8/6/04
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 June 30, 2004.
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
- --------------------------------- -----------------------------
(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 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 [X] No [ ]
As of August 6, 2004, 10,815,323 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..........................................16
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...........................21
Item 3. Defaults Upon Senior Securities....................................23
Item 4. Submission of Matters to a Vote of Security Holders................23
Item 5. Other Information..................................................23
Item 6. Exhibits, and Reports on Form 8-K..................................23
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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)
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June 30, March 31,
ASSETS 2004 2004
CURRENT ASSETS:
Cash and cash equivalents $4,893,322 $6,745,283
Restricted funds on deposit 1,171,959 2,154,928
Deferred offering costs 49,821
Other current assets 324,897 59,979
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Total current assets 6,439,999 8,960,190
PROPERTY AND EQUIPMENT - Net 3,587,461 3,610,214
OTHER ASSETS 15,477 15,477
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TOTAL $10,042,937 $12,585,881
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $509,348 $970,308
Accrued expenses 109,099 22,382
Deferred revenue 973,482 1,831,093
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Total current liabilities 1,591,929 2,823,783
DEFERRED RENTAL OBLIGATION 12,821 14,413
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Total liabilities 1,604,750 2,838,196
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share,
4,080,000 shares authorized and unissued as
of June 30, 2004 and March 31, 2004,
Series A convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
320,000 shares authorized, 80,400 and 80,800
shares outstanding as of June 30,2004 and
March 31, 2004, respectively; aggregate
liquidation preference of $2,034,906 as of
June 30, 2004 2,034,906 2,075,250
Series B convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
240,000 shares authorized, 19,925 shares
outstanding as of June 30, 2004 and
March 31, 2004; aggregate liquidation
preference of $506,158 as of June 30, 2004. 506,158 516,093
Series C convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
160,000 shares authorized, 67,252 and 72,304
shares outstanding as of June 30, 2004 and
March 31, 2004, respectively; aggregate
liquidation preference of $1,709,702 as of
June 30, 2004. 1,709,702 1,874,186
Series D convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
200,000 shares authorized, 200,000 shares
outstanding as of June 30, 2004 and
March 31, 2004; aggregate liquidation
preference of $5,063,288 as of June 30, 2004. 5,063,288 5,056,712
Common stock, par value $0.01 per share,
100,000,000 shares authorized, 9,905,324 and
9,835,286 shares issued and outstanding as
of June 30, 2004 and March 31, 2004,
respectively 99,053 98,353
Additional paid-in capital 59,361,612 58,666,489
Deficit accumulated during the developmental
stage (60,336,532) (58,539,398)
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Total stockholders' equity 8,438,187 9,747,685
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TOTAL $10,042,937 $12,585,881
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See notes to condensed consolidated financial statements.
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IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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October 15,
1984
Three Months Ended (Inception)
June 30, to June 30,
-------------------------- ---------------
2004 2003 2004
REVENUES $857,612 $484,672 $12,116,614
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EXPENSES:
Research and development 1,086,216 606,558 35,450,484
General and administrative 1,428,754 1,007,404 34,490,308
Equity in loss of joint venture 135,002
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Total expenses 2,514,970 1,613,962 70,075,794
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LOSS FROM OPERATIONS (1,657,358) (1,129,290) (57,959,180)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 9,066 888 607,058
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
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Other income (expense) - net 9,066 888 317,672
NET LOSS (1,648,292) (1,128,402) (57,641,508)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (148,842) (1,194,919) (5,064,923)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,797,134) $(2,323,321) $(60,336,532)
============ =========== =============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net loss ($0.17) ($0.14)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.02) (0.15)
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BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS ($0.19) ($0.29)
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WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 9,882,051 8,144,534
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See notes to condensed consolidated financial statements.
