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 September 30, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
Commission file number: 000-25669
IMMTECH INTERNATIONAL, INC.
--------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 39-1523370
- ------------------------------------ --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 573-0033
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of November 13, 2003, 9,344,715 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.
Table Of Contents
Page(s)
PART I. FINANCIAL INFORMATION...............................................................................1
Item 1. Condensed Consolidated 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. Change in Securities and Use of Proceeds...........................................................22
Item 3. Defaults Upon Senior Securities....................................................................24
Item 4. Submission of Matters to a Vote of Security Holders................................................24
Item 5. Other Information..................................................................................24
Item 6. Exhibits, and Reports on Form 8-K..................................................................24
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
-------------------------------------------
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
September 30, March 31,
ASSETS 2003 2003
CURRENT ASSETS:
Cash and cash equivalents $ 4,761,013 $ 112,040
Restricted funds on deposit 2,598,840 2,739,947
Other current assets 174,419 133,525
------------- -------------
Total current assets 7,534,272 2,985,512
PROPERTY AND EQUIPMENT - Net 3,558,755 3,604,656
OTHER ASSETS 12,146 19,848
------------- -------------
TOTAL $ 11,105,173 $ 6,610,016
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 757,256 $ 541,881
Accrued expenses 4,009 4,821
Deferred revenue 2,435,917 2,554,071
------------- -------------
Total current liabilities 3,197,182 3,100,773
DEFERRED RENTAL OBLIGATION 17,596 20,779
------------- -------------
Total liabilities 3,214,778 3,121,552
------------- -------------
MINORITY INTEREST 296,193 296,193
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,280,000 and 4,440,000 shares
authorized and unissued as of September 30, 2003 and March 31, 2003,
respectively
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 97,800 and 142,800 shares
outstanding as of September 30, 2003 and March 31, 2003, respectively;
aggregate liquidation preference of $2,512,387 as of September 30, 2003 2,512,387 3,668,005
Series B convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 240,000 shares authorized, 20,725 and 56,725
shares outstanding as of September 30, 2003 and March 31, 2003,
respectively; aggregate liquidation preference of $536,940 as
of September 30, 2003 536,940 1,469,967
Series C convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 160,000 shares authorized, 125,352 shares
outstanding as of September 30, 2003, aggregate liquidation preference of
$3,184,370 as of September 30, 2003 3,184,370
Common stock, par value $0.01 per share, 30,000,000 shares authorized,
9,263,847 and 7,898,986 shares issued and outstanding
as of September 30, 2003 and March 31, 2003, respectively 92,639 78,990
Additional paid-in capital 52,689,108 40,142,617
Deficit accumulated during the developmental stage (51,421,242) (42,167,308)
------------- -------------
Total stockholders' equity 7,594,202 3,192,271
------------- -------------
TOTAL $ 11,105,173 $ 6,610,016
============= =============
See notes to condensed consolidated financial statements.
-1-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Six Months Ended (Inception) to
September 30, September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002 2003
REVENUES $ 658,684 $ 360,171 $ 1,143,356 $ 790,252 $ 9,986,178
------------ ------------ ------------ ------------ ------------
EXPENSES:
Research and development 904,620 711,154 1,511,178 1,462,526 32,582,709
General and administrative 6,596,256 883,035 7,603,660 2,335,188 28,675,544
Equity in loss of joint venture -- -- -- -- 135,002
------------ ------------ ------------ ------------ ------------
Total expenses 7,500,876 1,594,189 9,114,838 3,797,714 61,393,255
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (6,842,192) (1,234,018) (7,971,482) (3,007,462) (51,407,077)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 4,451 1,640 5,339 9,901 582,917
Interest expense -- -- -- -- (1,129,502)
Loss on sales of investment securities - net -- -- -- -- (2,942)
Cancelled offering costs -- -- -- -- (584,707)
Gain on extinguishment of debt -- -- -- -- 1,427,765
------------ ------------ ------------ ------------ ------------
Other income (expense) - net 4,451 1,640 5,339 9,901 293,531
------------ ------------ ------------ ------------ ------------
NET LOSS (6,837,741) (1,232,378) (7,966,143) (2,997,561) (51,113,546)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (92,872) (207,057) (167,514) (266,747) (1,557,318)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS -- -- -- -- 2,369,899
CONVERTIBLE PREFERRED STOCK PREMIUM
DEEMED DIVIDENDS -- -- (1,120,277) -- (1,120,277)
------------ ------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (6,930,613) $ (1,439,435) $ (9,253,934) $ (3,264,308) $(51,421,242)
============ ============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss $ (0.79) $ (0.20) $ (0.95) $ (0.49)
Convertible preferred stock dividends (0.01) (0.03) (0.02) (0.04)
Convertible preferred stock premium deemed dividends -- -- (0.13) --
------------ ------------ ------------ ------------
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.80) $ (0.23) $ (1.10) $ (0.53)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 8,701,680 6,281,391 8,443,568 6,193,321
============ ============ ============ ============
See notes to condensed consolidated financial statements.
