UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended December 31, 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.
------------------------------------------------------------
(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 [X] No [ ]
As of February 8, 2005, 10,996,118 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.
Table of Contents
Page No.
--------
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.........................................21
Item 3. Quantitative and Qualitative Disclosures about Market Risk........28
Item 4. Controls and Procedures...........................................28
PART II. OTHER INFORMATION................................................29
Item 1. Legal Proceedings.................................................29
Item 2. Change in Securities and Use of Proceeds..........................30
Item 3. Defaults Upon Senior Securities...................................31
Item 4. Submission of Matters to a Vote of Security Holders...............31
Item 5. Other Information.................................................32
Item 6. Exhibits, and Reports on Form 8-K.................................32
Exhibit Index.............................................................33
SIGNATURES................................................................34
i
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
--------------------------------------------
-1-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
December 31, March 31,
ASSETS 2004 2004
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 9,919,011 $ 6,745,283
Restricted funds on deposit 1,552,048 2,154,928
Other current assets 157,068 59,979
------------- -------------
Total current assets 11,628,127 8,960,190
PROPERTY AND EQUIPMENT - Net 3,613,966 3,610,214
OTHER ASSETS 16,108 15,477
------------- -------------
TOTAL $ 15,258,201 $ 12,585,881
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,090,842 $ 970,308
Accrued expenses 316,517 22,382
Deferred revenue 1,362,673 1,831,093
------------- -------------
Total current liabilities 2,770,032 2,823,783
DEFERRED RENTAL OBLIGATION 9,638 14,413
------------- -------------
Total liabilities 2,779,670 2,838,196
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,080,000 shares
authorized and unissued as of December 31, 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, 72,400
and 80,800 shares outstanding as of December 31, 2004 and
March 31, 2004, respectively; aggregate liquidation
preference of $1,832,672 as of December 31, 2004 1,832,672 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 December 31, 2004 and March 31, 2004;
aggregate liquidation preference of $506,267 as of December 31, 2004 506,267 516,093
Series C convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 160,000 shares authorized, 64,452 and 72,304 shares
outstanding as of December 31, 2004 and March 31, 2004, respectively;
aggregate liquidation preference of $1,638,873 as of December 31, 2004 1,638,873 1,874,186
Series D convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 200,000 shares authorized, 197,480 and 200,000
shares outstanding as of December 31, 2004 and March 31, 2004;
aggregate liquidation preference of $5,000,300 as of December 31, 2004 5,000,300 5,056,712
Common stock, par value $0.01 per share, 100,000,000 shares
authorized, 10,972,118 and 9,835,286 shares issued and outstanding
as of December 31, 2004 and March 31, 2004, respectively 109,723 98,353
Additional paid-in capital 73,277,677 58,666,489
Deficit accumulated during the developmental stage (69,886,981) (58,539,398)
------------- -------------
Total stockholders' equity 12,478,531 9,747,685
------------- -------------
TOTAL $ 15,258,201 $ 12,585,881
============= =============
See notes to condensed consolidated financial statements
-2-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Nine Months Ended (Inception) to
December 31, December 31, December 31,
2004 2003 2004 2003 2004
-------------------------------- --------------------------------- --------------
REVENUES $ 325,160 $ 654,370 $ 2,887,406 $ 1,797,726 $ 14,146,408
--------------- ------------- -------------- --------------- --------------
EXPENSES:
Research and development 1,441,469 814,490 4,714,895 2,325,668 39,079,163
General and administrative 5,270,578 2,580,294 9,162,744 10,183,954 42,224,298
Equity in loss of joint venture 135,002
--------------- ------------- -------------- --------------- --------------
Total expenses 6,712,047 3,394,784 13,877,639 12,509,622 81,438,463
--------------- ------------- -------------- --------------- --------------
LOSS FROM OPERATIONS (6,386,887) (2,740,414) (10,990,233) (10,711,896) (67,292,055)
--------------- ------------- -------------- --------------- --------------
OTHER INCOME (EXPENSE):
Interest income 48,102 5,913 84,214 11,252 682,206
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 48,102 5,913 84,214 11,252 392,820
--------------- ------------- -------------- --------------- --------------
NET LOSS (6,338,785) (2,734,501) (10,906,019) (10,700,644) (66,899,235)
CONVERTIBLE PREFERRED STOCK DIVIDENDS
AND CONVERTIBLE PREFERRED STOCK
PREMIUM DEEMED DIVIDENDS (144,968) (130,700) (441,564) (1,418,491) (5,357,645)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS 2,369,899
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (6,483,753) $ (2,865,201) $ (11,347,583) $ (12,119,135) $ (69,886,981)
=============== ============= ============== =============== ==============
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss $ (0.59) $ (0.30) $ (1.04) $ (1.23)
Convertible preferred stock dividends
and convertible preferred stock
premium deemed dividends (0.01) (0.01) (0.04) (0.16)
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.60) $ (0.31) $ (1.08) $ (1.39)
=============== ============= ============== ===============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 10,893,365 9,330,360 10,458,073 8,746,914
=============== ============= ============== ===============
See notes to condensed consolidated financial statements
-3-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Nine Months Ended (Inception) to
December 31, December 31, December 31,
2004 2003 2004 2003 2004
---------------------------- ---------------------------- --------------
OPERATING ACTIVITIES:
Net loss $ (6,338,785) $ (2,734,501) $(10,906,019) $(10,700,644) $(66,899,235)
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 3,517,468 1,259,765 4,863,047 6,955,339 27,224,374
Depreciation and amortization of
property and equipment 33,486 35,466 95,536 85,574 847,977
Deferred rental obligation (1,592) (1,592) (4,776) (4,775) 9,637
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 (413,021) (219,628) 602,880 (78,521) (1,552,048)
Other current assets 82,487 (6,362) (97,089) 112,744 (157,068)
Other assets (631) (631) 7,702 (16,108)
Accounts payable (28,585) (24,236) 120,534 191,139 1,418,377
Accrued expenses 237,943 834 294,135 22 979,530
Deferred revenue 1,019,073 13,630 (468,420) (104,524) 1,362,673
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (1,892,157) (1,676,624) (5,500,803) (3,535,944) (37,937,209)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (39,028) (405,872) (99,287) (410,079) (1,435,013)
Advances to joint venture (135,002)
Proceeds from maturities of
investment securities 1,800,527
Purchases of investment securities (1,803,469)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (39,028) (405,872) (99,287) (410,079) (1,572,957)
------------ ------------ ------------ ------------ ------------
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 of dividends on convertible
preferred stock and for fractional
shares of common stock resulting from
the conversions of convertible preferred stock (430) (1,242) (1,790) (1,450) (3,523)
Net proceeds from issuance of common stock 335,940 530,431 8,775,608 4,357,666 29,577,649
Deferred offering costs (21,239) (181,239)
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 335,510 507,950 8,773,818 7,020,450 49,429,177
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,595,675) (1,574,546) 3,173,728 3,074,427 9,919,011
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,514,686 4,761,013 6,745,283 112,040 --
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,919,011 $ 3,186,467 $ 9,919,011 $ 3,186,467 $ 9,919,011
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
-4-
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 SELECTED 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
licensing and exclusive commercialization rights to a dicationic pharmaceutical
platform and is developing drugs intended for commercial use based on that
platform. The Company's development programs include treatments for malaria,
fungal infections, tuberculosis, diabetes, Pneumocystis pneumonia ("Pneumocystis
pneumonia" or "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, 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 its 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 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.