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IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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October 15,1984
Three Months Ended (Inception) to
June 30, June 30,
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2004 2003 2004
OPERATING ACTIVITIES:
Net loss $(1,648,292) $(1,128,402) $(57,641,508)
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 294,151 394,573 22,655,478
Depreciation and amortization of property and equipment 30,310 11,565 782,751
Deferred rental obligation (1,592) (1,591) 12,821
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 982,969 (545,187) (1,171,959)
Other current assets (264,918) (151,475) (324,897)
Other assets 7,702 (15,477)
Accounts payable (510,781) (48,197) 787,062
Accrued expenses 86,717 (3,965) 772,112
Deferred revenue (857,611) 540,530 973,482
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Net cash used in operating activities (1,889,047) (924,447) (34,325,453)
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INVESTING ACTIVITIES:
Purchase of property and equipment (7,557) (1,343,283)
Advances to joint venture (135,002)
Proceeds from maturities of investment securities 1,800,527
Purchases of investment securities (1,803,469)
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Net cash used in investing activities (7,557) (1,481,227)
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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 2,845,473 13,124,364
Payments for convertible preferred stock dividends and for fractional shares of
common stock resulting from the conversions of convertible preferred stock (1,337) (128) (3,070)
Net proceeds from issuance of common stock 45,980 20,848,021
Additional capital contributed by stockholders -- -- 245,559
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Net cash provided by financing activities 44,643 2,845,345 40,700,002
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,851,961) 1,920,898 4,893,322
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,745,283 112,040 -
- ---------------------------------------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,893,322 $2,032,938 $4,893,322
=========== =========== =============
NONCASH FINANCIANG ACTIVITY - DEFERRED OFFERING
COSTS FINANCED WITH ACCOUNTS PAYABLE $49,821 -- $49,821
See notes to condensed consolidated financial statements.
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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,
we or us") 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. The Company suggests 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 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiaries are pharmaceutical companies advancing the
development and commercialization of oral drugs to treat infectious
diseases, and neoplastic (cancer) and metabolic (diabetes) disorders. The
Company has development programs that include treatments for fungal
infections, malaria, tuberculosis, diabetes, Pneumocystis carinii pneumonia
("PCP") and tropical diseases, including African sleeping sickness
(trypanosomiasis) and leishmaniasis. The Company holds worldwide patents and
patent applications, and licenses and rights to license technology,
primarily from a scientific consortium that has granted to the Company
exclusive rights to commercialize products from, and license rights to the
technology. The scientific consortium includes scientists from The
University of North Carolina at Chapel Hill ("UNC"), Georgia State
University ("Georgia State"), Duke University ("Duke University") and Auburn
University ("Auburn University") (collectively, the "Scientific
Consortium"). The Company is a development stage enterprise and since its
inception on October 15, 1984 the Company has engaged in research and
development programs, expanded its network of scientists and scientific
advisors and licensing technology agreements, and advanced the
commercialization of the dication technology platform (the Company acquired
rights to the dication platform in 1997). 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, 2005, if at all.
Since its inception, the Company has incurred accumulated net losses of
approximately $57,642,000. Company management expects that the Company will
continue to incur significant losses during the next several years as the
Company continues research and development activities and clinical trial
efforts. In addition, the Company has various research and development
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agreements with third parties and is dependent upon such parties' abilities
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
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 develop its product candidates. The Company's cash
requirements may vary materially from those now planned because of the
results of research and development, results of pre-clinical and clinical
testing, responses to grant requests, relationships with strategic partners,
changes in the focus and direction in 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
currently intends to raise.
Management believes the Company's existing unrestricted cash and cash
equivalents, and the grants received or awarded and awaiting disbursement
of, will be sufficient to meet the Company's planned expenditures through
August of 2005, although there can be no assurance that 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 conduct profitable operations. Management's plans
for the forthcoming year, in addition to normal operations, include
continuing financing efforts, obtaining additional research grants and
entering into research and development agreements with other entities.
Principles of Consolidation - The condensed consolidated financial
statements include the accounts of Immtech International, Inc. and its
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 and/or those from a malaria drug development agreement with
Medicines for Malaria Venture ("MMV").
Concentration of Credit Risk - The Company maintains cash in commercial
banks. Balances on deposit are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to specific limits. Balances in excess of FDIC
limits are uninsured.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of June 30, 2004 and
March 31, 2004, 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 June 30, 2004 and March 31, 2004.
Recognition of any investment income on the equity method for the Company's
investment in NextEra will occur only after NextEra has earnings in excess
of previously unrecognized equity losses.
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Property and Equipment - Property and equipment are recorded at cost and
depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the respective assets ranging from three
to fifty years.
Long-Lived Assets - The Company periodically evaluates the carrying value of
its property and equipment. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, a loss
is recognized for the asset and is measured by the difference between the
fair value and the carrying value of the asset.
Deferred Rental Obligation - Rental obligations with scheduled rent
increases are recognized on a straight-line basis over the lease term.
Revenue Recognition - Grants to perform research are the Company's primary
source of revenue and are generally granted to support research and
development activities for specific projects or drug candidates. Revenue
related to grants to perform research and development 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.