-2-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Six Months Ended (Inception) to
September 30, September 30, September 30,
----------------------------- ----------------------------
2003 2002 2003 2002 2003
OPERATING ACTIVITIES:
Net loss $ (6,837,741) $ (1,232,378) $ (7,966,143) $ (2,997,561) $(51,113,546)
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 5,301,001 243,563 5,695,574 1,076,323 20,555,549
Depreciation and amortization of property
and equipment 38,543 22,715 50,108 48,311 687,288
Deferred rental obligation (1,592) (1,592) (3,183) (3,183) 17,596
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
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit 686,294 (1,028,102) 141,107 (691,496) (2,598,840)
Other current assets 270,581 -- 119,106 39,881 (14,419)
Other assets -- -- 7,702 -- (12,146)
Accounts payable 263,572 20,134 215,375 (196,507) 1,084,791
Accrued expenses 3,153 -- (812) (3,395) 667,022
Deferred revenue (658,684) 1,048,640 (118,154) 758,233 2,435,917
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (934,873) (927,020) (1,859,320) (1,969,394) (29,446,106)
------------ ------------ ------------ ------------ ------------
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 (4,207) (8,874) (4,207) (10,672) (717,997)
Cash paid for acquisition of land use rights (204,924)
Investment in and advances to joint venture (135,002)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (4,207) (8,874) (4,207) (10,672) (1,060,865)
------------ ------------ ------------ ------------ ------------
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)
Net proceeds from issuance of redeemable preferred
stock 3,330,000
Net proceeds from issuance of convertible preferred
stock and warrants 1,853,010 2,845,473 1,834,333 8,553,321
Net proceeds from issuance of common stock for stock
option and warrant exercises 3,827,235 3,827,235 125 20,144,518
Payments for fractional shares for convertible
preferred stock dividends and the conversions of
convertible preferred stock (80) (4) (208) (176) (542)
Deferred offering costs (160,000) (160,000) (160,000)
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 3,667,155 1,853,006 6,512,500 1,834,282 35,267,984
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,728,075 917,112 4,648,973 (145,784) 4,761,013
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,032,938 974,917 112,040 2,037,813 --
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,761,013 $ 1,892,029 $ 4,761,013 $ 1,892,029 $ 4,761,013
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
-3-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Immtech International, Inc. and its subsidiaries (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/A.
2. COMPANY BUSINESS AND SELECTED ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiaries (the "Company") are pharmaceutical
companies focused on the development and commercialization of oral drugs
to treat infectious diseases. The Company has development programs that
include treatments for fungal infections, Malaria, Tuberculosis, Hepatitis
C, diabetes, Pneumocystis carinii pneumonia and tropical medicine diseases
including African sleeping sickness (a parasitic disease also known as
Trypanosomiasis) and Leishmaniasis (a parasitic disease that destroys the
liver). The Company holds worldwide patents, patent applications, licenses
and rights to license worldwide patents and technologies from a scientific
consortium and exclusive rights to commercialize products from those
patents and licenses that are integral to the Company. The Company is a
development stage enterprise and since its inception on October 15, 1984,
has engaged in research and development programs, expanding its network of
scientists and scientific advisors, licensing technology agreements, and
advancing the commercialization of its dication technology platform. The
Company uses the expertise and resources of strategic partners and third
parties in a number of areas, including: (i) laboratory research, (ii)
pre-clinical and human clinical trials and (iii) manufacture of
pharmaceutical drugs. The Company has licensing and exclusive
commercialization rights to a dicationic 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 until after
March 31, 2004, if at all.
Since inception, the Company has incurred accumulated losses of
approximately $51,114,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
continues its commercialization, research and development activities and
clinical trial efforts. In addition, the Company has various research and
development agreements with third parties and is dependent upon their
ability to perform under these agreements. 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
-4-
amounts of cash. The negative cash flow from operations is expected to
continue in the foreseeable future. The Company will require substantial
additional funds to commercialize its product candidates. The Company's
cash requirements may vary materially from those now planned due to the
results of research and development efforts, results of pre-clinical and
clinical testing, responses to grant requests, relationships with
strategic partners, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances,
the regulatory process, and other factors. In any of these circumstances,
the Company may require substantially more funds than are currently
available or than management intends to raise.
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 at least the next twelve months, although there can
be no assurance the Company will not require additional funds. Management
may seek to satisfy future funding requirements through public or private
offerings of securities, by collaborative or other arrangements with
pharmaceutical or biotechnology companies or from other sources.
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
and to obtain additional research grants and entering into research and
development agreements with other entities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Immtech International, Inc., Lenton Fibre Optics
Development Limited ("Lenton"), a majority-owned subsidiary located in
Hong Kong, and Lenton's wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
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.
Concentration of Credit Risk - The Company maintains its cash in
commercial banks. Balances on deposit are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to specified limits. Balances in excess
of FDIC limits are insured.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of September 30,
2003 and March 31, 2003, 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 September 30, 2003 and March 31,
2003. 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.
Land Use Rights - Land use rights represent an agreement by Lenton Fibre
Optics Development Limited ("Lenton") to use land in the People's Republic
of China for a period of 50 years and is being amortized over that period
on a straight-line basis. Land use rights, net of accumulated
-5-
amortization, of $3,470,180 and $3,501,522 at September 30, 2003 and March
31, 2003, respectively, are included in the accompanying condensed
consolidated balance sheets under property and equipment.
Minority Interest - Minority interest represents the carryover basis of
the 20% of Lenton not owned by the Company at the date of acquisition,
plus equity in earnings or minus equity in losses from that date.
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, a 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.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share." Basic net income (loss) and diluted net income
(loss) per share are computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net income per share, when
applicable, is computed by dividing net income attributable to common
stockholders by the weighted average number of common shares outstanding
increased by the number of potential dilutive common shares.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the three month and six months periods ended September
30, 2003 and 2002, respectively.
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. Included in the carrying value of the Series A Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
is $67,387 and $98,005 of accrued preferred stock dividends at September
30, 2003 and March 31, 2003, respectively. 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 A"), subject to certain antidilution adjustments, as defined in the
Certificate of Designation. On April 15, 2003, the Company issued 23,316
shares of common stock and paid $96.06 in lieu of fractional common shares
as dividends on the preferred shares. On April 15, 2002, the Company
issued 8,249 shares of common stock and paid $165.92 in lieu of fractional
common shares as dividends on the preferred shares. During the three month
periods ended September 30, 2003 and 2002, certain preferred stockholders
converted 8,000 and 3,300 shares of Series A Convertible Preferred Stock,
including accrued dividends, for 45,616 and 18,871 shares of common stock,
respectively. During the six month period ended September 30, 2003 and
2002, certain preferred stockholders converted 45,000 and 9,300 shares of
Series A Convertible Preferred Stock, including accrued dividends for
257,429 and 53,127 shares of common stock, respectively.
