactured) and market (or have marketed) its product candidates.
The Company's working capital is not sufficient to fund the Company's
operations through the commercialization of one or more products yielding
sufficient revenues to support the Company's operations; therefore, the
Company will need to raise additional funds. The Company believes its
existing unrestricted cash and cash equivalents and the grants the Company
has received or has been awarded and is awaiting disbursement of, will be
sufficient to meet the Company's planned expenditures through May 2003,
although there can be no assurance the Company will not require additional
funds. These factors, among others, indicate that the Company may be unable
to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become
due and, ultimately, to obtain profitable operations. Management's plans
for the forthcoming year, in addition to normal operations, include
continuing their efforts to obtain additional equity and/or debt financing,
obtain additional research grants and enter into various research and
development agreements with other entities.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of an amount on deposit
at a bank and an investment in a money market mutual fund, stated at cost,
which approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash
on deposit at a bank which is restricted for use in accordance with a
clinical research subcontract agreement with The University of North
Carolina at Chapel Hill.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of December 31,
2002 and March 31, 2002, the Company owned approximately 28% of the issued
and outstanding shares of NextEra common stock. The Company has recognized
an equity loss in NextEra to the extent of the basis of its investment, and
the investment balance is zero as of December 31, 2002 and March 31, 2002.
Recognition of any investment income on the equity method by the Company
for its investment in NextEra will occur only after NextEra has earnings in
excess of previously unrecognized equity losses.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. In addition,
the valuation allowance is recognized if it is more likely than not that
some or all of the deferred income tax assets will not be realized. A
valuation allowance is used to offset the related net deferred income tax
assets due to uncertainties of realizing the benefits of certain net
operating loss and tax credit carryforwards and other deferred income tax
assets.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." Basic net income (loss) per share and diluted net
loss per share are computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share, when applicable, is computed by
dividing net income attributable to common stockholders by
6
the weighted average number of common shares outstanding increased by the
number of potential dilutive common shares based on the treasury stock
method. Diluted net loss per share was the same as the basic net loss per
share for the three and nine months ended December 31, 2002 and 2001, as
the Company's outstanding common stock options, warrants and conversion
features of Series A and B Convertible Preferred Stock were antidilutive.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the three and nine month periods ended December 31, 2002
and 2001, respectively.
New Accounting Standards - In December 2002, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to SFAS No.123's fair value method for
accounting for stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and Accounting Principles Board
("APB") Opinion No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects
of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The Company is in the process of assessing
the impact of SFAS No. 148 and will adopt this standard for periods
beginning after December 15, 2002.
3. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share and
are payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined. Accrued
preferred stock dividends are included in the carrying value of the Series
A Convertible Preferred Stock in the accompanying condensed balance sheets.
Each share of Series A Convertible Preferred Stock shall be convertible by
the holder at any time into shares of the Company's common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.42
conversion price (the "Conversion Price"), subject to certain antidilution
adjustments as defined in the Certificate of Designation. On April 15, 2002
and October 15, 2002 the Company issued 8,249 and 28,959 shares of common
stock and paid $165.92 and $64.23 to holders of fractional shares as
dividends on the Series A preferred shares, respectively. During the three
month period ended December 31, 2002, certain Series A preferred
stockholder converted 8,000 shares of Series A Convertible Preferred Stock
and the related dividend for 45,978 shares of common stock. A total of
$56,127 was accrued for the preferred stock dividend payable April 15, 2003
and was reported in the net loss attributable to common stockholder in the
accompanying statement of operations for the three months ended December
31, 2002. During the nine month period ended December 31, 2002, certain
Series A preferred stockholders converted 17,300 shares of Series A
Convertible Preferred Stock including accrued dividends for 99,105 shares
of common stock.
The Company may at any time after February 14, 2003, require that any or
all outstanding shares of Series A Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series A Convertible Preferred Stock are
convertible are registered pursuant to an effective registration statement,
as defined. The number of
7
shares of common stock to be received by the holders of the Series A
Convertible Preferred Stock upon conversion at the request of the Company
shall be determined by (i) dividing the Liquidation Price by the Conversion
Price provided that the closing bid price for the Company's common stock
exceeds $9.00 for 20 consecutive trading days within 180 days prior to
notice of conversions, as defined, (ii) or if the requirements of (i) are
not met, the number of shares of common stock is determined by dividing
110% of the Liquidation Price by the Conversion Price. The Conversion Price
is subject to certain antidilution adjustments, as defined in the
Certificate of Designation.
The Company may at any time, upon 30 day notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series A Convertible Preferred Stock into
shares of Common Stock during the 30 day period. The Series A Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share of
Series A Convertible Preferred Stock is entitled to 5.6561 votes (subject
to adjustment for dilution) with respect to any and all matters presented
to the stockholders of the Company for their action or consideration.
Except as provided by law or by the provisions establishing any other
series of preferred stock, Series A Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with
the holders of common stock as a single class.
Series B Convertible Preferred Stock - On September 25, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 240,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 8.0% per annum on the $25.00 stated value per share and
are payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined. Accrued
preferred stock dividends are included in the carrying value of the Series
B Convertible Preferred Stock in the accompanying condensed balance sheets.
Each share of Series B Convertible Preferred Stock shall be convertible by
the holder at any time into shares of the Company's common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.00
conversion price (the "Conversion Price"), subject to certain antidilution
adjustments, as defined in the Certificate of Designation. During September
2002 the Company issued 75,725 shares of preferred stock, Series B
Convertible Preferred for net proceeds of $1,834,333 (net of offering costs
of $58,900 of which $18,700 was paid during the quarter-ended June 30,
2002). During the quarter ended December 31, 2002 the Company issued 1000
shares of preferred stock, Series B Convertible Preferred for net proceeds
of $25,000. On October 15, 2002, the Company issued 2,658 shares of common
stock and paid $16.59 to holders of fractional shares as dividends on the
Series B preferred shares. A total of $38,173 was accrued for the preferred
stock dividend payable April 15, 2003 and was reported in the net loss
attributable to common stockholder in the accompanying statement of
operations for the three months ended December 31, 2002.