Research and Development Costs - Research and development costs are expensed
as incurred and include costs associated with research performed pursuant to
collaborative agreements. Research and development costs consist of direct
and indirect internal costs related to specific projects as well as fees
paid to other entities that conduct certain research activities on the
Company's behalf.
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. 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 Standard ("SFAS") No. 128,
"Earnings Per Share". Basic net income (loss)and diluted (loss) per share is
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 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 basic net loss per share for the three month periods ended June
30, 2004 and June 30, 2003, as the Company's outstanding common stock
options and warrants and conversion features of Series A, B and C
Convertible Preferred Stock were antidilutive.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the three month periods ended June 30, 2004 and June 30,
2003, respectively.
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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 $24,906 and $55,250 of
accrued preferred stock dividends at June 30, 2004 and March 31, 2004,
respectively. Each share of Series A Convertible Preferred Stock may be
converted by the holder at any time into shares of Company 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 Series A Certificate of Designation. On April
15, 2004, the Company issued 2,961 shares of common stock and paid $352 in
lieu of fractional common shares as dividends on the preferred shares. On
April 15, 2003, the Company issued 23,316 shares of common stock and paid
$96 in lieu of fractional common shares as dividends on the preferred
shares. During the three month periods ended June 30, 2004 and June 30,
2003, certain preferred stockholders converted 400 and 37,000 shares of
Series A Convertible Preferred Stock, including accrued dividends, for 2,264
and 211,813 shares of common stock, respectively.
The Company may 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 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 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 Series A 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 Company's stockholders 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
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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 $8,033 and $17,968 of accrued preferred stock
dividends as of June 30, 2004 and March 31, 2004, respectively. Each share
of Series B Convertible Preferred Stock may be converted by the holder at
any time into shares of 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 Series B
Certificate of Designation. On April 15, 2004, the Company issued 974 shares
of common stock and paid $107 in lieu of fractional common shares as
dividends on the preferred shares. On April 15, 2003, the Company issued
11,049 shares of common stock and paid $17 in lieu of fractional common
shares as dividends on the preferred shares. During the three month period
ended June 30, 2003, certain preferred stockholders converted 25,200 shares
of Series B Convertible Preferred Stock, including accrued dividends, for
159,845 shares of common stock. There were no conversions of Series B
Convertible Preferred Stock during the three month period ended June 30,
2004.
The Company may 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 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 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 Series B 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 Company's stockholders 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 sheets is $28,402 and $66,586 of
accrued preferred stock dividends as of June 30, 2004 and March
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31, 2004, respectively. Each share of Series C Convertible Preferred Stock
may be converted by the holder at any time into shares of 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 Series C Certificate of Designation. On April
15, 2004, the Company issued 3,534 shares of common stock and paid $397 in
lieu of fractional common shares as dividends on the preferred shares.
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). These
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. During the three month period ended June 30, 2004, certain
preferred stockholders converted 5,052 shares of Series C Convertible
Preferred stock, including accrued dividends, for 28,575 shares of common
stock. There were no conversions of Series C Convertible Preferred Stock
during the three month period ended June 30, 2003.
The Company may at any time require that any or all outstanding shares of
Series C Convertible Preferred Stock be converted into shares of 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 Series C Certificate of
Designation.
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. 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 Company's stockholders 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.
Series D Convertible Preferred Stock - On January 15, 2004, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 200,000 shares of the Company's 5,000,000 authorized
shares of preferred stock as Series D 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 D Convertible Preferred Stock in the
accompanying condensed consolidated balance sheets is $63,288 and $56,712 of
accrued preferred stock dividends as of June 30, 2004 and March 31, 2004,
respectively. Each share of Series D Convertible Preferred Stock may be
converted by the holder at any time into shares of 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 $9.00
conversion price (the "Conversion Price D"), subject to certain antidilution
adjustments, as defined
-10-
in the Series D Certificate of Designation. During the year ended March 31,
2004, the Company issued 200,000 shares of Series D Convertible Preferred
Stock for net proceeds of approximately $4,571,000 (net of approximately
$429,000 of cash offering costs).