-6-
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. The number of shares
of common stock to be received by the holders of the Series A Convertible
Preferred Stock upon a mandatory conversion by the Company is determined
by (i) dividing the Liquidation Price by the Conversion Price A, 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, or (ii) 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's 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 shall be entitled to 5.6561 votes
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. Included in the carrying value of the Series B Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
is $18,815 and $51,842 of accrued preferred stock dividends as of
September 30, 2003 and March 31, 2003, respectively. 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 B"), subject to certain antidilution adjustments,
as defined in the Certificate of Designation. On April 15, 2003, the
Company issued 11,049 shares of common stock and paid $16.67 in lieu of
fractional common shares as dividends on the preferred shares. During the
three month period ended September 30, 2003, certain preferred
stockholders converted 10,800 shares of Series B Convertible Preferred
stock, including accrued dividends, for 68,004 shares of common stock.
During the six month period ended September 30, 2003 certain preferred
stockholders converted 36,000 shares of Series B Convertible Preferred
Stock, including accrued dividends, for 227,849 shares of common stock.
There were no conversions of Series B Convertible Preferred Stock during
the three month period or six month period ended September 30, 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. The number of shares
of common stock to be received by the holders of the Series B Convertible
Preferred Stock upon a mandatory conversion by the Company is determined
by (i) dividing the Liquidation Price by the Conversion Price B, 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
-7-
conversions, as defined, or (ii) 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 B. The Conversion Price B 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.
Series C Convertible Preferred Stock - On June 6, 2003, the Company filed
a Certificate of Designation with the Secretary of State of the State of
Delaware designating 160,000 shares of the Company's 5,000,000 authorized
shares of preferred stock as Series C 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.
Included in the carrying value of the Series C Convertible Preferred Stock
in the accompanying condensed consolidated balance sheet is $50,570 of
accrued preferred stock dividends as of September 30, 2003. Each share of
Series C 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 C"), subject to certain antidilution adjustments,
as defined in the Certificate of Designation. During the three month
period ended June 30, 2003, the Company issued 125,352 shares of Series C
Convertible Preferred Stock for net proceeds of $2,845,000 (net of
approximately $288,000 of cash offering costs). The preferred shares
issued have an embedded beneficial conversion feature based on the market
value on the day of issuance and the price of conversion. The beneficial
conversion was equal to approximately $1,120,000 and was accounted for as
a deemed dividend during the three month period ended June 30, 2003. There
have been no conversions of the Series C Convertible Preferred Stock
during the three month period or six month period ended September 30,
2003.
The Company may at any time after May 31, 2004, require that any or all
outstanding shares of Series C Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series C 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 C Convertible Preferred Stock upon a
mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price C 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,
or (ii) 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 C. The Conversion Price C is subject to certain
antidilution adjustments, as defined in the Certificate of Designation.
-8-
The Company may at any time, upon 30 day notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series C Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series C 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 C Convertible Preferred Stock shall be 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 C Convertible Preferred
stockholders and holders of any other outstanding preferred stock shall
vote together with the holders of common stock as a single class.
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 six month period ended September 30,
2002, based on the estimated fair value of the shares on the date 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 period ended
September 30, 2002, based on the estimated fair value of the shares on the
date 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.
On March 21, 2003, the Company entered into media production agreements
with "Winmaxmedia," an operating division of Winmax Trading Group, Inc.
("Winmax"), to produce materials to be used in connection with equity
fundraising efforts. As consideration for services to be performed under
the agreement, the Company issued 100,000 shares of its common stock and
paid approximately $100,000 of cash during the year ended March 31, 2003.
On March 21, 2003, the Company entered into an Investor Relations
Agreement with Fulcrum Holdings of Australia, Inc. ("Fulcrum") for
financial consulting services and public relations management to be
provided over a 12-month period. As consideration for services to be
performed under the agreement, the Company will issue to Fulcrum 100,000
shares of common stock and warrants to purchase an additional 350,000
shares of common stock at prices ranging from $6.00 to $15.00 per share.
The common shares and warrants will be issued, and the related expense
will be recognized, on a pro-rata basis over the contract period. During
the three month period ended September 30, 2003, 25,000 common shares were
issued and a general and administrative expense of $331,669 was recorded
based on the market value of the common stock on the date of issuance.
During the six month period ended September 30, 2003, 50,000 common shares
were issued and a general and administrative expense of $472,919 based on
the market value of the common shares on the date of issuance was taken.
Also during the three month period ended September 30, 2003, warrants to
purchase 87,500 shares of common stock were issued and a general and
administrative
-9-
expense of $684,601 was recorded based on the value of the warrants using
the Black-Scholes option valuation model.
During the six month period ended September 30, 2003, warrants to purchase
175,000 shares of common stock were issued and a general and
administrative expense of $880,480 was recorded based on the value of the
warrants using the Black-Scholes option valuation model.
On July 25, 2003, the Company entered into a consulting agreement with
Fulcrum to identify and negotiate with stock exchanges to list the common
stock of the Company and to assist the Company to prepare applications to
list the common stock of the Company on a stock exchange. As consideration
for services under this agreement, upon the listing of the Company's
common stock on a stock exchange, the Company would issue to Fulcrum
100,000 shares of common stock. On August 11, 2003, the Company's common
stock was listed on the American Stock Exchange. Accordingly, the Company
issued 100,000 shares of its common stock to Fulcrum, resulting in general
and administrative expenses of $1,400,000, based on the market value of
common stock on the date of issuance.