The Company may at any time after September 24, 2003, require that any or
all outstanding shares of Series B Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series B Convertible Preferred Stock are
convertible are registered pursuant to an effective registration statement,
as defined. The number of shares of common stock to be received by the
holders of the Series B Convertible Preferred Stock upon conversion at the
request of the Company shall be determined by (i) dividing the Liquidation
Price by the Conversion Price provided that the closing bid price for the
Company's common stock exceeds $9.00 for 20 consecutive trading days within
180 days prior to notice of conversions, as defined, (ii) or if the
requirements of (i) are not met, the number of shares of common stock is
8
determined by dividing 110% of the Liquidation Price by the Conversion
Price. The Conversion Price is subject to certain antidilution adjustments,
as defined in the Certificate of Designation.
The Company may at any time, upon 30 day notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series B Convertible Preferred Stock into
shares of Common Stock during the 30 day period. The Series B Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share of
Series B Convertible Preferred Stock shall be entitled to 6.25 votes
(subject to adjustment for dilution) with respect to any and all matters
presented to the stockholders of the Company for their action or
consideration. Except as provided by law or by the provisions establishing
any other series of preferred stock, Series B Convertible Preferred
stockholders and holders of any other outstanding preferred stock shall
vote together with the holders of common stock as a single class.
In September 2002 and October 2002, the Company, in connection with the
Series B Convertible Preferred Stock private placement offerings, issued
warrants to purchase 189,312 and 2,500 shares of the Company's common stock
at an exercise price of $6.125 per share of common stock, respectively. The
warrants expire at various dates in September and October 2007. At any time
after the first anniversary of the date of grant and if the Company's
common stock closes above 200% of the exercise price for 20 consecutive
trading days, the Company may, upon 20 days notice, redeem any unexercised
portion of any warrants for a redemption fee of $.10 per share of common
stock underlying the warrants. During the 20 day notice period, if the
warrants are then exercisable as a result of the conversion or redemption
of the Series B Convertible Preferred Stock, such warrant holder may then
exercise all or a portion of the warrant by tendering the appropriate
exercise price.
The warrants issued in September 2002 to the holders of the Series B
Preferred Convertible Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $147,483 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series B Convertible Preferred Stock resulting in a $147,483
preferred stock dividend calculated in accordance with the Emerging Issues
Task Force ("EITF") Issue No. 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments." The dividend on the Series B Convertible
Preferred Stock was charged to deficit accumulated during the development
stage immediately upon issuance, as the preferred stock is immediately
convertible. The preferred stock dividend of approximately $149,000 and the
accrued preferred stock dividends of approximately $40,700 were reported as
dividends in determining the net loss attributable to common stockholders
in the accompanying statement of operations for the nine months ended
December 31, 2002.
Common Stock - On June 28, 2002, the Company entered into a Finder's
Agreement with an individual to develop and qualify potential strategic
partners for the purpose of testing and/or the commercialization of Company
products in China. As consideration for entering into the agreement, the
individual received 150,000 shares of the Company's common stock and the
Company recognized approximately $757,500 as a general and administrative
expense during the three month period ended September 30, 2002, based on
the estimated fair value of the shares issued.
On July 31, 2002, the Company entered into a one year agreement with The
Gabriele Group, L.L.C. ("Gabriele") for assistance to be provided by
Gabriele to the Company with respect to management consulting, strategic
planning, public relations and promotions. As compensation for these
services, the company granted Gabriele 40,000 shares of the Company's
common stock and the Company recognized approximately $187,600 as a general
and administrative expense during the three month
9
period ended September 30, 2002, based on the estimated fair value of the
shares issued. The Company also granted Gabriele warrants to purchase
30,000 shares of the Company's common stock at $6.00 per share. These
warrants vest when the price of the Company's common stock reaches certain
milestones, beginning at $10.00 per share for a period of 20 consecutive
days. This agreement may be renewed for additional one year terms at the
sole discretion of the Company.
Common Stock Options - On October 12, 2000, the Company's board approved
the issuance of options to purchase shares of common stock to certain
employees and other nonemployees who have been engaged to assist the
Company in various research and administrative capacities as part of the
2000 Stock Incentive Plan. The 2000 Stock Incentive Plan provides for the
issuance of up to 350,000 shares of common stock, in the form of incentive
options and non-qualified stock options. At the stockholders meeting held
November 15, 2002, the stockholders approved an amendment to the 2000 Stock
Incentive Plan to increase the number of shares of common stock reserved
for issuance from 350,000 shares to 1,100,000 shares. Options granted under
the 2000 Stock Incentive Plan that expire without exercise are available to
be reissued. The incentive stock options must be granted at a price at
least equal to fair market value on the date of grant.
The Company has granted common stock options to individuals who have
contributed to the Company in various capacities. The options contain
various provisions regarding vesting periods and expiration dates. The
options generally vest over periods ranging from 0 to 4 years and generally
expire after five or ten years. During the three and nine month periods
ended December 31, 2002, the Company issued 203,000 options to purchase
shares, of common stock to its employees and directors. During the three
and nine month periods ended December 31, 2002, 0 and 20,000 options
expired, respectively, which were previously granted under the 2000 Stock
Incentive Plan which are available to be reissued. As of December 31, 2002,
there were 620,750 shares available for grant (including 12,000 shares
which are reserved for issuance under certain consulting agreements with
nonemployees).