The Company may at any time after January 1, 2005, require that any or all
outstanding shares of Series D Convertible Preferred Stock be converted into
shares of the Company's common stock, provided that the shares of common
stock into which the Series D 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 D Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price D provided that the closing bid price for the Company's
common stock exceeds $18.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, 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 D. The
Conversion Price D is subject to certain antidilution adjustments, as
defined in the Series D Certificate of Designation. On April 15, 2004, the
Company issued 3,340 shares of common stock and paid $447 in lieu of
fractional common shares as dividends on the preferred shares.
Each issued and outstanding share of Series D Convertible Preferred Stock
shall be entitled to 2.7778 votes (subject to adjustment for dilution) with
respect to any and all matters presented to the Company's stockholders for
their action or consideration. Except as provided by law or by the
provisions establishing any other series of preferred stock, Series D
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 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 issued to Fulcrum 100,000 shares of common stock
and warrants to purchase 350,000 shares of common stock at prices ranging
from $6.00 to $15.00 per share. The common stock and warrants were issued,
and the related general and administrative expenses were recognized, on a
pro-rata basis over the contract period. During the three month period ended
June 30, 2003, 25,000 common shares were issued and general and
administrative expense of $141,250 was recorded based on the market value of
the common shares on the date of issuance. Also during the three month
period ended June 30, 2003, warrants to purchase 87,500 shares of common
stock were issued and a general and administrative expense of $195,879 was
recorded based on the value of the warrants using the Black-Scholes option
valuation model.
-11-
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 issued 220,000
shares of common stock to Wyndham. During the three month period ended June
30, 2003, 220,000 common stock 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.
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 its business 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 periods ended June
30, 2004 and June 30, 2003, the Company did not issue any options to
purchase shares of common stock to employees and directors. During the three
month periods ended June 30, 2004 and June 30, 2003, no options expired
which were previously granted under the 2000 Stock Incentive Plan which are
available to be reissued. As of June 30, 2004, there were 320,250 shares
available for grant.
During the three month periods ended June 30, 2004 and June 30, 2003, the
Company issued options to purchase 20,000 and 12,000 shares, respectively,
of common stock to nonemployees and recognized expense of approximately
$283,000 and $57,000, respectively, related to these options and certain
options issued during prior years which vest over a four year service
period. The expense was determined based on the estimated fair value of the
options issued using the Black-Scholes option valuation model.
On May 28, 2004, options to purchase 18,517 shares with an exercise price of
$0.4649 per share were exercised on a cashless basis. Based on the fair
market value calculated as of the date of exercise, the option holder
received 18,000 shares of common stock.
The 20,000 stock options issued during the three month period ended June 30,
2004 were granted to a consultant on May 12, 2004 as compensation for
services to develop relationships with Tsinghua University. Tsinghua
University has committed resources from its Department of Biological
Sciences and Biotechnology to assist the Company in its preclinical and
clinical trials of the Company's drug candidates targeting tuberculosis and
diabetes in China.
Warrants - During the three month period ended June 30, 2004, warrants to
purchase 6,000 shares of common stock were exercised, resulting in proceeds
to the Company of $45,980. Additionally, on May 11, 2004, a warrant holder
exercised a warrant to purchase 21,400 shares of common stock at an exercise
price of $16.00 per share on a cashless basis. Based on the fair market
value calculated as of the date of exercise, the warrant holder received
4,390 shares of common stock. There were no warrants exercised during the
three month period ended June 30, 2003.
-12-
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for employee stock option plans.
During the three month periods ended June 30, 2004 and June 30, 2003, the
Company issued no options to employees or directors. If the Company had
recognized compensation expense in accordance with the fair value provisions
of SFAS No. 123, during the three month periods ended June 30, 2004 and June
30, 2003, net loss and net loss per share would have been changed to the pro
forma amounts indicated below:
Three Months Ended June 30,
-----------------------------------------
2004 2003
Net loss attributable to common shareholders - as reported $ (1,797,134) $ (2,323,321)
Add: stock-based compensation expense included in reported
net loss 0 0
Deduct: total stock-based compensation expense determined
under fair value method for all awards (702,950) (97,202)
------------ -----------
Net loss attributable to common stockholders - pro forma $ (2,500,084) $ (2,420,523)
============ ============
Basic and diluted net loss per share attributable to common
stockholders - as reported $ (0.19) $ (0.29)
========= ========
Basic and diluted net loss per share attributable to common
stockholders - pro forma $ (0.25) $ (0.30)
========= ========
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 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 (the "Current Compounds") and to be licensed to the
Company in accordance with the Consortium Agreement, 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").