On March 21, 2003, the Company entered into a Finder's Agreement with
Wyndham Associates Limited ("Wyndham") to identify potential strategic
partners and assist in the raising of equity financing. As consideration
for services to be performed under the agreement, the Company was
obligated to issue 220,000 shares of common stock and pay a cash fee equal
to 4% of funds raised. The agreement further provided that Wyndam would
receive a cash fee for any additional equity investments by investors
introduced by Wyndham. During the six month period ended September 30,
2003, 220,000 common shares were issued and offering costs of $1,397,000
were recorded based on the market value of the common stock on the date of
issuance. There were no common shares issued or expenses incurred with
respect to this agreement during the three month period ended September
30, 2003.
In September 2003, the Company entered into a separate Finder's Agreement
with Wyndham to identify potential strategic partners and assist in the
private placements of debt, equity and/or warrants with proceeds to
Immtech through December 2003. As consideration for services to be
performed under this agreement, a cash fee equal to 8.0% of funds received
by the Company from investors introduced by Wyndham, is due at the closing
date of the respective placement. The Company also paid a refundable
retainer of $160,000 to Wyndham. In the event that investors introduced by
Wyndham do not subscribe to purchase at least $20,000,000, the $160,000
retainer is to be returned to Immtech. The $160,000 retainer is recorded
in the accompanying September 30, 2003 condensed consolidated balance
sheet within other current assets.
On July 16, 2003, the Company entered into an agreement with China Harvest
International Ltd. ("China Harvest") for services to be provided to assist
the Company in obtaining regulatory approval to conduct clinical trials in
China. As consideration for these services, the Company granted China
Harvest warrants to purchase 600,000 shares of common stock from the
Company at $6.08. These warrants are fully vested and have an exercise
period of five years. During the three month and six month periods ended
September 30, 2003, approximately $2,744,000 was recorded as general and
administrative expenses, based on the estimated value of the warrants
using the Black-Scholes option valuation model.
On July 16, 2003, the Company entered into a consulting agreement with
David Tat-Koon Shu for services to assist the Company with the formation
of a subsidiary and to gain regulatory approvals to enter into clinical
trials in China. As compensation for these services, Mr. Shu was granted
10,000 shares of the Company's common stock and a general and
administrative expense of $62,900 was recorded based on the market value
of the common stock on the date of issuance.
-10-
During the three and six month periods ended September 30, 2003, warrants
to purchase 456,000 shares of common stock were exercised.
Common Stock Options - On October 12, 2000, the Company's stockholders
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 provided 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 are
available to be reissued. Incentive stock options must be granted at a
price at least equal to fair market value at 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 month and six
month periods ended September 30, 2003 and 2002, the Company did not issue
options to purchase shares of common stock to employees and directors.
During the three month periods ended September 30, 2003 and 2002, no
options expired which were previously granted under the 2000 Stock
Incentive Plan. During the six month period ended September 30, 2003, no
options expired and 20,000 options expired during the six month period
ended September 30, 2002 which were previously granted under the 2000
Stock Incentive Plan and are available to be reissued. As of September 30,
2003, there were 608,750 shares available for grant.
During the three month periods ended September 30, 2003 and 2002, the
Company issued options to purchase 10,000 and zero shares, respectively,
of common stock to nonemployees and recognized expense of approximately
$78,000 and $56,000, respectively, related to these options and certain
options issued during prior years which vest over a four year period. The
10,000 options issued during the three month period ended September 30,
2003 were granted as consideration for consulting services with respect to
medical, technical and scientific issues, resulting in a research and
development expense of $45,738. During the six month periods ended
September 30, 2003 and 2002, the Company issued options to purchase 22,000
and 22,000 shares of common stock, respectively, to nonemployees and
recognized research and development expenses of $135,000 and $131,000,
respectively, related to these options and certain options issued during
prior years which vest over a four year period. The expense was determined
based on the estimated fair value of the options issued using the
Black-Scholes option valuation model.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans.
-11-
During the three month and six month periods ended September 30, 2003 and
2002, the Company did not issue any options to employees and directors. If
the Company had recognized compensation expense for the historical options
granted during the three and six month periods ended September 30, 2003
and 2002, consistent with the method prescribed by SFAS No. 123, net loss
and net loss per share would have been changed to the pro forma amounts
indicated below:
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
Net loss attributable to common shareholders -
as reported $(6,930,613) $(1,439,435) $(9,253,934) $(3,264,308)
Add: stock-based compensation expense to
employees and directors included in reported
net loss -- -- -- --
Deduct: total stock-based compensation expense
determined under fair value method for awards to
employees and directors (96,749) (66,531) (193,951) (134,646)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders -
pro forma $(7,027,362) $(1,505,966) $(9,447,885) $(3,398,954)
=========== =========== =========== ===========
Basic and diluted net loss per share attributable
to common stockholders - as reported $ (0.80) $ (0.23) $ (1.10) $ (0.53)
=========== =========== =========== ===========
Basic and diluted net loss per share attributable
to common stockholders - pro forma $ (0.81) $ (0.24) $ (1.12) $ (0.55)
=========== =========== =========== ===========
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.
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"), Georgia State
University, Duke University and Auburn University (the "Scientific
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
Scientific 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 Scientific Consortium and
previously licensed or optioned to Pharm-Eco and licensed to the Company
in accordance with the Consortium Agreement (the "Current Compounds"), and
all technology and compounds developed by the Scientific Consortium after
January 15, 1997, through use of Company-sponsored research funding or
National Cooperative Drug Development grant funding made available to the
Scientific Consortium (the "Future Compounds" and, collectively with the
Current Compounds, the "Compounds").
-12-
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 Scientific 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 Scientific 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 Scientific 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
Scientific 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 Scientific 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
Scientific 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 Scientific 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 Scientific 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 Scientific Consortium with regard to the Current Compounds.