-5-
Since inception, the Company has incurred accumulated net losses of
approximately $66,899,000. 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 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 commercialize 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 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 or by issuance of debt.
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 generate sufficient revenues for 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 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 with UNC and/or those from a malaria drug development
agreement with The Medicines for Malaria Venture ("MMV").
-6-
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 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 December 31, 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 December 31, 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.
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 grants 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 realized net deferred income tax assets
-7-
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 are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding. Diluted net income per
share, when applicable, is computed by dividing net income attributable to
common stockholders by 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 and nine month periods ended December 31, 2004 and
December 31, 2003, as the Company's outstanding common stock options and
warrants and conversion features of Series A, B, C, and D Convertible Preferred
Stock were anti-dilutive.
Comprehensive Loss - There were no differences between comprehensive loss and
net loss for the three and nine month periods ended December 31, 2004 and 2003,
respectively.
New Accounting Pronouncements - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment" ("SFAS
123R"), which requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of the compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R is effective for all
interim or annual periods beginning after June 15, 2005. Early adoption is
encouraged and retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. The Company has not yet adopted this pronouncement and is
currently evaluating the impact that the adoption of SFAS 123R will have on its
consolidated financial position, results of operations and cash flows.
3. EXCHANGE OF LAND USE RIGHTS
On November 28, 2003, the Company entered into a share purchase agreement and
deed of indemnity (the "Share Purchase Agreement") as related to the purchase of
shares of Super Insight Limited ("Super Insight") and an allonge ("Allonge") to
the Share Purchase Agreement as related to the purchase of shares of Super
Insight and Immtech Hong Kong Limited with Mr. Chan Kon Fung ("Mr. Chan"),
Lenton, Super Insight and Immtech Hong Kong Limited. Pursuant to the terms of
the Share Purchase Agreement and the Allonge, Immtech purchased (i) from Mr.
Chan 100% of Super Insight and its wholly-owned subsidiary, Immtech Life Science
Limited ("Immtech Life Science") and (ii) from Lenton 100% of Lenton's interest
in Immtech Hong Kong. As payment for the shares of Super Insight and Immtech
Hong Kong, Immtech transferred to Mr. Chan Immtech's 80% interest in Lenton and
paid $400,000 in cash.
-8-
Immtech Life Science has land-use rights through May 2051 for two floors of a
newly-constructed building located in the Futian Free Trade Zone, Shenzen, in
the People's Republic of China.
This transaction resulted in the surrender of the Company's ownership interest
in Lenton and the consolidation of the Company's wholly-owned subsidiary, Super
Insight. The primary assets of both Lenton and Super Insight were land-use
rights in China. This transaction did not impact the Company's statement of
operations.
4. 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 are
$22,672 and $55,250 of accrued preferred stock dividends as of December 31, 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 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 anti-dilution adjustments,
as defined in the Series A Certificate of Designation. On October 15, 2004, the
Company issued 6,026 shares of common stock and paid $136 in lieu of fractional
common shares as dividends on the preferred shares. On October 15, 2003, the
Company issued 4,010 shares of common stock and paid $296 in lieu of fractional
common shares as dividends on the preferred shares. 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. There were no conversions of
Series A Convertible Preferred Stock during the three month period ended
December 31, 2004. During the three month period ended December 31, 2003,
certain preferred stockholders converted 17,000 shares of Series A Convertible
Preferred Stock, including accrued dividends, for 96,238 shares of common stock.
During the nine month periods ended December 31, 2004 and 2003, certain
preferred stockholders converted 8,400 and 62,000 shares of Series A Convertible
Preferred Stock, including accrued dividends for 47,942 and 353,667 shares of
common stock, respectively.
The Company may at any time 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-
$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 A. The Conversion Price is subject to
certain anti-dilution adjustments, as defined in the Series A Certificate of
Designation.
The Company may at any time, upon 30 days' 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 (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 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 are $8,142 and $17,968 of accrued preferred stock dividends as of
December 31, 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
anti-dilution adjustments, as defined in the Series B Certificate of
Designation. On October 15, 2004, the Company issued 2,213 shares of common
stock and paid $34 in lieu of fractional common shares as dividends on the
preferred shares. On October 15, 2003, the Company issued 1,130 shares of common
stock and paid $139 in lieu of fractional common shares as dividends on the
preferred shares. 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. There were no conversions of Series B Convertible Preferred
Stock during the three month and nine month periods ended December 31, 2004.
During the three month period ended December 31, 2003, certain preferred
stockholders converted 800 shares of Series B Convertible Preferred Stock,
including accrued dividends, for 5,002 shares of common stock. During the nine
month period ended December 31, 2003, certain preferred stockholders converted
36,800 shares of Series B Convertible Preferred Stock, including accrued
dividends, for 232,851 shares of common stock.
The Company may at any time 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
-10-
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 anti-dilution adjustments, as defined in the Series B Certificate of
Designation.
The Company may at any time, upon 30 days' 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 are
$27,573 and $66,586 of accrued preferred stock dividends as of December 31, 2004
and March 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 anti-dilution adjustments,
as defined in the Series C Certificate of Designation. On October 15, 2004, the
Company issued 7,161 shares of common stock and paid $86 in lieu of fractional
common shares as dividends on the preferred shares. On October 15, 2003, the
Company issued 4,893 shares of common stock and paid $594 in lieu of fractional
common shares as dividends on the preferred shares. 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. There were no conversions of
Series C Convertible Preferred Stock during the three month period ended
December 31, 2004. During the nine month period ended December 31, 2004, certain
preferred stockholders converted 7,852 shares of Series C Convertible Preferred
Stock, including accrued dividends, for 44,611 shares of common stock. During
the three and nine month periods ended December 31, 2003, certain preferred
stockholders
-11-
converted 28,080 shares of Series C Convertible Preferred Stock, including
accrued dividends, for 159,018 shares of common stock.