During the three and nine months ended December 31, 2002, the Company
issued options to purchase 0 and 22,000 shares, respectively, of common
stock to nonemployees and recognized expense of approximately $56,000 and
$187,000, respectively, related to these options and certain options issued
prior to July 1, 2002 which vest over a four year service period. During
the three months ended December 31, 2001, the Company did not issue any
options to nonemployees and recognized expense of approximately $85,000
related to certain options issued prior to July 1, 2001 which vest over
four year service periods. During the nine months ended December 31, 2001,
the Company issued options to purchase 12,000 shares of common stock to
nonemployees and recognized expense of approximately $247,000 related to
these options and certain options issued prior to July 1, 2001 which vest
over four year service periods. The expenses were determined based on the
estimated fair value of the options issued.
The Company's stockholders exercised options for 0 and 217 shares of common
stock during the three and nine months ended December 31, 2002.
4. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional fees
for the attainment of certain milestones. The Company may receive royalties
on the sales of such products. The other parties generally receive
exclusive marketing and distribution rights for certain products for set
time periods in specific geographic areas.
10
The Company initially acquired its rights to the platform technology and
dications developed by a consortium of universities consisting of The
University of North Carolina at Chapel Hill ("UNC"), Duke University,
Auburn University and Georgia State University (the "Consortium") pursuant
to an agreement, dated January 15, 1997 (as amended, the "Consortium
Agreement") among the Company, Pharm-Eco Laboratories, Inc. ("Pharm-Eco"),
and UNC (to which each of the other members of the Consortium agreed
shortly thereafter to become a party). The Consortium Agreement commits the
parties to collectively research, develop, finance the research and
development of, manufacture and market both the technology and compounds
owned by the Consortium and previously licensed or optioned to Pharm-Eco
(the "Current Compounds") and to license to the Company in accordance with
the Consortium Agreement, all technology and compounds developed by the
Consortium after January 15, 1997, through use of Company-sponsored
research funding or National Cooperative Drug Development grant funding
made available to the Consortium (the "Future Compounds" and, collectively
with the Current Compounds, the "Compounds").
The Consortium Agreement contemplated that upon the completion of the
Company's initial public offering ("IPO") of shares of its common stock
with gross proceeds of at least $10,000,000 by April 30, 1999, the Company
and Pharm-Eco, with respect to the Current Compounds, and the Company and
UNC, (on behalf of the Consortium), with respect to Future Compounds, would
enter into license agreements for, or assignments of, the intellectual
property rights relating to the Compounds held by Pharm-Eco and the
Consortium; pursuant to which the Company would pay royalties and other
payments based on revenues received for the sale of products based on the
Compounds.
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000. Pursuant to the Consortium Agreement, both Pharm-Eco
and the Consortium then became obligated to grant or assign to the Company
an exclusive worldwide license to use, manufacture, have manufactured,
promote, sell, distribute, or otherwise dispose of any products based
directly or indirectly on all of the Current Compounds and Future
Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Consortium and 448,750 shares were issued to Pharm-Eco or persons
designated by Pharm-Eco.
Pursuant to the Consortium Agreement, the Company may, subject to the
satisfaction of certain conditions, be required to issue 100,000 shares of
common stock to the Consortium upon the filing by the Company of the first
new drug application or an abbreviated new drug application with the Food
and Drug Administration with respect to a product incorporating certain
Compounds. In addition, the Company will pay the Consortium an aggregate
royalty of up to 5.0% of net sales derived from the Compounds, except that
the royalty rate payable on any Compound developed at Duke University will
be determined by negotiation at the time such Compound is developed. In the
event that the Company sublicenses its rights with respect to the Compounds
to a third party, the Company will pay the Consortium a royalty based on a
percentage of any royalties the Company receives, and a percentage of all
signing, milestone and other payments made to the Company pursuant to the
sublicense agreement.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Consortium whereby the
Company received the exclusive license to commercialize dication technology
and compounds developed or invented by one or more of the Consortium
scientists after January 15, 1997, and which also incorporated into such
License Agreement the Company's existing license with the Consortium with
regard to the Current Compounds.
11
In June 1999, the Company entered into a research and manufacturing
agreement with Pharm-Eco for Pharm-Eco to produce good manufacturing
practices quality, as defined, dicationic drugs and products for clinical
testing and for early commercialization. Pharm-Eco was unable to
manufacture certain required compounds and the Company subsequently engaged
alternate suppliers who successfully manufactured the compounds.
In August 2000, Pharm-Eco and two of its senior executives filed suit in
Delaware against the Company in connection with a dispute under the
Consortium Agreement. The Company responded by denying the allegations and
filing a counter-claim against Pharm-Eco for breach of contract.
The Company filed a Motion for Summary Judgment, which was granted on
February 21, 2001. In his Memorandum Opinion, the Vice Chancellor hearing
the proceeding dismissed all of the plaintiffs' claims against the Company
and held that Pharm-Eco had breached the Consortium Agreement by failing to
grant or assign to the Company a license for the Current Compounds. On
March 12, 2001, the Vice Chancellor signed a Final Order and Judgment
directing Pharm-Eco to execute and deliver to the Company an agreement
granting or assigning to the Company the license. On March 27, 2001,
Pharm-Eco and the Company entered into an agreement assigning the license.
No further claims against the Company remain in this proceeding, and on May
1, 2001, a Stipulation of Dismissal was filed with the Court.
On April 20, 2001, the Company entered into a settlement agreement with
Pharm-Eco and certain other parties resolving all remaining matters between
them. Pursuant to this agreement, the Company received a cash payment of
$1,000,000; an assignment from Pharm-Eco of various contract rights; and a
termination of all of the Company's obligations to Pharm-Eco, including,
without limitation, (a) the obligation to issue an aggregate of 850,000
warrants for shares of the Company's stock, (b) the obligation to issue
shares of common stock upon the occurrence of a certain future event, (c)
the obligation to pay a percentage of all non-royalty payments that the
Company might receive under any sublicense that the Company might enter
into with respect to certain compounds, and (d) certain accounts payable
which Pharm-Eco claimed to be owed of approximately $159,000; and a release
of any and all claims that Pharm-Eco may have had against the Company. The
cash payment received and the accounts payable obligations which were
forgiven, aggregating approximately $1,159,000, was recorded as a credit to
(reduction of) research and development expense during the three months
ended June 30, 2001; as the Company had previously expensed the estimated
fair value of the shares of common stock issued to Pharm-Eco at the time of
the IPO and the accounts payable obligations, as research and development
expense.