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 and six month periods
ended September 30, 2003, the Company did not expense any grant payments
to UNC. During the three month and six month periods ended September 30,
2002, the Company expensed grant payments to UNC of zero and $100,000,
respectively. Such payments were recorded as research and development
costs.
In August 2001, the Company was awarded an 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 month and six month periods ended September 30, 2003 no revenues or
expenses were recognized under this grant. During the three months and six
month periods ended September 30, 2002, the Company recognized revenues of
approximately $5,000 and $70,000, respectively, from this grant and
expensed payments of approximately $5,000 and $70,000,
-13-
respectively, to UNC and certain other Scientific 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 period and six month period ended September 30,
2003, the Company expensed approximately $150,000 and $227,000,
respectively, of other payments to UNC and certain other Scientific
Consortium universities for patent related costs and other contracted
research. During the three month and six month periods ended September 30,
2002, the Company expensed approximately $103,000 and $185,000,
respectively, of other payments to UNC and certain other Scientific
Consortium universities for patent related costs and other contracted
research. Total payments expensed to UNC and certain other Scientific
Consortium universities were approximately $150,000 and $227,000 during
the three month and six month periods ended September 30, 2003,
respectively. Total payments expensed to UNC and certain other Scientific
Consortium universities were approximately $109,000 and $355,000 during
the three month and six month periods ended September 30, 2002,
respectively. Included in accounts payable as of September 30, 2003 and
March 31, 2003, were approximately $66,000, and $15,000, respectively, due
to UNC and certain other Scientific 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.
In April 2003, the Bill & Melinda Gates Foundation ("Gates Foundation")
awarded a $2,713,124 supplemental grant to UNC for the expansion of phase
IIB/III clinical trials for treatment of Human Trypanosomiasis (African
sleeping sickness) and improved manufacturing processes. The supplemental
increase to the Company due to this amendment is $2,466,475. The proceeds
to the Company are restricted and must be segregated from other funds and
used for specific purposes. Through the year ended March 31, 2003 the
Company had received $7,680,000 and during the six month period ended
September 30, 2003, the Company received an additional $1,025,201 (none of
which was received during the three month period ended September 30,
2003). Approximately $1,143,000 and $605,000 of these proceeds were
utilized for clinical and research purposes conducted and expensed during
the six month periods ended September 30, 2003 and 2002, respectively.
Approximately $659,000 and $315,000 of these proceeds were utilized for
clinical and research purposes conducted and expensed during the three
month periods ended September 30, 2003 and 2002, respectively. The Company
has recognized revenues of approximately $6,269,000 from inception through
September 30, 2003 for services performed under this agreement, including
approximately $1,143,000 and $605,000 during the six month periods ended
September 30, 2003 and 2002, respectively, and $659,000 and $315,000
during the three month periods ended September 30, 2003 and 2002,
respectively. The remaining amount (approximately $2,436,000 as of
September 30, 2003) 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. Under the agreement,
Neurochem had the right to license technology related to the tested
compounds upon the conclusion of the Confidentiality, Testing and Option
Agreement, as defined in the agreement. On
-14-
April 4, 2003, the Company notified Neurochem that the Confidentiality,
Testing and Option Agreement had previously expired by its terms and that
all rights granted to Neurochem thereunder had concurrently expired,
including any right Neurochem may or may not have had to license such
technology.
* * * * *
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- -----------------------------------------------------------------------------
Forward Looking Statements
- --------------------------
Certain statements contained in this quarterly 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 our 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 quarterly
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 may not be found to be
safe and effective after extensive clinical trials and the possibility that the
results of such trials, if 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 Food and Drug Administration,
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 that may not be described herein. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
- ---------------------
With the exception of certain research funding agreements and certain grants,
Immtech International, Inc. ("Immtech" or the "Company") has not generated any
revenue from operations and does not anticipate generating any revenue from
operations for the foreseeable future. The Company has funded, and plans to
continue to fund, its operations through research
-15-
funding agreements and grants, and the issuance of debt and equity securities.
For the period from inception, October 15, 1984, to September 30, 2003, the
Company incurred cumulative net losses of approximately $51,114,000. The Company
has incurred additional losses since such date and expects to incur additional
operating losses for the foreseeable future. The Company expects that its cash
sources for at least the next year will be generated from:
o Research grants, such as Small Business Technology Transfer Program
("STTR") grants and Small Business Innovation Research ("SBIR")
grants;
o Payments from the University of North Carolina at Chapel Hill,
private foundations and other research collaborators under
arrangements that may be entered into in the future; and
o The issuance of securities or borrowed funds.
The timing and amounts of grant payment revenues, if any, will likely fluctuate
sharply and depend upon the continued progress of our research and development
activities, and the results of operations for any period may be unrelated to the
results of operations for any other period.
Three Months Ended September 30, 2003 Compared with the Three Months Ended
September 30, 2002.
Revenues under collaborative research and development agreements were
approximately $659,000 and $360,000 for the three months ended September 30,
2003 and September 30, 2002, respectively. For the three months ended September
30, 2003, all revenues recognized related to a clinical research subcontract
agreement between the Company and The University of North Carolina at Chapel
Hill ("UNC"), while for the three months ended September 30, 2002, there were
revenues recognized of approximately $315,000 relating to the clinical research
subcontract agreement between the Company and UNC, grant revenues of
approximately $5,000 from SBIR grants from the NIH, and $40,000 from a
Confidentiality, Testing and Option Agreement with Neurochem, Inc.,
("Neurochem"). The clinical research subcontract agreement initiated in March
2001 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. Grant and research and development
agreement revenue is recognized as earned based on the performance requirements
of the specific grant. Upfront cash payments from research and development
grants are reported as deferred revenue until such time as the research and
development activities covered by the grant are performed.