During the nine month period ended December 31, 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 nine month period ended December 31, 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 anti-dilution adjustments, as defined in the Series C Certificate of
Designation.
The Company may at any time, upon 30 days' 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 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 are
$63,300 and $56,712 of accrued preferred stock dividends as of December 31, 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
-12-
dividends (the "Liquidation Price"), by a $9.00 conversion price (the
"Conversion Price D"), subject to certain anti-dilution adjustments, as defined
in the Series D Certificate of Designation. On October 15, 2004, the Company
issued 16,669 shares of common stock and paid $173 in lieu of fractional common
shares as dividends on the preferred shares. 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. During the three and nine month
periods ended December 31, 2004, certain preferred stockholders converted 2,520
shares of Series D Convertible Preferred Stock, including accrued dividends, for
7,012 shares of common stock.
The Company may at any time require that any or all outstanding shares of Series
D Convertible Preferred Stock be converted into shares of 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 our 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 anti-dilution adjustments, as defined in the Series D Certificate of
Designation. The Series D 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 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, ratably over the term in monthly
installments, 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 were issued, and the related expense
was recognized, on a pro-rata basis over the contract period. During the three
month period ended December 31, 2003, 25,000 common shares were issued and a
general and administrative expense of $358,750 was recorded based on the market
value of the common stock on the date of issuance. During the nine month period
ended December 31, 2003, 75,000 common shares were issued and a general and
administrative expense of $831,669 was recorded based on the market value of the
common shares on the date of issuance. Also, during the three month period ended
December 31, 2003, warrants to purchase 87,500 shares of common stock were
issued and a general and administrative expense of $588,355 was recorded based
on the value of the warrants using the Black-Scholes option valuation model.
During the nine month period ended December 31, 2003, warrants to purchase
262,500 shares of common stock were issued and a general and
-13-
administrative expense of $1,468,835 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 the American
Stock Exchange on August 11, 2003, the Company issued to Fulcrum 100,000 shares
of common stock, resulting in the recognition of general and administrative
expenses of $1,400,000 during the nine month period ended December 31, 2003,
based on the market value of the Company's 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 the Company to raise equity financing. As consideration for the services
performed under the agreement, the Company issued to Wyndham on June 20, 2003,
220,000 shares of common stock valued at $1,397,000 based on the market value of
the Company's common stock on the date of issuance. That amount was recorded as
offering costs during the nine month period ended December 31, 2003. There were
no common shares issued or expenses incurred with respect to this agreement
during the three month period ended December 31, 2003 or the three and nine
month periods ended December 31, 2004.
In September 2003, the Company entered into a second Finder's Agreement with
Wyndham to identify potential strategic partners and assist the Company in
private placements of debt or equity securities with proceeds to the Company of
not less than $20 million through December 2003. The Company advanced to Wyndham
a refundable retainer fee of $160,000 against a cash fee for Wyndham's services
equal to 8.0% of funds received by the Company from investors introduced by
Wyndham. The private placements contemplated in September 2003 were not
completed by December 2003 or at all. The Company requested but Wyndham did not
return the retainer fee. The Company has written off the retainer fee as
uncollectible.
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 per share.
These warrants are fully vested and have an exercise period of five years from
the date of grant. During the nine month period ended December 31, 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 Mr. 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 his 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 during the nine month period ended December 31, 2003 based on the
market value of the common stock on the date of issuance.
-14-
On July 30, 2004 the Company completed a secondary public offering of its common
stock wherein the Company sold 899,999 shares of common stock resulting in net
proceeds to the Company of approximately $8,384,000. The shares were sold to the
public at $10.25 per share.
Common Stock Options - On October 12, 2000, the Company's stockholders ratified
the board's approval of the Company's 2000 Stock Incentive Plan pursuant to
which the Company's board of directors are empowered to grant equity incentives
to certain employees and other nonemployees who have been engaged to assist the
Company in various research and administrative capacities. The 2000 Stock
Incentive Plan provided for the issuance of up to 350,000 shares of common stock
in the form of incentive options, non-qualified stock options and common stock
awards. At the stockholders' meeting held November 15, 2002, the stockholders
approved the first amendment to the 2000 Stock Incentive Plan which increased
the number of shares of common stock reserved for issuance thereunder from
350,000 shares to 1,100,000 shares. At the stockholders' meeting held November
12, 2004, the stockholders approved the second amendment to the 2000 Stock
Incentive Plan which increased the number of shares of common stock reserved for
issuance from 1,100,000 shares to 2,200,000 shares. Options granted under the
2000 Stock Incentive Plan that expire are available to be reissued. Incentive
stock options may not be granted with exercise prices less than fair market
value on the date of grant.
The Company has granted common stock options to individuals who have contributed
to the Company in various capacities. The options contain various provisions
regarding vesting periods and expiration dates. The options generally vest over
periods ranging from zero to four years and generally expire after five or ten
years. During the three month period ended December 31, 2004, the Company issued
165,000 options to purchase shares of common stock to employees and directors.
During the three month period ended December 31, 2003, the Company issued
164,500 options to purchase shares of common stock to employees and directors.
During the three and nine month periods ended December 31, 2003, 3,500 options
expired and were available to be reissued. As of December 31, 2004, there were
1,098,250 shares available for grant.
During the three month periods ended December 31, 2004 and 2003, the Company did
not issue any options to purchase shares of Company common stock to nonemployees
other than options issued to Company directors. However, during the three month
periods ended December 31, 2004 and 2003, the Company recognized expenses of
approximately $19,000 and $66,000, respectively, related to certain options
issued during prior years which vest over a four year period. During the nine
month periods ended December 31, 2004 and 2003, the Company issued options to
purchase 20,000 and 22,000 shares of common stock, respectively, to nonemployees
and recognized research and development expenses of $322,000 and $201,000,
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.
During the three month periods ended December 31, 2004 and 2003, there were no
options exercised. During the nine month periods ended December 31, 2004 and
2003, there were options exercised to purchase 18,000 and 9,218 shares of common
stock, respectively.