The Company was required, under an agreement which has subsequently
expired, to make quarterly research grants in the amount of $100,000 to UNC
through April 30, 2002. During the three month period ended December 31,
2001, the Company expensed grant payments to UNC of $100,000. During the
nine month periods ended December 31, 2002 and 2001, the Company expensed
grant payments to UNC of $100,000 and $300,000, respectively. Such payments
were recorded as research and development costs.
In August 2000, the Company was awarded two Small Business Innovation
Research ("SBIR") grants aggregating approximately $831,000 from the
National Institutes of Health ("NIH") to research various infections.
During the three and nine months ended December 31, 2001, the Company
recognized revenues of approximately $65,000 and $503,000, respectively,
from these grants. During the three and nine months ended December 31,
2001, the Company expensed payments of approximately $86,000 and $189,000,
respectively, to UNC and certain other Consortium universities for
contracted research related to these grants. There is no additional funding
available to the Company under these grants.
12
In August 2001, the Company was awarded an additional SBIR grant from the
NIH of approximately $144,000 as the third year grant to continue research
on "Novel Procedures for Treatment of Opportunistic Infections." During the
three and nine months ended December 31, 2002, the Company recognized
revenues of approximately $0 and $70,000, respectively, from this grant and
expensed payments of approximately $0 and $70,000, respectively, to UNC and
certain other Consortium universities for contracted research related to
this grant. There is no additional funding available to the Company under
this grant.
During the three month periods ended December 31, 2002 and 2001, the
Company expensed approximately $99,000 and $58,000, respectively, of other
payments to UNC and certain other Consortium universities for patent
related costs and other contracted research. Total payments expensed to UNC
and certain other Consortium universities were approximately $99,000 and
$222,000 during the three months ended December 31, 2002 and 2001,
respectively. During the nine months ended December 31, 2002 and 2001 the
Company expensed approximately $231,000 and $231,000, respectively, of
other payments to UNC and certain other Consortium universities for
reimbursement of patent related costs and other contracted research. Total
payments expensed to UNC and certain other Consortium universities were
approximately $401,000 and $727,000 during the nine months ended December
31, 2002 and 2001, respectively. Included in accounts payable as of
December 31, 2002 and March 31, 2002, were approximately $66,000 and
$267,000, respectively, due to UNC and certain other Consortium
universities.
In November 2000, The Bill & Melinda Gates Foundation ("Gates Foundation")
awarded a $15,114,000 grant to UNC to develop new drugs to treat Human
Trypanosomiasis (African sleeping sickness) and Leishmaniasis. On March 29,
2001, UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company is to receive up to $9,800,000, subject to
certain terms and conditions, over a five year period to conduct certain
clinical and research studies. The proceeds from this agreement are
restricted and must be segregated from the Company's other funds and used
for specific purposes. On March 29, 2001, the Company received a first
installment of $4,300,000, on September 24, 2002 approximately $1,364,000
and on December 31, 2002 approximately $2,016,000 of which approximately
$199,000 and $804,000 was utilized for clinical and research purposes
conducted and expensed during the three months and nine months ended
December 31, 2002. The Company has recognized aggregate revenues since
inception of approximately $4,541,000 through December 31, 2002 for
services performed under the agreement, including approximately $199,000
and $804,000 during the three and nine months ended December 31, 2002. The
remaining amount (approximately $3,139,000 as of December 31, 2002) has
been deferred and will be recognized as revenue over the term of the
agreement as the services are performed.
On April 22, 2002, the Company entered into a Confidentiality, Testing and
Option Agreement with Neurochem, Inc., ("Neurochem"), a Canadian
corporation, to supply Neurochem with selected dicationic compounds for the
testing, evaluation and potential future licensing of such compounds for
(i) the treatment and diagnosis of amyloidosis and the related underlying
conditions of Alzheimer's Disease, cerebral amyloid angiopathy, primary
amyloidosis, diabetes, rheumatic diseases and (ii) the treatments of
conditions related to secondary amyloidosis. Neurochem has the right to
license tested compounds upon the conclusion of the Confidentiality,
Testing and Option Agreement, as defined in the agreement. The Company has
recognized revenues for the three and nine month period ended December 31,
2002 of $35,000 and $150,000, respectively.
13
5. SUBSEQUENT EVENTS
On January 13, 2003, the Company issued 1,200,000 shares of its common
stock pursuant to a joint venture entered into with an investor ("seller")
who owned 100% of the outstanding equity of Lenton Fibre Optics Development
Limited ("Lenton"), a Hong Kong company. The primary purpose of the joint
venture is to construct and operate a pharmaceutical manufacturing facility
capable of producing commercial quantities of the Company's pharmaceutical
products at competitive costs. The land is located in a "free-trade zone"
called the Futian Free Trade Zone, Shenzhen, in the Peoples Republic of
China. The Company intends, once the facility is built and government
approvals are obtained, to engage the joint venture company to manufacture
for commercial distribution, Immtech's pharmaceutical products intended for
sale in Asia, Africa and other selected regions. Under the terms of the
agreement, the joint venture will be operated under the name Immtech Hong
Kong Limited.
The Company purchased an 80% interest in Lenton from the seller pursuant to
a Share Purchase Agreement relating to Shares in Lenton Fibre Optics
Development Limited for the aggregate consideration of 1,200,000
unregistered shares of Immtech common stock. The unaudited pro forma
condensed balance sheet below reflects the historical financial position of
the Company, with pro forma adjustments as if the joint venture had closed
on December 31, 2002. The accounting for the joint venture reflects the
preliminary allocation of the purchase price to the assets acquired and
liabilities assumed based on their estimated fair values.