Interest income for the three months ended September 30, 2003 and 2002 was
approximately $4,000 and $2,000, respectively. The increase in interest income
was due to an increase in funds invested. There was no interest expense for the
three months ended September 30, 2003 and September 30, 2002.
Research and development expenses increased to approximately $905,000 from
$711,000 for the three months ended September 30, 2003, and September 30, 2002,
respectively. The increase in research and development expenses was primarily
due to the increase in direct costs associated with clinical trials. Clinical
trial direct costs increased from approximately $187,000 in the three
-16-
months ended September 30, 2002 to approximately $382,000 in the three months
ended September 30, 2003.
General and administrative expenses increased to approximately $6,596,000 from
approximately $883,000 for the three months ended September 30, 2003, and
September 30, 2002, respectively. The increase was primarily due to non-cash
expenses for stock and warrant issuance in the three months ended September 30,
2003 of approximately $5,223,000 as compared to non-cash stock issuance in the
three months ended September 30, 2002 of approximately $187,000. During the
three months ended September 30, 2003, non-cash charges of (i) approximately
$2,744,000 were recorded for the issuance of Warrants to purchase 600,000 shares
of Common Stock issued to China Harvest International Ltd. as payment for
services to assist in obtaining regulatory approval to conduct clinical trials
in China, (ii) approximately $61,000 were recorded for the issuance of 10,000
shares of Common Stock issued to David Tat Koon Shu for consulting services in
China, (iii) approximately $1,400,000 were recorded for the issuance of 100,000
Common Shares to Fulcrum Holdings of Australia, Inc. ("Fulcrum") for assistance
with listing the Company's securities on a recognized stock exchange and for
consulting services, and (iv) approximately $1,016,000 were recorded for the
vested portion of 25,000 shares of Common Stock and the vested portion of
Warrants to purchase 87,500 shares of Common Stock issued to Fulcrum during the
period based on agreements signed March 21, 2003. Legal fees also increased from
approximately $185,000 during the three months ended September 30, 2002 to
approximately $521,000 during the three months ended September 30, 2003. The
increase in legal fees was primarily due to an increase in litigation fees. In
addition, during the three months ended September 30, 2003 the Company incurred
approximately $153,000 for the start-up of Immtech Therapeutics and expenses
related to Immtech Hong Kong.
The net loss increased to approximately $6,838,000 from approximately $1,232,000
for the three months ended September 30, 2003, and September 30, 2002,
respectively. The increase in net loss was primarily due to an increase in
general and administrative expenses resulting from non-cash expenses related to
stock and warrant issuances for services.
Six Months Ended September 30, 2003 Compared with the Six Months Ended
September 30, 2002.
Revenues under collaborative research and development agreements were
approximately $1,143,000 and $790,000 for the six months ended September 30,
2003 and 2002, respectively. For the six months ended September 30, 2003
revenues were recognized of approximately $1,143,000 relating to a clinical
research subcontract agreement between the Company and UNC, while for the six
months ended September 30, 2002, revenues consisted of approximately $605,000
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
$115,000 from the Confidentiality, Testing and Option Agreement with Neurochem.
The clinical research subcontract agreement relates to a grant from the Gates
Foundation to UNC for development of new drugs to treat Trypanosomiasis (African
sleeping sickness) and Leishmaniasis. The clinical research subcontract
agreement with UNC was consummated in March 2001. Grant and research and
development agreement revenue is recognized as earned based on the performance
requirements of the specific grant. Upfront cash payments from research and
development grants are reported as deferred revenue until such time as the
research and development activities covered by the grant are performed.
-17-
Interest income for the six months ended September 30, 2003 and 2002 was
approximately $5,000 and $10,000, respectively. The decrease in interest income
was due to a reduction in average funds invested and a reduction in interest
rates paid on the invested funds. There was no interest expense for the six
months ended September 30, 2003 and September 30, 2002.
Research and development expenses increased to approximately $1,511,000 in the
six months ended September 30, 2003 from approximately $1,463,000 in the six
months ended September 30, 2002. The increase in research and development
expenses was primarily the result of (i) decreases in the revenues relating to
the clinical research subcontract agreement between the Company and UNC and
grant revenues from SBIR grants from the NIH, (ii) offset by an increase in
clinical trial direct costs in the three months ended September 30, 2003.
General and administrative expenses increased for the six months ended September
30, 2003 to approximately $7,604,000 from approximately $2,335,000 for the six
months ended September 30, 2002. The increase in general and administrative
expenses was primarily due to non-cash expenses for stock and warrant issuance
in the six month period ended September 30, 2003 of approximately $5,561,000 as
compared to non-cash stock issuance in the six months ended September 30, 2002
of approximately $945,000. Non-cash expenses in the six months ended September
30, 2003 included (i) approximately $2,744,000 for the issuance of Warrants to
purchase 600,000 shares of Common Stock issued to China Harvest International
Ltd. as payment for services to assist in obtaining regulatory approval to
conduct clinical trials in China, (ii) approximately $61,000 for the issuance of
10,000 shares of Common Stock issued to David Tat Koon Shu for consulting
services in China, (iii) approximately $1,400,000 for the issuance of 100,000
shares of Common Stock issued to Fulcrum for assistance with listing the
Company's securities on a recognized stock exchange and for consulting services,
and (iv) approximately $1,353,000 for the vested portion of 50,000 shares of
Common Stock and the vested portion of Warrants to purchase 175,000 shares of
Common Stock issued to Fulcrum during the period based on agreements signed
March 21, 2003. Legal fees increased from approximately $330,000 during the six
month period ended September 30, 2002 to approximately $685,000 during the six
month period ended September 30, 2003. The increase in legal fees was primarily
due to an increase in litigation fees. Additionally, expenses relating to the
start-up of Immtech Therapeutics and continuing expenses for Immtech Hong Kong
were approximately $173,000 for the six months ended September 30, 2003.