-15-
Since inception, no stock awards have been granted under the Company's 2000
Stock Incentive Plan.
Warrants - 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. The Company has recorded a non-cash charge during the
nine month period ended December 31, 2004 of $1,032,000, determined using the
Black-Scholes option pricing model. Additionally, the Company's board of
directors approved a four-year exercise extension to warrants to purchase
750,000 shares of the Company's common stock which were originally issued to
RADE on October 12, 1998. The expiration dates for these warrants, which have an
exercise price of $6.47 per share, were extended from October 12, 2004 to
October 12, 2008. The Company has recorded a non-cash charge during the three
month period ended December 31, 2004 of $3,498,000, determined using the
Black-Scholes option pricing model.
In connection with the secondary public offering completed on July 30, 2004, the
underwriter (Jeffries & 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.
During the three month periods ended December 31, 2004 and 2003, warrants to
purchase 56,000 and 83,350 shares of common stock were exercised, resulting in
proceeds to the Company of $336,000 and $530,000, respectively. During the nine
month periods ended December 31, 2004 and 2003, warrants to purchase 76,390 and
539,350 shares of common stock were exercised, resulting in proceeds to the
Company of $442,000 and $4,354,000, respectively.
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.
During the three month and nine month periods ended December 31, 2004, the
Company issued 165,000 and 322,000 options, respectively, to purchase shares of
common stock to employees and directors. During the three month and nine month
periods ended December 31, 2003, the Company issued 164,500 options to purchase
shares of common stock to employees and directors. If the Company had recognized
compensation expense for the current and historical options granted during the
three and nine month periods ended December 31, 2004 and 2003, 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:
-16-
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---------------------------- ----------------------------
Net loss attributable to common shareholders -
as reported $ (6,483,753) $ (2,865,201) $(11,347,583) $(12,119,135)
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 (904,251) (359,229) (2,477,995) (553,180)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders -
pro forma $ (7,388,004) $ (3,224,430) $(13,825,578) $(12,672,315)
============ ============ ============ ============
Basic and diluted net loss per share attributable
to common stockholders - as reported $ (0.60) $ (0.31) $ (1.08) $ (1.39)
============ ============ ============ ============
Basic and diluted net loss per share attributable
to common stockholders - pro forma $ (0.68) $ (0.35) $ (1.32) $ (1.45)
============ ============ ============ ============
5. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenues under various collaborative research agreements.
Under the terms of these arrangements, the Company has generally 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 initially acquired its rights to the platform technology and
dications developed by a consortium of universities consisting of 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").
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
-17-
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 completion 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 negotiations 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. Also pursuant to the Consortium Agreement, Pharm-Eco agreed
to transfer to the Company the worldwide exclusive license to use, manufacture,
have manufactured, promote, sell, distribute or otherwise dispose of any and all
products based directly or indirectly on dications developed by the Scientific
Consortium on or prior to January 15, 1997 and previously licensed (together
with related technology and patents) to Pharm-Eco. In March 2001, Pharm-Eco
assigned the license to us. The Consortium Agreement provides us with rights to
the Scientific Consortium's library of over 2,000 well-defined aromatic cationic
compounds/dications and to future technology to be designed by the Scientific
Consortium.
In July 2004, the Company was awarded an SBIR grant from the NIH of $107,000 as
a grant to research on "Aromatic Dication Prodrugs for CNS Trypanosomiasis".
During the three month period ended December 31, 2004, the Company recognized
revenues of approximately $63,000 and expensed payments of approximately
$18,000. During the nine month period ended
-18-
December 31, 2004, the Company recognized revenues of approximately $63,000 and
expensed payments of approximately $63,000. Approximately $33,000 of the grant
was paid to UNC and certain other Scientific Consortium members for contracted
research related to the grant.
During the three month and nine month periods ended December 31, 2004, the
Company expensed approximately $172,000 and $476,000, respectively of other
payments to UNC and other Scientific Consortium members for patent related costs
and other contracted research. During the three month and nine month periods
ended December 31, 2003, the Company expensed approximately $177,000 and
$404,000, respectively, of other payments to UNC and other Scientific Consortium
members for patent related costs and other contracted research. Total payments
expensed to UNC and other Scientific Consortium members were approximately
$190,000 and $509,000 during the three month and nine month periods ended
December 31, 2004, respectively. Total payments expensed to UNC and other
Scientific Consortium members were approximately $177,000 and $404,000, during
the three month and nine month periods ended December 31, 2003, respectively.
Included in accounts payable as of December 31, 2004 and March 31, 2004, were
approximately $107,000 and $132,000, respectively, due to UNC and other
Scientific Consortium members.
In November 2000, The Bill & Melinda Gates Foundation (the "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 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 Gates Foundation awarded a $2,713,124 supplemental grant to
UNC for the expansion of phase IIB/III human clinical trials for treatment of
human Trypanosomiasis (African sleeping sickness) and improved manufacturing
processes. The Company is to receive, pursuant to the clinical research
subcontract with UNC, $2,466,475 of the supplemental grant bringing the total
clinical research subcontract funding available to the Company to $12,266,475.
Grant funds paid in advance of the Company's delivery of services are treated as
restricted funds, must be segregated from other funds and used only for the
purposes specified. Through the year ended March 31, 2004 the Company received
$8,705,000 under the clinical research subcontract and during the three and nine
month periods ended December 31, 2004, the Company has received no additional
funds. Approximately $2,335,000 and $1,614,000 were utilized for clinical and
research purposes conducted and expensed during the nine month periods ended
December 31, 2004 and 2003, respectively. Approximately $769,000 and $471,000
were utilized for clinical and research purposes conducted and expensed during
the three month periods ended December 31, 2004 and 2003, respectively. The
Company recognized revenues of approximately $8,705,000 from inception of this
grant through December 31, 2004 for services performed under this agreement,
including approximately $1,465,000 and $1,614,000 during the nine month periods
ended December 31, 2004 and 2003, respectively, and none and $471,000 during the
three month periods ended December 31, 2004 and 2003, respectively.