DECEMBER 31,
2002
ASSETS
Total current assets $ 4,119,608
Property and equipment - net 120,054
Other assets:
Investment 2,856,000
Deposits 19,848
----------
Total assets $7,115,510
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities $3,533,157
Deferred rental obligation 22,371
----------
Total liabilities 3,555,528
Total stockholders' equity 3,559,982
----------
Total liabilities and stockholders' equity $7,115,510
==========
As consideration for investment advisory services performed for the Company in
connection with the acquisition of Lenton, two entities (Pacific Dragons Group
Limited and Champion Traders Investment Limited) each received 30,000 shares of
the Company's common stock.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Forward-looking Statements
Certain statements contained in this report and in the documents
incorporated by reference herein, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "intends," "plans," "believes," "anticipates" or "expects"
or similar words and may include statements concerning the Company's strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this report and in
our annual report, the following (i) we are in an early stage of product
development, (ii) our technology is in the research and development stage and
therefore its potential benefits for human therapy are unproven, (iii) the
possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iv) the possibility that we or our
collaborators will not successfully develop any marketable products, (v) the
possibility that advances by competitors will cause our product candidates not
to be viable, (vi) uncertainties as to the requirement that a drug product be
found to be safe and effective after extensive clinical trials and the
possibility that the results of such trials, if commenced and completed, will
not establish the safety or efficacy of our drug product candidates, (vii) risks
relating to requirements for approvals by governmental agencies, such as the
FDA, before products can be marketed and the possibility that such approvals
will not be obtained in a timely manner or at all or will be conditioned in a
manner that would impair our ability to market our product candidates
successfully, (viii) the risk that our patents could be invalidated or narrowed
in scope by judicial actions or that our technology could infringe upon the
patent or other intellectual property rights of third parties, (ix) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of developing and testing a successful product or
that future financing will be completed on unfavorable terms, (x) the
possibility that any products successfully developed by us will not achieve
market acceptance and (xi) other risks and uncertainties which may not be
described herein.
Overview
We are a pharmaceutical company focused on the development and
commercialization of oral drugs to treat infectious diseases that include fungal
infections, malaria, tuberculosis, hepatitis C, Pneumocystis carinii pneumonia
and tropical medicine diseases including African sleeping sickness
(Trypanosomiasis) and Leishmaniasis. We hold worldwide patents, licenses and
rights to license worldwide patents, patent applications, technologies from a
scientific consortium and exclusive rights to commercialize products from those
patents and licenses that are integral to our business.
15
Since our formation in October 1984, we have engaged in research and
development programs, expanding our network of scientists and scientific
advisors, licensing technology agreements, and advancing the commercialization
of the dication technology platform. We use the expertise and resources of
strategic partners and contracted parties in a number of areas, including: (i)
laboratory research, (ii) pre-clinical and human clinical trials and (iii)
manufacture of pharmaceutical products. We have licensing and exclusive
commercialization rights to a dicationic anti-infective pharmaceutical platform
and are developing drugs intended for commercial use based on that platform.
These dication pharmaceuticals work by blocking life-sustaining enzymes from
binding to the key sites in the "minor groove" of an organism's deoxyribonucleic
acid ("DNA"), thereby killing the infectious organisms that cause fungal,
parasitic, bacterial and viral diseases. The minor groove or key site on an
organism's DNA is an area where enzymes interact with the DNA as part of their
normal life cycle. Structurally, dications are chemical molecules that have two
positively charged ends held together by a chemical linker. The composition of
the dications, with positive charges on both ends (shaped like molecular
barbells) allows dications to bind (similar to a bandaid) to the negatively
charged active sites (sites where enzymes interact with DNA) of an infectious
microorganism's DNA. The bound dications block the enzymes necessary to the life
of the microorganism from attaching to certain of its DNA's active sites thereby
killing the infectious microorganism.
Dication technology is the result of a research program developed by
scientists at The University of North Carolina at Chapel Hill ("UNC"), Duke
University ("Duke University"), Auburn University ("Auburn University") and
Georgia State University ("Georgia State") (collectively, the "Consortium"). We
entered into an agreement with the Consortium, dated January 15, 1997, as
amended, and a License Agreement, dated as of January 28, 2002 (collectively,
the "Consortium Agreements"), to commercialize product candidates resulting from
the Consortium's research, including the dication technology.
We have entered Phase IIb human trials with our lead compound DB289 for
treatment of African sleeping sickness (Trypanosomiasis) and expect, assuming
results consistent with our prior trials, to book orders for sales of DB289 for
limited distribution in certain African countries by the end of calendar year
2003 or first quarter 2004. In connection with the above limited distribution
product orders, we anticipate using our existing, and engaging new,
pharmaceutical manufacturers to produce the quantities of DB289 needed, and
seeking foreign regulatory approvals to import the product into the selected
countries, all of which may take several months or more to complete. We have
also entered into a joint venture arrangement with a Hong Kong entity whereby we
acquired real property located in a "free trade zone" in the Peoples Republic of
China on which we intend, through the joint venture entity Immtech Hong Kong
Limited, to construct a pharmaceutical manufacturing facility to produce our
future products.
Results of Operations
Immtech has not generated any revenue from operations and does not
anticipate generating any revenue from operations prior to the 4th calendar
quarter of 2003. The Company has funded, and plans to continue to fund, its
operations through research funding agreements and grants, and the sale of debt
and equity securities. For the period from inception, October 15,
16
1984, to December 31, 2002, the Company incurred cumulative net losses of
approximately $42,355,000. The Company has incurred additional losses since such
date and expects to incur additional operating losses for the foreseeable
future.
Three Months Ended December 31, 2002 Compared with the Three Months Ended
December 31, 2001.