We incurred a net loss of approximately $7,966,000 for the six months ended
September 30, 2003 as compared with a net loss of approximately $2,998,000 for
the six months ended September 30, 2002. The increase in net loss was primarily
due to an increase in general and administrative expenses resulting from
non-cash expenses related to stock and warrant issuances for services.
Liquidity and Capital Resources
- -------------------------------
During the three and six month periods ended September 30, 2003, cash and cash
equivalents were primarily invested in a money market fund. Unrestricted cash
and cash equivalents were approximately $4,761,000 as of September 30, 2003.
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There were equipment expenditures during the three and six month periods ended
September 30, 2003 of approximately $4,000 as compared to approximately $9,000
and $11,000 during the three and six month periods ended September 30, 2002,
respectively.
The Company periodically receives cash from the exercise of Common Stock
options. During the three and six month periods ended September 30, 2003,
options were exercised for 9,218 shares of Common Stock.
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 from the end of the quarter through
the next twelve months, although there can be no assurance we will not require
additional funds.
To date, we have financed our operations with:
o proceeds from various private placements of debt and equity
securities, an initial public offering and other cash
contributed from stockholders, which in the aggregate raised
approximately $35,268,000;
o payments from research and testing agreements, foundation
grants and SBIR grants and STTR grants of approximately
$9,986,000; and
o the use of stock, options and warrants in lieu of cash
compensation.
Our cash resources have been used to finance research and development (including
sponsored research), capital expenditures, expenses associated with development
of product candidates, as well as general and administrative expenses. All
resources have been used pursuant to an agreement, dated January 15, 1997, (the
"Consortium Agreement"), among the Company, UNC, and Pharm-Eco (to which each of
Duke University, Auburn University and Georgia State University 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. Over the next several years we expect to incur
substantial additional research and development costs, including costs related
to early-stage research in pre-clinical (laboratory) and clinical (human)
trials, administrative expenses to support our research and development
operations and capital expenditures for expanded research capacity, various
equipment needs and facility improvements.
Our future working capital requirements will depend upon numerous factors,
including the progress of research and development and commercialization
programs (which may vary as product candidates are added or abandoned),
pre-clinical testing and clinical trials, achievement of regulatory milestones,
the Company's corporate partners 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 other companies to provide funding to the
Company to support these activities, and other factors. In
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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 research grants, and
to enter into various research and 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 may require.
Item 4. Controls and Procedures.
-----------------------
Disclosure and Procedures
- -------------------------
The Company maintains controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC. The Company's Chief Executive
and Chief Financial Officers are responsible for establishing and maintaining
these procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of the Company's disclosure controls
and procedures, which took place as of the end of the period covered by this
quarterly report on Form 10-Q, the Chief Executive and Chief Financial Officers
believe that these procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
Internal Controls
- -----------------
The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
generally accepted accounting principles and (ii) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
There was no change in our internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Dale M. Geiss v. Immtech International, Inc. and Criticare Systems, Inc.
- ------------------------------------------------------------------------
On August 29, 2003, Geiss responded to certain affirmative defenses that the
Company had filed by generally denying the defenses. Geiss also filed a motion
to strike two of the Company's affirmative defenses. On September 25, 2003, the
parties filed a stipulated order with the court extending the discovery schedule
and amending the case management order. On October 9, 2003, defendant Criticare
Systems, Inc. served discovery requests on Geiss.
Immtech International, Inc. v. Neurochem, Inc.
- ----------------------------------------------
On September 2, 2003, the Company entered into a stipulation withdrawing without
prejudice its request for a preliminary injunction and agreed to stay discovery
pending settlement discussions. Since September 2003, the Company has been
engaged in settlement discussions with Neurochem.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et al.:
- ------------------------------------------------------------------
On or about October 20, 2003, plaintiffs filed a complaint in the United States
District Court for the Northern District of Illinois against the Company and
certain officers and directors. Plaintiffs' complaint alleged that (i) the
Company refused to authorize the Company's transfer agent to remove the
restrictive legends from the plaintiffs' stock certificates; (ii) the Company
refused to honor plaintiff's exercise of certain stock options; and (iii) the
Company refused to honor an agreement regarding certain technology. Plaintiffs'
complaint also alleged that certain officers and directors interfered with
plaintiffs' contracts with the Company. Plaintiffs' complaint seeks unspecified
monetary damages and punitive damages, equitable relief and costs and attorneys'
fees. The Company believes that the plaintiffs' claims are meritless and intends
to vigorously defend against this proceeding.
Except as noted above and in Part I, Item 3, Legal Proceedings, of the Form
10-K/A filed on October 15, 2003, the Company is not aware of any pending
litigation.
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Item 2. Change in Securities and Use of Proceeds.
----------------------------------------
Recent Sales of Unregistered Securities.
- ---------------------------------------
Common Stock.
On August 11, 2003, the Company issued 100,000 shares to Fulcrum Holdings of
Australia, Inc. for providing assistance in listing the Company on a major
exchange and for consulting services.
Option Exercise.
On August 4, 2003 Jeffrey Bluestone paid $3,510.00 and exercised an option to
purchase 7,550 shares of Common Stock. On August 28, 2003 Patrick Yeramian
exercised a cashless option to purchase 1,668 shares of Common Stock.
Warrant Exercise.
The table below sets forth dates, shareholders, shares of Common Stock
purchased, exercise prices and aggregate exercises paid for our Common Stock in
connection with warrants exercised.