-13-
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, Pharm-Eco and the
Company, with respect to the Current Compounds, and UNC, (on behalf of the
Scientific Consortium), and the Company, 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 an 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 exisiting license with the
Scientific Consortium with regard to the Current Compounds.
During the three month periods ended June 30, 2004 and June 30, 2003, we
expensed approximately $98,000 and $77,000, 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
$98,000 and $77,000 during the three month periods ended June 30, 2004 and
June 30, 2003, respectively. Included in accounts payable as of June 30,
2004 and March 31, 2004, were approximately $47,000, and $132,000,
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.
-14-
In April 2003, the 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
process. The supplemental increase to the Company due to the amendment is
$2,466,475, bringing the total available funding to the Company under this
agreement to $12,266,475. 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, 2004 the Company received approximately $8,705,000
and during the three month period ended June 30, 2004, the Company received
no additional funds, of which in total approximately $646,000 and $485,000
was utilized for clinical and research purposes conducted and expensed
during the three month periods ended June 30, 2004 and June 30, 2003,
respectively. The Company has recognized aggregate revenues of approximately
$7,886,000 through June 30, 2004 for services performed under this
agreement, including approximately $646,000 and $485,000 during the three
month periods ended June 30, 2004 and June 30, 2003, respectively. The
remaining amount (approximately $819,000 as of June 30, 2004) has been
deferred and will be recognized as revenue over the term of the agreement as
the services are performed.
On November 26, 2003, the Company entered into a testing agreement with
Medicine for Malaria Venture ("MMV"), a foundation established in
Switzerland, and UNC. Pursuat to this agreement the Company, with the
support of MMV and UNC, is to conduct a proof of concept study of the
dicationic drug candidate DB289, including Phase II and Phase III human
clinical trials, and will pursue drug development activities of DB289 alone,
or in combination with other anti-malaria drugs, with the goal of obtaining
marketing approval of a product for the treatment of malaria.
Under the terms of the agreement, MMV has committed to advance funds to the
Company to pay for human clinical trials and regulatory preparation and
filing costs for the approvals to market DB289 for treatment of malaria by
at least one internationally accepted regulatory body and one malaria
endemic country. The funding under this agreement is for the performance of
specific research and is not subject to maximum funding amounts. The term of
the funding portion of this agreement is three years and is subject to
annual renewals. The Company has forecasted such costs to be approximately
$8.2 million over the three years. In return for this funding from MMV, the
Company is required to sell all malaria drugs derived from this research
into "malaria endemic countries," as defined, at an affordable price. As
used in the agreement, an affordable price shall not be less than the cost
to manufacture and deliver the drugs plus administrative overhead costs (not
to exceed 10% of the cost to manufacture) and a modest profit. The agreement
does not subject the Company to price constraints on product sales into
non-malaria endemic countries. The Company must, however, pay to MMV a
royalty not to exceed 7% of net sales as defined, on product sales into
non-malaria endemic countries until the amount funded under the agreement
and amounts funded under a related discovery agreement between MMV and UNC
is refunded to MMV.
MMV has agreed to fund the forecasted amount based on progress achieved. The
Company recognized revenues of approximately $212,000 during the three month
period ended June 30, 2004 for expenses incurred related to activities
within the scope of the agreement with MMV. At June 30, 2004, the Company
has approximately $155,000 recorded as deferred revenue with respect to this
agreement.
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 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.
5. SUBSEQUENT EVENTS
On July 20, 2004, the Company's board of directors approved a four-year
exercise extension to warrants to purchase 225,000 shares of the Company's
common stock which were originally issued to RADE Management Corporation
("RADE") on July 24, 1998. The expiration dates for these warrants, which
have an exercise price of $6.47 per share, were extended from July 24, 2004
to July 24, 2008. As a result of these extensions, the Company will record a
non-cash charge during the quarter ending September 30, 2004 of
approximately $1,032,000, determined using the Black-Scholes option pricing
model.
On July 30, 2004 the Company closed a secondary public offering of its
common stock. In the offering the Company issued 899,999 shares of common
stock resulting in proceeds to the Company of approximately $8,671,490,
which is net of underwriter commissions. The shares were sold to the public
at $10.25 per share. Jefferies & Company, Inc. acted as the sole
book-running manager and underwriter of this offering.
In connection with the secondary public offering completed on July 30, 2004,
the underwriter (Jefferies & Company, Inc.) was granted a warrant to
purchase 80,100 shares of common stock at an exercise price of $12.81 per
share. The warrant is exercisable for five years from the date of grant and
has standard anti-dilution protection for recapitalizations.