Revenues under collaborative research and development agreements were
approximately $234,000 and $955,000 for the three months ended December 31, 2002
and December 31, 2001, respectively. For the three months ended December 31,
2002 there were revenues recognized of approximately $199,000 relating to a
clinical research subcontract agreement between the Company and UNC and revenues
of $35,000 relating to the Confidentiality, Testing and Option Agreement between
the Company and Neurochem, Inc. ("Neurochem"), while for the three months ended
December 31, 2001, there were revenues recognized of approximately $858,000
relating to the clinical research subcontract agreement between the Company and
UNC and grant revenues of approximately $97,000 from SBIR grants from the NIH.
The clinical research subcontract agreement relates to a grant from the Bill &
Melinda Gates Foundation ("Gates Foundation") to UNC to develop new drugs to
treat Trypanosomiasis (African sleeping sickness) and Leishmaniasis. This
program was initiated in March 2001. Grant and research and development
agreement revenue is recognized as research is completed under the terms of the
respective agreements, according to Company estimates. Grant and research and
development funds received prior to completion under the terms of the respective
agreements are recorded as deferred revenues.
Interest income for the three months ended December 31, 2002 was
approximately $3,000. Interest income for the three months ended December 31,
2001 was approximately $2,000. The increase is due to an increase in available
funds invested. The Company had no interest expense for the three months ended
December 31, 2002 and December 31, 2001.
Research and development expenses decreased to approximately $402,000 in
the three months ended December 31, 2002 from approximately $1,206,000 in the
three months ended December 31, 2001. The Company had significant expenses
relating to pre-clinical studies required for regulatory filings and purchase of
product in the three months ended December 31, 2001 that were not incurred in
2002.
General and administrative expenses increased for the three months ended
December 31, 2002 to approximately $724,000 from approximately $689,000 for the
three months ended December 31, 2001.
We incurred a net loss of approximately $889,000 for the three months ended
December 31, 2002 as compared with a net loss of approximately $938,000 for the
three months ended December 31, 2001.
Nine Months Ended December 31, 2002 Compared with the Nine Months ended December
31, 2001.
17
Revenues under collaborative research and development agreements were
approximately $1,024,000 and $2,914,000 for the nine months ended December 31,
2002 and 2001, respectively. For the nine months ended December 31, 2002 there
were revenues recognized of approximately $804,000 relating to the clinical
research subcontract agreement between the Company and UNC, grant revenues of
approximately $70,000 from SBIR grants from the NIH and revenues of $150,000
relating to the Confidentiality, Testing and Option Agreement between the
Company and Neurochem, while for the nine months ended December 31, 2001, there
were revenues recognized of approximately $2,379,000 relating to the clinical
research subcontract agreement between the Company and UNC and grant revenues of
approximately $535,000 from SBIR grants from the NIH.
Interest income for the nine months ended December 31, 2002 was
approximately $13,000. Interest income for the nine months ended December 31,
2001 was approximately $39,000. The decrease is due to a reduction in funds
invested and a reduction in interest rates paid on the invested funds. The
Company had no interest expense for the nine months ended December 31, 2002 and
December 31, 2002.
Research and development expenses decreased to approximately $1,864,000 in
the nine months ended December 31, 2002 from approximately $2,987,000 in the
nine months ended December 31, 2001. The decrease for the period is primarily
attributable to a reduction in expenses relating to pre-clinical studies
required for regulatory filings and funding of clinical trials in the nine
months ended December 31, 2001 that were not incurred in 2002.
General and administrative expenses increased for the nine months ended
December 31, 2002 to approximately $3,059,000 from approximately $2,370,000 for
the nine months ended December 31, 2001. The increase was primarily due to
non-cash compensation charges of approximately $946,000 recorded in the nine
months ended December 31, 2002 related to the issuance of 150,000 shares of the
Company's Common Stock to Mr. Cheung Ming Tak (for services with respect to
introduction to strategic partners in China) and 40,000 shares of Common Stock
to the Gabriele Group (for providing management consulting, strategic planning,
public relations and promotions assistance). Additionally, the Company incurred
increases of approximately $86,000 in patent related expenses and approximately
$107,000 in travel expenses related to fund raising, offset by a decrease of
approximately $444,000 in legal fees.
We incurred a net loss of approximately $3,886,000 for the nine months
ended December 31, 2002 as compared with a net loss of approximately $2,404,000
for the nine months ended December 31, 2002.
Liquidity and Capital Resources
As of December 31, 2002, the Company had approximately $1,035,000 of cash
and cash equivalents, substantially all of which were invested in a money market
mutual fund.
There were equipment expenditures of approximately $5,000 for the three
month period ended December 31, 2001 as compared to no equipment expenditures
for the same period last year. During the nine month periods ended December 31,
2002 and December 31, 2001,
18
equipment purchases were approximately $16,000 and $62,000, respectively. No
significant purchases of equipment are anticipated by the Company.
The Company periodically receives cash from the exercise of common stock
options. During the three months ended December 31, 2002 there were no options
exercised and during the nine months ended December 31, 2002 there were 217
options exercised.
On September 25, 2002 and October 28, 2002 we closed private placements of
76,725 shares of our Series B Convertible Preferred Stock, $0.01 par value
("Series B Stock"), pursuant to Regulation D and Regulation S of the Securities
Act of 1933, as amended ("Securities Act") at a stated value of $25.00 per share
and warrants to purchase 191,813 shares of our Common Stock at an exercise price
of $6.125 per share of Common Stock for $1,918,125 in the aggregate, before
issue cost. Each share of Series B Stock, among other things, (i) earns an 8%
dividend payable, at the Company's discretion, in cash or Common Stock, (ii) has
a $25.00 (plus accrued but unpaid dividends) liquidation preference pari passu
with our Series A Convertible Preferred Stock, (iii) is convertible into 6.25
shares of Common Stock and (iv) may be redeemable by the Company after one year
from issuance. The warrants expire five years from the date of grant and contain
certain anti-dilution protections. A complete description of the designations,
preferences, voting powers, qualifications, special or relative rights and
privileges of the Series B Stock is contained in the Company's Series B
Convertible Preferred Stock Certificate of Designation filed on a Current Report
on Form 8-K on September 25, 2002. We believe our existing unrestricted cash and
cash equivalents and the grants we have received or have been awarded and are
awaiting disbursement of, will be sufficient to meet our planned expenditures
through May 2003, although there can be no assurance we will not require
additional funds.