On November 26, 2003, the Company entered into a testing agreement ("Malaria
Testing Agreement") with The Medicines for Malaria Venture ("MMV"), a foundation
established in Switzerland, and UNC, pursuant to which the Company, with the
support of MMV and UNC, is
-19-
conducting 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 Malaria Testing Agreement, MMV has committed to advance
funds to Immtech 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 the Malaria Testing Agreement is for the performance
of specific research and is not subject to maximum funding amounts. The term of
the funding 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 MMV's funding, the Company is required, when selling malaria drugs
derived from this research into "malaria endemic countries," as defined, to sell
such drugs at affordable prices. As used in the Malaria Testing Agreement, an
affordable price means a price 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. There are no 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 Malaria
Testing Agreement and amounts funded under a related discovery agreement between
MMV and UNC is refunded at face value to MMV.
MMV has agreed to fund the forecasted amount based on progress achieved. Through
the period ended December 31, 2004, the Company received approximately
$3,024,000 and during the three and nine months ended December 31, 2004, the
Company received approximately $1,281,000 and $2,356,000, respectively. The
Company recognized revenues of approximately $262,000 and $1,359,000 during the
three and nine month periods ended December 31, 2004, respectively, for expenses
incurred related to activities within the scope of the Malaria Testing
Agreement. The Company recognized revenues of approximately $184,000 during the
three and nine month periods ended December 31, 2003. At December 31, 2004, the
Company recorded approximately $1,363,000 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.
* * * * * *
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
The following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes thereto included in Part I,
Item 1 of this quarterly report on Form 10-Q.
Forward-Looking Statements
- --------------------------
Certain statements contained in this report and in the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact may be deemed to be forward-looking statements.
Forward-looking statements frequently, but not always, use the words "intends,"
"plans," "believes," "anticipates" or "expects" or similar words and may include
statements concerning 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 report and in our annual report on Form 10-K, as
amended, 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 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, (vi) risks relating to
requirements for approvals by governmental agencies, such as the U.S. Food &
Drug Administration ("FDA") and the FDA's foreign counterparts, 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 not 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.
General
- -------
Our current revenues are primarily derived from ventures with our research
partners, research and testing agreements and grants, related to the development
and commercialization of oral treatments for diseases such as malaria,
Pneumocystis pneumonia, fungal infections, tuberculosis and hepatitis, and
tropical diseases such as African sleeping sickness and leishmaniasis. The
-21-
Company has worldwide, exclusive rights to commercialize a dicationic
pharmaceutical platform from which a pipeline of products may be developed to
target large, global markets.
Program Updates
- ---------------
Phase 1 Dose-Escalating Trial. On October 14, 2004, we announced the successful
completion of a supplemental human Phase I pharmacokinetic (the study of the
amount, or concentration, of a drug in the blood) study of DB289. The trial was
designed to assess the safety and pharmacokinetics of once- or twice-daily oral
dosing of 200 mg., 400 mg. and 600 mg. of DB289, over a three-day period, in a
75 subject population that included African, Asian and Caucasian volunteers. The
study showed that, at all dosage levels tested, sufficient concentrations of the
drug were measured for a period thought to be effective in the treatment of
malaria. The goal of the study was to assess whether DB289 could be dosed
once-daily for 3 days, a frequency and duration of therapy that will
subsequently be studied in the treatment of malaria.
Completion of Patient Enrollment in Pneumocystis Pneumonia Trial. On October 27,
2004 we announced the completion of enrollment of our Phase II human trial of
DB289 for treatment of Pneumocystis pneumonia ("Pneumocystis pneumonia" or
"PcP") in Peru. All of the patients were infected with HIV and had been
diagnosed with AIDS, had acute PcP and had failed standard therapy. Patients
were treated with DB289 100 mg. twice daily for 21 days. Preliminary results
indicated that PcP patients treated with DB289 returned to normal lung function
during the trial period which included a three-month post-treatment follow-up
examination. DB289 was well tolerated, with no significant adverse events
related to the administration of DB289.
Conclusion of Phase IIb Extended Dose Regimen African Sleeping Sickness Trial.
On November 9, 2004, we announced the successful completion of enrollment of
thirty patients in an extended dose regimen of DB289 for the treatment of
early-stage African sleeping sickness conducted at two sites in the Democratic
Republic of Congo. In the open label trial, the patients were given DB289 100 mg
twice daily orally for ten days. All thirty patients cleared the African
sleeping sickness parasite at the end of the treatment period and remained
disease free at the 3-month follow-up, which was the primary endpoint for the
trial. No significant adverse events were reported. Medical investigators will
continue to monitor the patients at 6, 12, 18 and 24 month follow-up evaluations
to check for any recurrence of the disease. These results support the use of the
10 day regimen of DB289 in the randomized, controlled Phase III pivotal trial of
DB289 vs pentamidine (the current standard therapy for early stage patients)
scheduled in multiple sites in Angola, southern Sudan, and the Democratic
Republic of Congo.
Commencement of DB289 Formulation Trial. On January 24, 2005, we announced the
commencement of a human Phase I trial to compare the current capsule formulation
with two new tablet formulations of DB289. The study in progress in Florida in
42 healthy volunteers will test the consistency of absorption of DB289 into the
blood of each of the three formulations and any differences in absorption
between the capsule and tablet formulations. Each volunteer will take one 100
mg. dose of each formulation, in random order, with successive doses after a
seven day interval. The tablets are lower in cost to manufacture and are
expected to be more stable and easier to ship, store and dispense in tropical
climates with high temperature and humidity.
-22-
Results of Operations
- ---------------------
With the exception of certain research funding agreements and grants, we have
not generated revenue from operations. For the period from inception, October
15, 1984, to December 31, 2004, we incurred cumulative net losses of
approximately $66,899,000. 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 pursuant to research funding agreement and certain grants
from The University of North Carolina at Chapel Hill ("UNC") and The
Medicines for Malaria Venture ("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;
o collaborative or other arrangements with pharmaceutical or
biotechnology companies; and
o the sale of equity securities or borrowed funds.
The timing and amounts of research funding and grant 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 December 31, 2004 Compared with the Three Month
Period Ended December 31, 2003.
Revenues under collaborative research and development agreements were
approximately $325,000 and $654,000 for the three month periods ended December
31, 2004 and December 31, 2003, respectively. For the three month period ended
December 31, 2004, there were no revenues recognized related to a clinical
research subcontract between us and UNC, compared to $470,000 for the three
month period ended December 31, 2003. The clinical research subcontract relates
to a grant from The Bill & Melinda Gates Foundation ("Gates Foundation") to UNC
to develop new drugs to treat trypanosomiasis (African sleeping sickness) and
leishmaniasis. This program was initiated in March 2001. For the three month
period ended December 31, 2004, there were revenues recognized of approximately
$262,000 related to the testing agreement with MMV, compared to revenues of
$184,000 for the period ended December 31, 2003. The MMV testing agreement was
effective as of November 26, 2003. For the three month period ended December 31,
2004, there were revenues recognized of approximately $63,000 relating to an
SBIR grant, compared to no revenues for the three month period ended December
31, 2003. Research and development, and grant revenue is recognized as earned
when the related services or tasks are completed, according to Company
estimates, under the terms of the agreements. Research and development and grant
funds received prior to completion of the related services or tasks are recorded
as deferred revenues.