* * * * * *
-15-
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 "may", "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)
the possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our product candidates not
to be viable, (v) 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 completed, will not establish
the safety or efficacy of our drug product candidates, (vi) 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, (vii) 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, (viii) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of commercializing a successful product or that
future financing will be completed on unfavorable terms, (ix) the possibility
that any products successfully developed by us will not achieve market
acceptance and (x) 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.
Products and Programs Update
Malaria
Maximum Tolerable Dose Study
In August 2004 we commenced a study in France in uninfected, normal volunteers
to determine the maximum tolerable dose ("MTD") of DB289 in a three day
treatment regimen. The study in uninfected, normal volunteers will include 74
volunteers from three different ethnic groups to compare metabolism of DB289 and
to compare 5 day dosing to 3 day dosing and is expected to
-16-
be completed in September 2004. The MTD study is directed toward our malaria
program, however, trial results may be used to modify dosages in DB289 trials
for other indications.
The MTD study design is set forth below.
- --------------------------------------------------------------------------------
Clinical Trial Trial Design End Points Sites
- --------------------------------------------------------------------------------
DB289 alone o Phase I o Maximum France
o Healthy tolerable dose
volunteers o Safety
o Single doses o Pharmacokinetics
for 3 days
o Compare 3 and
5 day dosing
o Different
ethnic groups
Results of Operations
With the exception of certain research funding agreements and certain grants, we
have not generated any revenue from operations. For the period from inception
(October 15, 1984) to June 30, 2004, we incurred cumulative net losses of
approximately $57,642,000. We have incurred additional losses since such date
and we expect to incur additional operating losses for the foreseeable future.
We expect that our cash sources for at least the next year will be limited to:
o payments from The University of North Carolina at Chapel Hill and
MMV, and other foundations and research collaborators under
arrangements that may be entered into in the future;
o research grants, such as Small Business Technology Transfer Program
("STTR") grants and Small Business Innovation Research ("SBIR")
grants; and
o borrowing funds or the issuance of securities.
The timing and amounts of grant and payment revenues, if any, will likely
fluctuate sharply and depend upon the achievement of specified milestones, and
our results of operations for any period may be unrelated to the results of
operations for any other period.
Three Month Period Ended June 30, 2004 Compared with the Three Month Period
Ended June 30, 2003.
Revenues under collaborative research and development agreements were
approximately $858,000 and $485,000 for the three month periods ended June 30,
2004 and June 30, 2003, respectively. For the three month period ended June 30,
2004, revenues recognized of approximately $646,000 related to a clinical
research subcontract agreement between us and The University of North Carolina
at Chapel Hill ("UNC") and $212,000 related to a grant from
-17-
Medicines for Malaria Venture ("MMV") to fund clinical studies and manufacturing
of DB289 for treatment of malaria, while for the three month period ended June
30, 2003, all revenues recognized of approximately $485,000 related to a
clinical research subcontract agreement between us and UNC.
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. MMV also receives funding from the Gates Foundation. Grant and
research and development agreement revenue is recognized as 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 month period ended June 30, 2004 was approximately
$9,000. Interest income during the three month period ended June 30, 2003 was
approximately $1,000. The increase is due to an increase in funds invested from
the prior corresponding quarter. There was no interest expense during the three
month period ended June 30, 2004 and June 30, 2003.
Research and development expenses increased to approximately $1,086,000 from
$607,000 for the three month period ended June 30, 2004, and June 30, 2003,
respectively. The increased research and development expenses were primarily
attributable to required pre-clinical toxicology costs.
General and administrative expenses increased to approximately $1,429,000 from
approximately $1,007,000 during the three month period ended June 30, 2004, and
June 30, 2003, respectively. The increase was primarily due to increased legal
fees, travel and general and administrative fees associated with development of
projects with our subsidiaries Immtech Hong Kong Ltd. and Super Insight Ltd. The
legal fees, travel expenses, and general and administrative fees associated with
the development of the joint projects with our subsidiaries increased by
approximately $169,000, $106,000, and $153,000, respectively during the three
month period ended June 30, 2004 when compared with the same period in the
previous year. For the three month period ended June 30, 2003 our legal fees,
travel expenses, and general and administrative fees associated with the
development of joint projects with our subsidiaries were approximately $176,000,
$3,000, and $0, respectively, and in the three month period ended June 30, 2004
those fees were approximately $345,000, $109,000, and $153,000, respectively.