To date, we have financed our operations with:
o proceeds from the above mentioned Series B Stock private placements
which in the aggregate raised net proceeds of approximately
$1,859,000;
o proceeds from various other private placements of debt and equity
securities, an initial public offering, exercises of stock options and
warrants and other cash contributed from stockholders, which in the
aggregate raised approximately $26,896,000;
o funding from research agreements, foundation grants, SBIR grants and
Small Business Technology Transfer Program grants and testing
agreements of approximately $8,258,000; and
o the use of stock, options and warrants in lieu of cash compensation.
Our cash resources have been used to finance, develop and begin
commercialization of drug product candidates, including sponsored research,
conduct of human clinical trials, capital expenditures, expenses associated with
development of product candidates pursuant to an agreement, dated January 15,
1997, (the "Consortium Agreement"), among the Company, UNC, and Pharm-Eco
Laboratories, Inc. (to which each of Duke University, Auburn University and
19
Georgia State agreed shortly thereafter to become a party, and all of which,
collectively with UNC, are referred to as the "Consortium") and, as contemplated
by the Consortium Agreement, under a license agreement dated January 28, 2002
("Consortium License Agreement") with the Consortium, and general and
administrative expenses. Over the next several years we expect to incur
substantial additional research and development costs, including costs related
to research in pre-clinical (laboratory) and human clinical trials,
administrative expenses to support our research and development operations and
marketing expenses to launch the sale of any commercialized product that may be
developed.
Our future working capital requirements will depend upon numerous factors,
including the progress of research, development and commercialization programs
(which may vary as product candidates are added or abandoned), pre-clinical
testing and human clinical trials, achievement of regulatory milestones, third
party collaborators fulfilling their obligations to the Company, the timing and
cost of seeking regulatory approvals, the level of resources that the Company
devotes to the engagement or development of manufacturing capabilities, the
ability of the Company to maintain existing and to establish new collaborative
arrangements with others to provide funding to the Company to support these
activities, and other factors. In any event, we will require substantial funds
in addition to our existing working capital to develop product candidates and
otherwise to meet our business objectives.
Our ability to continue as a going concern is dependent upon our ability to
generate sufficient funds to meet obligations as they become due and,
ultimately, to obtain profitable operations. Management's plans for the
remainder of the fiscal year, in addition to normal operations, include
continuing their efforts to obtain additional financing and grants, and to enter
into various research, development and commercialization agreements with other
entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's cash and cash equivalents are maintained primarily in U.S.
dollar accounts and amounts payable for research and development to research
organizations are contracted in U.S. dollars. Accordingly, the Company's
exposure to foreign currency risk is limited because its transactions are
primarily based in U.S. dollars. The Company does not have any other exposure to
market risk. The Company will develop policies and procedures to manage market
risk in the future as circumstances require.
Item 4. Controls and Procedures
The Company maintains "disclosure controls and procedures", as such term is
defined under Exchange Act Rule 13a-14(c), that are designed to ensure that
information required to be disclosed in the Company's Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. The Company has carried out an evaluation, within the 90
days prior to the date of filing of this report, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial
20
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon their evaluation and subject to
the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective in ensuring
that material information relating to the Company, is made known to the Chief
Executive Officer and Chief Financial Officer during the period in which this
report was being prepared. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date the Company completed its evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Dale M. Geiss v. Immtech International, Inc. and Criticare Systems, Inc.
On September 19, 2002 the Court (Circuit Court of the Nineteenth Judicial
Circuit, Lake County, Illinois) granted Immtech's motion to dismiss plaintiff's
amended complaint, but gave plaintiff another opportunity to file and serve an
amended complaint, if he so chooses. Plaintiff filed a second amended complaint
dated November 1, 2002 against the Company and Criticare alleging the same
allegations as before. On December 6, 2002, the Company and Criticare again
filed motions to dismiss plaintiff's amended complaint. On February 6, 2003, the
Court denied the motions to dismiss and granted Criticare and Immtech 30 days to
answer or otherwise plead to the Second Amended Complaint. The Company intends
to vigorously defend against the allegations and believes the claims have no
merit.
Except as noted above, in Part I, Item 3, Legal Proceedings, of the Form
10-K filed on July 15, 2002, in Part II, Item 1 of the Form 10-Q filed on
November 14, 2002 and in Part II, Item 1 of the Form 10-Q filed on August 14,
2004, the Company is not aware of any pending litigation.
Item 2. Changes in Securities and Use of Proceeds.
Common Stock.
On January 13, 2003, the Company issued 1,200,000 shares of its Common
Stock pursuant to a joint venture entered with an investor ("seller") who owned
100% of the outstanding equity of Lenton Fibre Optics Development Limited
("Lenton"), a Hong Kong company. The primary purpose of the joint venture is to
construct and operate a pharmaceutical manufacturing facility capable of
producing commercial quantities of the Company's pharmaceutical products at
competitive costs. The land is located in a "free-trade zone" called the Futian
Free Trade Zone, Shenzhen, in the Peoples Republic of China. The Company
intends, once the facility is built and government approvals are obtained, to
engage the joint venture company to manufacture for commercial distribution,
Immtech's pharmaceutical products intended for sale in Asia, Africa and other
selected regions. Under the terms of the agreement, the joint venture will be
operated under the name Immtech Hong Kong Limited.