-23-
Research and development expenses increased to approximately $1,441,000 from
approximately $814,000 for the three month periods ended December 31, 2004 and
December 31, 2003, respectively. Expenses related to the MMV testing agreement
increased from $182,000 in the three month period ended December 31, 2003 to
approximately $261,000 in the three month period ended December 31, 2004.
Expenses relating to the clinical research subcontract with UNC increased from
approximately $470,000 in the three month period ended December 31, 2003 to
approximately $769,000 for the three month period ended December 31, 2004. Other
pre-clinical and clinical trial expenses for the three month period ended
December 31, 2004 increased approximately $248,000 from the corresponding three
month period in 2003.
General and administrative expenses increased for the three month period ended
December 31, 2004 to approximately $5,271,000 from approximately $2,580,000 for
the corresponding three month period ended December 31, 2003. The increase was
primarily due to non-cash expenses related to stock and warrant issuances: (1)
for the period ended December 31, 2004, approximately $3,498,000 was recorded
for the extension of the exercise term of warrants to purchase 750,000 shares of
common stock originally issued to RADE Management, compared to (2) for the
period ended December 31, 2003 (i) approximately $947,000 was recorded for the
vesting of 25,000 shares of a 100,000 share issuance of common stock and the
vesting of 87,500 shares of warrants to purchase 350,000 shares of common stock,
each issued to Fulcrum Holdings of Australia, Inc. relating to the agreements
signed March 21, 2003 and (ii) approximately $247,000 relating to the vesting of
warrants to purchase 20,000 shares of common stock resulting from the attainment
of certain stock price milestones on warrants issued to Pilot Capital Group, LLC
(f/k/a The Gabriele Group, LLC), on July 31, 2002. Legal fees were relatively
unchanged from approximately $502,000 during the three month period ended
December 31, 2003 and approximately $504,000 for the three month period ended
December 31, 2004. Each of accounting and patent fees decreased from
approximately $87,000 and $184,000 for the three month period ended December 31,
2003, to $35,000 and $88,000, respectively, for the same period ended December
31, 2004. Contract services and public relations fees increased from
approximately $81,000 to approximately $347,000 during the three month periods
ended December 31, 2003 and December 31, 2004, respectively. Primarily due to
increased staffing, payroll increased approximately $153,000 for the three month
period ended December 31, 2003 compared to the corresponding period in 2003;
business travel and insurance expenses also increased approximately $137,000
over the same periods.
Interest income for the three month period ended December 31, 2004 was
approximately $48,000. Interest income for the three month period ended December
31, 2003 was approximately $5,900. The increase in interest income is due to an
increase in available funds invested and an increase in the interest rate paid
on invested funds. We had no interest expense during the three month period
ended December 31, 2004 and December 31, 2003.
We incurred a net loss of approximately $6,339,000 for the three month period
ended December 31, 2004 as compared with a net loss of approximately $2,735,000
for the three month period ended December 31, 2003. The increase in net loss was
due primarily to an increase in general and administrative expenses which was
predominately attributable to non-cash expenses related to stock and warrant
issuances for services.
-24-
Nine Month Period Ended December 31, 2004 Compared with the Nine Month Period
ended December 31, 2003.
Revenues under collaborative research and development agreements were
approximately $2,887,000 and $1,798,000 for the nine month periods ended
December 31, 2004 and December 31, 2003, respectively. For the nine month period
ended December 31, 2004 there were revenues recognized of approximately
$1,465,000 relating to the clinical research subcontract with UNC, and
approximately $1,359,000 relating to the testing agreement with MMV, while for
the nine month period ended December 31, 2003, there were revenues recognized of
approximately $1,614,000 relating to the clinical research subcontract and
approximately $184,000 relating to the MMV testing agreement. Additionally, for
the nine month period ended December 31, 2004, there were revenues recognized of
approximately $63,000 relating to an SBIR grant. There were no corresponding
SBIR grant revenues during the nine month period ended December 31, 2003.
Research and development expenses increased to approximately $4,715,000 during
the nine month period ended December 31, 2004 from approximately $2,326,000 in
the nine month period ended December 31, 2003. Expenses relating to the clinical
research subcontract with UNC increased from approximately $1,601,000 in the
nine month period ended December 31, 2003 to approximately $2,331,000 for the
nine month period ended December 31, 2004. Expenses related to the MMV testing
agreement for the nine month period ended December 31, 2004 were approximately
$1,354,000, as compared to $182,000 for the same period in 2003. Expenses
relating to pre-clinical and clinical trial costs related primarily to
Pneumocystis pneumonia increased from approximately $69,000 in the nine month
period ended December 31, 2003 to approximately $138,000 in the nine month
period ended December 31, 2004. Pneumocystis pneumonia trial expenses were
related primarily to Phase II clinical trial patient enrollment and
corresponding sample analysis costs. Other pre-clinical and clinical trial
expenses for the nine month period ended December 31, 2004 increased
approximately $418,000 from the corresponding nine month period in 2003.
General and administrative expenses decreased during the nine month period ended
December 31, 2004 to approximately $9,163,000 from approximately $10,184,000 for
the nine month period ended December 31, 2003. The decrease in general and
administrative expenses was primarily due to a decrease in non-cash expenses for
common stock, stock options and warrant issuances in the nine month period ended
December 31, 2004 of approximately $4,773,000 as compared to non-cash stock
issuance in the nine month period ended December 31, 2003 of approximately
$6,754,000. Non-cash expenses (1) for the nine month period ended December 31,
2004 included (i) approximately $4,530,000 for the extension of the exercise
term of warrants to purchase 975,000 shares of common stock originally issued to
RADE management, (ii) approximately $233,000 for the issuance of options to
purchase 20,000 shares of common stock issued to an individual to assist in
developing relationships with Tsinghua University in China, and (iii)
approximately $10,000 relating to the cashless exercise of warrants issued to
underwriters in connection with the Company's initial public offering, as
compared to (2) for the nine month period ended December 31, 2003 (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 $63,000 for the issuance of 10,000 shares of common
stock issued to
-25-
an individual 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, (iv) approximately $2,300,000 for the vested
portion of 75,000 shares of common stock and the vested portion of warrants to
purchase 262,500 shares of common stock issued to Fulcrum during the period
based on agreements signed March 21, 2003, and (v) approximately $247,000
resulting from attainment of certain stock price milestones which caused the
vesting of warrants to purchase 20,000 shares of common stock issued to Pilot
Capital Group, LLC (f/k/a The Gabriele Group, LLC) pursuant to an agreement with
Pilot dated July 31, 2002.