Shares of
Common Stock Exercise Aggregate
Date Shareholder Purchased Price Exercise
8/6/2003 Hui Chin Ki 3,000 6.1250 18,375.00
8/11/2003 Griffith Shelmire Partners Inc 6,180 12.0625 74,546.25
8/11/2003 Jesse Shelmire 17,510 12.0625 211,214.38
8/11/2003 Scott R. Griffith 17,510 12.0625 211,214.38
8/12/2003 Donald H. Wong 5,000 6.0000 30,000.00
8/12/2003 Clough Offshore 8,500 6.0000 51,000.00
8/12/2003 Clough Investment Partners I 28,500 6.0000 171,000.00
8/12/2003 Clough Investment Partners II 3,000 6.0000 18,000.00
8/13/2003 John Coonan 1,000 6.0000 6,000.00
8/13/2003 Wong Lin Chooi 10,000 6.0000 60,000.00
8/19/2003 Dwight B. Crane 6,000 6.0000 36,000.00
8/20/2003 The Kreigsman Group 100,000 10.7500 1,075,000.00
8/21/2003 Lau Shun Shing 1,000 6.1250 6,125.00
8/21/2003 Man Yau Ming 1,000 6.1250 6,125.00
8/21/2003 Griffith Shelmire Partners Inc 8,820 12.0625 106,391.25
8/21/2003 Jesse Shelmire 24,990 12.0625 301,441.88
8/21/2003 Scott R. Griffith 24,990 12.0625 301,441.88
8/22/2003 Select Defender Fund 2,500 6.0000 15,000.00
8/22/2003 Vivienne Lee 5,000 6.0000 30,000.00
8/22/2003 John Orlando 2,500 6.0000 15,000.00
8/22/2003 Scott Hess 1,500 6.0000 9,000.00
8/26/2003 Wong Hon Fai Jones 2,500 6.0000 15,000.00
8/26/2003 Cheung Wai Hung 2,500 6.0000 15,000.00
8/26/2003 Purchase Power Management 2,500 6.0000 15,000.00
8/28/2003 Val Busler 3,000 6.0000 18,000.00
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Shares of
Common Stock Exercise Aggregate
Date Shareholder Purchased Price Exercise
8/29/2003 Lo Siu Sun 1,500 6.0000 9,000.00
8/29/2003 Yue Chung Yee 5,000 6.1250 30,625.00
9/2/2003 Monet Capital Fund 1 35,000 6.0000 210,000.00
9/2/2003 Kum Choi Fung Flora 3,000 6.1250 18,375.00
9/2/2003 Alan Lai Nin 5,000 6.1250 30,625.00
9/3/2003 Au Yeung Chun Kit 1,250 6.0000 7,500.00
9/3/2003 Ching Jung Cheng 30,000 6.0000 180,000.00
9/4/2003 To Wing Ming James 5,000 6.0000 30,000.00
9/4/2003 Lau Mei Yin Amy 3,000 6.0000 18,000.00
9/5/2003 TEFA 35,000 6.0000 210,000.00
9/9/2003 Thorpe LTD 7,000 6.0000 42,000.00
9/17/2003 Robert Frazer 1,250 6.0000 7,500.00
9/22/2003 E-World 35,000 6.1250 214,375.00
10/14/2003 Fu Hui Chen 6,250 6.0000 37,500.00
10/21/2003 Bruce Chiu 20,000 6.0000 120,000.00
10/22/2003 Tony Yeung Ming Kwong 30,000 6.1250 183,750.00
10/29/2003 Robert Frazer 1,250 6.0000 7,500.00
513,500 $4,172,625.01
Conversion of Series A Preferred Stock to Common Stock.
On August 8, 2003, the Company converted 4,000 shares of Series A Convertible
Preferred Stock to 22,832 shares of Common Stock. On August 12, 2003, the
Company converted 2,800 shares of Series A Convertible Preferred Stock to 15,957
shares of Common Stock. On September 9, 2003, the Company converted 1,200 shares
of Series A Convertible Preferred Stock to 6,827 shares of Common Stock. Each
conversion was made at the request of the holders of the respective Series A
Convertible Preferred Stock and included accrued interest through the day prior
to the date of conversion.
Conversion of Series B Preferred Stock to Common Stock.
On August 20, 2003, the Company converted 800 shares of Series B Convertible
Preferred Stock to 5,036 shares of Common Stock. On September 2, 2003, the
Company converted 4,000 shares of Series B Convertible Preferred Stock to 25,182
shares of Common Stock. On September 19, 2003, the Company converted 6,000
shares of Series B Convertible Preferred Stock to 37,786 shares of Common Stock.
On October 27, 2003, the Company converted 800 shares of Series B Convertible
Preferred Stock to 5,002 shares of Common Stock. Each conversion was made at the
request of the holders of the respective Series B Convertible Preferred Stock
and included accrued interest through the day prior to the date of conversion.
Series A, Series B and Series C Preferred Stock Dividend Payment.
On October 15, 2003, the Company issued 4,010 shares of Common Stock as payment
of a dividend earned on outstanding Series A Preferred Stock to holders thereof.
-23-
On October 15, 2003, the Company issued 1,130 shares of Common Stock as payment
of a dividend earned on outstanding Series B Preferred Stock to holders thereof.
On October 15, 2003, the Company issued 4,893 shares of Common Stock as payment
of a dividend earned on outstanding Series C Preferred Stock to holders thereof.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
Item 6. Exhibits, and Reports on Form 8-K.
---------------------------------
Exhibits.
- --------
See Exhibit Index.
Reports On Form 8-K.
- -------------------
Immtech filed the following report on Form 8-K during the second quarter of
2003:
Form 8-K filed by Immtech with the Securities and Exchange Commission on August
6, 2003, pursuant to Items 5 and 7 with respect to Immtech's press release
announcing that Immtech was approved for listing on The American Stock Exchange
("Amex") effective August 11, 2003 under the ticker symbol "IMM."
-24-
Exhibit Index
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of 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: November 14, 2003 By: /s/ T.Stephen Thompson
----------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ Gary C. Parks
-----------------
Gary C. Parks
Treasurer, Secretary and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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