21
The Company purchased 80% of the outstanding equity of Lenton from the
seller pursuant to a Share Purchase Agreement relating to Shares in Lenton Fibre
Optics Development Limited dated January 13, 2003 by and among the seller,
Lenton and the Company for the aggregate consideration of 1,200,000 unregistered
shares of Common Stock. The Common Stock was issued to the seller pursuant to an
exemption from registration under Regulation S of the Securities Act. The
parties have also entered into a Shareholders' Agreement relating to Lenton
Fibre Optics Development Limited dated January 13, 2003 that sets forth the
parties agreement as to the affairs of the joint venture and the conduct of its
business. The seller has guaranteed the obligations of Lenton under a Deed of
Indemnity dated January 13, 2003. In connection with the structuring of the
joint venture, the Company issued 30,000 shares of Common Stock to each of
Pacific Dragons Group Limited and Champion Traders Investment Limited as
compensation for their services.
On January 14, 2003 the Company filed a Current Report on Form 8-K
attaching the Share Purchase Agreement as related to shares in Lenton Fibre
Optics Development Limited, the Shareholders' Agreement relating to Lenton Fibre
Optics Development Limited and the seller's Deed of Indemnity.
Issuance of Series B Stock
On October 28, 2002 we issued 1,000 shares of our Series B Stock pursuant
to an exemption from registration under Regulation D of the Securities Act at a
stated value of $25.00 per share and warrants to purchase 2,500 shares of our
Common Stock at an exercise price of $6.125 per share of Common Stock for
$25,000 in the aggregate. Each share of Series B Stock, among other things, (i)
earns an 8% dividend, (ii) has a $25.00 (plus accrued but unpaid dividends)
liquidation preference pari passu with our Series A Convertible Preferred Stock,
(iii) is convertible into 6.25 shares of Common Stock and (iv) may be redeemable
by the Company after one year from issuance. The warrants expire five years from
the date of grant and contain certain anti-dilution protections. A complete
description of the designations, preferences, voting powers, qualifications,
special or relative rights and privileges of the Series B Stock is contained in
the Company's Series B Convertible Preferred Stock Certificate of Designation
filed on a Current Report on Form 8-K on September 25, 2002.
Option Exercise.
None.
Conversion of Series A Stock to Common Stock.
On December 20, 2002, the holders of Series A Convertible Preferred Stock
("Series A Stock") converted 8,000 shares of Series A Stock and accrued
dividends into 45,978 shares of Common Stock.
Series A and Series B Stock Dividend Payment.
On October 15, 2002, the Company issued 31,617 shares of Common Stock in
the aggregate as preferred stock dividends to the holders of outstanding shares
of Series A Stock and Series B Stock, pro rata based on the number of the shares
of Series A Stock and Series B Stock
22
held. On January 8, 2003 the Company discovered a miscalculation in the dividend
due certain holders of Series A Stock and issued an additional 5,663 shares of
Common Stock in the aggregate to those holders.
Use of Proceeds.
Immtech will use proceeds from the sale of its stock, including the
exercise of options and warrants, for general corporate purposes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
VOTES OF THE SHAREHOLDERS.
The Company held its Annual Meeting on November 15, 2002 at the Westin
O'Hare in Rosemont, Illinois. The following matters were presented to the
stockholders: (1) election of five directors to serve until the next annual
meeting of the stockholders, (2) Proposal 1 - approval of an amendment to the
Company's 2000 Stock Incentive Plan to increase the number of shares of Common
Stock reserved for issuance thereunder from 350,000 shares to 1,100,000 shares,
(3) Proposal 2 - approval of the conversion of Series A Stock held by certain
officers and directors of the Company into Common Stock and (4) Proposal 3 -
ratification of the Company's Board of Director's selection of Deloitte & Touche
LLP as the Company's independent auditors for the fiscal year ending March 31,
2003. The results of the votes are as follows:
The following individuals were elected Directors by the VOTES AUTHORITY
Shareholders FOR WITHHELD
-------------------- ------------------
T. Stephen Thompson 4,762,046 60,841
Harvey M. Colten, M.D. 4,774,546 48,341
Eric L. Sorkin 4,762,046 60,841
Cecilia Chan 4,774,546 48,341
Frederick W. Wackerle 4,760,277 62,610
VOTES VOTES
FOR AGAINST ABSTAIN
--------------------- --------------------- ------------------
Proposal 1 - Amendment to 2000 Stock 1,654,160 239,957 41,105
Incentive Plan (85.5%) (12.38%) (2.12%)
Proposal 2 - Conversion of Series A 1,838,179 71,680 41,105
Stock (94.84%) (3.70%) (1.46%)
Proposal 3 - Ratification of Deloitte 4,675,879 145,266 1,742
& Touche LLP as independent auditors (96.95%) (3.01%) (0.04%)
23
Item 5. Other Information.
None.
Item 6. Exhibits, and Reports on Form 8-K.
1. Exhibits.
See Exhibit Index, page 25.
2. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on January 14, 2003
reporting the consummation of a joint venture whereby the Company purchased
an 80% interest in a Hong Kong entity, Lenton Fibre Optics Development
Limited, that owns commercial real estate in a "free trade zone" located in
the Peoples Republic of China. The joint venture entity intends to
construct a pharmaceutical manufacturing facility on the PRC property to be
used to manufacture the Company's future products.
A Current Report on Form 8-K was filed on January 23, 2003 reporting the
receipt of a $2.1 million payment relating to the clinical research
subcontract agreement between the Company and UNC funded by a grant from
The Bill and Melinda Gates Foundation.
24
Exhibit Index
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
25
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: February 14, 2003 By: /s/ T. Stephen Thompson
---------------------------------
T. Stephen Thompson
President and Chief Executive
Officer
Date: February 14, 2003 By: /s/ Gary C. Parks
---------------------------------
Gary C. Parks
Treasurer, Secretary and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS
I, T. Stephen Thompson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Immtech
International, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ T. Stephen Thompson
------------------------
T. Stephen Thompson
President & Chief Executive Officer
I, Gary C. Parks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Immtech
International, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Gary C. Parks
----------------------------
Gary C. Parks
Chief Financial Officer