Our net loss increased to approximately $1,648,000 from approximately $1,128,000
during the three month period ended June 30, 2004, and June 30, 2003,
respectively. The increase was primarily attributable to the increases in
research and development costs and general and administrative expenses noted
above.
On July 20, 2004, the Company's board of directors approved a four-year exercise
extension to warrants to purchase 225,000 shares of the Company's common stock
which were originally issued to RADE Management Corporation ("RADE") on July 24,
1998. The expiration dates for these warrants, which have an exercise price of
$6.47 per share, were extended from July 24, 2004 to July 24, 2008. As a result
of these extensions, the Company will record a non-cash charge during the
quarter ending September 30, 2004 of approximately $1,032,000, determined using
the Black-Scholes option pricing model.
-18-
Liquidity and Capital Resources
As of June 30, 2004, cash and cash equivalents, substantially all of which were
invested in a money market mutual fund, were $4,893,322.
We spent approximately $8,000 on equipment purchases during for the three month
period ended June 30, 2004, compared to no equipment expenditures for the same
period in the previous year. No significant purchases of equipment are
anticipated by us during the year ending March 31, 2005.
We periodically receive cash from the exercise of common stock options and
warrants. During the three month period ended June 30, 2004, we received no cash
from the exercise of options. Warrant holders exercised warrants to purchase
6,000 shares of common stock resulting in gross proceeds to us of approximately
$46,000. (See "Changes in Securities and Use of Proceeds - Recent Sales of
Unregistered Securities" below).
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 August 2005, although there
can be no assurance we will not require additional funds.
Through June 30, 2004, we 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 $40,700,000;
o payments from research and testing agreements, foundation grants
and SBIR grants and STTR grants of approximately $12,117,000; and
o the use of stock, options and warrants in lieu of cash compensation.
On July 30, 2004 we closed a secondary public offering of 899,999 shares of
common stock which resulted in proceeds to us of approximately $8,671,490, which
is net of underwriter commissions.
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
restricted funds have been used pursuant to an agreement, dated January 15,
1997, (the "Consortium Agreement"), among us, The University of North Carolina
at Chapel Hill ("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 or pursuant to our agreement with MMV. 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
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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 programs (which may vary as
product candidates are added or abandoned), pre-clinical testing and clinical
trials, achievement of regulatory milestones, counter parties to our contracts
and agreements fulfilling their obligations to us, the timing and cost of
seeking regulatory approvals, the level of resources that we devote to the
engagement or development of manufacturing capabilities, our ability to maintain
existing and to establish new collaborative arrangements with others to provide
funding and services to us 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 come 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 licensing
and research and development agreements with other entities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The exposure of market risk associated with risk-sensitive instruments is not
material, as our operations are conducted primarily in U.S. dollars and we
invest primarily in short-term government obligations and other cash
equivalents. We intend to develop policies and procedures to manage market risk
in the future if and when circumstances require.
Item 4. Controls and Procedures.
Disclosures and Procedures
We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Our 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 our disclosure controls and
procedures, which took place as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive and Chief Financial Officers
believe that these procedures are effective to ensure that we are able to
collect, process and disclose the information we are required to disclose in the
reports we file with the SEC within the required time periods.
Internal Controls
We maintain 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
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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 have been no significant changes during the three months ended June 30,
2004 in such controls or in other factors that could have significantly affected
those controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Internal Controls over Financial Reporting.
We are currently undergoing a comprehensive effort to ensure compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 for our fiscal year ending March
31, 2005. This effort includes internal control documentation and review under
the direction of senior management. During the course of these activities, we
have identified certain internal control issues which management believed needed
to be improved. These control issues are, in large part, the result of our
increased size and need for segregation of duties. The review has not identified
any material weakness in internal control as defined by the Public Company
Accounting and Oversight Board. However, we have made improvements to our
internal controls over financial reporting as a result of our review efforts and
will continue to do so. These improvements include formalization of policies and
procedures, improved segregation of duties, and additional monitoring controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
We refer you to the disclosure in our Annual Report on Form 10-K/A filed with
the SEC on July 20, 2004 for the general background and of prior developments
concerning this matter.
On July 30, 2004, the court issued an Opinion and Order denying the Company's
motion to dismiss. The Company's answer to the plaintiff's complaint is due
August 20, 2004.