Patent expenses decreased from approximately $365,000 in the nine month period
ended December 31, 2003 to approximately $258,000 during the nine month period
ended December 31, 2004. Legal fees decreased from approximately $1,187,000 in
the nine month period ended December 31, 2003 to approximately $1,060,000 during
the nine month period ended December 31, 2004. For the nine month period ended
December 31, 2004 compared to the nine month period ended December 31, 2003,
payroll and payroll related expenses increased approximately $323,000 primarily
due to increased staffing; related business travel, insurance and contract
services increased approximately $551,000 over the same period. Expenses
relating to Immtech Therapeutics, Super Insight, Immtech Life Science and
Immtech Hong Kong were relatively unchanged at approximately $336,000 for the
nine month period ended December 31, 2004 and approximately $327,000 for the
nine month period ended December 31, 2003.
Interest income for the nine month period ended December 31, 2004 was
approximately $84,000. Interest income for the nine month period ended December
31, 2003 was approximately $11,000. The increase in interest income is due to an
increase in average funds invested and an increase in the interest rate paid on
invested funds. We had no interest expense during the nine month period ended
December 31, 2004 and December 31, 2003.
We incurred a net loss of approximately $10,906,000 for the nine month period
ended December 31, 2004 as compared with a net loss of approximately $10,701,000
for the nine month period ended December 31, 2003.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 2004, we had approximately $9,919,000 of cash and cash
equivalents, substantially all of which were invested in a money market mutual
fund.
There were equipment expenditures of approximately $39,000 for the three month
period ended December 31, 2004 as compared to equipment expenditures of
approximately $6,000 for the three month period ended December 31, 2003. During
the nine month periods ended December 31, 2004 and December 31, 2003, equipment
purchases were approximately $99,000 and $10,000, respectively.
We periodically receive cash from the exercise of common stock options. During
the three month period ended December 31, 2004, no options were exercised and
during the nine month period ended December 31, 2004, options to purchase 18,000
shares of common stock were exercised on a cashless basis. During the three and
nine month periods ended December 31,
-26-
2004, warrants to purchase 56,000 and 76,390 shares of common stock,
respectively, were exercised resulting in aggregate payments to us of $336,000
and $442,000.
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
at least the next twelve month period.
Through December 31, 2004, we have financed our operations with:
o proceeds from various private placements of equity securities, an initial
public offering, a secondary public offering, exercises of stock options
and warrants and other cash contributed from stockholders, which in the
aggregate raised approximately $49,429,000;
o funding from research agreements, foundation grants, SBIR grants and Small
Business Technology Transfer Program grants and testing agreements of
approximately $14,146,000; and
o the use of stock, options and warrants in lieu of cash compensation.
Our cash resources have been used to finance, develop and begin
commercialization of drug product candidates, including sponsored research,
conduct of human clinical trials, capital expenditures, expenses associated with
development of product candidates pursuant to an agreement, dated January 15,
1997, (the "Consortium Agreement"), among us, and UNC (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, and general and administrative expenses. Over
the next several years we expect to incur substantial additional research and
development costs, including costs related to research in pre-clinical
(laboratory) and human clinical trials, administrative expenses to support our
research and development operations and marketing expenses to launch the sale of
any commercialized product that may be developed.
Our future working capital requirements will depend upon numerous factors,
including the progress of research, development and commercialization programs
(which may vary as product candidates are added or abandoned), pre-clinical
testing and human clinical trials, achievement of regulatory milestones, third
party collaborators fulfilling their obligations to us, the timing and cost of
seeking regulatory approvals, the level of resources that we devote to the
engagement or development of manufacturing capabilities including the build-out
of our subsidiary's facility in China, our ability to maintain existing and to
establish new collaborative arrangements with others to provide funding to
support these activities, and other factors. In any event, we will require
substantial additional funds in addition to our existing resources to develop
product candidates and to otherwise meet our business objectives.
Management's plans for the remainder of the fiscal year, in addition to normal
operations, include continuing their efforts to create strategic joint ventures,
obtain additional grants, to
-27-
develop and enter into research, development and/or commercialization
agreements with others, and if market conditions are favorable, raise
additional capital through equity or debt issuance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The exposure of market risk associated with risk-sensitive instruments is not
material to our business, 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 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 December
31, 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.
-28-
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.
------------------
Immtech International, Inc. v. Neurochem Inc.
- ---------------------------------------------
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc. alleging
that Neurochem misappropriated the Company's intellectual property by filing a
series of patent applications relating to compounds synthesized and developed by
the Consortium, with whom Immtech has an exclusive license agreement. The
misappropriated intellectual property was provided to Neurochem pursuant to a
testing agreement under which Neurochem agreed to test the compounds to
determine if they could be successfully used to treat Alzheimer's disease. In
the event that any of the tested compounds proved efficacious, Neurochem had the
right to exercise an option and enter into an exclusive license for those
compounds for the treatment of Alzheimer's and certain other related diseases.
Neurochem never exercised the option. Pursuant to the terms of the agreement,
Neurochem agreed to keep all information confidential, not to disclose or
exploit the information without Immtech's prior written consent, to immediately
advise Immtech if any compound was worthy of seeking a patent and to cooperate
with Immtech and its counsel in filing.
The Company also alleges that Neurochem fraudulently induced the Company into
signing the testing agreement, and breached numerous provisions of the testing
agreement, thereby blocking the development of the Consortium's compounds for
the treatment of Alzheimer's disease. By engaging in these acts, the Company
alleges that Neurochem has prevented the public from obtaining the potential
benefit of new drugs for the treatment of Alzheimer's disease, which would be in
competition with Neurochem's Alzhemed drug.