Except as noted above and in Part I, Item 3, Legal Proceedings, of our Form
10-K/A filed on July 20, 2004, we are not aware of any pending litigation.
Item 2. Change in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities.
Common Stock.
Option Exercise
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On May 28, 2004, options to purchase 18,517 shares with an exercise price of
$0.4649 per share were exercised on a cashless basis. Based on the fair market
value calculated as of the date of exercise, the option holder received 18,000
shares of common stock.
Conversion of Preferred Stock to Common Stock.
Series A Stock
On May 10, 2004, a holder of Series A Convertible Preferred Stock, $0.01 par
value ("Series A Stock"), converted 400 shares of Series A Stock into 2,264
shares of our common stock.
Series B Stock
No Series B Convertible Preferred Stock, $0.01 par value ("Series B Stock") was
converted into common stock during the three month period ended June 30, 2004.
Series C Stock
On April 15, 2004, a holder of Series C Convertible Preferred Stock, $0.01 par
value ("Series C Stock") converted 3,768 shares of Series C Stock into 21,311
shares of our common stock; on April 16, 2004, a holder of Series C Stock
converted 884 shares of Series C Stock into 5,000 shares of our common stock;
and on May 10, 2004, a holder of Series C Stock converted 400 shares of Series C
Stock into 2,264 shares of our common stock.
Series D Stock
No Series D Convertible Preferred Stock, $0.01 par value ("Series D Stock") was
converted into common stock during the three month period ended June 30, 2004.
Preferred Stock Dividend Payment.
On April 15, 2004, we issued 10,809 shares of common stock as payment of a
dividend earned on outstanding preferred stock to the holders thereof: holders
of Series A Stock earned 2,961 shares of common stock on 80,800 outstanding
shares; holders of Series B Stock earned 974 shares of common stock on 19,925
outstanding shares; holders of Series C Stock earned 3,534 shares of common
stock on 72,304 outstanding shares; and holders of Series D Stock earned 3,340
shares of common stock on 200,000 outstanding shares.
Warrants - Exercises
On April 21, 2004 a warrant holder exercised a warrant to purchase 1,000 shares
of our common stock at an exercise price of $16.00 per share; we received
$16,000. On May 10, 2004, a warrant holder exercised a warrant to purchase 5,000
shares of common stock at an exercise price of $6.00 per share; we received
approximately $30,000. On May 11, 2004, a warrant holder exercised a warrant to
purchase 21,400 shares of our common stock at an exercise price of $16.00 per
share on a cashless basis. Based on the fair market value calculated as of the
date of exercise, the warrant holder received 4,390 shares of common stock.
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Warrants - Issuance and Extension
In connection with a secondary public offering completed on July 30, 2004, the
underwriter (Jefferies & Company, Inc.) was granted a warrant to purchase 80,100
shares of our common stock at an exercise price of $12.81 per share. The warrant
is exercisable for five years from the date of grant and has standard
anti-dilution protection for recapitalizations. This warrant to purchase 80,100
shares is in lieu of the 200,000 share warrant described in the Underwriting
Agreement between us and Jefferies dated July 26, 2004.
On July 20, 2004, the board approved a four-year exercise extension to warrants
originally issued to RADE Management Corporation ("RADE") on July 24, 1998. The
warrants are exercisable for 225,000 shares in the aggregate at $6.47 per share.
The warrants that would have otherwise expired on July 24, 2004 now expire on
July 24, 2008. Since the time of the grant RADE has transferred beneficial
ownership of a portion of the warrants to certain individuals, including Mr.
Sorkin (Director) and Ms. Chan (Officer and Director) who left the Board meeting
during the discussion and for the vote on the extension of the exercise period
of the warrants.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Related Party Transactions
The exercise periods of two warrants, one held by each of Mr. Sorkin and Ms.
Chan, were extended from July 24, 2004 to July 24, 2008. Each warrant represents
the right to purchase 51,923 shares of common stock. (See "Changes in Securities
and Use of Proceeds - Warrant Issuances and Extensions" above).
Item 6. Exhibits, and Reports on Form 8-K.
Exhibits
See Exhibit Index.
Reports On Form 8-K
None.
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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.
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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: August 9, 2004 By: /s/ T. Stephen Thompson
-----------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: August 9, 2004 By: /s/ Gary C. Parks
-----------------------------------------
Gary C. Parks
Treasurer, Secretary and Chief Financial
Officer (Principal Financial and
Accounting Officer)