Since filing the complaint, Neurochem has aggressively sought to have an
International Chamber of Commerce ("ICC") arbitration panel hear this dispute,
as opposed to the federal district court. The Company recently agreed to have a
three member ICC arbitration panel (the "Arbitration Panel") hear and rule on
the dispute, based on the expectation of reaching a more timely and economic
resolution. In this regard, the hearing is scheduled from September 7, 2005
through September 16, 2005, and the Company anticipates a resolution of this
matter by the end of the calendar year.
The Company recently filed a document with the Arbitration Panel that identified
the issues to be considered and provided a preliminary estimate of $10 to $30
million in damages that it is seeking.
The Respondents, Neurochem, Inc. and Neurochem (International) Limited also
filed a document with the Arbitration Panel that identified the issues it deemed
the Arbitration Panel Tribunal
-29-
should consider and provided a preliminary estimate of $3 million in damages
that it is seeking based on its counterclaims.
Item 2. Change in Securities and Use of Proceeds.
-----------------------------------------
Recent Sales of Unregistered Securities
- ---------------------------------------
Common Stock.
None.
Option Exercises.
None.
Conversion of Preferred Stock to Common Stock.
On October 25, 2004, holders of Series D Convertible Preferred Stock ("Series D
Stock") converted 2,520 shares of Series D Stock and accrued dividends into
7,012 shares of common stock.
Preferred Stock Dividend Payment.
On October 15, 2004, we issued 32,069 shares of common stock in the aggregate as
preferred stock dividends to the holders of outstanding shares of our Series A
Stock, Series B Stock, Series C Stock and Series D Stock, pro rata, based on the
number of the shares of preferred stock held.
Warrant Exercises.
The table below sets forth dates, shares of common stock purchased, exercise
prices paid and aggregate consideration received by us in connection with
warrant exercises during the quarter and prior to the filing of this quarterly
report on Form 10-Q.
Shares of Common Per Share Aggregate
Date Stock Purchased Exercise Price Consideration
10/1/2004 6,000 6.00 36,000.00
12/1/2004 10,000 6.00 60,000.00
12/7/2004 10,000 6.00 60,000.00
12/13/2004 10,000 6.00 60,000.00
12/20/2004 10,000 6.00 60,000.00
12/23/2004 10,000 6.00 60,000.00
1/4/2005 10,000 6.00 60,000.00
1/11/2005 10,000 6.00 60,000.00
1/25/2005 4,000 6.00 24,000.00
------------------- --------------- ----------------
80,000 $480,000.00
-30-
Use of Proceeds.
We intend to use the proceeds from the exercise of warrants for general
corporate purposes.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Votes of the Shareholders.
We held our Annual Meeting on November 12, 2004 at the Westin O'Hare Hotel in
Rosemont, Illinois. The following matters were presented to the stockholders:
(1) election of seven directors to serve until the next annual meeting of the
stockholders, (2) Proposal No. 1 - to approve an amendment to our First Amended
and Restated Immtech International Inc. 2000 Stock Incentive Plan to increase
the number of shares of Common Stock reserved for issuance thereunder from
1,100,000 shares to 2,200,000 shares and (3) Proposal No. 2 - to ratify the
selection of Deloitte & Touche LLP as the Company's independent auditors for the
fiscal year ending March 31, 2005. The results of the votes are as follows:
The following individuals were elected Votes Authority
Directors by the Shareholders: For Withheld
---------- ---------
T. Stephen Thompson 10,495,102 133,298
Cecilia Chan 10,252,193 376,207
Harvey M. Colten, M.D. 10,445,879 182,521
Judy Lau 10,446,075 182,325
Levi Lee, M.D. 10,499,402 128,998
Eric L. Sorkin 10,200,556 427,844
Frederick W. Wackerle 7,727,046 2,901,354
Votes Votes
For Against Abstain
---------- --------- ---------
Proposal 1 - Amendment of
the 2000 Stock Incentive Plan 5,711,021 4,826,943* 90,436
Proposal 2 - Ratification
of Deloitte & Touche LLP
as independent auditors 10,461,489 68,791 98,120
* Pursuant to the Company's Proxy Statement on Schedule 14A dated October 12,
2004, "broker non-votes" were counted as votes against the proposal. Broker
non-votes occur when a beneficial owner of shares held in "street name" at a
brokerage fails to give the broker instructions as to how to vote the shares on
a particular proposal. Brokers are prohibited from voting shares held in
custodial accounts other than for certain specified matters such as appointment
of auditors.
-31-
Item 5. Other Information.
------------------
Employee Update
- ---------------
Since July 1, 2004, through the fiscal quarter ended December 31, 2004, and to
date, we have added eight new employees. Our new hires include a chief medical
officer, a director of commercial development, a director of global regulatory
compliance, a general counsel, a manager of information technology, a manager of
analytical development and a manager of accounting who assists with
Sarbanes-Oxley Section 404 compliance. With our new hires, our staff has
increased to 19 employees, 11 of whom hold advanced degrees, 7 of whom work in
support of clinical trials, research and development and regulatory compliance
and the other 12 work in general and administrative capacities which includes
business development, investor relations, finance, legal and administration.
Amendment to By-Laws
- --------------------
On July 14, 2000, by unanimous written consent, the Company's board of directors
voted to amend Article II, Section 1 of the Company's By-laws to change the time
within which the Company must hold its annual meeting. The board determined that
the by-law that required the Company to hold its annual meeting within 120 days
of the close of the Company's fiscal year was impractical for a public company
and therefore revised the by-law to permit the Company to hold its annual
meeting "on such date and at such time and place as the [Company's] board of
directors may determine". The By-law amendment is attached hereto as Exhibit 3.1
Item 6. Exhibits, and Reports on Form 8-K.
----------------------------------
1. Exhibits.
See Exhibit Index, page 33.
2. Reports on Form 8-K.
We filed the following reports on Form 8-K during our third fiscal quarter.
On October 8, 2004 we filed a Current Report on Form 8-K announcing the
completion of a five-year extension to the Company's office lease in Vernon
Hills, IL. The lease extension is through March 15, 2010.
On October 27, 2004 we filed a Current Report on Form 8-K announcing receipt of
a third advance payment in the amount of $1,280,724 (aggregating to
approximately $3.023 million) from The Medicines for Malaria Venture.
-32-
Exhibit Index
-------------
3.1 Amendment to the By-Laws of Immtech International, Inc. effective as of July
14, 2000.
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.
-33-
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: February 9, 2005 By: /s/ T. Stephen Thompson
------------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: February 9, 2005 By: /s/ Gary C. Parks
------------------------------------------
Gary C. Parks
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)